An Introduction to Basic Finance - Business Finance - ثاني ثانوي

An Introduction to Basic Finance What are the key functions of financial institutions? Financial institutions in the King Abdullah Financial District, Riyadh

MUND LEARNING OBJECTIVES Once you have completed this chapter, you should be able to: Give an overview of the function of 1 financial institutions and provide several examples of financial institutions. Understand that financial practices vary 2 in different cultures throughout the world. 3 Explain the key divisions of finance. Describe the following key financial 4 concepts: sources of finance; risk and return: financial leverage; and valuation. 5 Explain how finance differs from and relates to other business disciplines. 23

FIGURE 1.1 The Role of Francia Institutions 24 Business Finance о or many people around the world, hardly a day goes by without having contact with financial institutions. They make deposits and withdrawals from banks, buy and sell shares, make contributions to pension plans, pay taxes, buy goods, and borrow funds from a variety of sources. Each of these acts involves contact with a financial institution (see Figure 1.1). Commercial banks facilitate the transfer of funds from lenders to borrowers Stock exchanges facilitate the exchange of shares and securities from sellers to buyers Some of these institutions facilitate the transfer of funds from lenders to borrowers (such as commercial banks), while others facilitate the exchange of securities from sellers to buyers (for example, the Tadawul Saudi Stock Exchange). Other financial institutions affect the level of income and the stability of consumer prices (such as the Saudi Central Bank). Participants in these markets for financial products and services range from institutions, large corporate enterprises and the government to the independent market trader and individual saver. You are likely to come into contact with these financial institutions, and increasing your knowledge of them can help you better function in today's financial environment. To succeed in international business, it is also important to understand that approaches and attitudes towards financial practices can vary considerably in different cultures throughout the world. For example, the concept of monetary interest is central to many aspects of business in Western culture. While some aspects of business finance and certain financial practices may not necessarily be directly applicable in Saudi Arabia, an awareness of them is vital in preparing to operate in the global marketplace.

Finance studies money and its management. Like economics, it explores the allocation of resources. The process of resource allocation occurs over time. Firms invest in inventory, plant, and equipment, but the returns are earned in the future. An investor constructs a portfolio of assets, but the return is earned in the future. In many regions worldwide, a commercial bank grants a loan in anticipation of earning interest and having the principal repaid. In each case the financial decision is made in the present but the return is in the future. Because the future is unknown, finance studies the allocation of resources in a world of uncertainty. Of course, future events are anticipated, but they are not certain. Not every possible outcome that may affect returns can be anticipated. Unexpected events infuse financial decisions with uncertainty and the potential risk of loss. Investors, portfolio managers, and corporate financial managers may take actions to help manage risk, but risk still exists and is a major component in the study of finance. Exercises Choose the correct answer. 1. Commercial banks facilitate the transfer of funds from lenders to borrowers. True/False 2. The study of money and its management is called; a. banking. b. finance. c. accounting. d. economics. وزارة الصليد CHAPTER An Introduction to Basic Finance 25