FINANCIAL

INSTITUTIONS

Source: Investopedia
What is a financial institution?
•A financial institution (FI) is a
company engaged in the business
of dealing with financial and
monetary transactions, such as
deposits, loans, investments and
currency exchange.
What is a financial institution?
•encompass a broad range of
business operations within the
financial services sector, including
banks, trust companies, insurance
companies, brokerage firms and
investment dealers
What is a financial institution?
•exists to provide a wide
variety of deposit, lending
and investment products to
individuals, businesses or
both.
 9 Major Financial Institutions
1. Central Banks
• is the financial institution responsible for the oversight
and management of all other banks
• In the United States, the central bank is the Federal
Reserve Bank, which is responsible for conducting
monetary policy and supervision and regulation of
financial institutions
• Individual consumers do not have direct contact with a
central bank; instead, large financial institutions work
directly with the Federal Reserve Bank to provide
products and services to the general public.
2. Retail and Commercial Banks
• offered products to individual consumers while
commercial banks worked directly with businesses.
• Currently, the majority of large banks offer deposit
accounts, lending and limited financial advice to
both demographics.
• Products offered at retail and commercial banks
include checking and savings accounts, certificates
of deposit (CDs), personal and mortgage loans,
credit cards, and business banking accounts.
3. Internet Banks
• A newer entrant to the financial institution
market is the internet bank, which works
similarly to a retail bank.
• Internet banks offer the same products and
services as conventional banks, but they do so
through online platforms instead of brick and
mortar locations. (For related reading, see: The
Pros and Cons of Internet Banks.)
4. Credit Unions
•serve a specific demographic per their
field of membership, such as teachers or
members of the military.
•While products offered resemble retail
bank offerings, credit unions are owned
by their members and operate for their
benefit.
5. Savings and Loan Associations
• Financial institutions that are mutually held
and provide no more than 20% of total lending
to businesses fall under the category of savings
and loan associations.
• Individual consumers use savings and loan
associations for deposit accounts, personal
loans and mortgage lending.
6. Investment Banks and Companies
• Investment banks do not take deposits; instead,
they help individuals, businesses and
governments raise capital through the issuance
of securities.
• Investment companies, more commonly known
as mutual fund companies, pool funds from
individual and institutional investors to provide
them access to the broader securities market.
7. Brokerage Firms
•A brokerage firm assists individuals and
institutions in buying and selling securities
among available investors.
•Customers of brokerage firms can place
trades of stocks, bonds, mutual
funds, exchange-traded funds (ETFs) and
some alternative investments.
8. Insurance Companies
•Financial institutions that help individuals
transfer risk of loss are known as insurance
companies.
•Individuals and businesses use insurance
companies to protect against financial loss
due to death, disability, accidents, property
damage and other misfortunes.
9. Mortgage Companies

•Financial institutions that originate or

fund mortgage loans are mortgage
companies.
•While most mortgage companies serve
the individual consumer market, some
specialize in lending options for
commercial real estate only.
What is a Financial Instrument?
• Financial instruments are assets that can be traded.
• They can also be seen as packages of capital that
may be traded. Most types of financial instruments
provide an efficient flow and transfer of capital all
throughout the world's investors.
• These assets can be cash, a contractual right to
deliver or receive cash or another type of financial
instrument, or evidence of one's ownership of an
entity.
•International Accounting
Standards (IAS) defines financial
instruments as "any contract that
gives rise to a financial asset of one
entity and a financial liability or
equity instrument of another
entity."
• Financial instruments can be real or virtual
documents representing a legal agreement involving
any kind of monetary value.
• Equity-based financial instruments represent
ownership of an asset.
• Debt-based financial instruments represent a loan
made by an investor to the owner of the asset.
• Foreign exchange instruments comprise a third,
unique type of financial instrument.
• Different subcategories of each instrument type
exist, such as preferred share equity and common
share equity.
 Types of Financial Instruments
Cash Instruments
• The values of cash instruments are directly influenced and
determined by the markets. These can be securities that are
easily transferable.
• Cash instruments may also be deposits and loans agreed upon
by borrowers and lenders.
Derivative Instruments
• The value and characteristics of derivative instruments are
based on the vehicle’s underlying components, such as assets,
interest rates or indices.
• These can be over-the-counter (OTC) derivatives or exchange-
traded derivatives.
Types of Financial Instruments based on Asset Class
Debt Based (Short Term)
• Short-term debt-based financial instruments last for one year
or less.
• Securities of this kind come in the form of T-
bills and commercial paper.
• Cash of this kind can be deposits and certificates of deposit
(CDs).
• Exchange-traded derivatives under short-term debt-based
financial instruments can be short-term interest rate futures.
• OTC derivatives are forward rate agreements.
Types of Financial Instruments based on Asset Class
Debt Based (Long Term)
• Long-term debt-based financial instruments last for more
than a year.
• Under securities, these are bonds.
• Cash equivalents are loans.
• Exchange-traded derivatives are bond futures and options
on bond futures. OTC derivatives are interest rate swaps,
interest rate caps and floors, interest rate options, and
exotic derivatives.
Types of Financial Instruments based on Asset Class
Equity Based
• Securities under equity-based financial instruments are stocks.
• Exchange-traded derivatives in this category include stock
options and equity futures.
• The OTC derivatives are stock options and exotic derivatives.
• There are no securities under foreign exchange.
• Cash equivalents come in spot foreign exchange. Exchange-
traded derivatives under foreign exchange are currency futures.
• OTC derivatives come in foreign exchange options, outright
forwards and foreign exchange swaps.
What is Financial Market?
• The financial market is a broad term describing
any marketplace where trading of securities
including equities, bonds, currencies and
derivatives occur.
• Some financial markets are small with little
activity, while some financial markets like
the New York Stock Exchange (NYSE) trade
trillions of dollars of securities daily.
 Types of Financial Markets
Financial Markets for Stocks
•The stock market is a financial market that
enables investors to buy and sell shares of
publicly traded companies.
•The primary stock market is where new issues of
stocks are first offered.
• Any subsequent trading of stock securities
occurs in the secondary market.
 Types of Financial Markets
Over the Counter Market
• The over-the-counter (OTC) market is an example of a
secondary market.
• An OTC market handles the exchanging of public stocks
not listed on the NASDAQ, New York Stock Exchange or
American Stock Exchange.
• Companies with stocks trading on the OTC market are
usually smaller organizations, as this financial market
requires less regulation and is less expensive to be traded
on.
 Types of Financial Markets
Financial Market for Bonds
• A bond is a security in which an investor loans money for
a defined period of time at a pre-established rate of
interest.
• Bonds are not only issued by corporations but may also
be issued by municipalities, states and federal
governments from around the world.
• Also referred to as the debt, credit or fixed-income
market, the bond market sells securities such as notes and
bills issued from the United States Treasury.
 Types of Financial Markets
Money Market
•A money market is a portion of the financial
market that trades highly liquid and short-term
maturities.
•The intention of the money market is for short-
term borrowing and lending of securities with a
maturity typically less than one year.
•This financial market trades certificates of deposit,
banker’s acceptances, certain bills, notes
and commercial paper.
 Types of Financial Markets
Derivatives Market
•The derivatives market is a financial market
that trades securities that derive its value from
its underlying asset.
•The value of a derivative contract is determined
by the market price of the underlying item.
•This financial market trades derivatives
including forward contracts, futures, options,
swaps and contracts-for-difference.
 Types of Financial Markets
Forex Market
•The forex market is a financial market where
currencies are traded.
•This financial market is the most liquid market
in the world, as cash is the most liquid of
assets.
•The interbank market is the financial system
that trades currency between banks.