What is Finance?

It Is the process of providing funds for business activities, making purchases, or

investing.
The term "finance" refers to financial activities that support the lives of
individuals, businesses, and governments. Some of those activities include
banking, borrowing, saving, and investing

What is Business Finance?

Business finance is the funding a business needs for commercial purposes. Raising
and managing of funds, it is the money business owners require to start, run, or
expand a business.

Financial decisions affect both the profitability and the risk of a firm’s operations

Example:

An increase in cash holdings, for instance, reduces risk; but, because cash is not
an earning asset, converting other types of assets to cash reduces the firm’s
profitability. Similarly, the use of additional debt can raise the profitability of a
firm (because it is expanding its business with borrowed money), but more debt
means more risk.
Maintaining the long-term value of a firm’s securities is the task of finance.

You use finance to purchase assets, goods, and raw materials. Essentially anything
that will push your business forward. Therefore, finance and funds are known as
the lifeblood of any business. You simply cannot function properly unless you
have an adequate amount of money accessible to you and your business.
Two Types of Financing

What if your company hits hard times or the economy, once again, experiences a
meltdown? What if your business does not grow as fast or as well as you
expected?
To raise capital for business needs, companies primarily have two types of
financing as an option: equity financing and debt financing. Most companies use a
combination of debt and equity financing, but there are some distinct advantages
to both. Principal among them is that equity financing carries no repayment
obligation and provides extra working capital that can be used to grow a business.
Debt financing on the other hand does not require giving up a portion of
ownership.

1. Equity financing

 The process of raising capital through the sales of shares

 Involves selling a portion of a company's equity in return for capital.

 Investing your own money, or funds from other investor, in exchange for
partial ownership.

Example:
Selling of percentage of the properties

The owner of Company ABC might need to raise capital to fund

business expansion. The owner decides to give up 10% of ownership
in the company and sell it to an investor in return for capital. That
investor now owns 10% of the company and has a voice in all
business decisions going forward.
The main advantage of equity financing is that there is no obligation
to repay the money acquired through it. Of course, a company's
owners want it to be successful and provide the equity investors with
a good return on their investment, but without required payments or
 interest charges, as is the case with debt financing.

2. Debt Financing

 Involves money borrowed from external lenders, such as bank or lending

company.

 Involves the borrowing of money and paying it back with interest.

Example:

The most common form of debt financing is a loan

Company ABC is looking to expand its business by building new factories and
purchasing new equipment. It determines that it needs to raise $50 million in
capital to fund its growth. It obtains a business loan from a bank in the amount of
$30 million, with an interest rate of 3%. The loan must be paid back in three
years.

The advantages of debt financing are the lender has no control over your
business. Once you pay the loan back, your relationship with the financier ends

The Financial Manager is responsible for making this decision.

Financial Manager

The one who oversee the financial health of an organization and help ensure its
continued viability
Financial Institutions

What Is a Financial Institution?

A financial institution (FI) is a firm that deals with financial and monetary activities
such deposits, loans, investments, and currency exchange.

Most people are served by financial institutions in some form, as financial

activities are a crucial aspect of any economy, with individuals and businesses
relying on financial institutions for transactions and investment. Because banks
and financial institutions play such an important role in the economy,
governments believe it essential to control and regulate them. Bankruptcies of
financial firms have historically caused panic.

Financial institutions are businesses that offer loan, credit, fund administration,
financing, depositor, and safekeeping services. Financial institutions are broadly
characterized as follows:

1. Depository Institutions

A Depository Institution is an organization, bank, or institution that keeps

securities and facilitates their trading. A depository provides market security and
liquidity, lends money stored for safekeeping to others, invests in other assets,
and provides a funds transmission mechanism. Upon request, a depository must
return the deposit in the same condition.

These are financial institutions that take deposits from individuals and
corporations, make loans to borrowers, transfer cash, and manage funds for
investment.

Depository institutions include the following:

Bank
A bank is a financial institution that is licensed to accept checking and savings
deposits and make loans. The major classifications of banks operating in the
Philippines are as follows:

o Central Bank- A central bank is a financial institution given privileged control

over the production and distribution of money and credit for a nation or a
group of nations. In modern economies, the central bank is usually
responsible for the formulation of monetary policy and the regulation of
member banks. A central bank can be a lender of last resort to troubled
financial institutions and even governments.
Regulates inflation
o Rural Bank- designed to provide credit facilities to farmers, fishermen,
merchants, their cooperatives, small business enterprises and to rural
communities in general2.
Example: Own Bank, Rural Bank of Kawit, Rural Bank of Maragondon

o Retail or Savings Bank- provides financial services to individual consumers

rather than large institutions. It is a financial institution whose primary
purpose is accepting savings deposits and paying interest on those deposits.
Services offered include savings and checking accounts, mortgages, personal
loans, debit or credit cards, and certificates of deposit (CDs).
Example: PSBank, Chinabank savings, PNB savings, BPI Savings

o Commercial Bank- a bank that offers services to the public and to

companies. The term commercial bank refers to a financial institution that
accepts deposits, offers checking account services, makes various loans, and
offers basic financial products like certificates of deposit (CDs) and savings
accounts to individuals and small businesses.
Example: Unionbank, Citibank

Difference of a Savings Bank to a Commercial Bank

 Retail banks place a stronger emphasis on residential mortgages, whereas
commercial banks tend to concentrate on working with large businesses and
on unsecured credit services (such as credit cards

o Universal Bank- is a bank that combines the three main services of banking
under one roof. The three services are commercial banking, retail banking,
and investment banking. In other words, it is a Retail bank, a Commercial
bank, and an investment bank

Savings and Loan Associations

o Referred to as a “financing and mortgage loan company”. This is a financial

institution that accumulate the saving of its members and stockholders for
loans or investments in securities of productive enterprises.
o The unique feature of the financing and mortgage loan company is that the
depositor are also the member-borrowers of the association.
o Example: AMWSLAI, Composite Wing Savings and Loan Association

What is Financial Market and Different financial instruments

Financial markets refer broadly to any marketplace where the trading of securities
occurs, including the stock market, bond market, forex market, and derivatives
market, among others. Financial markets are vital to the smooth operation of
capitalist economies

Understanding the Financial Markets

Financial markets play a vital role in facilitating the smooth operation of capitalist
economies (Capitalism is often referred to as a free market economy in its purest
form. A common type of socialism is communism) by allocating resources and
creating liquidity for businesses and entrepreneurs. The markets make it easy for
buyers and sellers to trade their financial holdings. Financial markets create
securities products that provide a return for those who have excess funds
(Investors/lenders) and make these funds available to those who need additional
money (borrowers).

there are numerous types of financial instruments in the Financial markets

including:

1. Equities

2. Bonds

3. Currencies

4. Derivatives

Type of financial market.

1. Stock Markets

Perhaps the most ubiquitous of financial markets are stock markets. These are
venues where companies list their shares, and they are bought and sold by
traders and investors. Stock markets, or equities markets, are used by companies
to raise capital via an initial public offering (IPO), with shares subsequently traded
among various buyers and sellers in what is known as a secondary market.

The primary market refers to the market where securities are created, while the
secondary market is one in which they are traded among investors.

- Primary Capital Markets

When a company publicly sells new stocks and bonds for the first time, it
does so in the primary capital market. This market is also called the new
 issues market. In many cases, the new issue takes the form of an initial
public offering (IPO).

- Secondary Capital Markets

The secondary market is where securities are traded after the company has
sold its offering on the primary market. It is also referred to as the stock
market.

2. Over-the-Counter Markets

An over the counter (OTC) market is a decentralized market where penny stocks
are being traded—it does not have physical locations, and trading is conducted
electronically—in which market participants trade securities directly between two
parties without a broker.

3. Capital or Bond Markets

A bond is a security in which an investor loans money for a defined period at a

pre-established interest rate. You may think of a bond as an agreement between
the lender and borrower that contains the details of the loan and its payments.
Bonds are issued by corporations as well as by municipalities, states, and
sovereign governments to finance projects and operations.

4. Money Markets

Typically, the money markets trade in products with highly liquid short-term
maturities (of less than one year) and are characterized by a high degree of safety
and a relatively low return in interest.

Example:
 - Treasury Bill (T-Bill) is a short-term government debt obligation backed by
the Treasury Department with a maturity of one year or less

- A time deposit is an interest-bearing bank account that has a pre-set date

of maturity. A certificate of deposit (CD) is the best-known example

5. Derivatives Markets

A derivative is a contract between two or more parties whose value is based on

an agreed-upon underlying financial asset (like a security) or set of assets (like an
index).

https://www.youtube.com/watch?v=tYkqwIllFX4

Types of Derivatives

- Forward contracts
They are customized contractual agreements between two parties where
they agree to trade a particular asset at an agreed-upon price and at a
particular time in the future. These contracts are not traded on an
exchange but privately traded over the counter.

- Futures contracts
These are the standardized versions of the forward contract which takes
place between two parties where they agree to trade a particular contract
at a specified time and at an agreed-upon price. These contracts are traded
on the exchange.

- Options
It is an agreement between a buyer and a seller which gives the buyer the
right but not the obligation to buy or sell a particular asset later at an
agreed-upon price.
 Something that gives you an option

6. Forex Market

The forex (foreign exchange) market is the market in which participants can buy,
sell, hedge, and speculate on the exchange rates between currency pairs. The
forex market is the most liquid market in the world, as cash is the most liquid of
assets. The currency market handles more than $6.6 trillion in daily transactions,
which is more than the futures and equity markets combined.

7. Commodities Markets

Commodities markets are venues where producers and consumers meet to

exchange physical commodities such as agricultural products (e.g., corn, livestock,
soybeans), energy products (oil, gas, carbon credits), precious metals (gold, silver,
platinum), or "soft" commodities (such as cotton, coffee, and sugar). These are
known as spot commodity markets, where physical goods are exchanged for
money.

8. Cryptocurrency Markets

The past several years have seen the introduction and rise of cryptocurrencies
such as Bitcoin and Ethereum, decentralized digital assets that are based on
blockchain technology. Today, thousands of cryptocurrency tokens are available
and trade globally across a patchwork of independent online crypto exchanges