Financing Institutions & Stock Markets
In this lesson, you’re expected to learn about:
– types of financing institutions
– stock markets and the role of the central bank
Financing institutions are like banks in that they lend money but they’re different in two ways:
– they tend to give different types of loans than banks do.
– the get their funding by borrowing it themselves instead of through deposits. They earn a profit by charging you higher interest rates than they’re paying on their own loans.
Let’s look at some different types of financing institutions.
Sales financing institutions work with individuals and companies making large purchases.
For example, at a car dealership, you could be offered a loan that you can use to purchase a car immediately and then pay it off in installments. In such a case, the dealership itself is not offering you the loan; a type of financing institution called a ‘sales financing institution’ works with the store to give you the loan.
They are companies that offer small personal loans and credit cards to individuals.
Since they don’t have much to do with corporate finance, we won’t cover them in detail.
Commercial organizations can get credit card and credit loans as you can and those credit loans come from a type of financing institution called a business credit institution.
Business credit loans differ from standard business loans in that they’re a line of credit in the same manner as your credit card. These loans can be freely increased or gradually paid off within certain limits as long as the company makes periodic minimum payments on the balance.
Companies and people who are considered higher risk often qualify only for loans considered subprime, which are offered at interest rates higher than the prime rate.
During the 80s and 90s, subprime mortgage lenders were very common. In fact, they contributed to the financial crisis of 2007 when many commercial banks were venturing into the subprime market with little or inappropriate risk management.
A payday loan gives you money for a short period, usually only one to two weeks, and charges several hundred (sometimes thousand) percent in annual percentage rate, in addition to fees and penalties.
It’s advisable to avoid loan sharks and subprime lenders at all costs or else they ruin your finances.
Stock markets such as the NASDAQ, FTSE 100 and Nikkei are globally renowned for being open forums for trading.
In stock and commodities exchanges, the most recognized space is called the pit or trading floor, where large numbers of brokers and dealers buy, sell and trade shares.
The function of the exchanges themselves is more about providing a place for these trading activities to occur more than anything else, making them increasing irrelevant, with modern technological advances in investing transactions making trading easier.
Numerous regulatory bodies oversee corporate finances and financial institutions and each one has its own rules and regulations. Some examples are:
A country’s central bank sets interest rates and decides on levels of quantitative easing in times of economic difficulty.
A professional organization that regulates chartered financial analysts.
Associations of certified chartered. accountants often form a committee of accountancy bodies.
– independent public organization
– authorized to print money
– accepts deposits
– makes loans to member banks
– facilitates loans between banks using deposits
– determines interest rates for loans and the bank reserve requirement (proportion of total deposits that commercial banks must keep available as liquid cash). Bank reserve requirements are used to manage bank liquidity for customer withdrawals and to manage the supply of money in the economy.
The central banks tries to strike a balance between inflation and interest rates because when interest rates are low, it encourages people to spend. But this spending promotes growth and feeds inflation.
If the central bank decides that the economy is growing at such a pace that demand is going to exceed supply, it can raise interest rates to slow down the amount of cash that enters the economy.