A bank earns its keep in the gap between two interest rates
When you deposit money, a bank pays you interest, then lends those funds to a borrower who pays a higher rate. The difference is the bank's reward for matching savers with people who need cash. That shuffle, moving money from those with surplus to those short of it, is what finance is really about.
Anyone earning more than they spend can lend or invest the surplus for a return. Anyone short can raise money in two basic ways: borrowing, through loans or by selling government or corporate bonds, or, for companies, selling shares, known as equity. Buyers range from pension funds and investment banks to private savers, called retail investors. Investment banks find the first buyers for new shares and bonds, exchanges handle later trading, and mutual funds, brokers and wealth managers serve individuals. At the biggest scale, trading between institutions is known as wholesale finance, where custom options, swaps and structured products make firms major employers of mathematically trained quants.
The field splits into three branches. Personal finance covers budgeting, insurance, loans, big purchases such as homes and cars, and saving for retirement. Corporate finance asks which projects deserve investment, whether spare cash should be reinvested or paid out as dividends, and what mix of debt and equity keeps the cost of capital lowest. Public finance deals with what governments spend, how they raise tax and other revenue, and when they issue sovereign or municipal bonds, usually planning five or more years ahead. Central banks such as the Federal Reserve, the European Central Bank and the Bank of England act as lenders of last resort and steer credit conditions.
Finance is as old as money itself, which is prehistoric; ancient and medieval societies already banked, traded and kept accounts, and a global financial system took shape in the late 19th century. As a university subject it is young, with the first doctoral programmes appearing in the 1960s and 1970s. Newer offshoots include financial technology, experimental finance that tests theories scientifically, and climate finance for curbing climate change.
Source: Finance
