1. Definition of Finance!

Definition of Finance
Finance is defined by WEBSTER’S DICTIONARY as:
“The system that includes the circulation of money, the granting of credit, the making of
investments, and the provision of banking facilities.”
General Definition of Finance
“Finance is the function in a business responsible for acquiring funds for the firm, managing
funds within the firm, and planning for the expenditure of funds on various assets.”

Areas of Finance
Finance divided into three areas:
A. Financial Management (Corporate Finance)
Financial management is the activity of planning, managing, controlling, disbursing, and
storing company (or individual) funds to maximize profits with minimal capital. This
management covers three decisions, namely investment decisions, financial decisions,
and dividend decisions.
Financial Management Functions:
a. Financial planning
b. Determination of Capital Composition
c. Investment Fund
d. Surplus Management
e. Financial Control
Financial Management Objectives:
a. Profit Maximization
b. Proper Financial Mobilization
c. Governing Company
d. Correct Coordination
e. Lowering Capital Costs

B. Capital Markets
The capital market is a market that operates in an organized manner where there is
trading activity in securities such as stocks, equity, debt instruments, bonds, and other
securities issued by the government and private companies.
 Capital Market Function:
a. Economic Functions
The economic function means that the capital market brings together those
who are short of funds (issuers) with those who are excess funds (investors).
b. Financial Function
The financial function is a means of investing the public in financial
instruments, such as stocks, bonds, mutual funds, and others.
Type of Capital Market:
 Primary Market
 Secondary Market

C. Investment
Investment is an investment effort to get profit at a later date.
Investment Type:
a. Short Term Investments
Investors get profits from one year to three years.
b. Long term investment
Investors get profits in three years, five years, or dozens to dozens of times to
come.
Investment Benefits:
 Achieve Financial Freedom
 Increase Wealth and Asset Value
 Protecting Financial Conditions from Inflation

2. Financial Role in Organization

Finance is an essential and indispensable part of any organization. It is difficult for organizations,
whether profit-making or otherwise, to sustain themselves for long without proper finances. Not
just that, the efficient management of these financial resources is essential to be sustainable and
viable in the long-run. Financial management helps organizations to do so. Financial
management refers to the effective and efficient planning, organizing, directing and controlling
of financial activities and processes of an organization. This includes but is not limited to fund
procurement, allocation of financial resources, utilization of funds, etc.
The Major Roles of Financial Management:
 Financial decisions and controls: 
 Financial management and financial managers play a crucial role in making financial
decisions and exercising control over finances in the organization. They make use of
techniques like ratio analysis, financial forecasting, profit and loss analysis, etc.
 Financial Planning:
The finance managers are responsible for the planning of financial activities and
resources in the organization. To this end, they use available data to understand the needs
and priorities of the organization as well as the overall economic situation and make
plans and budgets for the same.
 Capital Management:
It is the responsibility of financial management to estimate the capital requirements of the
organization from time to time, determines the capital structure and composition and
makes the choice of source of funding for the capital needs.
 Allocation and Utilization of financial resources:
Financial management ensures that all financial resources of the organizations are used
and invested effectively and efficiently so that the organization is profitable, sustainable
and viable in the long-run.
 Cash Flow Management:
It is extremely important for organizations to have sufficient working capital and cash
flow to meet their operational expenses and emergencies. Financial management tracks
account payable and receivable to ensure there is sufficient cash flow available at all
times.
 Disposal of Surplus:
The decisions on how the surplus or profits of the organizations is utilized is taken by the
financial managers of the organizations. They decide if dividends should be distributed
and how much as well as the proportion of profits that must be retained and ploughed
back into the business.
 Financial Reporting:
Financial management maintains all necessary reports related to the finance of the
organization and uses this as the database for forecasting and planning financial
activities.
 Risk Management:
Sound financial management prepares the organization to forecast risks, put in place
mitigation plans as well as to meet unforeseen risks and emergencies effectively.
 
3. Types of Organization

a.  Sole Proprietorship
A sole proprietorship is the most basic – and easiest – type of business to establish. There’s no
distinction between the business and the owner. The owner entitled to all profits and are
responsible for all our business’s debts, losses and liabilities. We don’t have to take any formal
action to form a sole proprietorship, but we do need to obtain any necessary licenses and permits,
like all businesses.
b.  Partnership
A partnership is a single business where two or more people share ownership. Each partner
contributes to all aspects of the business, including money, property, labor or skill. In return,
each partner shares in the profits and losses of the business.

c. Corporation
A corporation is an independent legal entity owned by shareholders. This means that the
corporation itself is held legally liable for the actions and debts the business incurs. Corporations
are more complex than other business structures because they tend to have costly administrative
fees and complex tax and legal requirements. Because of these issues, corporations are generally
suggested for established, larger companies with multiple employees.
d. Limited Liability Company (LLC)
A limited liability company (LLC) is a hybrid type of legal structure that provides the limited
liability features of a corporation and the tax efficiencies and operational flexibility of a
partnership. The “owners” of an LLC are referred to as “members.” Depending on the state, the
members can be a single individual (one owner), two or more individuals, corporations or other
LLCs. Unlike shareholders in a corporation, LLCs aren’t taxed as a separate business entity.
Instead, all profits and losses are passed through the business to each member of the LLC. LLC
members report profits and losses on their personal federal tax returns, just like the owners of a
partnership would.
e. Cooperative
A cooperative is a business or organization owned by and operated for the benefit of those using
its services. They’re common in healthcare, retail, agriculture, art and restaurant industries.
Profits and earnings generated by the cooperative are distributed among the members, also
known as user-owners.
Typically, an elected board of directors and officers run the cooperative while regular members
have voting power to control the direction of the cooperative. Members can become part of the
cooperative by purchasing shares, though the amount of shares they hold does not affect the
weight of their vote.

4. Relation Between Principal and Agent

Relationship between owner (principal) and manager (agent). Owner the company gives
decision-making authority to the manager accordingly with a work contract. Owners who are
unable to manage their own company hand over the operational responsibilities of his company
to the manager accordingly employment contract. The manager as an agent is responsible for
running the company as well possible to carry out operating activities and increase company
profits. Meanwhile, the principal controls the manager's performance to ensure company
operations are well managed.

1. Differentiation Between Financial Market and Financial Institutional!

Financial Market
Financial Market refers to a marketplace, where creation and trading of financial assets, such as
shares, debentures, bonds, derivatives, currencies, etc. take place. It plays a crucial role in
allocating limited resources, in the country’s economy. It acts as an intermediary between the
savers and investors by mobilising funds between them. The financial market provides a
platform to the buyers and sellers, to meet, for trading assets at a price determined by the demand
and supply forces.
Functions of Financial Market:
 It facilitates mobilisation of savings and puts it to the most productive uses.
 It helps in determining the price of the securities. The frequent interaction between
investors helps in fixing the price of securities, on the basis of their demand and supply in
the market.
 It provides liquidity to tradable assets, by facilitating the exchange, as the investors can
readily sell their securities and convert assets into cash.
 It saves the time, money and efforts of the parties, as they don’t have to waste resources
to find probable buyers or sellers of securities. Further, it reduces cost by providing
valuable information, regarding the securities traded in the financial market.
The financial market maybe have or maybe not have a physical location, so the exchange of asset
between the parties can also take place over the internet or phone also.
Classification of Financial Market
1. By Nature of Claim
a. Debt Market:
The market where fixed claims or debt instruments (such as debentures or bonds) are
bought and sold between investors.
b. Equity Market:
Equity market is a market where in the investors deal in equity instruments. It is the
market for residual claims.
2. By Maturity of Claim
a. Money Market:
 The market where monetary assets (such as commercial paper, certificate of deposits,
treasury bills, etc.) which mature within a year. It is the market for short-term funds. No
such market exist physically. The transactions are performed over a virtual network, i.e.
fax, internet or phone.
b. Capital Market:
The market where medium and long term financial assets are traded in the capital market.
It is divided into two types:
 Primary Market (Financial Market): Where in the company listed on an exchange,
for the first time, issues new security or already listed company brings the fresh
issue.
 Secondary Market (Stock Market): An organised marketplace, where in already
issued securities are traded between investors, such as individuals, merchant
bankers, stockbrokers and mutual funds.
3. By Timing of Delivery
a. Cash Market:
The market where the transaction between buyers and sellers are settled in real-time.
b. Futures Market:
Futures market is one where the delivery or settlement of commodities takes place at a
future specified date.
4. By Organizational Structure
a. Exchange-Traded Market:
A financial market, which has a centralised organization with the standardised procedure.
b. Over-the-Counter Market: 
An OTC is characterised by a decentralised organisation, having customised procedures.

Financial Institutional
Financial Institution is an intermediary between consumers and the capital or the debt markets
providing banking and investment services. A financial institution is responsible for the supply
of money to the market through the transfer of funds from investors to the companies in the form
of loans, deposits, and investments. Financial institutions encompass a broad range of business
operations within the financial services sector including banks, trust companies, insurance
companies, brokerage firms, and investment dealers. Virtually everyone living in a developed
economy has an ongoing or at least periodic need for the services of financial institutions. Large
financial institutions such as JP Morgan Chase, HSBC, Goldman Sachs or Morgan Stanley can
even control the flow of money in an economy.
Two main types of financial institutions are:
1. Depository banks and credit unions which pay interest on deposits from the interest earned
on the loans.
2. Non-depository insurance companies and mutual funds which collect funds by selling their
policies or shares to the public and provide returns in the form periodic benefits and profit
payouts.
How Financial Institutions Work
Financial institutions serve most people in some way, as financial operations are a critical part of
any economy, with individuals and companies relying on financial institutions for transactions
and investing. Governments consider it imperative to oversee and regulate banks and financial
institutions because they do play such an integral part of the economy. Historically, bankruptcies
of financial institutions can create panic.
Types of Financial Institutions
Financial institutions offer a wide range of products and services for individual and commercial
clients. Types of Financial Institution, that is:
 Commercial Banks
A commercial bank is a type of financial institution that accepts deposits, offers checking
account services, makes business, personal, and mortgage loans, and offers basic financial
products like certificates of deposit (CDs) and savings accounts to individuals and small
businesses. Banks also act as payment agents via credit cards, wire transfers, and currency
exchange.
 Investment Banks
Investment banks specialize in providing services designed to facilitate business operations, such
as capital expenditure financing and equity offerings, including initial public offerings (IPOs).
They also commonly offer brokerage services for investors, act as market makers for trading
exchanges, and manage mergers, acquisitions, and other corporate restructurings.
 Insurance Companies
Insurances Companies providing insurance, whether for individuals or corporations. Protection
of assets and protection against financial risk, secured through insurance products, is an essential
service that facilitates individual and corporate investments that fuel economic growth.
 Brokerage Firms
Investment companies and brokerages, such as mutual fund and exchange-traded fund (ETF)
provider Fidelity Investments, specialize in providing investment services that include wealth
management and financial advisory services. They also provide access to investment products
that may range from stocks and bonds all the way to lesser-known alternative investments, such
as hedge funds and private equity investments.

2. Role of Financial Market and Financial Institutional in Capital Allocation!

 In a well-functioning economy, capital flows efficiently from those who supply capital to
those who demand it. Suppliers of capital-individuals and institution with “excess funds.” These
groups are saving money and looking for a rate of return on their investment. Demanders or
users of capital-individuals and institutions who need to raise funds to finance their investment
opportunities.
One of the main functions of financial markets is to allocate capital. Capital markets
especially facilitate the raising of capital while money markets facilitate the transfer of liquidity,
matching those who have capital to those who need it. Financial markets attract funds from
investors and channel them to enterprises that use that capital to finance their operations and
achieve growth, from start-up phases to expansion--even much later in the firm's life. Money
markets allow firms to borrow funds on a short-term basis, while capital markets
allow corporations to gain long-term funding to support expansion.
Financial institutions are intermediary institutions that operate in financial markets. The
existence of these financial institutions aims to make the process of allocating savings to parties
who need investment more efficiently.

3. Operational of Money Market and The Types of Financial Market!

Money Market Operations

The borrowing and re-lending of highly liquid, short-term assets and securities. Examples
include the borrowing and re-lending of U.S. Treasury bills and commercial paper. Money
market operations are conducted between banks.
The primary means of money market operations are open market operations, through
which the Bank provides loans to financial institutions, or purchases from or sells to financial
institutions financial assets.
Types of Financial Markets
1. Stock market
The stock market trades shares of ownership of public companies. Each share comes with a
price, and investors make money with the stocks when they perform well in the market. It is easy
to buy stocks. The real challenge is in choosing the right stocks that will earn money for the
investor.
There are various indices that investors can use to monitor how the stock market is doing. When
stocks are bought at a cheaper price and are sold at a higher price, the investor earns from the
sale.
2. Bond market
The bond market offers opportunities for companies and the government to secure money to
finance a project or investment. In a bond market, investors buy bonds from a company, and the
company returns the amount of the bonds within an agreed period, plus interest.
3. Commodities market
The commodities market is where traders and investors buy and sell natural resources or
commodities such as corn, oil, meat, and gold. A specific market is created for such resources
because their price is unpredictable. There is a commodities futures market wherein the price of
items that are to be delivered at a given future time is already identified and sealed today.
4. Derivatives market
The derivatives market is the financial market for derivatives, financial instruments like futures
contracts or options, which are derived from other forms of assets.