The field of finance is composed of three areas:'institutions and markets, investments, and financial management. These areas are illustrated in the accompanying diagram. Part 2 focuses on the investments area of finance. Investments involve the sale or marketing of securities, the analysis and valuation of securities and other financial claims, and the management of investment risk through holding diversified portfolios. Money flows into the financial markets from households' and firms' retained earnings. Funds flow into financial institutions such as banks and life insurance companies, which, in turn, invest the funds in various securities such as stocks and bonds, as well as other financial claims. Financial claims are anything that has a debt or equity claim on income or property, such as a car loan, a mortgage, or an equity investment in a small partnership. Financial institutions facilitate the work of the financial markets by directing funds from savers to those individuals, firms, or governments who need funds to finance current operations or growth.
Part 1 dealt with the operations of the financial markets in general within the context of the financial system. The financial crisis and Great Recession of 2007–2009, sometimes referred to as the “perfect financial storm,” tested the workings of the U.S. financial system to an extent not seen ...