What is Finance?

• Finance is the art & science of managing 'MONEY'.

• Finance is the life blood of Business (funds).
• “Finance v/s Money”
Nature of Financial Management
 Financial management is mainly concerned with the proper management of funds.
 The financial manager must see that the funds are procured in a manner that there is risk, cost and control considerations are properly
balanced in a given situation and there is optimum utilization of funds.
Financial institution- Is an organization that handles financial transactions for individuals, groups and other organization – profit, non profit, private
or government owned.

 Transactions like saving and borrowing money, sending or receiving money to or from overseas, and exchanging currencies are all done
through financial institutions.

 Most common examples of financial institutions and the ones you are most familiar with are banks and insurance companies

FINANCIAL INSTITUTIONS are also referred to as FINANCIAL INTERMEDIARIES

Financial intermediaries are called as such because at times, they facilitate the flow of funds between the savers and demanders of funds
in an economy or a financial system.
 FINANCIAL PRODUCTS are called as FINANCIAL INSTRUMENTS
Financial products are signified by instruments when individuals and organizations alike deal with each other in completing financial transactions.
FINANCIAL INSTRUMENTS?
 a document which signifies a legal or binding agreement between the 2 parties.
 It has a monetary values
- Ex: personal check ( it has monetary value: once it is dated, written or payee, signed by the person who issued or
his/her legal representative.
- Ex: stock certificate ( once issued to the purchaser of the stock certificate, legally it means that the person or
organization owns stocks of a business enterprise)
Depository institution & non depository institution
a. Depository institution - manages money that is deposited by individuals and organizations.
Examples: banks, credit unions and savings and loan associations
b. Non depository institution – does not handle deposits. Instead, such institutions serve as intermediaries between savers and demanders of
funds, individuals, households and other businesses who need additional funds to support personal needs or business operations.
Examples: mutual funds, hedge funds, brokerage, and investment firms.
* Hedge funds (a limited partnership of investors that uses high risk methods, such as investing with borrowed money, in hopes of realizing large
capital gains)

TYPES OF FINANCIAL INSTITUTIONS

• Commercial Banks
o Accepts deposits from individuals and organizations that have
excess funds and provide them loans to those who need or want to borrow money.
o Savings and loans have been the focus or services that commercial
banks provide to their customers
 Credit Unions
o are normally associated with cooperatives
o the interest rates offered by this are generally higher or lower on certain types of loans compared to what most
banks will offer.
o this is done to encourage more people to become members
o However, it is not open to general public
o Only members are serviced by this
o There is usually a profit sharing between members every at the end of fiscal yr
 Investment Bank
o they do not have any dealings with the general public
o they facilitate buying and selling of stocks
  Insurance Companies
o provide individuals and organizations a way to manage risk
o they operate on the principle of pooling of risks wherein premiums are collected from clients.
 Brokerage
o a financial institution that earns through commissions
o they facilitate buying and selling of securities
o it can either be a discount or full service
*Discount brokerage firms – allow their clients to do their own research about investment options.
*Full service brokerage firms – provides clients advice and help them manage their investment portfolio
-> Investment portfolio – a collection of financial products owned by a single investor – either individual or an organization
 Investment Companies
o wherein individuals and other organizations invest in investment portfolios that are managed by professionals who are tasked to
keep track of market trends and the performance of different financial product or instruments.
o Investors pool their funds together and combined funds then placed by the company in different investment options
Example: mutual funds
FINANCIAL MARKET
Financial institutions operate in the financial market
 Financial Market – means for the buying and selling of stocks, bonds and other financial instruments.
 STOCKS – shares of a corporation sold to investors
 BONDS - are a form of debt that the issuing entity promises to repay at some point in the future
MONEY MARKET & CAPITAL MARKET
 Money markets = are the markets where transactions involving short term debt securities take place.
 SHORT TERM DEBT – just like in accounting, is one that is due or demandable within one year or less
Ex: treasury bills, commercial paper
CAPITAL MARKET
- Capital markets = are the markets where transactions involving long term debt maturing in more than one year. The buying and selling of
stocks issued by corporations also takes place here.
2 types of markets of financial transactions within the capital market:
1. Primary market – new issues of securities are traded. Source of new securities for the secondary market
2. Secondary market – where previously issued securities are traded
MOST COMMON FINANCIAL INSTRUMENTS
1. Savings
2. Loans
3. Bonds
4. Security
5. Treasury bills
6. Insurance products
7. Mutual funds
CAREERS IN FINANCE
1. Investment Banker
2. Insurance Broker/Agent
3. Financial Advisor
4. Stockbroker
5. Fund Manager
6. Academe
7. Corporate Consultants
8. Country Manage
9. CFO
10. Corporate Finance Manager