Finance is a broad term used to describe matters concerning the study, development, management and allocation of money. In particular, it deals specifically with the issues of how and who an individual, firm or government makes the money required through different transactions or exchanges in the market. Finance is also used to describe the processes by which money is produced, borrowed or saved and is usually used to describe the various ways in which firms and governments make their money: borrowing from others, creating new money from bank deposits, issue loans, create reserves, issue securities (stock) as well as repaying debts.
All of these processes involve the use of money as a medium through which these activities are carried out. However, money is not the only thing that forms the basis of modern finance; other things, such as human capital, physical capital and other resources are needed to make finance possible. It therefore forms part of the methodology of science and the study of economic activity. Finance therefore seeks to capture the interaction of economic systems in a general framework in order to provide a framework in which to understand how these systems function in the real world.
One of the most important elements of modern finance is the financial system of the country in which it is practised. A financial system is said to be sound when it facilitates the proper circulation of money, including its storage, reproduction and repayment. Proper monetary and banking systems provide a platform for efficient economic activity and hence have great social value. Finance therefore includes the knowledge and practices required for the successful operation of economic systems. This also gives an accurate account of the real value of the various assets and the real state of the finance and banking systems. Finance therefore combines the economic theories with the economic practices to provide objective and practical guidance in the economic domain.
A wide variety of financial instruments are involved in the field of finance. These include financial derivatives, stock and bond markets, money markets, bank borrowing and other forms of non-monetary finance. The most significant area of finance is the financial systems and banking systems. The whole idea of the financial system is that it exists to facilitate the economic processes by providing financial means and channels through which the economic activities can take place.
Finance is intimately associated with economics and the study of modern financial theories and practices. Modern economic theory and practice, therefore, closely parallel with the workings of finance. Finance theory attempts to explain why and how people make decisions in any economic situation. The analysis of finance helps us to forecast the macroeconomic processes, showing the forecasting abilities of markets. Finance helps us understand the relationships between financial instruments and their markets and the role of various economic policies.
Finance is intimately associated with economics and the study of modern financial theories and practices. Modern economic theory and practice, therefore, closely parallel with the workings of finance. Finance helps us understand the relationships between financial instruments and their markets and the role of various economic policies. Finance is also involved in setting the level of the supply of money and determining the value of currency. Thus, finance includes various elements of economics.