Finance is a broad term which includes all things relating to the science, development, and allocation of capital and funds. It is used in all areas of human activity, including planning and organizing the economic activities of a country, state, or community. The scope of finance is ever-broadening because it touches on all aspects of life from production to distribution and everything in between. The field of finance is often considered as one of the most important in the world. Many people are deeply involved in it through their personal savings, income generating activities, investment, and saving plans, etc.
Finance is an important field in economics. All economic activity arises from one or more interactions of forces within the market, with external factors affecting these interactions, and with each interacting in a manner determined by the other. In short, economics is the study of how people, organizations, firms, and institutions interact to produce and distribute economic wealth. Finance therefore, is the methodology by which we attempt to understand how to allocate the economic wealth so as to generate economic growth and development. Finance thus, is not only an interesting area of study, but also a very important element of our everyday lives.
In general, there are three distinct areas of finance: personal, institutional, and business. Personal finance refers to any efforts we make to save for retirement, buy a new house, purchase education and training, build a home, etc. We may use personal finance to plan for the purchase of a new vehicle, college education, or even a down payment on a new house. In contrast, institutional finance refers to those attempts made by government at both the national and local level to ensure that some segment or portion of the public gets its fair share of the economic pie.
In addition to this, there are many types of financial systems, including government finance, corporate finance, and nonfinancial finance. Government finance is basically the effort made by the government to create and maintain adequate financial assets. This involves governmental organizations such as the National Institutes of Technology, NASA, the Department of Defense, the Federal Reserve, and many others. Corporate finance is essentially the efforts of businesses to create and manage their own financial instruments. This can be in the form of retained earnings, dividends, short sales, investment securities, and other assets.
Economics is the study of how people, firms, markets, and institutions interact to produce a surplus or a deficit. The study of economics is closely tied to the study of finance because most of what people do – buy, work, save, invest, etc. – is done on finance terms. Thus, if you are looking at the economics of something, you are almost always looking at finance.
Another related area of study is banking. Banks are one of the major areas of finance that most people know a lot about. For example, you probably have a checking account at a local bank and have a savings account at another bank. If you are an undergraduate student, your major may be in finance. Your undergraduate adviser may have strong connections to some of the world’s top banks and invest your studies in banking either through a Master’s degree or a PhD. In fact, many of today’s top banking officials have earned a doctorate in finance.