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The financial system is one of the factors that directly or
indirectly affect the financial operation of the business
organization. A system is composed of the several parts with
interrelated functions. If one of part of the system is
dysfunctional, the operation of the whole system is expected
to be adversely affected.
THE FINANCIAL SYSTEM

The financial system at the societal environment or regional level is

principally responsible for the flow of money or funds from the lender to the
borrower. The financial system controls, regulates, and facilitates the
saving, borrowing, lending, and investing activities happening among the
different players in the system.
There is no standard structure of a financial system that operates in the
world. It varies among countries and among business organizations. The
type of government and the economic system is also determine or
influence the structure of the financial system of a country.
Typical Structures of a Financial
System
Cash returned Cash payments

Household Cash investment

savings/surplus
cash • Financial
Institutions Borrowers
• Financial Cash • Individuals
Markets loans • Corporate
Cash Investment • Financial entities
Business Instruments
savings/ surplus
cash

Cash returned
Cash payments
The Basic Elements of a financial
system are as follows:
1. Financial institutions
2. Financial markets
3. Financial instruments
4. Lenders and borrowers
FINANCIAL INSTITUTIONS

Financial institutions are institutions or organizations that provides

financial services, among others, in the form of loan, credit, fund
administration, financing, depository and safekeeping. Financial
institution, therefor, is a broad term that encompasses all organizations
that provide the aforementioned financial services.
Financial institution, based on the financial services provided, are
generally classified as follows:
1. Depository institutions
2. Financial intermediaries
3. Investment institutions
1. Depository institutions

Depository institutions are financial institutions that accepts

deposits(savings, current, and time deposits) from individuals and
corporate entities, extend loans to borrowers, transfer funds for
investment purposes.
Depository institutions include that following;
1. Banks
2. Savings and loan association
3. Trust companies
4. Credit unions
1-1 Banks

Banks are institution authorized to operate and regulated by the BSP

under the General Banking Law of 2000. They accepts deposit and bills
payment, provide loans, and facilitate the transfer of funds
domestically or abroad.
1-2 Savings and Loan Association

A savings and loan association, sometimes referred to us as a

financing and mortgage loan company, is a financial institution that is
engaged in the business of accumulating the savings of its members
and stockholders, and using such accumulations for loans or
investments in securities of productive enterprise.
1-3 Trust Companies

A trust company is a legal business entity, usually a major division of

a universal or commercial bank, that acts as a fiduciary agent or
trustee on behalf of an individual person or corporate entity for the
purpose of management, administration, and final transfer of property
to the beneficiary.
in other words, the trust company acts as the custodian of the
property for and on behalf of the beneficiary for a fee. It also performs
the following related custodial tasks:
a) Asset management
b) Ownership registration for the beneficiary
c) Stock transfer
d) Custodial arrangement like in the court proceedings
1-4 Credit Unions

A credit union is a financial depository institution that is mainly

controlled and operated by its members for the following purposes:
a. Extending credit to member
b. Offering competitive interest rate
c. Promoting the concept of thrift
d. Providing other types of financial services
Credit unions exist to help and extend financial assistance to members
by pooling and accumulating funds from all the members. The funds
amassed from the membership fees shall be made available for
borrowing by the member who are in need. Only those who have
accounts with the credit union are considered members and owners.
2. Financial intermediaries

A financial intermediaries is a type of financial institution that acts

as the middleperson between two parties- the investor and the
borrowers. Financial intermediaries raise and accumulate money from
investors and offer the accumulated money to the individual or
corporate entities in need of financial assistance.
The concept of financial intermediaries is very broad. It includes all
types of financial institutions that receive money from one party and
offer it to another as financial aid.
Financial intermediaries refer to the following
a. Mutual funds
b. Pension funds
c. Insurance companies
2-a Mutual funds

Mutual funds accumulate money by selling shares of stocks or

bonds of publicly-listed corporation to individual or corporate investors.
The funds from the proceeds of the sale are pooled together and
channeled to the borrowers.
2-b Pension funds

A pension fund is set up by a business for the purpose of

paying the pension requirement of all private-sector
employees who retires from the business organization
upon reaching the retirement age.
2-c Insurance companies
An insurance company acts as a financial intermediary by pooling
together the proceeds of insurance policies sold to the public and investing
the accumulated funds in high-yield maturing securities from investment
houses. Most of the money accumulated by the insurance companies from
insurance premiums is lent in either medium-or long-term loan to companies
engaged in commercial real estate.
Insurance companies may offer the following products to the public:
a. Life insurance
b. Health insurance
c. Car insurance
d. Fire insurance
e. Crop insurance
f. Marine insurance
g. Other insurance products
Investment institutions
An investment institution is a company engaged in buying securities
of other companies which are listed in the stock exchange for
investment purpose only. Hence, the buying and selling of financial
securities are not the primary business activities of and investment
institution.
In other words, an investment institution or company simply holds
on to the securities it acquired from other companies. Financial
securities are held up to the time of their maturity. This financial
institutions earns income from holding the securities in the form of
interest or dividends.
An investment institution is usually composed of very wealthy
investors. The resources of these investors are pooled together in the
institution for the purchase of financial securities of high-grade
companies. Mutual fund and insurance companies likewise pool their
financial resources together to form an investment company for
investment purpose only.
Financial Market
Market refers to the place where the sellers and buyers of goods and services
meet. In the market, the major business happening is the selling-buying activity, in
which exchange occurs. The exchange process indicates that the seller and the
buyer agree on the exchange price.
Financial market refers to the place where the selling-buying activity occurs to
trade equity securities such as bonds and stocks, currencies, derivative securities,
notes and mortgages. The selling-buying transaction happening in the financial
market is called trading activity. The kinds of financial transactions and financial
securities traded determine the types of financial market.
The typical financial market, among other, include the following:
1. Capital market
2. Money market
3. Primary market
4. Secondary market
5. Public market
1. Capital market

The capital market is a finance market where stocks and bonds are
issued for medium- and long-term period. Stock are treated as equity
securities while bonds are technically considered debt securities.
Investors who hold stocks receive return from their investments in the
form of dividends while those hold bonds earn income in the form of
interest.
2. Money market

The financial market is classified as money market when

the financial securities being traded have period of less
than one year. This type of financial security is called
short-term security. Since short-term securities are not
intended to be held for more than one year, they are also
referred to as trading securities.
3. Primary market

The primary market is a financial market where a

corporation can issue new shares of stocks. Stock
corporation that needs fresh capital can raise the required
funds by issuing new share of stocks. The primary market
facilitates the raising of the required amount when the
investors directly buy the new shares from the issuing
corporation.
4. Secondary market

The secondary market is a financial market where

financial securities are traded between or among investors.
In the secondary market, there is no issuance of new shares
from the corporation.
5. Public market

A public market is a market in which the financial securities of

publicly-listed corporation are traded following a standardized
contract agreement and procedures. A corporation is classified as
publicly-listed when its shares are available for sale to the public.
Basically, a public market is an organized financial market.
FINANCIAL INSTRUMENTS

Refer to contracts that give rise to the formation of financial assets of one entity
and at the same time the creation of a financial liability or an equity instrument in
another entity.
The most common forms of financial instruments are as follows:
1. Cash – On the part of the holder, cash is a financial asset. However, on the part
of the government such as the Bangko Sentral ng Pilipinas, cash is a financial
liability.
2. Check – It is a financial asset of the payee, but is considered a financial liability
of the drawer or issuer.
3. Loan – It is a financial asset of the lender or creditor and a financial liability of
the borrower or the debtor.
4. Bond – It is a financial asset of the holder or investor but considered a financial
liability of the issuing company.
5. Stock – It is a financial asset of the investor or shareholder but an equity of the
issuing company.
► BONDS
► A bond is a financial instrument that represents a contractual debt of
the party issuing the bond. The issuing party may either be a private
business entity or a government . This type of financial instrument is
evidenced by a certificate called bond indenture.
STOCKS

Stock is a financial security that signifies ownership of the assets of the

corporation. Only stock corporations are authorized by the Securities and
Exchange Commission (SEC) to issue stocks; hence, sole proprietorships
and partnerships can never issue shares of stock.
The holders of the shares of stock as evidenced by the stock certificate
are called shareholders or stockholders. The shareholder has claim on the
net assets of the business as owners of the corporation.
The two major types of stocks:
1. Common stock or ordinary shares
2. Preferred stock or preference shares
COMMON STOCK

► The common stock or ordinary share is financial instrument whose

holders do not have preferences over each other. The common
stockholders have the same rights and privileges in terms of dividend
or asset distribution with other stockholders.
PREFERENCE SHARE

► The preference share is a kind of stock that is preferred over common

stock. These preferences are in terms of the following:
a. Distribution of earnings or dividend distribution
b. Net assets at the time liquidation
The privileges of the preference share outline the distinct difference
between common stockholders and the preference stockholders.
However, preference shareholders do not have voting rights.
the preference on the distribution of profit means that preference
stockholders are paid first of the dividends accruing to them. It indicates
that ordinary shareholders can only share the dividends once all the
dividend claims of the preference shareholders are fully settled.