Financial Institution

Unit 1

INTRODUCTION TO FINANCIAL MARKETS & INSTITUTION

1.1 Why Study Finance?
Finance may be defined as the art and science of managing money Finance is the study of how individuals, institutions, government and businesses acquire, spend and manage money and other financial resources Finance is the science of managing financial resources in an optimal pattern i.e. the best use of available resources Finance consists of three interrelated areas: Finance

Financial Management

Investment

Financial Market & Institutions

1.1.1 Financial Management Financial Management involves the arrangement of unarranged financial resources of the firms Financial management is concerned with the duties of the financial managers in the business firm Financial managers actively manage the financial affairs of any type of business, namely, financial and nonfinancial, private and public, large and small, profit-seeking and not-for-profit They perform such variety of tasks as budgeting, financial forecasting, cash management, credit administration, investment analysis, funds management and so on

1.1.2 Investment Investment focuses on the decisions of both individual and institutional investors as they choose assets for their Investment Portfolios Use money to make or gain more money Commitment to fund assets Purchase of Capital Goods

1.1.3.1 Financial Markets Financial market is a market for creation and exchange of financial assets A financial market is a market in which people and entities can trade financial securities These markets channel funds from savers to investors, thereby promoting economic efficiency Market activity affects personal wealth, the behavior of business firms, and economy as a whole There are different ways of classifying financial market
Work Book Foundation Level 1 Introduction to Financial Market & Institutions

Financial Institution

Unit 1

Nature of Claim

Equity Market o o o o

Debt Market

Equity market is a market for internal or floating claim like common share and preference shares The stock market is the market where stocks representing ownership in a company, are traded Debt market is a market for external or fixed claims like bonds Debt markets, or bond markets, allow governments, corporations, and individuals to borrow to finance activities

In this market, borrowers issue a security, called a bond, that promises the timely payment of interest and principal over some specific time horizon Maturity of Claim

Money Market

Capital Market

Money market is market for short term financial claims of debts (within one year) Capital market is market for long term financial claims of debts and equity (beyond one year) Issuance of Claim

Primary Market

Secondary Market

A market that involves the issue of new securities by the borrower in return for cash from investors (Capital formation occurs) is called primary market

Secondary Market deals of buying and selling of existing securities. Funds flow from buyer to seller. Seller becomes the new owner of the security (Capital formation is not occur) Timing of Claim

Cash or Spot Market

Forward or Future Market

A Cash or Spot Market is one where delivery occurs immediately Forward and Future Market is one where delivery occurs at a pre-determined time in future

Another type of financial market is foreign exchange market where international currencies trade and exchange rates are set Well functioning financial markets, such as the bond market, stock market, and foreign exchange market, are key factors in producing high economic growth.

Work Book Foundation Level

Introduction to Financial Market & Institutions

Financial Institution

Unit 1

1.1.3.2 Financial Institutions Financial institutions are what make financial markets work Channeling finance from saving surplus to saving deficit unit of economy Financial institution acts as an agent that provides financial services for its clients. Financial institutions generally fall under financial regulation from a government authority They sit between savers and borrowers and so are known as financial intermediaries Concerned with financial instrument Accept deposit and Advance loan, difference is Spread
FINANCIAL INSTITUTIONS OF PAKISTAN

NBFIs Banks

CDNS Insurance

DFIs P. Off. State Owned Inv. B Domestic Private Lea. C Foreign Reinsurance Modaraba Co. N. Sav. Life Insurance Non Life Insurance

Specialized Microfinance Islamic

HBFC Mutual Fund

Discount Houses

Venture Capital

1.2. Financial Environment

Financial environment contains financial intermediaries, financial markets and borrowers

1.3. Flows of Fund through Financial System

Work Book Foundation Level

Introduction to Financial Market & Institutions

Financial Institution

Unit 1

1.3.1 Direct Finance Borrowers borrow directly from lenders in financial markets by selling financial instruments which are claims on the borrowers future income or assets 1.3.2 Indirect Finance Borrowers borrow indirectly from lenders via financial intermediaries by issuing financial instruments which are claims on the borrowers future income or assets

1.4 Organizational Structure

1.5 Real Assets and Financial Assets

Real assets are tangible things owned by persons and businesses Residential structures and property Major appliances and automobiles Machinery and equipment Financial assets are what one individual has lent to another Consumer credit / Insurance Policy Loans / Mortgages Shares / Bonds

1.6 Separation of Ownership and Control

Work Book Foundation Level

Introduction to Financial Market & Institutions