What Is Finance?

Finance is a term for matters regarding the management, creation, and study of money and investments. Finance can be broadly divided into three categories:

Public finance

Corporate finance

Personal finance

There are many other specific categories, such as behavioral finance, which seeks to identify the cognitive (e.g., emotional, social, and psychological) reasons behind financial decisions.

KEY TAKEAWAYS 

Finance is a term broadly describing the study and system of money, investments, and other financial instruments.

Finance can be divided broadly into three distinct categories: public finance, corporate finance, and personal finance.

More recent subcategories of finance include social finance and behavioral finance.

The history of finance and financial activities dates back to the dawn of civilization. Banks and interest-bearing loans existed as early as 3000 BC. Coins were being circulated as early as 1000 BC.

While it has roots in scientific fields, such as statistics, economics, and mathematics, finance also includes non-scientific elements that liken it to an art.

Understanding Finance:

"Finance" is typically broken down into three broad categories: Public finance includes tax systems, government expenditures, budget procedures, stabilization policy and instruments, debt issues, and other government concerns. Corporate finance involves managing assets, liabilities, revenues, and debts for a business. Personal finance defines all financial decisions and activities of an individual or household, including budgeting, insurance, mortgage planning, savings, and retirement planning.

History of Finance:

Finance as a study of theory and practice distinct from the field of economics arose in the 1940s and 1950s with the works of Markowitz, Tobin, Sharpe, Treynor, Black, and Scholes, to name just a few. But particular realms of finance—such as banking, lending, and investing, of course, money itself—have been around since the dawn of civilization in some form or another.

Around 3000 BC, banking seems to have originated in the Babylonian/Sumerian empire, where temples and palaces were used as safe places for the storage of financial assets—grain, cattle, and silver or copper ingots. Grain was the currency of choice in the country, while silver was preferred in the city.1

The financial transactions of the early Sumerians were formalized in the Babylonian Code of Hammurabi (circa 1800 BC). This set of rules regulated ownership or rental of land, employment of agricultural labor, and credit. Yes, there were loans back then, and yes, interest was charged on them—rates varied depending on whether you were borrowing grain or silver.

By 1200 BC, cowrie shells were used as a form of money in China. Coined money was introduced in the first millennium BC. King Croesus of Lydia (now Turkey) was one of the first to strike and circulate gold coins around 564 BC—hence the expression, “rich as Croesus.”

Early Stocks, Bonds, and Options:

From the 6th century BC to the 1st century AD, the ancient Greeks enumerated six different types of loans; personal loans charged interest as high as 48% per month.1 There were also options contracts. According to Aristotle, a man named Thales went long on olive presses—buying the rights to use them, as he anticipated a big olive harvest. (He was right.)

Bills of exchange were developed during the Middle Ages as a means of transferring funds and making payments over long distances without physically moving large quantities of precious metals.1 Thirteenth-century merchants, bankers, and foreign exchange dealers used them in major European trading centers, like Genoa and Flanders.

The first financial exchange, dealing in commodities and, later, bonds and futures contacts, was the Antwerp Exchange, founded in 1460. During the 17th century, the action shifted to Amsterdam. 1602 saw the arrival of the first public company, the VOC (Vereenigde Oost-Indische Compagnie or United East India Company), which issued shares anyone could trade—on the newly created Amsterdam Exchange, the Western world's first stock market.

Advances in Accounting:

Compound interest—interest calculated not just on principal but on previously accrued interest—was known to ancient civilizations (the Babylonians had a phrase for “interest on interest,” which basically defines the concept). But it was not until medieval times that mathematicians started to analyze it in order to show how invested sums could mount up: One of the earliest and most important sources is the arithmetical manuscript written in 1202 by Leonardo Fibonacci of Pisa, known as Liber Abaci, which gives examples comparing compound and simple interest.