Finance is a relatively broad term for things about the management, development, and research of funds and investments. Financial discipline refers to the ability to select, plan, and manage financial resources with an emphasis on long-term profitability. This includes all […]
Finance is a relatively broad term for things about the management, development, and research of funds and investments. Financial discipline refers to the ability to select, plan, and manage financial resources with an emphasis on long-term profitability. This includes all financial activities – buying and selling of financial assets, saving and spending, and financing of businesses and other forms of activity.
The term financial management is also used in much broader terms such as financial planning, income management, asset management, cash flow management, cost management, portfolio management, financial analysis, and international finance. In addition, it is also used in many other contexts which include law, economics, management, accounting, risk management, portfolio management, insurance, securities, and real estate. Finance is an essential element in all of these contexts because it enables people to deal with the complex situations that affect their finances and to take advantage of opportunities that may arise.
The basic function of finance is to provide individuals and organizations with the means to deal with the world of finance and to achieve their goals. Finance is therefore not just about distributing income to individuals according to their needs. It is also about providing individuals with the means by which they can build and strengthen financial systems in a way that ensures adequate allocation of funds to meet long-term goals. In fact, a large part of finance is devoted to establishing and maintaining financial systems that are both efficient and safe enough to be successful.
As long as humans have been dealing with finance, there have been attempts to understand how it works, who makes sense of it, and what it does for the overall economy. Modern approaches to the study of finance include econometrics, microeconomics, and macroeconomics, each of which has its own unique contribution to make to understanding finance. Within these various perspectives of finance, the most commonly accepted view is that it is concerned with providing a platform for economic activity and making sure that appropriate prices and production factors are achieved through a properly organized set of financial tools and institutions.
Among those attempting to understand the role of finance in modern society, a number of different approaches have been made. One of the most influential came from the work of the thinker John Locke, who was a great defender of the freedom of the individual in his Essay on Justice. Locke believed that all human actions were governed by forces outside of individual minds and bodies. These forces were actually independent of government and were the driving forces behind the accumulation and disbursement of wealth. According to Locke, the distribution of wealth was not only fair but was natural and just. Therefore, the purpose of banking or investing in financial systems was not to provide individuals with an opportunity to accumulate wealth beyond their means, but to ensure that the distribution of wealth was fair and just.
Modern economists have developed several different theories of how finance can be used and how it affects the overall economy. Some modern theories of finance include the theory of asset pricing, which suggests that current interest rates reflect changes in the expected value of future portfolio holdings, while other theories of finance include the theory of asset allocation, which suggests that different investments yield different results in the economy. Regardless of the theory of finance that is applied, it is important to remember that it is impossible to accurately predict what path a given investment will take, no matter how well-established the theory of finance is. As such, it is often more effective to invest in ways that do not conform to widely-held theories of finance, even if the methods are less-traditional.