Finance is a broad term encompassing various things about the study, development, management, and allocation of funds. Finance can be used in many different contexts, including business, politics, and philanthropy. The study of finance is an important subject in colleges and universities. In the United States, around 70 percent of undergraduate students major in finance. Some of the topics in modern day finance study include interest rates on loans, spending and revenue, the role of banks and central banks in economic activity, and the role of government finance.
Finance is part of accounting, and like all disciplines, it is constantly changing. Modern day finance theories are influenced by broad areas of inquiry into how people produce, manage, and save their money. For example, modern day economics has some strong connections to ancient accounting principles, including such disciplines as mathematics, science, and economics. Most importantly, the study of finance is intimately connected to the study of business, which in turn means that an understanding of business will help one to understand finance.
Public finance is intimately connected to the study of business. Two schools of thought emerge from this discipline. One school of thought is called the Realist school, which seeks to understand the “real” costs of economic activity. The other school of thought is known as the Utility Sectoralist school, which tries to explain the utility of economic decisions through an economic lens. Most modern economists consider themselves to be part of the Realist school.
Behavioral finance is a field that studies the behavior of individuals as they make choices. Theories and models based on traditional economics, including marginal analysis, demand theory, and consumer behavior, are used in this field. These models help researchers understand consumer spending patterns, which in turn help them understand individual economic behavior. One of the most influential proponents of modern financial modeling is the Chicago School of Business, which put forth the Barometer theory, which discusses the role of consumer behavior in predicting corporate behavior.
Another branch of modern financial planning concerns the time-series approach to forecasting. With this approach, models are used to forecast the performance of specific variables over time. While the time-series approach does not allow for exogenetic (one-shot) predictions, it can provide valuable insight into how current financial management decisions may affect future outcomes. In addition to forecasting the likely path of interest rates, this same branch is also useful for understanding inflation, economic policies, inflation expectations, and financial cycles.
A relatively new field that came into being after the Great Depression is known as market research, which seeks to better understand the behavior of financial markets. Market research can be done through a wide range of methods. Some researchers choose to conduct surveys, focus groups, or questionnaires. Other researchers choose computer models that can make detailed predictions about how people’s decisions within financial markets may be affected by external factors.
Another important area of modern day personal finance, accounting, deals with the recording, assessment, reporting, and interpretation of financial transactions. While all of these areas of finance share some similarities, there are also significant differences. The accounting profession includes a number of specialties, including government financial accounting, insurance, banking, investment banking, asset management, private sector financial accounting, internal auditing, and CPA accounting.
In addition to the more general areas of finance, there are also specialized areas of specialization. Real estate finance includes financing the purchase of residential real estate. Hedge funds deal with the purchase and sale of securities based on risk and the expected return on investments. Public finance deals with issues that affect the public welfare, such as education, health care, crime, and taxes. International finance includes factors that affect money flows within the U.S., such as trade policies, immigration, and central bank policy.