Financial institutions

Financial Institutions

• The modern specialized money economy is totally different from a barter economy, where all the goods and services were exchanged for goods and services.

• To enjoy the maximum benefits of specialization, we need to have the support of a full-fledged set of institutions dealing with money.

What are financial institutions?

• Business organizations that specialize in providing the services in the money market are called financial institutions.

What is money market?

• Money market is made up of all those people and organizations that want money (demand) and all the people and organizations willing and able to supply money. (supply)

What is a bank?

• Banks are financial institutions in the money market.

• They accept deposits of money and savings from customers and make loans..

How do Banks earn profit?

• Interest loans.• Charging fees for the services.• Investment in shares.

Types of Banks

Commercial Banks

Savings Banks

Savings and Loan Associations

Credit Unions

Investment Banks

Islamic Banks

Commercial Banks

• These are banks set up to provide financial services for small businesses.

• They are also known as “high-street banks”.• Functions:• Accepting deposits• Make and receive payments• Providing insurance• Operating pension funds• Financial and tax planning• Storage facility• Buying and selling shares

Savings banks

• Banks set up to provide a safe and accessible place for low income group.

• They offer similar services to customers as the commercial banks.

Savings and loan associations

• These keep savings deposits and lend money to people on low income groups to buy homes.

• These long-term loans are known as mortgages.

Credit unions

• A credit union is a co-operative, not-for-profit organization, owned by its members.

• These are also meant for low income groups who work or live together to provide low cost loans.

Investment banks

• These banks help large business organizations raise finance to fund their operations and expansions.

• They also provide advice on company mergers and takeovers.

• Merchant banks

Islamic banks

• These banks are based on the principles of Islamic Shariah’s law. They wouldn’t charge interest for the loans.

Other money market institutions

Finance houses

Venture capitalists

Pension funds

Insurance companies

Investment and unit trusts

Building societies

Finance houses

• Finance houses are specialized financial institutions in hire purchase.

Venture capitalists

• These are specialized in providing finance for new and risky business ventures, usually in return for some ownership and control of new business.

Pension funds

• These are financial institutions facilitate the mobilization of pension funds.

• They provide an important source of finance for companies and governments.

Insurance companies

• Financial institutions providing insurance.• They invest in shares and dividends and

profits shared among the shareholders.

Investment and unit trusts

• An investment trust buy shares in other companies and earn a profit out of its dividends and profits.

• A unit trust buy shares in variety of companies the think will be profitable.

Building societies

• They specialize in helping people buy houses and property.

The Stock market

• A stock market or equity market is a public entity for the trading of company stock (shares) at an agreed price.

Shareholder

• A shareholder is any person or organization that holds shares, as part owner of a corporation’s stock.

Market capitalization

• The total value of a corporation’s issued shares is called its market capitalization.

• it is equal to the share price times the number of shares outstanding

What do stock markets do?

• Stock markets provide a global market for the buying and selling of new and second-hand shares.

• The stock market is one of the most important sources of companies to raise money.

Stock exchanges

• A stock exchange is a form of exchange which provides services for stock brokers and traders to trade stocks, bonds, and other securities.

Biggest Five Stock Exchanges

• New York Stock Exchange (NYSE) - Headquartered in New York City.

Biggest Five Stock Exchanges

• NASDAQ OMX - Headquartered in New York City.

Biggest Five Stock Exchanges

• Tokyo Stock Exchange – Headquartered in Tokyo.

Biggest Five Stock Exchanges

• London Stock Exchange - Headquartered in London

Biggest Five Stock Exchanges

• Hong Kong Stock Exchange- Headquartered in Hong Kong.

Functions of stock exchanges

• 1. Continuous and ready market for securities

• 2. Facilitates evaluation of securities• 3. Encourages capital formation• 4. Provides safety and security in

dealings• 5. Regulates company management• 6. Facilitates public borrowing• 7. Serves as Economic Barometer

Types of stocks

• Company stock1. Preferred stocks or preference shares2. Common stock or ordinary shares

• Government stock

Preferred stocks or preference shares

• A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock.

• Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.

Common stock or ordinary shares

• Common stockholders are on the bottom of the priority ladder for ownership structure.

• In the event of liquidation, common shareholders have rights to a company's assets only after bond holders, preferred shareholders and other debt holders have been paid in full.

Government stock

• One of the bonds sold by a government to finance its budget deficit (the difference between what it gets in taxes and what it spends).

• Government bonds are usually considered to be a very safe form of investment.

How stock exchanges work

• Stock exchanges are not open to general public.

• They need to get the help of stock brokers.

Market makers

• A broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security.

• They are special brokers who buys and sells shares from other brokers.

Indices

• Indices reflects the movements in the share prices in the market.

• Sensex

speculation

• Attempting to make money from buying and selling shares I the hope their prices will change is called speculation

Bulls

• People and firms who buy shares in the hope their prices will rise so that they can sell them at a profit are called bulls.

Bears

• People and firms who sell shares in the hope their prices will fall so that they can buy them back later at lower prices are called bears.

Stags

• People and firms who apply to buy up newly issued shares in the hope their prices will rise quickly after dealings begins are called stags.

Central bank

• Bank at the centre of banking system.• It is the government’s banker.• It is the bankers’ bank.• Owned by the government.

Functions

• Issues notes and coins.• Government’s banker.• Manages nation’s gold and foreign currency

reserves.• Manages national debt.• Regulates and supervises the banking system.• The lender of last resort.• Sets the official interest rate.

Types of account

Deposit account:

• Interest earning account at a bank or other the withdrawals from which are limited to the amount of the account's credit balance.

Current/Checking Account

• Money held in a checking account is very liquid, and can be withdrawn using checks, automated cash machines and electronic debits, among other methods.

• Allows for numerous withdrawals and unlimited deposits, whereas savings accounts sometimes limit both.

Savings Account

• A deposit account held at a bank or other financial institution that provides principal security and a modest interest rate.

• Interest will be added to your savings by bank depending on how much you are saved and how often you can make withdrawals.

Types of Loans

Overdraft

• An overdraft allows the individual to continue withdrawing money even if the account has no funds in it. Basically the bank allows people to borrow a set amount of money.

Personal loan

• A loan that establishes consumer credit that is granted for personal use; usually unsecured and based on the borrower's integrity and ability to pay.

Commercial loan

• Commercial loans may be used to fund large capital expenditures and/or operations that a business may otherwise be unable to afford.

Mortgage loan

• It is a long term loan used by people and businesses to buy property.

• These are secured against property.

Methods of payments

• Cash

• Check

• Direct debit

• Debit card

• Credit card