Finance is a broad term encompassing various things about the study, creation, management and allocation of financial resources. In particular, it concerns the questions of who, what, when and where an individual, organization or government to obtain the funds required for its operation and its maintenance; and how they use or spend that money. This study includes the evaluation of alternative courses of action to achieve certain objectives. It also involves the allocation of resources between competing ends by governments and organizations. Finance can be used to measure and control the performance and success of enterprises, corporations, institutions and other entities. The discipline is further subdivided into various specialized areas, including: international finance, public finance, sovereign finance and household finance.
In the United States, banking is one of the important parts of finance. Banking is the practice of borrowing funds secured by the assets of individuals or banks. Borrowing by banks is normally carried on behalf of borrowers by financial institutions such as commercial banks, savings and loan associations, credit unions and mortgage banks. Besides banking, financial markets include other financial activities such as insurance, market investment, derivatives, corporate financing, asset management and bond markets.
Finance theory is the branch of economics that studies how people utilize financial assets and whether these assets are used effectively to support economic activity and economic goals. A good example of this is the concept of demand finance which examines the effects of supply and demand on prices, output and growth in an economy. Another important branch of economics that looks into the behavior of actors and firms and their decisions, is decision theory. Decision theory suggests that people will make choices when faced with options. The emphasis on economic planning is also found in the field of macroeconomics, which studies the movement of prices and production within a country or globally.
Business finance is another branch of economics that concentrates on business problems arising in the business environment. Examples of topics covered include working capital management, merchant finance, buy-sell agreement business financing and venture capital. International business finance is concerned with financing both domestic and foreign businesses. The study of international finance is also part of political science, which studies the interaction of political leaders in international affairs.
Financial market analysis deals with the movement of financial assets and liabilities on the market. Finance theory predicts that financial markets will distribute funds efficiently depending on the expectations of the market for future financial returns. This theory also describes how firms decide what funds to avail themselves of and under what terms. Analysis of financial markets helps managers plan efficiently and solve problems in the organization. Financial management also helps organizations to reduce costs by categorizing, estimating and monitoring the use of funds and identifying sources of surplus cash.
Finance is essential for a healthy economy, as it affects all economic decisions. A well-managed finance system ensures that funds are available when they are needed for particular purposes. For instance, if all banks had enough funds to lend, there would not be any deficit in funding public needs, but people would still go about their business as usual. Proper management of financial resources makes possible the smooth functioning of the economy as well as the smooth conduct of government policies.