Finance is a term for matters regarding the management, creation, and study of money and investments. Specifically, it deals with the questions of how and why an individual, company or government acquires the money needed - called capital in the company context - and how they spend or invest that money. Finance is then often split per the following major categories: corporate finance, personal finance and public finance. At the same time, and correspondingly, finance is about the overall "system" - i.e. the financial markets that allow the flow of money, via investments and other financial instruments, between and within these areas; this "flow" is facilitated by the financial services sector. A major focus within finance is thus investment
management — called money
management for individuals, and asset
management for institutions — and finance then includes the associated activities of securities trading &
stock broking, investment banking, financial engineering, and risk management. Given its wide scope, finance is studied in several academic disciplines, and, correspondingly, there are several related professional qualifications that can lead to the field. As above, the financial system constitutes the flow of capital, between individuals (personal finance), governments (public finance), and businesses (corporate finance). Although they are closely related, the disciplines of
economics and finance are distinct. The "economy" is a social institution that organizes a society's production, distribution, and consumption of goods and services, all of which must be financed. Generalizing, an entity whose income exceeds its expenditure can lend or invest the excess, intending to earn a fair return. Correspondingly, an entity where income is less than expenditure can raise capital usually in one of two ways: (i) by borrowing, in the form of a loan (private individuals), or by selling bonds (may be government bonds or corporate bonds); (ii) by a corporate selling equity, also called
stock or shares (may take various forms: preferred
stock or common stock). The owners of both bonds and
stock may be institutional investors – financial institutions such as investment banks and pension fund – or private individuals, called private investors or retail investors. The lending is often indirect, through a financial intermediary such as a bank, or via the purchase of notes or bonds (corporate bonds, government bonds, or mutual bonds) in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary earns the difference for arranging the loan. A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. Investing typically entails the purchase of stock, either individual securities, or via a mutual fund for example. Stocks are usually sold by corporations to investors so as to raise required capital in the form of "equity financing", as distinct from the debt financing described above. The financial intermediaries here are the investment banks, which find the initial investors and facilitate the listing of the securities (equity and debt); and the securities exchanges, which allow their
trade thereafter, as well as the various service providers which manage the performance or risk of these investments.
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