What Is Finance?

Finance is the application of economic principles to decision-making that involves the allocation of money under conditions of uncertainty. Finance is defined as the management of money and includes activities such as investing, borrowing, lending, budgeting, saving, and forecasting. In other words, in finance we worry about money and we worry about the future. Investors allocate their funds among financial assets in order to accomplish their objectives, and businesses and governments raise funds by issuing claims against themselves and then use those funds for operations. Finance provides the framework for making decisions as to how to get funds and what we should do with them once we have them. It is the financial system that provides the platform by which funds are transferred from those entities that have funds to those entities that need funds. The foundations for finance draw from the field of economics and, for this reason, finance is often referred to as financial economics.


  1. Analytical, using statistical, probability, and mathematics to solve problems.

  2. Based on economic principles.

  3. Uses accounting information as inputs to decision-making.

  4. Global in perspective.

  5. The study of how to raise money and invest it productively.

The Three Areas within the Field of Finance


The field of capital markets and capital market theory focuses on the study of the financial system, the structure of interest rates, and the pricing of risky assets. The financial system of an economy consists of three components:

(1) financial markets;

(2) financial intermediaries

(3) financial regulators.


Financial management, sometimes called business finance or corporate finance, is the specialty area of finance concerned with financial decision making within a business entity. Although financial management is often referred to as corporate finance, the principles of financial management also apply to other forms of business and to government entities

Regarding investment decisions, we are concerned with the use of funds—the buying, holding, or selling of all types of assets: Should a business purchase a new machine? Should a business introduce a new product line? Sell the old production facility? Acquire another business? Build a manufacturing plant? Maintain a higher level of inventory?

Financing decisions are concerned with the procuring of funds that can be used for long-term investing and financing day-to-day operations. Should financial managers use profits raised through the company’s revenues or distribute those profits to the owners? Should financial managers seek money from outside of the business? A company’s operations and investments can be financed from outside the business by incurring debt such as through bank loans or the sale of bonds—or by selling ownership interests. Because each method of financing obligates the business in different ways, financing decisions are extremely important. The financing decision also involves the dividend decision, which involves how much of a company’s profit should be retained and how much to distribute to owners.

A company’s financial strategic plan is a framework of achieving its goal of maximizing owner’s wealth. investment decisions made by the financial manager involve the long term commitment of a company’s scarce resources in long-term investments.

Another critical task in financial management is the risk management of a company. The process of risk management involves determining which risks to accept, which to neutralize, and which to transfer.


Investment management is the specialty area within finance dealing with the management of individual or institutional funds. Other terms commonly used to describe this area of finance are asset management, portfolio management, money management, and wealth management.

In corporate finance, investment management is the process of ensuring that a company's tangible and intangible assets are maintained, accounted for, and put to their highest and best use.


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