Financial Institution

Work Book Foundation Level 1 Introduction to Financial Market & Institutions

Unit 1

INTRODUCTION TO FINANCIAL MARKETS & INSTITUTION

1.1 Why Study Finance?
Finance may be defined as the art and science of managing money
Finance is the study of how individuals, institutions, government and businesses acquire, spend and manage money
and other financial resources
Finance is the science of managing financial resources in an optimal pattern i.e. the best use of available resources
Finance consists of three interrelated areas:






1.1.1 Financial Management
Financial Management involves the arrangement of unarranged financial resources of the firms
Financial management is concerned with the duties of the financial managers in the business firm
Financial managers actively manage the financial affairs of any type of business, namely, financial and non-
financial, private and public, large and small, profit-seeking and not-for-profit
They performsuch variety of tasks as budgeting, financial forecasting, cash management, credit administration,
investment analysis, funds management and so on

1.1.2 Investment
Investment focuses on the decisions of both individual and institutional investors as they choose assets for their
Investment Portfolios
Use money to make or gain more money
Commitment to fund assets
Purchase of Capital Goods



1.1.3.1 Financial Markets
Financial market is a market for creation and exchange of financial assets
A financial market is a market in which people and entities can trade financial securities
These markets channel funds from savers to investors, thereby promoting economic efficiency
Market activity affects personal wealth, the behavior of business firms, and economy as a whole
There are different ways of classifying financial market
Finance
Financial
Management

Investment
Financial
Market &
Institutions
Financial Institution


Work Book Foundation Level 2 Introduction to Financial Market & Institutions

Unit 1





o Equity market is a market for internal or floating claimlike common share and preference shares
o The stock market is the market where stocks representing ownership in a company, are traded
o Debt market is a market for external or fixed claims like bonds
o Debt markets, or bond markets, allow governments, corporations, and individuals to borrow to finance
activities
o In this market, borrowers issue a security, called a bond, that promises the timely payment of interest and
principal over some specific time horizon





Money market is market for short termfinancial claims of debts (within one year)
Capital market is market for long term financial claims of debts and equity (beyond one year)





A market that involves the issue of new securities by the borrower in return for cash frominvestors
(Capital formation occurs) is called primary market
Secondary Market deals of buying and selling of existing securities. Funds flow frombuyer to seller.
Seller becomes the new owner of the security (Capital formation is not occur)






A Cash or Spot Market is one where delivery occurs immediately
Forward and Future Market is one where delivery occurs at a pre-determined time in future

Another type of financial market is foreign exchange market where international currencies trade and exchange
rates are set
Well functioning financial markets, such as the bond market, stock market, and foreign exchange market, are
key factors in producing high economic growth.

Nature of Claim
Equity Market Debt Market
Maturity of Claim
Money Market Capital Market
Issuance of Claim
Primary Market Secondary Market
Timing of Claim
Cash or Spot Market Forward or Future Market
Financial Institution


Work Book Foundation Level 3 Introduction to Financial Market & Institutions

Unit 1

1.1.3.2 Financial Institutions
Financial institutions are what make financial markets work
Channeling finance fromsaving surplus to saving deficit unit of economy
Financial institution acts as an agent that provides financial services for its clients. Financial institutions
generally fall under financial regulation froma government authority
They sit between savers and borrowers and so are known as financial intermediaries
Concerned with financial instrument
Accept deposit and Advance loan, difference is Spread
















1.2. Financial Environment
Financial environment contains financial intermediaries, financial markets and borrowers

1.3. Flows of Fund through Financial System
FINANCIAL INSTITUTIONS OF PAKISTAN
P. Off.
N. Sav.
DFIs
Inv. B
Lea. C
ModarabaCo.
HBFC
Mutual Fund
Discount Houses
Non LifeInsurance
LifeInsurance
Reinsurance
StateOwned
Domestic Private

Foreign
Specialized
Microfinance
Islamic
Venture Capital
Banks
NBFIs CDNS
Insurance
Financial Institution


Work Book Foundation Level 4 Introduction to Financial Market & Institutions

Unit 1

1.3.1 Direct Finance
Borrowers borrow directly fromlenders in financial markets by selling financial instruments which are claims
on the borrowers future income or assets

1.3.2 Indirect Finance
Borrowers borrow indirectly fromlenders via financial intermediaries by issuing financial instruments which
are claims on the borrowers future income or assets

1.4 Organizational Structure

1.5 Real Assets and Financial Assets
Real assets are tangible things owned by persons and businesses
Residential structures and property
Major appliances and automobiles
Machinery and equipment

Financial assets are what one individual has lent to another
Consumer credit / Insurance Policy
Loans / Mortgages
Shares / Bonds

1.6 Separation of Ownership and Control