Finance

The financial system consists of the flows of capital that take place between individuals and households (personal finance), governments (public finance), and businesses (corporate finance). "Finance" thus studies the process of channeling money from savers and investors to entities that need it. Savers and investors have money available which could earn interest or dividends if put to productive use. Individuals, companies and governments must obtain money from some external source, such as loans or credit, when they lack sufficient funds to operate.

An entity whose income exceeds its?expenditure?can lend or invest the excess, intending to earn a fair return. Correspondingly, an entity where income is less than expenditure can raise capital usually in one of two ways:

(i) by borrowing in the form of a loan (private individuals), or by selling?government or corporate bonds.

(ii) By a corporation selling?equity, also called stock or shares (which may take various forms:?preferred stock?or?common stock). The owners of both bonds and stock may be?institutional investors?– financial institutions such as investment banks and?pension funds?– or private individuals, called?private investors?or?retail investors; see?Financial market participants.

The?lending?is often indirect, through a?financial intermediary?such as a?bank, or via the purchase of notes or?bonds?(corporate bonds,?government bonds, or mutual bonds) in the?bond market. The lender receives interest, the?borrower?pays a higher interest than the lender receives, and the financial intermediary earns the difference for arranging the loan.?A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity.

Investing typically entails the purchase of?stock, either individual securities or via a?mutual fund, for example. Stocks are usually sold by corporations to investors so as to raise required capital in the form of "equity financing", as distinct from the?debt financing?described above. The financial intermediaries here are the?investment banks. The investment banks?find the initial investors?and facilitate the listing of the securities, typically shares and bonds. Additionally, they facilitate the?securities exchanges, which allow their trade thereafter, as well as the various service providers which manage the performance or risk of these investments. These latter include?mutual funds,?pension funds,?wealth managers, and?stock brokers, typically servicing?retail investors?(private individuals).

Inter-institutional trade and investment, and?fund-management at this scale, is referred to as "wholesale finance". Institutions here?extend the products offered, with related trading, to include bespoke?options,?swaps, and?structured products, as well as?specialized financing; this "financial engineering" is?inherently mathematical, and these institutions are then the major employers of?"quants".