Finance vs. Economics: An Overview
Although they are often taught and presented as separate disciplines, economics and finance are interrelated and inform and influence each other. Investors are concerned about these studies because they also affect the markets a lot. Both are important and have valid applications.
In general, the focus of an economy is a larger picture in nature, such as the performance of a country, region, or market. Economics also focuses on general policy, while the focus is on financing more a specific company or industry. Finance also focuses on how companies and investors assess risk and return. Historically, economics has been more theoretical and finance more practical, but in the past 20 years the distinction has become less clear
In fact, the disciplines seem to converge in some ways. Both economists and financial professionals are employed in governments, companies, and financial markets. At some fundamental levels, there will always be decoupling, but both are likely to remain very important to the economy, investors, and markets for years to come.
Finance
Finance in many respects is a branch of economics. Finance describes the management, creation, and study of the money, banking, credit, investments, and assets and liabilities that make up financial systems, as well as the study of those financial instruments. Finance can be divided into three categories: public finance, corporate finance and personal finance.
Finance usually focuses on the study of prices, interest rates, money flows, and financial markets. Thinking more broadly, finance tends to focus on topics that include the time value of money, rates of return, cost of capital, optimal financial structures, and risk estimation.
Finance, as in the case of corporate finance, includes the management of the assets, liabilities, revenue, and debts of a business. Companies obtain financing through a variety of means, ranging from equity investments to credit arrangements. A business may take out a loan from a bank or arrange for a line of credit - getting and managing debt properly can help expand the business and eventually become more profitable.
Personal finance defines all financial decisions and activities of an individual or family, including budgeting, insurance, mortgage planning, saving, and retirement planning.
Public finance includes tax systems, government expenditures, budget procedures, stabilization policy and tools, debt issues, and other government concerns.
Special considerations
A degree in finance is a common denominator among many of those who work on Wall Street as analysts, bankers, or fund managers. Likewise, many employees of commercial banks, insurance companies, and other financial service providers have college backgrounds in finance. Aside from the financial industry itself, a finance degree can serve as a pathway to senior management for businesses and corporations.
Financing involves assessing the value of financial instruments, such as determining the fair value of a wide range of investment products. Financing includes the use of equity pricing models such as the Capital Asset Pricing Model (CAPM) and options models such as Black-Scholes. Financing also includes determining the optimal dividend or debt policy for the company or the appropriate asset allocation strategy for the investor.
It can also be argued that finance influences markets through a seemingly constant flow of new products. Although many derivatives and advanced financial products were damaged in the wake of the Great Recession, many of these instruments were designed to address and solve the needs and wants of the market. For example, derivatives can be used to hedge risk for investors, hedge funds, or large banks, thus protecting the financial system from harm in the event of a recession.
Economics
Economics is a social science that studies the production, consumption, and distribution of goods and services, with the goal of explaining how economies function and how their customers interact. Although described as a "social science" and often treated as liberal arts, modern economics is often very quantitative and pragmatically oriented towards mathematics. There are two main branches of economics: macroeconomics and microeconomics.
Macroeconomics is the branch of economics that studies how the overall economy behaves. In macroeconomics, a variety of macroeconomic phenomena are comprehensively examined, such as inflation, national income, gross domestic product, and changes in unemployment.
Microeconomics is the study of economic tendencies, or what is likely to happen when individuals make certain choices or when factors of production change. Just as macroeconomics focuses on how the macroeconomy behaves, microeconomics focuses on the smaller factors that influence the choices that individuals and firms make.
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