FINANCE LESSON 2: FINANCIAL INSTITUTIONS, INSTRUMENTS, AND MARKETS

“Which bank have you already been to? What

transaction have you performed?”
THE SOCIETAL ENVIRONMENT OF THE Classification of financial institution:
BUSINESS
• Depository institutions (8th slide)
• Financial intermediaries (10th slide)
• Investment institutions (11th slide)
I. Depository institutions
Depository institutions – are financial institutions
that accepts deposits (savings, current, and time
deposits) from individual, and manage funds for
investment purposes.
System – it is composed of several parts with • Banks – institutions authorized by the
interrelated functions. If one part of the system is BSP. They accept deposits and bills
dysfunctional, the operation of the whole system payment, provide loans, and facilitate the
is expected to be adversely affected transfer of funds domestically or abroad.
FINANCIAL SYSTEM 1. Universal bank
• Financial system – at a societal 2. Commercial bank
environment or regional level is
3. Thrift bank
principally responsible for the flow of
money or funds from the lender to the 4. Rural bank
borrower.
5. Cooperative bank
The basic elements of a financial system are as
6. Islamic bank
follows:
Savings and loan association – sometimes
1. Financial institutions
referred to as a financing and mortgage loan
2. Financial markets company. A financial institution that is
engaged in the business of accumulating the
3. Financial instruments
savings of its members and use it for loan or
4. Lenders and borrowers investment.
Trust companies – act as the custodian of the
property for and on behalf of the beneficiary
for a fee. The one appointed as the
administrator of the properties of a decedent
when indicated in the last will and testament.
Credit union – A financial depository
institution that is mainly controlled and
operated by its members for the following
purposes: extending credit to members,
FINANCIAL INSTITUTION offering competitive interest rates, promoting
concept of thrift, providing other types of
Financial Institution – are organizations that
financial services.
provide financial services, in a form of loan,
credit, financing, depository, and safekeeping. II. Financial intermediaries
Financial intermediary – a type of financial • (Examples: government, suppliers,
institution that acts as the middleperson between investors, communities, employees, and
two parties – the investors and the borrowers. It customers)
raise and accumulate money from investors and
• STOCKS – a financial security that
offer the money to corporate entities in need.
signifies ownership of the assets of the
• Mutual funds – the funds accumulated corporation.
from individual or corporation are used to
• COMMON STOCK – has voting right in
invest either to stocks or bonds. It will be
the company
managed by professional fund manager.
• PREFERRED STOCK – no voting right,
• Pension funds – a fund set up by the
prioritized during dividend distribution
business for the purpose of paying the
pension of private-sector employees who • PSE - Philippine Stock Exchange
retire from the business organization. …………. BROKERAGE FIRM – they
will help you buy and sell securities
• Insurance companies – it acts as financial
intermediary by pooling together the • DIVIDENDS - a sum of money paid
proceeds of insurance policies sold to the regularly (typically quarterly) by a
public and investing the accumulated company to its shareholders out of its
funds in high-yield maturing securities. profits
(LIFE insurance and NON-Life insurance)
• BONDS – is a financial instrument that
III. Investment institution represents a contractual debt of the party
issuing the bond.
• An investment company usually composed
of very wealthy investors. The resources of • MUTUAL FUNDS – is a type of
these investors are pooled together in the financial vehicle made up of a pool of
company for the purchase of financial money collected from many investors to
securities of high-grade companies. invest in securities like stocks, bonds,
money market instruments, and other
• Institutional investors are legal entities that
assets.
participate in trading in the financial
markets. • INVESTMENT – is the action or process
of investing money for profit.
• Financial Securities examples: bonds and
stocks • RISK RETURN TRADE-OFF -
Higher risk is associated with greater
ADDITIONAL LEARNINGS:
probability of higher return and
• CAPITAL - a term for financial assets, lower risk with a greater probability of
such as funds held in deposit accounts smaller return.
and/or funds obtained from
• STOCK CERTIFICATE – is a physical
special financing sources.
piece of paper that represents a
• PROFIT - a financial gain, especially the shareholder's ownership in a company.
difference between the amount earned and
• BOND CERTIFICATE/ BOND
the amount spent in buying, operating, or
INDENTURE - is a legal document
producing something.
describing the indebtedness of
• STOCKHOLDER or SHAREHOLDER – a borrower and the terms under which that
holder of the stocks in a company indebtedness will be paid back to
the investor.
• STAKEHOLDER - is a party that has an
interest in a company and can either affect Market – the place where the sellers and buyers
or be affected by the business. of good or services meet.
Financial Market – a place where the selling- evidence of an ownership interest in an entity
buying activity occurs to trade equity securities. or a contractual right to receive or deliver.
Trading Activity – the selling-buying transaction • CASH – on the part of the holder it is an
happening in financial market. asset. However, a financial liability on the
side of the bank.
TYPES OF FINANCIAL MARKET
• CHECK – an asset of the payee (you), but
• Capital market
considered liability of the issuer (bank)
• Money market
• LOAN – asset of the lender, liabilities of
• Primary market the borrower.

• Secondary market • BONDS

• Public market • STOCKS

FINANCIAL MARKET BONDS - It is a financial instruments that

represents a contractual debt of the party issuing
CAPITAL MARKET – A financial market that the bond. The bond issuer is the borrower, while the
issues for medium – and long-term periods. bondholder or purchaser is the lender. At the maturity
of the bond, bond issuers repay the bondholder the
(3-5 years – Medium term
principal value.
period / 5years above – Long term period)
MOST COMMON TYPES OF BONDS:
MONEY MARKET – A financial market that
issues securities with a period of less than one • Term bond – bond with single maturity
year. date
PRIMARY MARKET – A financial market • Serial bond – bond with several maturity
where a corporation can issue new shares of date
stocks. The investors directly buy the shares from
• Secured bond – is a type of investment
the issuing corporation.
in debt that is secured by a specific asset
SECONDARY MARKET – A financial market owned by the issuer.
where financial securities are traded between or
• Debenture bond – is a type of bond or
among investors. There is NO issuance of new
other debt instrument that is unsecured by
shares from the corporation.
collateral
PUBLIC MARKET – a market where financial
• Convertible bond – bond which can be
securities of a public-listed corporation are traded
converted into shares of stocks in a later
with standardized contract agreement and
date.
procedures.
• Callable bond – also known as
a redeemable bond, is a bond that the
issuer may redeem before it reaches the
stated maturity date.
STOCKS - It is a financial security that signifies
ownership of the assets of the corporation.

THE TWO MAJOR TYPES OF STOCKS

ARE AS FOLLOWS:
FINANCIAL INSTRUMENTS
1. Common Stock or Ordinary Shares
Financial instruments are monetary contracts
between parties. They can be created, traded, 2. Preferred stock or Preference Shares
modified and settled. They can be cash,