INTRODUCTION Financial Institutions

In the previous lesson, we learned that the primary goal of a management is to maximize the shareholder’s wealth in the long run. and that the value of shareholder is determined in the financial market. Therefore, in this chapter we describe the markets where capital is raised, securities are traded, and stock prices are established, as well as the institutions that operate in these markets.

Good morning so in today’s lesson we will be having financial institutions and market now in the previous lesson we learned that the primary goal of a management is to maximize the shareholders well in the long run and that the value of shareholder is determined um in the financial market okay so therefore in this chapter we describe the markets where capital

Is raised securities are traded and stock prices are established now as well as the institutions that operates the financial market or these markets the first question to start with why do business raise funds first we have expansion second it could be a purchase of equipment or it could be a start-up capital or debt payment or through payment of expenses

Now these are some of the reasons why business needs to raise money or fund primarily because the business is not look liquid enough to fund its project or plans how do business raise the capital or financial management there is what we call the capital formation process now in this diagram you can see three different ways to transfer financial capital in the

Economy so here it is okay first um we have here the direct transfer of funds now this is the easiest way to transfer capital or fund from both the borrower the business and the saver okay the borrower does not need to go through the investment bankers or any financial intermediaries now the scenario here is that um there is a direct transfer of money and

Securities and it will occur when the business sell the shares okay or the firm security through stocks and bonds directly in the financial market without going through any financial institution now for example a person needs capital to start his own business but that person lacks of capital so his friend lends him money to raise fund in order to start up his

Business now so his friend directly transfers the money to that person okay now let’s go to the second wave we have here the indirect transfer using investment banker okay now in this way um the company in this way uh when the company needs to raise money or to raise up the capital faster so the company will prefer to go through an investment banker so this is

The investment banker okay or the investment banking house to establish new investment securities in order to help the company to obtain financing now for example xyz company is temporarily lacking in capital so xyz company needs to sell the shares or bonds to the investment banking house in order to raise fund quickly now when the firms sell their securities

To the investment banking house the investment banking house will now resell okay resell resell the securities to the savers so the investment banking house is the middleman okay so this is as you can see it is it um acts as the middle man between the business and the savers okay now let’s go to the third way um to transfer financial capital in the economy we

Have here the indirect transfer using financial intermediary now in this way um financial intermediaries is also or also acts as the middleman between the saver and the business okay it acts as a middleman between the saver between the business and the saver now some types of intermediaries includes banks credit unions pension funds and etc now in this transfer

The financial intermediaries will collect the money from the savers that wish to invest or the savers purchase the intermediary security now after that the financial intermediary will use this amount of money to provide financial service such as provide loans to the borrowers to start up the business okay now question what is the difference between the two okay

What is the difference between the two now the difference between the investment banker and financial intermediary is that the investment banker will just resell okay if you can see here whatever whatever um the business sells the investment bankers sells it to the savers okay will resell um the securities bought from the business or firm well in the financial

Intermediaries whatever the business sells to the financial intermediaries the financial intermediary will only collect those securities and then the financial intermediary will issue its own securities to the savers okay it will issue its own securities to the savers to collect money from the savers okay go to the financial market now financial market it is

Basically the mechanism through which deficit units meets its surplus units okay now it is the mechanics through which buyers and sellers are brought together to facilitate the exchange of financial assets which are often known as the securities or financial investment thus financial market exists in order to bring together buyers and sellers of securities let’s

Go through the types of financial market now before that we first differentiate physical assets from the physical asset those are the assets that are tangible or real assets with physical existence now for financial asset it it is or those are um intangible financial instruments with contractual provision now here is an example of a physical asset so if you can

See here you can see gold greens corn vegetables equipment anything that you can see anything that you can hold anything that is tangible or real asset now here for the financial asset it is purely paper paper with provisions paper with um contractual provisions that represents as security and exchange with the money that the cap uh the the business needs is

Here the capital versus the money market so what is a capital market capital market uh those are instruments with a longer maturity now it involves financial assets that have a lifespan of more than one year so most of the time capital market have this lifespan of three to five years or three years and above now it is a market from which long-term capital is being

Raised for the setting up and sustained growth of business organization for the money market these are the instruments or it has the instruments with short-term maturity now short-term maturity it involves financial asset that has a lifespan of less than a year so in this market of short-term borrowing uh it it is the market of short-term borrowing instruments

The money market in the capital market now if you can see here the money bar market we have here treasury bills commercial papers and consumer credit loans now these are considered short-term um financial assets considering that the the maturity of this are only 90 days or about less than a year now for the capital market we have here common stock preferred stock

Bonds leases and mortgages why because these um financial assets are considered long term because for example um in the bonds it has a maturity of let’s say five years five years okay i have here the primary market so these are the market where new issues are sold by corporations to acquire new capital via the sale of common stock preference stock or bonds

Now the sale takes place through an investment banker okay investment banker then in which the corporation raises new capital through first is the ipo or the initial public offering it is also known as the unseasoned news uh new issue and then the season new issue these are or it refers to the offering of an additional amount of an already existing security

Okay and then the shares involve the initial offering for security to the public so unlike ipo these are new shares being issued to the public now for the seasoned new issue market it is only an additional amount for an already existing security okay secondary market now for the secondary market it involves between owners after the issue has been sold to the

Public by the company and then the proceeds from the sale of the secondary market do not go to the company as in the case of ipo because if there is an issuance of ipo when someone or when an investor buys those shares the money that the investor um uh pays will go directly to the business or the firm issuing the ipo while here in the secondary market um the

Proceeds of the second the sales from the secondary market will not go through go to the company uh directly okay so in which existing securities are traded among investors okay so example are nyse or the new york stock exchange here and here for in the philippines we have here the pse or the philippine stock exchange let’s have an illustration uh to simplify

The explanation for the difference between the market a primary market and the secondary market okay now here okay now in this we have here the primary market and here the secondary market now as you can see um investor a bought the shares from xyz incorporation are incorporated now in this case the xyz incorporated issue shares through an ipo and then investor

A has bought the ipo and the money has been directly um transferred to xyz company okay now in the secondary market the share that investor a has been holding was bought by investor b so investor b gives money to investor a and the shares that was bought by investor a from xyz was being transferred to investor b we have here also the over-the-counter market now

In the over-the-counter market market for securities outside the control of the official stock exchange so the trading securities are not listed in the physical stock exchange and then the broker dealers are linked by a network of telephones and computer terminals through which they deal directly with one another and with the customers so this is different from

The primary market and the secondary market wherein the stocks or the securities are being listed in the physical stock exchange share trading now here in the blockchain share trading traders are institutions now essentially a communication network among institutional investors that trade large blocks without the aid of a broker let’s differentiate equity versus

That market now in an equity market uh corporate stocks are being traded in the debt market bonds or corporate liabilities are being traded okay so again when we say stocks we are referring to the equity okay but when we say bonds we are referring to the debt market okay here for the stocks these are again considered as an equity instrument carrying ownership

Or interest now there is a dividend payout for this if you have again a preferred stock so you are being prioritized for the dividend payment um unlike with the stock uh common stock holders um for their returns uh there is no guarantee returns because again this is an equity okay so there could be a volatile um changes in the stock prices now for the additional

Benefits for the stocks the voting rights will be available if you’re a stockholder considering that you are partly owner of the company now for the bonds the bond again is part of the debt market so it is a debt instrument with a promise to pay back the money with interest and then its return is through interest okay and then there is a guaranteed return okay

Unlike unlike with the uh stocks uh there is no guaranteed return considering again that the stock price or the value of your stocks could change over the time while in bonds the principal amount will be given back to you at the end of the maturity now additional benefits there is a preferential treatment when bond mature okay so that is the primary difference

Between the equity or the stocks and bonds now what is a financial institutions now institutions first off is the bank we have here commercial banks which is the middleman between the savers and the borrowers mostly here investment banks still a middleman but it is an organization that helps to sell new investment securities like bonds and stocks we have here

Also financial service corporation it is a firm that offers a wide range of financial services that includes investment banking commercial banking brokerage and insurances now we also have here funds pull money to invest we have here the mutual fund pension funds or retirement plans hedge funds or exchange traded funds now these are the full of full of funds

Meaning to say uh there are types different types of securities being invested in in one um in one type of investment okay like for example in mutual fund it could be a mixture of a fixed securities um an equity or a short-term securities okay and then there are other financial institutions like life insurance companies that collects premium and invest if you

Have vol or the value variable unit life insurance it is a mixture between it is a mixture of an insurance and an investment part of your um premium will go to your investment and part for a part of your premium will go to uh your insurance okay also it is um other financial institution is the private equity wherein borrow it borrows money to invest or manage the whole company

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INTRODUCTION Financial Institutions By LearnwithFun 101liveBroadcastDetails{isLiveNowfalsestartTimestamp2020-10-06T000026+0000endTimestamp2020-10-06T002038+0000}