PRINCIPLES OF BUSINESS



PRINCIPLES OF BUSINESS

SECTION 7: BUSINESS FINANCE

COMMERCIAL BANKS

These are financial institutions, which are privately owned by shareholders

Functions of Commercial Banks

• Acceptance of deposits

• Supply finance (loans, investment)

• Provide a system of payment for bills

• Can act as executor/trustee

• Provide safe keeping of documents 9wills, life insurance policies, title deed, jewellery etc.)

• Assist with foreign exchange rate

• Provide credit rating to customers

• Dispense cash

• Buy government securities

• Negotiate investments for customers

Services Offered

➢ Deposits (e.g. savings accounts, fixed deposit, chequing accounts etc.)

➢ Safety Deposit Boxes

➢ Mortgages ( long term e.g. houses, commercial buildings, land)

➢ Other Loans (shorter term e.g. cars, education, furniture, travel etc.)

➢ Credit Cards

➢ Retirement Savings Plans (RSP)

CENTRAL BANK

This is an institution controlled by the government and does not compete with commercial banks.

Function of Central Bank

• Issues and regulates bank notes (currency)

• Acts as government’s bank (holds all government accounts & issues treasury bills)

• Responsible for foreign reserves

• Executes government monetary policy by exercising control of money supply, borrowing and saving interest rates.

• Looks after borrowing from IMF

• Supervises commercial banks’ operations

• Acts as bankers’ bank (issuing notes and coins, holding banks’ reserves etc.)

• Assists with the setting up of financial markets such as the stock exchange

Relationship between Central Bank and Commercial Banks

➢ Banks are legally required to deposit with the central bank (as a reserve) a percentage of their total deposits. This is called the legal reserve requirement. This can be changed by the central bank depending on its objectives. The higher the amount required, the less money would be available for loans to the public.

➢ The Central Bank can also decide the amount of local assets which commercial banks must hold as part of the total assets which they hold

➢ There is also a liquidity requirement. This is the ratio of liquid assets to the total assets held by the bank. Liquid assets are those which can be easily converted to cash

MONEY MANAGEMENT

Savings

This is money is usually held by a bank or credit union on which interest is earned. The principal amount remains the same unless some is withdrawn.

Investment

This involves the purchase of shares in an organisation. Dividends are usually paid when profits are made. The value of the shares can increase or decrease, depending on the profitability of the company. There the initial amount invested can increase or decrease. Investments can be made on the stock market, mutual funds or simply putting money into a new business.

What is money management?

Sound money management is a sensible way of spending and investing money. One’s total expenditure should not exceed one’s income. Sound money management should follow these guidelines stated below:

1. Set goals based on what is important to you

2. Prioritise goals

3. Provide for basic needs first

4. Save for the future(pay sheet deductions, credit union, banks etc)

5. Make wise decisions when buying (i.e. shop around)

6. Get the most out of your purchases (use items properly)

7. Live within your means

A budget can be made an essential part of money management. It is a document showing all sources of income and the ways in which it will be used for a certain period. A comparison can then be made between the planned and actual expenditure. If necessary, adjustments can be made during or after the specified planning period.

Saving should be included in one’s management of money. This can be done through a number of organisations and informal groups such as

❖ Banks

❖ Insurance companies

❖ Credit unions

❖ Sou sou, lend- a- hand, meeting turn, box etc.

SOURCES OF FINANCE/CAPITAL

Capital is all the funds raised by individuals or organisations from savings or borrowing. It may include short-term financing, long-term financing or a combination of both

Money Markets

Money can be borrowed from commercial banks, credit unions, hire purchase companies etc. These institutions are usually more concerned with short-term lending but it is not uncommon to lend for longer periods e.g. mortgages.

Capital Markets

These specialise in long-term lending almost entirely to business and industries. They include insurance companies, pension funds, stock exchange, development banks and other government agencies

STOCK EXCHANGE

This is the market place where buyers and sellers of securities (all stocks and shares) can

meet to buy and sell. The Stock Exchange is responsible for making arrangements for the

trading of shares. It also sets the rules of operation of the Stock Market and ensures that

members adhere to the rules at all times. In the Caribbean Barbados, Jamaica and Trinidad have stock markets on which cross border trading is allowed. That is, it is possible to buy shares from the stock market of another country. Since the shares which are being trading on the stock exchange were already sold once, the stock exchange is said to be the market place for second hand trading.

On a stock market there are various risks and benefits. Usually, the higher the risk the higher the gain. It is often wise to spread investments across high and low risk investments to minimise losses.

Why is the Stock Exchange Important?

In the Caribbean, many companies (and governments) do not possess the finances to purchase all they need for continued success. In order to acquire these large sums of money (capital), businesses go to the public and encourage persons/organisations to purchase shares. However, most persons will not invest if they did not think that they could achieve some return on their investment. The money acquired is then invested into the business but cannot be returned to the individual/organisation. If the investor wishes to get back the money, the shares can be sold to another investor. These transactions are facilitated by the stock exchange. Stock exchanges also have international importance because they provide a market for foreign investment.

Terms of Stock Market

➢ Bull market- Investors buy or hold on to shares in the anticipation of a rise in price.

As the prices are rising in this market, investors will make a profit by selling at the

higher price.

➢ Bear Market- In anticipation of a fall in price, investor will sell shares in order to minimise losses. They may buy back the shares at a relatively low price. In this market prices tend to be falling.

➢ Stag market- Investors buy new shares, with the aim of reselling at a profit when second hand deal starts on the stock exchange.

REVISION

1. List THREE functions of Commercial Banks.

2. Identify Two services offered by a commercial banks to citizens of a country.

3. Which bank can be called “the bankers’ bank”?

4. Which bank is responsible for the government’s finances?

5. Explain the difference between investment and saving.

6. Explain one reason why commercial banks need the Central Bank.

7. If you want to borrow money list TWO examples of sources from

a) the money market b) the capital market

8. Describe TWO functions of the Stock Market.

9. Name TWO Caribbean countries where stock markets can be found.

REVISION

1. List THREE functions of Commercial Banks.

2. Identify Two services offered by a commercial banks to citizens of a country.

3. Which bank can be called “the bankers’ bank”?

4. Which bank is responsible for the government’s finances?

5. Explain the difference between investment and saving.

6. Explain one reason why commercial banks need the Central Bank.

7. If you want to borrow money list TWO examples of sources from

a) the money market b) the capital market

8. Describe TWO functions of the Stock Market.

9. Name TWO Caribbean countries where stock markets can be found.

REVISION

1. List THREE functions of Commercial Banks.

2. Identify Two services offered by a commercial banks to citizens of a country.

3. Which bank can be called “the bankers’ bank”?

4. Which bank is responsible for the government’s finances?

5. Explain the difference between investment and saving.

6. Explain one reason why commercial banks need the Central Bank.

7. If you want to borrow money list TWO examples of sources from

a) the money market b) the capital market

8. Describe TWO functions of the Stock Market.

9. Name TWO Caribbean countries where stock markets can be found.[pic]

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download