Editing Finance (section)

==Areas of finance==
As outlined, finance comprises, broadly, the three areas of personal finance, corporate finance, and public finance. These, in turn, overlap and employ various activities and sub-disciplines—chiefly [[investment]]s, risk management, and [[quantitative finance]].

===Personal finance===
[[File:Wealth Management Consultation.jpg|thumb|[[Wealth management]] consultation—here, the [[financial planner|financial advisor]] counsels the client on an appropriate [[investment strategy]].]]
{{Main|Personal finance}}
{{further|Financial planner|Investment advisory}}
Personal finance refers to the practice of budgeting to ensure enough funds are available to meet basic needs, while ensuring there is only a reasonable level of risk to lose said capital. Personal finance may involve paying for education, financing [[durable good]]s such as [[real estate]] and cars, buying [[insurance]], investing, and saving for [[retirement]].<ref>{{Cite book|url=https://books.google.com/books?id=DF7FCQAAQBAJ|title=Finance (Speedy Study Guides)|last=Publishing|first=Speedy|year=2015|publisher=Speedy Publishing LLC|isbn=978-1-68185-667-4|language=en}}</ref> Personal finance may also involve paying for a loan or other debt obligations. The main areas of personal finance are considered to be income, spending, saving, investing, and protection. The following steps, as outlined by the Financial Planning Standards Board,<ref>{{Citation|chapter=Financial Planning Standards Board|date=2019|pages=709–735|publisher=John Wiley & Sons, Ltd|language=en|doi=10.1002/9781119642497.ch80|isbn=978-1-119-64249-7|title=Financial Planning Competency Handbook|s2cid=242623141|editor1-last=Snowdon|editor1-first=Michael}}</ref> suggest that an individual will understand a potentially secure personal finance plan after:
* Purchasing insurance to ensure protection against unforeseen personal events;
* Understanding the effects of tax policies, subsidies, or penalties on the management of personal finances;
* Understanding the effects of credit on individual financial standing;
* Developing a savings plan or financing for large purchases (auto, education, home);
* Planning a secure financial future in an environment of economic instability;
* Pursuing a checking or a savings account;
* Preparing for retirement or other long term expenses.<ref>{{Cite web|url=https://www.investopedia.com/terms/p/personalfinance.asp|title=Personal Finance|last=Kenton|first=Will|website=Investopedia|access-date=2020-01-20|archive-date=2000-08-18|archive-url=https://web.archive.org/web/20000818133538/https://www.investopedia.com/terms/p/personalfinance.asp|url-status=live}}</ref>

===Corporate finance===
{{Main|Corporate finance|Financial management}}
{{further|Strategic financial management}}
Corporate finance deals with the actions that managers take to increase the value of the firm to the shareholders, the sources of funding and the [[capital structure]] of corporations, and the tools and analysis used to allocate financial resources. While corporate finance is in principle different from [[managerial finance]], which studies the [[financial management]] of all firms rather than corporations alone, the concepts are applicable to the financial problems of all firms,<ref name="Drake_Fabozzi">Pamela Drake and [[Frank Fabozzi]] (2009). [https://media.wiley.com/product_data/excerpt/52/04704073/0470407352.pdf What Is Finance?] {{Webarchive|url=https://web.archive.org/web/20230223003858/https://media.wiley.com/product_data/excerpt/52/04704073/0470407352.pdf |date=2023-02-23 }}</ref> and this area is then often referred to as "business finance".

Typically, "corporate finance" relates to the ''long term'' objective of maximizing the value of the [[Enterprise value|entity's assets]], its [[stock]], and its [[return on equity|return to shareholders]], while also [[Risk–return spectrum|balancing risk and profitability]]. This entails<ref>See [[Aswath Damodaran]], [http://pages.stern.nyu.edu/~adamodar/New_Home_Page/AppldCF/other/Image2.gif Corporate Finance: First Principles] {{Webarchive|url=https://web.archive.org/web/20161017190714/http://pages.stern.nyu.edu/~adamodar/New_Home_Page/AppldCF/other/Image2.gif |date=2016-10-17 }}</ref> three primary areas:
# [[Capital budgeting]]: selecting which projects to invest in—here, accurately [[Corporate finance#Investment and project valuation|determining value]] is crucial, as judgements about asset values can be "make or break".<ref name="Irons">{{cite book |last1=Irons |first1=Robert |title=The Fundamental Principles of Finance |date=July 2019 |publisher=Routledge |location=Google Books |isbn=978-1-000-02435-7 |url=https://play.google.com/store/books/details/Robert_Irons_The_Fundamental_Principles_of_Finance?id=tzr3DwAAQBAJ&hl=en_US&gl=US |access-date=3 April 2021 |archive-date=11 November 2021 |archive-url=https://web.archive.org/web/20211111150837/https://play.google.com/store/books/details/Robert_Irons_The_Fundamental_Principles_of_Finance?id=tzr3DwAAQBAJ&hl=en_US&gl=US |url-status=live }}</ref>
# [[Dividend policy]]: the use of "excess" funds—these are to be reinvested in the business or returned to shareholders.
# [[Capital structure]]: deciding on the mix of funding to be used—here attempting to find the [[Capital structure#Optimal capital structure|optimal capital mix]] re debt-commitments vs [[cost of capital]].
# Working capital management: is concerned about the daily funding operations and the goal is to maintain liquidity, minimize risk and maximize efficiency 
# Cost of capital: consists in understanding how much the firm has to generate to satisfy the investors, they do that by minimizing the weighted average cost of capital (WACC) so the value of the company increases
The latter [[Investment banking#Corporate finance|creates the link]] with [[investment banking]] and [[securities trading]], as above, in that the capital raised will generically comprise debt, i.e. [[corporate bond]]s, and [[Equity (finance)|equity]], often [[stock (finance)|listed shares]]. Re risk management within corporates, see [[#Risk management|below]].

Financial managers—i.e. as distinct from corporate financiers—focus more on the ''short term'' elements of profitability, cash flow, and "[[working capital management]]" ([[inventory]], credit and [[debtor]]s), ensuring that the firm can [[Corporate finance#Working capital management|safely and profitably]] carry out its financial ''and operational'' objectives; i.e. that it: (1) can service both maturing short-term debt repayments, and scheduled long-term debt payments, and (2) has sufficient cash flow for ongoing and upcoming [[operations management|operational expenses]]. (See [[Financial management]] and [[FP&A]].)
<!-- At more senior levels, financial managers are also involved with the longer term [[strategic financial management]] re capital structure and -investment.
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===Public finance===
[[File:20071203-Bush speech on budget Rose Garden.jpg|thumb|President [[George W. Bush]], speaking on the [[United States federal budget|Federal Budget]] in 2007, [[n:US Congress debates Iraq funding|requesting additional funds]] from [[United States Congress|Congress]]]]
[[File:2023-federal-budget-breakdown.png|thumb|322x322px|CBO: 2023 US Federal Budget Infographic]]

{{Main|Public finance}}
Public finance describes finance as related to sovereign states, sub-national entities, and related public entities or agencies. It generally encompasses a long-term strategic perspective regarding investment decisions that affect public entities.<ref>{{cite book|last1=Doss|first1=Daniel|last2=Sumrall|first2=William|last3=Jones|first3=Don|title=Strategic Finance for Criminal Justice Organizations|date=2012|publisher=CRC Press|location=Boca Raton, Florida|isbn=978-1-4398-9223-7|page=23|edition=1st}}</ref> These long-term strategic periods typically encompass five or more years.<ref>{{cite book|last1=Doss|first1=Daniel|last2=Sumrall|first2=William|last3=Jones|first3=Don|title=Strategic Finance for Criminal Justice Organizations|date=2012|publisher=CRC Press|location=Boca Raton, Florida|isbn=978-1-4398-9223-7|pages=53–54|edition=1st}}</ref> Public finance is primarily concerned with:<ref>{{Cite book |first1=Sharon |last1=Kioko |first2=Justin |last2=Marlowe |title=Financial Strategy for Public Managers |publisher=Rebus Foundation |url=https://press.rebus.community/financialstrategy/ |year=2016 |isbn=978-1-927472-59-0 |access-date=2022-07-05 |archive-date=2022-06-15 |archive-url=https://web.archive.org/web/20220615185910/https://press.rebus.community/financialstrategy/ |url-status=live }}</ref>
* Identification of [[government expenditures|required expenditures]] of a public sector entity;
* Source(s) of that [[government revenue|entity's revenue]];
* The [[government budget|budgeting process]];
* Sovereign [[Government bond|debt issuance]], or [[municipal bond]]s for [[public works]] projects.

Central banks, such as the [[Federal Reserve System]] banks in the [[United States]] and the [[Bank of England]] in the [[United Kingdom]], are strong players in public finance. They act as [[lender of last resort|lenders of last resort]] as well as strong influences on monetary and credit conditions in the economy.<ref>Board of Governors of Federal Reserve System of the United States. Mission of the Federal Reserve System. [http://www.federalreserve.gov/aboutthefed/mission.htm Federalreserve.gov] Accessed: 2010-01-16. (Archived by WebCite at  {{webarchive|url=https://web.archive.org/web/20100114154328/http://www.federalreserve.gov/aboutthefed/mission.htm |date=2010-01-14 }})</ref>

[[Development finance]], which is related, concerns investment in [[economic development]] projects provided by a [[Development finance institution#Typology|(quasi) governmental institution]] on a non-commercial basis; these projects would otherwise not be able [[Public utility#Finance|to get financing]]. A [[public–private partnership]] is primarily used for [[infrastructure]] projects: a private sector corporate provides the financing up-front, and then draws profits from taxpayers or users.
[[Climate finance]], and the related [[Environmental finance]], address the financial strategies, resources [[Climate finance#Financial instruments|and instruments]] used in [[climate change mitigation]].

===Investment management===
[[File:Stock Price Listing Numbers on a Korean Newspaper.jpg|thumb|[[Share price]]s listed in a Korean newspaper]]
[[File:Stock_ticker.jpg|thumb|"The excitement before the bubble burst"—viewing prices via [[ticker tape]], shortly before the [[Wall Street crash of 1929]]]]
[[File:E-ticker.jpg|thumb|A modern price-ticker. This infrastructure underpins contemporary exchanges, evidencing prices and related ticker symbols. The ticker symbol is represented by a unique set of characters used to identify the subject of the financial transaction.]]
{{main|Investment management}}
{{see also|Active management|Passive management}}
Investment management<ref name = "Drake_Fabozzi"/> is the professional asset management of various securities—typically shares and bonds, but also other assets, such as real estate, commodities and [[alternative investment]]s—in order to meet specified investment goals for the benefit of investors.

As above, investors may be institutions, such as insurance companies, pension funds, corporations, charities, educational establishments, or private investors, either directly via investment contracts or, more commonly, via collective investment schemes like mutual funds, [[exchange-traded funds]], or [[real estate investment trust]]s.

At the heart of investment management<ref name = "Drake_Fabozzi"/> is [[asset allocation]]—[[Diversification (finance)|diversifying the exposure]] among these [[asset classes]], and among individual securities within each asset class—as appropriate to the client's [[investment policy]], in turn, a function of risk profile, investment goals, and investment horizon (see [[Investor profile]]). Here:
* [[Portfolio optimization]] is the process of selecting the best portfolio given the client's objectives and constraints.
* [[Fundamental analysis]] is the approach typically applied in [[valuation (finance)|valuing]] and evaluating the individual securities.
* [[Technical analysis]] is about forecasting future asset prices with past data.<ref>{{Cite journal |last1=Han |first1=Yufeng |last2=Liu |first2=Yang |last3=Zhou |first3=Guofu |last4=Zhu |first4=Yingzi |date=2021-05-21 |title=Technical Analysis in the Stock Market: A Review |url=https://papers.ssrn.com/abstract=3850494 |language=en |location=Rochester, NY|doi=10.2139/ssrn.3850494 |ssrn=3850494 |s2cid=235195430 |website=SSRN Papers}}</ref>

Overlaid is the portfolio manager's [[investment style]]—broadly, [[Active management|active]] vs [[passive management|passive]], [[value investing|value]] vs [[growth investing|growth]], and [[Small cap company|small cap]] vs. [[large cap]]—and [[investment strategy]].

In a well-diversified portfolio, achieved [[investment performance]] will, in general, largely be a function of the asset mix selected, while the individual securities are less impactful. The specific approach or philosophy will also be significant, depending on the extent to which it is complementary with the [[Stock market cycles|market cycle]].

Additional to this [[diversification (finance)|diversification]], the fundamental risk mitigant employed, [[Financial risk management#Investment management|investment managers will apply]] various hedging techniques as appropriate,<ref name = "Drake_Fabozzi"/> these may relate to the [[Portfolio insurance|portfolio as a whole]] or [[Hedge (finance)#Hedging a stock price|to individual stocks]]. [[Bond fund|Bond portfolios]] are often (instead) managed via [[cashflow matching|cash flow matching]] or [[immunization (finance)|immunization]], while for derivative portfolios and positions, traders use [[Greeks (finance)#Use of the Greeks|"the Greeks"]] to measure and then offset sensitivities. In parallel, managers – [[active management|active]] and [[Passive management|passive]] – [[Performance attribution|will monitor]] [[tracking error]], thereby minimizing and preempting any underperformance [[Investment management#Risk-adjusted performance measurement|vs their "benchmark"]].

A [[quantitative fund]] is managed using [[Quantitative fund#Investment process|computer-based mathematical techniques]] (increasingly, [[machine learning]]) instead of human judgment. The actual trading [[automated trading system|is typically automated]] via [[algorithmic trading|sophisticated algorithms]].

===Risk management===
[[File:Crowds gathering outside New York Stock Exchange (4).jpg|thumb|Crowds gathering outside the New York Stock Exchange after the [[Wall Street crash of 1929]]]]
[[File:Northern Rock Queue.jpg|thumb|Customers queuing outside a [[Northern Rock]] branch in the [[United Kingdom]] to withdraw their savings during the [[2008 financial crisis]]]]
{{main|Financial risk management}}
[[Risk management]], in general, is the study of how to control risks and balance the possibility of gains; it is the process of measuring risk and then developing and implementing strategies to manage that risk.
[[Financial risk management]]<ref name="Christoffersen2011">{{Cite book |last=Peter F. Christoffersen |url=https://books.google.com/books?id=YkcMBGYbRasC |title=Elements of Financial Risk Management |year=2011 |publisher=Academic Press |isbn=978-0-12-374448-7}}</ref><ref name="Malz2011">{{Cite book |last=Allan M. Malz |url=https://books.google.com/books?id=rFX2f6AxH1QC |title=Financial Risk Management: Models, History, and Institutions |year=2011 |publisher=John Wiley & Sons |isbn=978-1-118-02291-7}}</ref> is the practice of protecting [[enterprise value|corporate value]] against [[financial risk]]s, often by [[hedge (finance)|"hedging"]] exposure to these using financial instruments. The focus is particularly on credit and market risk, and in banks, through regulatory capital, includes operational risk.
* [[Credit risk]] is the risk of [[Default (finance)|default on a debt]] that may arise from a borrower failing to make required payments;
* [[Market risk]] relates to losses arising from movements in market variables such as prices and exchange rates;
* [[Operational risk]] relates to failures in internal processes, people, and systems, or to external events (these risks will often be [[insurance|insured]]).

Financial risk management is [[Corporate finance#Financial risk management|related to corporate finance]]<ref name = "Drake_Fabozzi"/> in two ways. Firstly, firm exposure to market risk is a direct result of previous capital investments and funding decisions; while credit risk arises from the business's credit policy and is often addressed through [[Trade credit insurance|credit insurance]] and [[Bad debt#Doubtful debt reserve|provisioning]].  Secondly, both disciplines share the goal of enhancing or at least preserving, the firm's [[economic value]], and in this context<ref>John Hampton (2011). ''The AMA Handbook of Financial Risk Management''. [[American Management Association]]. {{ISBN|978-0-8144-1744-7}}</ref> overlaps also [[enterprise risk management]], typically the domain of [[strategic management]].  Here, businesses devote much time and effort to [[financial forecast|forecasting]], [[FP&A|analytics]] and [[Managerial finance#Managerial accounting techniques|performance monitoring]]. (See [[Asset and liability management|ALM]] and [[treasury management]].)

[[Financial risk management#Banking|For banks]] and other wholesale institutions,<ref name="DeMeo"/> risk management [[Quantitative analysis (finance)#Risk management|focuses on]] managing, and as necessary hedging, the various positions held by the institution—both [[trading book|trading positions]] and [[banking book|long term exposures]]—and on calculating and monitoring the resultant [[economic capital]], and [[regulatory capital]] under [[Basel III]]. The calculations here are mathematically sophisticated, and within the domain of [[quantitative finance]] as below. Credit risk is inherent in the business of banking, but additionally, these institutions are exposed to [[counterparty credit risk]]. Banks typically employ [[Middle office]] [[Investment banking#Risk management|"Risk Groups"]], whereas [[front office]] risk teams provide risk "services" (or "solutions") to customers.

[[Insurers]]<ref>Thomas M. Grondin (2001). [https://www.soa.org/globalassets/assets/library/proceedings/record-of-the-society-of-actuaries/2000-09/2001/january/RSA01V27N218PD.PDF  "Risk Management Practices in the Insurance Industry"] {{Webarchive|url=https://web.archive.org/web/20250320092151/https://www.soa.org/globalassets/assets/library/proceedings/record-of-the-society-of-actuaries/2000-09/2001/january/RSA01V27N218PD.PDF |date=20 March 2025 }}. [[Society of Actuaries]]</ref> [[Financial risk management#Insurance|manage their own risks]] with a focus on [[Solvency ratio|solvency]] and the ability to pay claims: [[Life insurer|Life Insurers]] are concerned more with [[longevity risk]] and [[interest rate risk]]; Short-Term Insurers ([[property insurance|Property]], [[health insurance|Health]],[[casualty insurance|Casualty]]) emphasize [[Catastrophe modeling|catastrophe-]] and claims volatility risks. For expected claims [[actuarial reserve|reserves]] are set aside periodically, while to absorb unexpected losses, a minimum [[Solvency II|level of capital]] is maintained.

===Quantitative finance===
[[File:Dojima-Rice-Exchange-Osaka-by-Yoshimitsu-Sasaki.png|thumb|right|alt=Dōjima Rice Exchange, the world's first futures exchange, established in Osaka in 1697.|[[Dōjima Rice Exchange]], the world's first [[futures exchange]], established in [[Osaka]] in 1697]]
{{main|Quantitative analysis (finance)}}
Quantitative finance—also referred to as "mathematical finance"—includes those finance activities where [[Financial modeling#Quantitative finance|a sophisticated mathematical model]] is required,<ref name="SIAM">See discussion here: {{cite web |url=https://www.siam.org/Portals/0/Student%20Programs/Thinking%20of%20a%20Career/brochure.pdf |archive-url=https://web.archive.org/web/20190305095047/https://www.siam.org/Portals/0/Student%20Programs/Thinking%20of%20a%20Career/brochure.pdf |archive-date=2019-03-05 |url-status=live |title=Careers in Applied Mathematics|publisher=[[Society for Industrial and Applied Mathematics]]}}</ref> and thus overlaps several of the above.

As a specialized practice area, quantitative finance comprises primarily three sub-disciplines; the underlying theory and techniques [[#Financial mathematics|are discussed]] in the next section:
# Quantitative finance is often synonymous with [[financial engineering]]. This area generally underpins a bank's [[Investment banking#Sales and trading|customer-driven derivatives business]]—delivering bespoke [[Over-the-counter (finance)#Contracts|OTC-contracts]] and [[exotic derivative|"exotics"]], and [[Structured product#Product design and manufacture|designing]] the various structured products and solutions mentioned—and encompasses [[Financial modeling#Quantitative finance|modeling and programming]] in support of the initial trade, and its subsequent hedging and management.
# Quantitative finance also significantly overlaps [[financial risk management]] in banking, as [[#Risk management|mentioned]], both as regards this hedging, and as regards economic capital as well as compliance with regulations and [[Basel III|the Basel capital / liquidity requirements]].
# "Quants" are also responsible for building and deploying the investment strategies at the quantitative funds [[#Investment management|mentioned]]; they are also involved in [[Outline of finance#Quantitative investing|quantitative investing]] more generally, in areas such as [[trading strategy]] formulation, and in [[automated trading]], [[high-frequency trading]], [[algorithmic trading]], and [[program trading]].