Modern Financial Theory and Practice

Finance is the language of money. The basics of finance include knowing where to get credit, understanding what makes money grow, and knowing when to cash in. Money, as the saying goes, is the root of all evil. If you can understand this basic idea of finance, then you can start doing pretty much anything. Finance is the language of the financial world. And like any language, it must be learned and understood.

What does that mean to you? Basically, it means that as an analyst in a financial firm, your job is to interpret and understand the various financial statements and reports that are given to you by your clients. You have to interpret the financial statements so that you make sense of them. How does this translate into “financial science”? Basically, financial science refers to the principles that govern the ways people make and manage their money. Those who are involved in day-to-day financial activities are said to be “financial scientists.”

One branch of modern financial science is known as behavioral finance. Behavioral finance attempts to explain the reasons why people make the decisions they do. People who are involved in behavioral finance are said to have a “self-regulating” personality. These personality traits cause them to act in a certain way based on the observations of that particular person. Thus, it can be said that behavioral finance is the science of why people buy or sell stocks, why they decide to buy or sell a stock, or why they decide not to buy or sell a stock.

A big piece of behavioral finance is modern microeconomics. Microeconomics tries to describe the minute details of how people act. For example, it can describe the many small decisions that consumers make in any given day. Each of these decisions has a distinct “microeconomics” impact. Behavioral economists are involved in explaining how these microeconomics affect people’s decisions.

The first main sub category of finance is “finance logic.” This refers to the rules that all good bankers must follow. All good banners (at least those who have passed the requisite exam required for becoming a banker) adhere to a set of principles or formulas that they use to make lending and borrowing decisions. Among these are the Theory of Subsidy, The Theory of Relative Discount, The Analysis of Credit Risk, and The Concept of Efficiency.

The second main sub category of modern economics and finance is “social finance.” This includes things like public policies intended to promote investment in certain projects or activities. Public policies such as universal health care, worker pensions, and other financial programs designed to assist individuals in meeting their needs are all examples of social finance. Another subcategory of modern economics and finance is “complex finance.”

Broad Term Financial Planning and Its Application The third major area of modern finance is a broad term planning, also known as strategic management. It deals with long-term plans for investments and financing of business ventures. This sub-category of modern finance can be further split into two categories: one that deals with institutional finance and another that deals with individual and household finance. The largest portion of this broad term planning involves the activities of large banks and other large financial institutions.

All of the three main subcategories of modern financial theory and practice to deal with different aspects of finance. Each subcategory has its own area of specialization and practice. For example, personal finance deals with expenditures for living and personal financial matters. Corporate finance deals with large financial transactions for business purposes. And finally, a broad term and complex finance govern all other areas of modern financial theory and practice.

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