Overview of the financial system
A financial system refers to the mechanism that involves financial markets, financial institutions, laws, regulations and techniques through which financial resources are mobilized from those who have surplus to those in deficit an economy. The primary task of any financial system therefore is to facilitate the movement of funds from those who save to those who borrow to buy needed goods and services or for investments. The financial system determines both the cost of funds (capital) and how much funds will be available to finance consumption and investments. The agents of the financial system that facilitate the movement of the funds from savers to borrowers are the financial institutions. The financial institutions include commercial banks, insurance companies, investment banks, finance companies and mutual funds, as well as regulators such as Central Banks, Securities and Exchange Commission, and the Stock Exchange. They collectively play the role of financial intermediaries in an economy, by mobilizing funds by means of developed instruments or products from those who have surplus to those who have shortage of funds. A well functioning financial system is therefore crucial to the economic health of a country.
What is Finance? Finance is a branch of economics concerned with how individuals, businesses and governments source funds to finance their consumption and investments decisions. For example, an individual can source funds from a bank to buy a car. A business organisation can raise money by issuing securities (bonds or shares) to finance the expansion of operations. Governments can issue bonds to raise money to finance infrastructural projects. The focus of this course however is on how business organisations source funds to finance their operational and investment decisions.
The four basic areas of Finance
Finance is commonly partitioned into four segments namely:
Financial Markets and Institutions
This is the area of finance concerned with corporate investment and financing decisions to achieve corporate business objectives and goals. The investment planning and decision also called capital budgeting decision is the decision to acquire assets (real assets and/or financial assets). The financing decision addresses the problem questions of how and where to source the required funds to finance the investment decisions. Thus corporate finance is concerned with how corporations can efficiently source funds and effectively use the funds to achieve investment goals and objectives. Investment Management
This is a specialized area of finance that discusses how investors can undertake successful investments in real or financial assets. Through developed quantitative models, professional investors can estimate and evaluate the expected levels of returns and risks associated with alternative investment opportunities as well as the best mix of such assets to achieve investment goals. Specialist in this field are mostly found in Investment banks, Brokerage firms, Mutual Funds, Pension Funds, Venture Capital Funds and investment departments of other financial institutions as well corporations. International Finance
This area of finance is concerned with all processes and instruments relating to investments and in-and-out flows of funds between a country and the rest of the world. That is investments and financial transactions across national borders involving individuals, business and governments. Its main areas of concern include movements of exchange rates among national currencies, differences in interest rates and inflation rates that international payments and investments.
Financial Markets and Institutions
This constitutes the institutional players or participants in the various fields of the financial markets. It is concerned with the study of...
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