This document discusses the basic forms of business organization and the financial environment and markets. It describes the three main forms of business as sole proprietorships, partnerships, and corporations. It then explains key components of the financial environment including financial markets, money markets, capital markets, and primary and secondary markets. It also outlines various processes for issuing securities, the roles of financial intermediaries and brokers, and functions of capital markets and securities exchanges.
This document discusses the basic forms of business organization and the financial environment and markets. It describes the three main forms of business as sole proprietorships, partnerships, and corporations. It then explains key components of the financial environment including financial markets, money markets, capital markets, and primary and secondary markets. It also outlines various processes for issuing securities, the roles of financial intermediaries and brokers, and functions of capital markets and securities exchanges.
This document discusses the basic forms of business organization and the financial environment and markets. It describes the three main forms of business as sole proprietorships, partnerships, and corporations. It then explains key components of the financial environment including financial markets, money markets, capital markets, and primary and secondary markets. It also outlines various processes for issuing securities, the roles of financial intermediaries and brokers, and functions of capital markets and securities exchanges.
This document discusses the basic forms of business organization and the financial environment and markets. It describes the three main forms of business as sole proprietorships, partnerships, and corporations. It then explains key components of the financial environment including financial markets, money markets, capital markets, and primary and secondary markets. It also outlines various processes for issuing securities, the roles of financial intermediaries and brokers, and functions of capital markets and securities exchanges.
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Bangladesh University of Business & Technology (BUBT)
Course Title: Introduction to Finance
Course Number: FIN !" The Business #nvironment & The Financial #nvironment The Basic Forms of Business There are three basic forms of business organization: 1. Sole Proprietorship: A business owned by one person and operated for his or her own profit. The owner of this form of business raises capital from personal resources or by borrowing and is responsible for all business decision. This single owner has unlimited liability (the owners liability to satisfy the creditors is up to the total wealth of the owner) for all debts of the firm. 2. Partnerships: A business form in which two or more individuals act as owners operated the business for profit. In a general partnership all partners have unlimited liability for the debts of the firm in a limited partnership one or more partners may have limited liability. 3. Corporations: A business form legally separated from its owners. Therefore a corporation is an intangible business entity created by law (often called a !legal entity). Its distinguishing features include limited liability easy transfer of ownership unlimited life and an ability to raise large sums of capital. The Financial Environment All businesses operate within the financial system which consists of a number of institutions and mar"ets serving business firms individuals and governments. Financial Market: #inancial $ar"ets are not so much physical places as they are mechanisms for channeling savings to the ultimate investors in real assets. All institutions and procedures for bringing buyers and sellers of financial instruments together are called financial mar"ets. #inancial $ar"ets provide a forum (meeting) in which suppliers of funds and demanders of funds can transact business directly. The purpose of financial mar"ets in an economy is to allocate savings efficiently to the ultimate users. Financial markets can be broken into two classes: 1 1. Money market: The money mar"et is concerned with the buying and selling of short%term government and corporate debt securities. 2. Capital market: The capital mar"et deals with relatively long&term debt and e'uity instruments. (ithin money and capital mar"ets there e)ists both primary and secondary mar"et: a) Primary market: A mar"et where new securities are bought and sold for the first time. Therefore it is a !new issues* mar"et. This is the only mar"et where in which the issuer is directly involved in the transaction. b) Secondary market: A mar"et for e)isting securities rather than new securities. That is the pre%owned securities are traded. +urchases and sales of e)isting financial assets occur in the secondary mar"et. In this regard organized e)changes ,-. /-. provide a means by which buy and sell orders can be deficiently matched. In addition the over%the%counter (0T/) mar"et serves as part of the secondary mar"et for stoc"s and bonds not listed on and e)change as well as for certain listed securities. It means a large collection of bro"ers 1 dealers connected electronically by telephones and computers which provides for trading in unlisted securities. Processes of Issuing Securities: a) Private Placement: To raise money firms can go for private placement. +rivate placement refers the sale of a new security issue typically bonds or preferred stoc" directly to an investor or a group of investors (insurance company pension funds etc.) b) Public Placement: To raise money most firms raise money through a public offering of securities which involves the sale of either bonds or stoc"s to the general public2 The secondary mar"et financial intermediaries and financial bro"ers are the "ey institutions that enhance funds flows. Financial Intermediaries #inancial intermediaries consist of financial institutions those accept money from savers and use those funds to ma"e loans and other financial investments in their own name. They include commercial ban"s savings institutions insurance companies pension funds finance companies and mutual funds. 2 Financial Brokers #inancial bro"ers are not performing a direct lending function but rather are acting as matchma"ers or middlemen. -uch as: a) nvestment bankers: A financial institution that underwrites new securities for resale. b) Mort!a!e banker: A financial institution that originates mortgages primarily for resale. The a!ital "arket /apital mar"ets are financial mar"ets for the buying and selling of long%term debt% or e'uity%bac"ed securities. The bac"bone of capital mar"et is formed by the various securities e)changes that provide a forum for debt and e'uity transaction. #e$ securities $a3or securities traded in the capital mar"et include bonds (long%term debt) and both common and preferred stoc" (e'uity or ownership). Functions of securities e%changes The capital mar"et permits the conversion of savings into investment through loans or through the sale of ownership. The securities e)changes that ma"e up the capital mar"ets perform a number of important functions. Creatin! a continuous market: The "ey function of securities e)changes is to create a continuous mar"et for securities at a price that is not very different from the price at which they were previously sold. The continuity of securities mar"ets provides the li'uidity necessary to attract investors funds. "llocatin! scarce capital: The securities e)changes help allocate scarce funds to the best users. #eterminin! and publici$in! security prices: (hat is bought or sold or the demand and supply for the security determine the price of the individual security. "idin! in new %inancin!: -ecurities e)changes also provide firms with a method of obtaining new financing. 3