What Does Finance Mean? Its History, Types and Importance Explained

What Is Finance?

Finance means movement and management of money. It explains how people, businesses and governments earn, save, borrow, invest and spend money.

When it comes to personal finance, it is about how a person plans their income and expenses – like making a budget, saving money, investing for the future or taking a loan when needed.

Corporate finance is about how companies handle their money. It includes collecting funds, issuing company shares, buying machines or property, paying salaries and growing business. Public finance deals with the money of a government. It includes how government collects taxes, manages loans, pays for public services and supports country’s economy.

In simple words, finance is very important because it helps people and organizations build wealth, make smart decisions and reduce risk.

How Finance Works

Finance has three main parts – public finance, corporate finance and personal finance.

1. Public Finance:

This is about how governments use and control money. It includes things like collecting taxes, making budgets, spending on public needs, managing debt and improving economy.

2. Corporate Finance:

This part focuses on how companies handle their money. It includes managing their income, expenses, assets and debts to keep business running smoothly and earn profits.

3. Personal Finance:

This is about how a person or a family handles their money. It includes saving money, buying insurance, planning for a home loan and preparing for retirement.

Important Finance Words You Should Know

• Asset: Something that has value, like cash, land, gold or a house. A business can have short-term assets or long-term assets.
• Balance Sheet: A paper or record that shows what a company owns (assets) and what it owes (debts). If you remove debts from assets, you get company’s real value.
• Cash Flow: It means how money moves in and out of a business or home.
• Compound Interest: Interest that is added not only on main amount but also on interest already earned. It grows faster than simple interest.
• Equity: It means ownership. When you buy a company’s shares, you own a small part of that company.
• Liability: It means any money a person or company has to pay back, like a loan or debt.
• Liquidity: It means how easily something can be turned into cash. For example, selling a house takes time, so it is not very liquid.
• Profit: Profit is money left after paying all costs and expenses. A profit and loss report shows how much a business earned or lost.

History of Finance

Finance became a separate subject from economics around 1940s and 1950s. Thinkers like Harry Markowitz, William Sharpe, Fischer Black and Myron Scholes helped shape modern finance.

However, money management and trading are very old ideas. People have been borrowing, lending and investing since ancient times.

Sumerians and Babylonians had rules for lending and borrowing written in the Code of Hammurabi around 1800 BCE. These laws explained land renting, worker payment and credit. Even in those days, people took loans and paid interest – and rates changed depending on whether loan was in grain or silver.

By 1200 BCE, people in China used cowrie shells as money. Later, coins were made. Around 564 BCE, King Croesus of Lydia (now Turkey) made and used gold coins, which led to famous saying, “rich as Croesus”

In ancient Rome, coins were kept in temple basements because priests were seen as honest. Temples acted like banks and even gave loans.

Early Stocks, Bonds and Options

First stock exchange is believed to have started in Antwerp (Belgium) in 1531. Later, East India Company became the first company to sell public shares and pay profits to its investors in 1600s.

London Stock Exchange was formed in 1773 and New York Stock Exchange started about 20 years later.

First bond appeared around 2400 BCE on a stone tablet that showed a debt promise for repaying grain.

Governments later began using bonds to raise money for wars. The Bank of England was made to fund British Navy in the 1600s. The U.S. government also sold bonds to support Revolutionary War.

Idea of options trading is very old too. The Greek thinker Aristotle wrote about Thales, a man who predicted a great olive crop and bought rights to use all olive presses early. When crop came, he earned big profits. Later, in 17th century Amsterdam, people were already using forward and options contracts in a proper trading system.

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Growth in Accounting

People have known about compound interest for thousands of years. Even the Babylonians had a phrase for “interest on interest”
But during medieval times, scholars began studying it deeply to show how investments can grow over time.

A famous book called “Liber Abaci” written in 1201 by Leonardo Fibonacci compared compound and simple interest.

Another important book called “Summa de Arithmetica” was written by Luca Pacioli in 1494, which became the first full guide on accounting.

In 1612, William Colson published a book with the first compound interest tables in English. The next year, Richard Witt wrote “Arithmeticall Questions”, which made compound interest more popular.

Later, by the end of the 17th century, people used interest and survival rates to create life annuities in England and the Netherlands. These helped people plan income for their old age.

Types of Finance

1. Public Finance

Public finance is about how government manages money. It makes sure that money is used properly for country’s needs and that economy stays stable. The government collects most of its money from taxes. It also earns money by borrowing from banks, insurance companies, other countries and by receiving dividends from companies it owns.

Local and state governments also get grants and help from central (federal) government.

Other ways the government earns money include:

• Fees from services like airports, ports or transport
• Fines when people break the law
• Money from licenses like driving or business permits
• Selling government bonds and securities

2. Corporate Finance

Corporate finance is about how businesses get and use money to grow and earn profit.

A company can take a loan from a bank or open a credit line to get funds. If it handles its debt wisely, it can grow and become more successful. New businesses, called startups, can get money from investors who give funds in return for some ownership in company. When a company grows well, it can sell its shares to the public on stock market through something called an IPO (Initial Public Offering). This brings in a lot of money to help company expand.

Big companies may also sell bonds or extra shares to raise more money. They can also invest in other companies or buy them to increase their earnings.

Some examples include:

• Bausch & Lomb, a healthcare company, sold its shares in 2022 and raised about $630 million.
• Ford Motor Credit manages loans and bonds to help Ford Motor Company.
• HomeLight, a real estate company, raised $115 million by mixing equity and loan financing to buy another company called Accept.

3. Personal Finance

Personal finance means how a person or family plans and manages their own money. It includes checking how much money they earn and spend, saving for future needs and setting goals for both short and long terms.

Personal finance includes things like:

• Using credit cards wisely
• Buying insurance for life, home or health
• Taking a home loan or car loan
• Saving money for retirement
• Managing bank accounts and investments

Main steps in personal finance are:

• Checking your current financial position – like your savings and monthly income.
• Buying insurance to stay safe from big risks.
• Planning and paying your taxes.
• Saving and investing regularly.
• Making a retirement plan.

Earlier, personal finance was taught as “home economics” in schools and people thought it was only for housewives. But now experts say that learning about personal finance is very important for everyone, because it affects the whole country’s economy.

4. Social Finance

Social finance means investing money to do good for society while also earning some profit. It includes giving money to social businesses, charity groups or cooperatives that help people or solve problems in community. Sometimes it includes microfinance, where small loans are given to small business owners in poor areas so they can start or grow their work. The lenders earn some interest and at same time help improve lives.

There are also social impact bonds (also called Pay for Success Bonds). These are special deals where investors earn money only if a social goal – like improving education or reducing poverty – is achieved.

5. Behavioral Finance

Behavioral finance is about how people actually think and behave with money, not just what financial theories say they should do. Earlier, experts believed that people always make smart and logical financial decisions. But over time, they noticed that many people act in strange or emotional ways with money. So, scientists started using psychology to understand these behaviors. This became known as behavioral finance.

It studies why people sometimes make wrong or risky money choices and how emotions like fear or greed affect investing.

Famous researchers like Daniel Kahneman, Amos Tversky and Richard Thaler helped create this field. They studied how human thinking affects money decisions.

Here are some main ideas in behavioral finance:

• Mental Accounting: People often separate their money into different “boxes” For example, keeping a jar of savings for a trip while still having unpaid credit card bills. This behavior doesn’t always make sense.
• Herd Behavior: Many people copy what others are doing – like buying a stock just because everyone else is buying it. This can cause big market bubbles or crashes.
• Anchoring: People link their decisions to some random number or belief. For example, thinking a ring must cost two months’ salary or buying a stock again just because it once cost more.
• High Self-Rating (Overconfidence): Many investors think they are smarter than others. They believe they can easily pick winning stocks. But studies show that too much confidence often leads to bad results and losses.

Finance vs. Economics

Finance and economics are connected subjects. They both study how money moves and how people and organizations use it.

Economics looks at bigger picture, like how a country, market or region is doing. It helps us understand how resources are shared, how prices change and how public policies affect people.

Finance, on other hand, focuses on individuals, companies or industries – how they earn, spend, save and invest money.

For example, microeconomics (a part of economics) studies small-level changes. It says that if the price of cars goes up, people will buy fewer cars. Or, if a copper mine in South America closes, price of copper will increase because supply is less.

Finance focuses on how people and companies balance risk and reward – how they make safe or risky money decisions.

In simple words:

• Economics explains why things happen in market.
• Finance explains what to do about it.

Earlier, economics was more theoretical (based on ideas) and finance was more practical (based on real use). But now, both are closely related and often work together.

Is Finance an Art or a Science?

Finance is both an art and a science.

Finance as a Science

Finance uses many scientific methods. It depends a lot on mathematics, statistics and data. Many modern finance ideas are built like formulas in science.

For example, models like Black-Scholes model or Capital Asset Pricing Model (CAPM) use math to explain how stock prices move and how people should invest.

These scientific models assume that people always make logical and emotionless decisions. They look at finance as a subject that follows clear rules – just like physics or chemistry.

Finance as an Art

But in real life, people are not always logical. Emotions like fear, greed and excitement affect financial decisions. This makes finance an art as well.

For example: In 1929 and 1987, stock market suddenly crashed. These events are known as Black Thursday and Black Monday.
Science alone could not explain these crashes. Fear and panic among people also played a big role.

Researchers have also found strange patterns in markets, such as:

• Sunny days often make investors feel more positive, so they buy more stocks.
• The January effect, where prices fall at end of year and rise again at the beginning of the next year.

These things show that stock market does not always follow exact scientific rules. human side of finance makes it part art, part science.

Careers in Finance

There are many good job options in field of finance. Here are some common ones:

• Accountant: Keeps track of a company’s money, records income and expenses and prepares financial reports.
• Auditor: Checks financial records to make sure everything is correct. Auditors can work for companies, clients or government.
• Banker: Helps people and businesses with loans, savings and investments.
  A commercial banker works with businesses.An investment banker helps companies raise money or sell/merge with other firms.
• Capital Manager: Helps companies decide where to invest their money for best results.
• Lender: Works in banks or loan offices to give loans for homes, cars or businesses.
• Market Analyst: Studies market, checks trends and gives advice to help companies make financial decisions.

How Much Do Finance Jobs Pay?

Here are some average yearly salaries (approximate figures):

• Personal Financial Advisor: Around $189,000 per year.
• Treasury Analyst: Around $104,000 per year.
• Corporate Treasurer (experienced): Around $180,000 per year.
• Financial Analyst: Around $106,000 per year.
• Accountant or Auditor: Around $88,000 per year.
• Certified Public Accountant (CPA): Around $231,000 per year.
• Financial Manager: Around $155,000 per year. They make plans and reports for a company’s long-term financial goals.
• Securities Broker: Around $155,000 per year.
• Commodities Broker: Around $204,000 per year.
• Chief Financial Officer (CFO) or Chief Compliance Officer usually earns most. As of April 2025, CFOs earned about $154,982 per year before bonuses.

FAQs

How Can I Learn Finance?

If you want to learn finance, you can start by studying it in college. A bachelor’s degree in finance will help you understand basic ideas. If you want to go deeper, you can study for a master’s degree in finance,

which will teach you more advanced topics. You can also study MBA (Master of Business Administration). It includes finance along with other business subjects. If you already finished your studies but still want to learn finance, you can try the CFA program (Chartered Financial Analyst). It has three exams and is known all over the world. It is hard but it helps you learn a lot about finance. There are other programs too, like CFP (Certified Financial Planner), which helps people learn how to plan money and investments.

What Is the Purpose of Finance?

Main goal of finance is to help people and companies use money in right way. Finance helps in borrowing and lending money, investing, raising funds and buying or selling shares.

For example, without finance, most people could not buy a house because they could not pay all the money at once. Finance helps them take a loan and pay slowly. Companies also use finance to grow their business, build new things or start new projects.

In simple words, finance helps people and companies get money when they need it and use it wisely to earn more in future.

What Is the Difference Between Accounting and Finance?

Accounting is a part of finance. It keeps track of daily money work, such as how much money comes in and goes out. Accounting includes things like bookkeeping, tax filing and checking accounts (auditing). Finance, on the other hand, looks at the bigger picture. It helps people and companies plan, invest and grow their money. So, accounting is about recording money, while finance is about using money to make more.