Finance is a term related to managing, creating, and learning about money and investing. Finance can be divided into three major categories:
Public FinanceCorporate FinancePersonal 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
- Behavioral finance is an area of study focused on how psychological influences can affect market outcomes.
- Behavioral finance can be analyzed to understand different outcomes across a variety of sectors and industries.
- One of the key aspects of behavioral finance studies is the influence of psychological biases.
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 is a study of theory and practices distinct from the field of economics that 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.1
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.”2
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.
"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 is a study of theory and practices distinct from the field of economics that 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.1
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.”2
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.1
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