FINANCE

TERMS
• Finance: The proper management of money.

• Money: The current medium of exchange or means of

payment.

• Credit or Loan: A sum of money to be returned normally with

interest.

 Classification of finance

 Public finance

 Private finance
CLASSIFICATION
OF FINANCE
1. Public finance
• It studies the sources of funds of public authorities such
as states, local self-governments and the Central
Government.
• It is concerned with the income and expenditure of
public authorities and with the adjustment of one to
another.
2. Private finance
• An individual
• Profit-seeking business organizations
• External finance (outside sources)
• Direct financing (through issuing securities)
• Indirect financing (through middlemen)
• Internal finance (ploughing back of profits)
• A non-profit organization
FINANCIAL SYSTEM
A SET OF INSTITUTIONS, INSTRUMENTS AND MARKETS WHICH
PROMOTE SAVINGS AND CHANNEL THEM TO THEIR MOST
EFFICIENT USE. Financial
Financial Financial Financial
Institutions instruments
Markets (Claims, Services
assets,
securities)
Regulatory Inter- Non- Others
mediaries Inter-
mediaries Primary Secondary

Banking Non- Organized Un-

banking organised
Short Medium Long
Term
term Ter
m
Primary Secondary

Capital Money
Markets Markets

Equity Market Debt Market Derivatives Market

FINANCIAL
INSTITUTION:
A financial institution is an institution whose primary source of
profits is through financial asset transactions.

A financial institution acts as an agent that provides

financial services for its clients.

Financial institutions generally fall under financial regulation

from a government authority.

Financial Institutions- act as mobilisers and depositories of

saving and as the custodian of finance.
 Functions of Financial
Institutions

The principal function of financial institutions is to collect funds

from the investors and direct the funds to various financial
services providers in search for those funds.
 FINANCIAL
MARKETS
A financial market is a market in which financial assets are
traded. In addition to enabling exchange of previously issued
financial assets

• Financial markets include all markets where transactions relating

to the trading of financial securities and extending credit take
place.
FINANCIAL MARKETS
• Physical Asset markets
• Spot markets
• Money markets
• Mortgage markets
• The primary market
• The secondary
market
• Private markets
• The money market
• The capital market
• Security exchanges
Financial Asset Markets:
Financial asset markets, on the other hand deal stocks
bonds,
with notes, mortgages and other financial instruments. ,
Spot
Markets: and future markets the terms that refer to whether
Spotassets
the markets
are being bought or sold on the spot delivery or for
delivery at some future date. Such as six months or a year in future.
Money Markets:
Are the markets for short term, highly liquid debt securities.
Mortgage Markets:
Deals with loan and residential, commercial and real estate and
on farmland.
The Primary Market:
When a security is created and sold for the first time in the financial
marketplace, the transaction takes place in the primary market. It is
also known as Initial Public Offering (I PO)
The Secondary Market:
Once a security has been issued, it may be traded from one investor to
another.

The Money Market:

Short term securities are traded in money market. Network of
operate in this dealers
market.
The Capital Market:
Long term securities traded in the capital market.

Security Exchanges:
Security exchanges trading of stock or bond among investors.
facilitate
SIX BASIC FUNCTIONS OF
FINANCIAL MARKETS
• Borrowing and Lending
• Price Determination
• Information Aggregation and
Coordination
• Risk Sharing
• Liquidity
• Efficiency
FINANCIAL INSTRUMENTS
Financial instruments are cash, evidence of an ownership interest
in an entity, or a contractual right to receive, or deliver, cash or
another financial instrument.

Cash instruments :are financial instruments whose value is

determined directly by markets. They can be divided into Securities,
which are readily transferable, and other cash instruments such as
Loans and Deposits, where both borrower and lender have to
agree on a transfer

Derivatives instruments: are financial contracts, or financial

instruments, whose prices are derived from the price of
something else
 Financial institution are divide into to forms

TYPES OF FINANCIAL
Depository
Non
INSTITUTIONS
Depository

Non Depository
Are financial intermediaries that do not accept deposits but
do pool the payments of many people in the form of
premiums or contributions and either invest it or provide
credit to others.

 Pension funds,
 Securities firms,
 Government-sponsored enterprises,
 Finance companies.
TYPES OF FINANCIAL
INSTITUTIONS
• Banks
• Savings & loan
Associations
• Investment Companies
• Credit Unions
• Insurance Companies
• Mutual Funds
• Pension Funds
• Brokerage Houses
 1) BANKS
• A bank is a commercial or state institution that provides
financial services, including issuing money in various forms,
receiving deposits of money, lending money and processing
transactions and the creating of credit.
1.8) NON-BANKING
FINANCIAL COMPANY
• Non-bank financial companies (NBFCs) also known as a non-
bank or a non-bank bank, are financial institutions that
provide banking services without meeting the legal definition
of a bank,
i.e. one that does not hold a banking license.

• Operations are, regardless of this, still exercised under bank

regulation. However this depends on the jurisdiction, as in
some jurisdictions, such as New Zealand, any company can do
the business of banking, and there are no banking licenses
issued.
2) INVESTMENT
COMPANY
• Generally, an "investment company" is a company
(corporation, business trust, partnership, or limited liability
company) that issues securities and is primarily engaged in
the business of investing in securities.

• An investment company invests the money it receives from

investors on a collective basis, and each investor shares in the
profits and losses in proportion to the investor’s interest in
the investment company.
 3) LEASING
COMPANIES
A lease or tenancy is the right to use or occupy personal property
or real property given by a lessor to another person (usually called
the lessee or tenant) for a fixed or indefinite period of time,
whereby the lessee obtains exclusive possession of the property in
return for paying the lessor a fixed or determinable consideration
(payment).
4) INSURANCES
COMPANIES
• Insurance companies may be classified as

1.Life insurance companies, which sell life

insurance, annuities and pensions products.

2.Non-life or general insurance companies, which

sell other types of insurance.
 5) MUTUAL
FUND
• An investment which is comprised of a pool of funds collected
from many investors for the purpose of investing in securities
such as stocks, bonds, money market securities and similar
assets.

• Mutual funds are operated by money mangers, who invest the

fund's capital and attempt to produce capital gains and income
for the fund's investors. A mutual fund's portfolio is structured
and maintained to match the investment objectives stated in its
prospectus
6) PENSION FUNDS:
Pension funds are retirement funde by
or government agencies for their
plans d and corporations
generally
workers by the trust departments of banks or by
administered
commercialcompanies. Pension funds invest primarily
insurance lifein bonds,
stocks, mortgages and real estate.
7) CREDIT UNIONS:
• Credit are associations
members
unions are cooperativeto have a common bond,
whose
being employees of the
supposed
as suchsame firm.
savings are loans and home mortgage, credit
Member's
are oftenunions
the cheapest source of funds availableto the
borrowers.
individual
 8) BROKERAGE HOUSES

Stock brokers assist people in investing, online only

companies are called 'discount brokerages', companies with
a branch presence are called 'full service brokerages' or
'private client services.