In Western scientific and educational literature, general definitions of finance are usually not given, finance is interpreted quite broadly. Usually, it is specified what kind of finance we are talking about: public, corporate or personal finance. Public finance is understood as the process and mechanism of formation and use of public resources, the balance of revenues and expenditures, as well as the corresponding methods of control. Corporate finance means "proper money management" or "the art and science of money management". Thus, the terms "financial management", "managerial finance", "corporate finance" and "business finance" are practically equivalent and are interchangeable. The theory of finance refers to the theories of arbitrage pricing, capital structure, portfolio theory, the theory of pricing of financial assets, options and other theories based on G. Markowitz, W. Sharp, R. Merton, F. Modigliani, M. Miller, J. Tobin, F. Black, M. Scholes and others.

History

Banking already existed in Ancient Greece and Ancient Rome. The speeches of the Athenian orators contain information about the drawing up of a contract when opening a deposit in a bank, about the value of the collateral and the amount of the loan interest. Both in Ancient Greece and in Ancient Rome, banks arose from the offices of money changers. At the same time, financial activity was not considered prestigious, so in Greece it was carried out by slaves (who eventually gained freedom) and foreign metics (who eventually received citizenship). In ancient Rome, representatives of the privileged class of equestrians became argentaria bankers. As follows from Cicero's speeches, they could have become influential people, but this did not add respect to them.

In the Middle Ages in Europe, at first, as in other areas, there was a regression in the field of finance compared to antiquity, but at the turn of the XII-XIII centuries, the expansion of trade and craft activities led to the development of the financial sphere. For a long time, the main creditors of the peasants were monasteries, and in the cities Jews issued loans at interest. This was due to the fact that Jews were forbidden to engage in agriculture, so they had to look for unoccupied niches. In addition, usury was condemned by the Catholic Church, and its power did not extend to the Jews. However, as Jews were expelled from England (in 1290 and 1306) and France (in 1394), loans began to be issued by Christian Italians (immigrants from Lombardy, with whom the word "pawnshop" originated), and later by local residents. In this regard, the attitude of the Church to usury began to soften: now only the collection of "excessive" interest was condemned.

In the Middle Ages, churches and monasteries were considered the safest place to place money and store treasures, as church buildings were considered inviolable. Founded in 1119, the Templar Order successfully used this to their advantage. The Templars are called the inventors of checks - now people, having given money to the Templars, could go on a pilgrimage with a note on a piece of leather and receive coins for it in any Templar commandery. The authenticity of the check was certified by the depositor's fingerprint, so there was no need to fear that it would be taken away by robbers on the way. The financial activities of the Templars were not limited to this. When a client handed over a certain amount to the Templars in Paris, a kind of current account was opened in his name. If two clients had current accounts with the Templars, then mutual payments between them could be made by means of a simple entry in the account books. The Templars issued loans, first for pilgrimage, and then for other purposes, including to rulers. For example, the English king John the Landless, in order to get a loan of 3 thousand marks from the Templars, had to give them gold for this amount as collateral. Pope Alexander III, expelled from Rome, often experienced financial difficulties during his forced movements and took loans from the Templars. The Templars were so skilled in financial matters that the French kings entrusted them with the management of their finances. Thus, under Philip Augustus, for 25 years, the royal treasury was managed by the treasurer of the Templars, brother Haimard; he also carried out various financial commissions of the Roman Curia, went to Rome to Pope Innocent III to negotiate the collection of tithes, monitored the correct receipt of money for the Crusades, and issued loans to both clergy and laymen.

Commodity-money relations reached the highest level in Italy. In the XIV century, bills of exchange began to be widely used there. It was the Italians who developed the norms of the bill of exchange law. Genoa and Florence had the most important markets for bills of exchange; Italians were managers of bill exchanges in other European countries. For example, in Leipzig, bulletins on bill rates were published in Italian until the middle of the XVIII century. In the 14th century, insurance contracts also appeared, for the first time in Venice.

Gradually, some bankers became very powerful people. In the 15th century, the Medici family used their bank to seize power in Florence, and in the early 16th century, Jacob Fugger spent a lot of money assembling a consortium of German and Italian bankers to bribe the electors and make the future Charles V Holy Roman Emperor. After a while, Fugger received a monopoly on silver mining from the new emperor.

From the end of the XV century, the Age of Great Geographical Discoveries began, which led to the formation of the world economy and the beginning of the era of primitive accumulation. Due to the fact that the port of Amsterdam became an important transshipment center, by the 17th century, a financial sector had developed in this city, serving not only foreign trade, but also manufacturing industries. In 1602, the Amsterdam Stock Exchange was established, and in 1609, the City of Amsterdam founded the Bank of Amsterdam. Amsterdam has become an international financial center. Amsterdam financiers invested in foreign bonds; The authorities of these states themselves asked Amsterdam entrepreneurs to organize their loans. Amsterdam bank Hope & Co.Founded in 1762 by a family who had emigrated from Scotland, by the end of the 18th century it had become the largest in Europe. In 1800, the Amsterdam Stock Exchange listed 70 bond issues from 14 countries, with a total value of twice the GDP of the Netherlands.

By the end of the 18th century, London began to compete with Amsterdam for the role of an international financial center. In 1773, brokers meeting at London's Jonatan' Coffee House decided to name it the London Stock Exchange. There was trade not only in government bonds, but also in securities of joint-stock companies, primarily the Bank of England and the British East India Company. The largest bank not only in the City of London, but also in the world, was Barings & Co, which maintained a partnership with Hope & Co. In particular, in 1803, both of these banks acted as intermediaries in the purchase of Louisiana by the United States from France: they paid $11.25 million in gold to the French government and received the same amount in government bonds from the US authorities.

By the 1840s, London was the world's main financial center. The London-based Rothschild banking house has outpaced other banks as the main agent for foreign government loans. London was followed by Paris, followed by Amsterdam, Brussels, Frankfurt and Geneva.

In the second half of the 19th century, joint-stock banks became widespread, which had significant capital and could also attract a lot of money from private depositors. There was a massive construction of railways, which required very high costs. Joint-stock railway companies issued bonds and sold their shares on the stock markets of the world's largest financial centers, primarily in London. If in 1855 $1 billion was invested abroad in the world, then in 1870 it was already $7.7 billion.

By the end of the 19th century, New York had become one of the world's main financial centers. The formation of the US stock market began with railway companies raising funds by placing shares and bonds on the New York Stock Exchange. At the same time, before the First World War, the United States was the main importer of capital in the world: American companies owed foreign investors $7 billion (two-thirds of this amount was British). New York investment banks invested the funds of their clients, including foreign ones, in the rapidly growing shares of American companies; J.P. Morgan & Co. became the largest investment bank in the world at the beginning of the 20th century.

In the 1970s, Tokyo also became an international financial center, in 1987 the profit of the largest Japanese investment bank Nomura Securities was higher than that of the American investment banks Citibank and Merrill Lynch combined, and the total value of shares traded on the Tokyo Stock Exchange surpassed the value of shares traded on the New York Stock Exchange. However, then an economic crisis began in Japan, which in the 1990s grew into a long-term stagnation of production, and the value of shares on the Tokyo Stock Exchange from 1989 to 1998 halved, foreign banks reduced their operations in the Japanese stock market, and some stopped them altogether.

In the 1980s, Singapore and Hong Kong also became international financial centers.

Classification of finances

Traditionally, finance is divided into public finance (centralized, state and municipal finance) and private finance (decentralized). The latter include both corporate finance (finances of organizations) and household finances (personal and family finances).

The most significant feature of the difference between public and private finance is that public finance and private sector finance have different goals. The main goal of the private sector is to make a profit, that is, to increase the exchange value of capital as much as possible through reproduction and/or speculation. In turn, the purpose of public finance is the distribution and redistribution of public goods consumed at the national and regional level.

Due to the significant difference between household finance and corporate finance, these categories are considered as separate, thus, in general, finance is classified into:

public finance,
Corporate Finance,
personal finance.
In corporate finance, due to the specifics and special role, the finances of the financial services sector are separately distinguished, first of all, the finances of credit institutions (banks) and the finances of insurance organizations. Sometimes the finances of non-profit organizations, as well as the finances of small businesses, are also distinguished.

Financial sciences

Finance (primarily public) is studied within the framework of the scientific disciplines "Finance", "Finance and Credit", "Finance, Money Circulation and Credit". These disciplines study money and socio-economic relations related to the formation, distribution and use of material resources. Finance is an applied economic discipline.

Financial management (primarily corporate) is studied within the discipline of financial management, as well as "finances of organizations (enterprises)". Financial management of a bank is usually studied within the framework of the discipline "Banking". Control over financial flows is studied within the framework of the discipline "Financial Control".

Methods and models for analyzing financial information are studied within the framework of financial mathematics. Financial mathematics is the basis of financial management.

At the level of microeconomics

Financial mathematics is a set of tools for modeling and supporting decision-making used in various branches of finance, including in the calculation of interest rates and financial instruments.
Investments are criteria and methods for choosing an object for investment depending on profitability.
Asset valuation is the valuation of financial assets (stocks, bonds, options, see financial asset), companies or real estate.
Financial policy is the choice of a method of financing the company in order to optimize the weighted average cost of capital (WACC). The choice of the optimal capital structure, dividend policy, etc., are the central issues of the financial policy of companies.
Modern portfolio theory is the optimization of asset allocation through diversification. Originally developed for financial markets, this discipline also serves in the field of corporate finance. In general, this is risk management.
Behavioral finance is the identification of psychological factors, individual and collective, that affect financial decisions and their impact on price formation and financial results.
At the level of macroeconomics
Monetary policy and international finance – for example, monetary policy implemented by central banks in cooperation with international financial organizations (IMF, World Bank, Bank for International Settlements, EIB, EBRD, etc.).

Basic financial

Financial activity is the application of a number of techniques and procedures that individuals and organizations use to manage their finances. The difference between income and expenses and the assessment of investment risk are especially important.

If income exceeds expenses (i.e. there is a surplus), then the difference can be borrowed at interest or invested in some business or in the purchase of property. This is the essence of financial activity – if there are free financial resources, then they must be put into business in order to bring additional income.

If expenses exceed income (that is, there is a deficit), then it is necessary to make up for the missing financial resources. This can be done by obtaining a loan, or by issuing shares or bonds on the stock exchange. In the modern world, the borrower does not need to go and look for a lender himself – he can go to a bank or to the stock exchange, and the corresponding financial institution will find a lender for a certain commission. Or vice versa - it will find a borrower for the lender. In fact, the whole essence of banking and stock exchange activities is to effectively connect those in need with those who have free funds.

As mentioned earlier, the bank serves as an intermediary between borrowers and lenders. In practice, it looks like this: a lender (depositor) comes and puts his free money into a bank account (deposit) in order to receive interest income from his deposit. Then the borrower comes to the bank to get a loan. The bank lends the depositor's money to the borrower at interest, and this interest includes both income for the depositor and income for the bank itself, plus some interest to insure the risk of non-repayment of the loan.

The exchange also serves the purpose of connecting creditors and borrowers, but, unlike a bank, it does not have its own "financial buffer", that is, it cannot put money on deposit until a borrower appears. The exchange can connect the lender and the borrower only in real time. The bank can save funds, that is, the lender (depositor) can come to the bank today, and the borrower (who wants to borrow the depositor's money) can appear only in a month.

In addition, the exchange trades deposits and loans in an indirect form. A person wishing to take a loan issues shares or bonds on the stock exchange. The share is the owner's share in the borrowing company, and, therefore, at the same time serves as collateral for the loan. A bond is also a type of loan, but, unlike a share, it does not give ownership of the borrowing company, although it may provide for some separate collateral. Interest income (dividends, coupon) can also be paid on stocks and bonds. If a dividend is not paid on the share, it is assumed that the share will grow in price, and the creditor who bought the share will be able to receive the profit due to him only after the sale of the more expensive share.

Financial services

A general term to describe the services of companies whose activities involve monetary or investment services.

Financial services include the following types of services:

Banking services
Investment Banking Services
Insurance services
Leasing services
Factoring services
Financial markets

The financial market is a market that encompasses primarily the capital market and the money market, often represented by stock exchanges. It serves the trading of financial assets, manages financial risks and promotes investments. It is customary to divide into the following financial markets:

Stock market
Derivatives Market
Foreign Exchange Market (Forex)
Money Market (Money Market)
According to IMF estimates, the current value of financial products on the world market is three and a half times higher than the value of the products of the real economy

Personal Finance

Maintaining personal accounting, planning personal income and expenses (drawing up a financial plan) is not mandatory. But the use of such approaches allows for a more rational use of available resources. A number of typical sources of income and areas of expenditure are usually taken into account.

Income

earnings;
pensions and compensations due;
income from bank deposits;
income from renting out real estate;
income from existing securities;
Income from copyrights and licenses;
other income.
Investment
During the analysis, reserves (for example, unused assets) are identified and options for their use or sale are considered.

Expenses

taxes;
Payment for housing and utilities;
payment for meals;
medical services (including health insurance);
Repayment of loans;
purchase of durable goods;
insurance of risks (property, health, etc.);
deductions for pension savings;
other expenses.
In long-term financial planning, it is necessary to take into account the possibility of inflation.

Finances of enterprises

The main task of corporate finance is the financial support of the organization's activities. It is also important to find the optimal balance between business profitability and financial risks. Short-term bank loans are usually taken to meet the current financial needs of the business. To meet long-term needs, bonds or shares without a fixed dividend are more often issued. Such strategic decisions about loans or the issuance of shares ultimately determine the very capital structure of the organization.

Another important aspect of corporate finance is investment decisions, that is, decisions about the investment of available free funds. After all, an investment is an investment of a free asset with the hope that it will increase in value over time. Investment management is the most important aspect of finance at any level, and the corporate level is no exception. Before making an investment decision, you need to analyze the following factors:

Relationship between: goal – time period – inflation – risk aversion – taxes
Choosing between an active and passive hedging strategy
Assessment of the effectiveness of the investment portfolio
Financial management in organizations is in many ways similar to accounting. But accounting is concerned with accounting for transactions that have already taken place (and, therefore, accounting for "historical" financial information). And financial management looks to the future and is engaged in the analysis of efficiency and planning of future financial operations.

State finances

Government loan

Separately, it is necessary to say about government bonds (they are also called "government loan bonds"). These securities are issued by the government of the country and distributed within the country and abroad. This is like a loan that the state itself takes for its needs. Of course, the richer and more stable the state, the more willing it is to issue loans and buy its bonds. Therefore, the United States is the country with the largest public debt in the world. Many countries around the world hold their foreign exchange reserves in U.S. government securities. The more efficiently the state can dispose of the money borrowed, the more profitable it is to take a loan. And vice versa, if the state cannot recoup the interest on the loan, then loans become a heavy burden for the state budget.

Revenue distribution
State revenues are distributed among the following main expenditure items:

Defenses
Law enforcement
industry
power engineering
Capital Construction
housing and communal services
transport
Road facilities
connection
science
health care
education
sport
culture
Among the forms of allocations are subsidies, grants and subventions.

Financial economics

Financial economics is a branch of economics that studies the relationship between financial quantities, such as price, value added, equity, etc. Here are the main areas of research:

Valuation – Determining the intrinsic value of an assetHow high are the risks of this asset? (finding the correct discount rates)
What kind of cash flow can an asset cause? (discounted cash flows)
What is the market price of a similar asset? (relative evaluation)
Do financial flows depend on any other asset or event? (derivative valuation)
Financial Markets and InstrumentsGoods
Stock
Bonds
FX Market Instruments
Derivative securities
Financial institutions and regulations

Interpretation of the term "finance"

"Western" interpretation

Modern interpretations of the term finance originate in cameralism, the German version of mercantilism, a science that dealt with the formation and intended use of the state treasury. By finance, cameralists understood the management of revenues intended for use for the needs of the state. The concepts of "cameral science" and "financial science" were sometimes used as synonyms in Western literature, but after the chamber collegiums were established in the structure of the cameral economy, which included the police, the term "finance" acquired an independent, narrower meaning: "... a branch of government activity aimed at the acquisition, preservation and proper use of material values necessary for state power and consisting in the conduct of one's own economy or in the care of state revenues and expenditures. These cares of the government... constitute the subject of the so-called finance, financial management, government economy or state economy" (in pre-revolutionary Russia the term was used in the same meaning as in Germany.

In the English-language literature of the second half of the 19th and early 20th centuries, the term "finance" was not interpreted as unambiguously as in German. In particular, Webster's Dictionary (1886 edition) said that finance is "the income (revenue) of the ruler or the state; sometimes, the income of an individual". Thus, this definition reflects the point of view of a narrow circle of Western scholars of that time, according to which the sphere of finance was limited only to state revenues] and, in addition, indicates the use of the term "finance" not only in relation to the public sector of the economy, but also to the private sector. In the second half of the 19th century, in the context of finance, not only government revenues and expenditures were discussed, but also speculation in securities, capital accumulation and the interest rate on loan bank capital, as important aspects of financial science. In the book of the English author G. King "The Theory of Finance" there is no mention of the public sector of the economy at all, but it is about profit, actuarial calculations, simple and compound interest on loan capital. In this regard, the definition of finance by F. Cleveland is also indicative: "Finance is a branch of business that deals with the receipt and expenditure of funds necessary for equipping and managing an enterprise. … What are funds? How to get them? How to manage them? The answers to these three questions cover the entire field of finance." And K. Marx in his "Capital" uses the term "finance" in the context of money capital, banks and stock exchanges.

The transfer of the semantic content of the term "finance" from the public to the private sector of the economy occurred as a result of metonymy (according to the book by K. Plehn "Introduction to Public Finance" (1921)). As a result, used without qualifying adjectives ("public", "personal", "corporate"), the term "finance" received a broader meaning than it originally had, and, in addition to the public sector, began to cover issues of capital, profit, income and expenses of enterprises and individuals that it is more correct to use the adjective "fiscal" in relation to public finances, saying "fiscal year" rather than "fiscal year".

The use of the term "finance" without qualifying adjectives only in relation to the public sector of the economy was characteristic, first of all, of the German scientific school. This interpretation of finance reflects the initial stage of the development of Western financial science and has now lost its relevance. The other extreme is the use of the term "finance" (without qualifying adjectives) only in the context of the private sector of the economy. Such an approach to the interpretation of the term is often found in modern educational and scientific Western literature. The dominant approach in modern Western literature is the predominant use of the term "finance" with qualifying adjectives (public, personal, corporate) and a broad interpretation of the general term (without these adjectives).

"Public finances" are associated with the activities of the state (or local authorities), which consist in obtaining and using the funds necessary for the performance of proper functions, with the process and mechanism of formation and use of state resources, the balance of revenues and expenditures, and the corresponding administrative control. Some authors also emphasize that the subject of public finance lies on the border between economics and politics, and also note that in modern societies the revenues and expenditures of public authorities consist almost exclusively of cash receipts.

Public finance is based on the theory of the distribution of public goods. Its essence lies in the fact that there are certain goods (national defense, protection of public order, roads, etc.), the need for which cannot be satisfied and paid for individually by means of commodity-money exchange. As a result, the need for such collective goods cannot be realized through the market mechanism. Based on this, the distribution of public goods is assumed by the state represented by central and local authorities through the budgets of the corresponding levels. "Public expenditure is part of the consumption of society, in which the state is a regulatory body". Through fiscal and budgetary instruments, public goods are not only distributed, but also redistributed. In particular, redistribution can be done through a combination of high taxes on wealthy citizens and subsidies on low-income citizens. Thus, through the redistribution of benefits between the high-income and low-income strata of the population, the concept of social justice and humanism is realized: "If we believe that it is the moral duty of society as a whole to help the weak, then helping the poor gives the common good."

Corporate finance is concerned with the acquisition and allocation of funds or resources of a corporation in order to maximize the welfare of shareholders, with the effective and efficient management of resources, cash flows to achieve the goals of this organization, which implies "planning and control over the provision of resources (where they come from), allocation of resources (where they are deployed), ultimate control over resources (whether they are used efficiently or not)". Western authors identify two key concepts of corporate finance that are of great importance in decision-making: the relationship between risk and return and the concept of the time value of money. Some authors define finance as the assessment and management of risk on the basis that, from the point of view of finance, "a corporation is a set of risky cash flows."