Finance unit 2 topic 1

• Proprietary organisations


  Businesses owned by and responsible to, shareholders
• Bank


  • 3 main roles:
  • Provide a safe place for cash
  • Provide a way for account holders to receive payments and pay bills
  • Provide loans and mortgages for customers who need to borrow
• Proprietary organisations


  Businesses owned and responsible to shareholders
• Financial providers

  • banks
  • building societies
  • insurance companies
  • investment companies
• Types of financial institutions

  • Building Societies
  • Insurance companies
• Building Societies


  • Main role is providing Savings accounts and loans
  • Can also provide current accounts and many services
  • Mutual organisations owned by members
• Insurance companies


  • Provide insurance policies that help people and businesses reduce financial risk
  • Example: Life assurance pays out money if the insured person dies
• Financial institutions provide services that people and businesses want when realistic
• Investment companies 


  Invest money for people with a view to making a profit
• Collective funds 


  Everyone’s money is pooled together for investment
• Current account 


  Offered by banks and building societies. Designed for day-to-day finances. provide following main features:

  • receiving salaries
  • bills
  • cheque books
  • online facilities
• Savings account 


  Provide reasonable interest rate. ideal for money left over in current accounts
• Borrowing products

  • Mortgages
  • personal loans- offered my banks and building societies
  • credit cards
• Financial products

  • Current accounts
  • savings account
  • borrowing accounts
• Insurance products 


  Require the policyholder to pay for the policy payment usually paid monthly. The amount depends on the risk of the company having to pay out. based on what the policy covers
• Bank and building society 


  Able to offer basic advice on money management and planning
• Credit unions 


  non profit. run for the benefit of their members

  all members linked by a common bond
• Main life stages

  • Childhood - no financial responsibilities, everything paid for, pocket money
  • teenager - spending rather than saving, pocket money, part time job
  • young age - building foundation of their later life, job, may have loans from education
  • mature adult - likely to earn more with different needs. might be concerned about: savings, kids, future needs
  • middle to late Middle Ages - well working life, saving for retirement
  • old Age - savings into income, essential expenditure is lower.
• Risk versus reward 


  The risk is value could go up or down and you could even lose all your money. the reward is that over the longer term you could make far more money than by taking little to no risk
• investments that fit into the risk vs reward spectrum:

  • deposits
  • gilts and corporate bonds
  • property
  • uk shares
  • oversea shares
  • specialist investments
• Deposits 


  Safe in terms of risk my deliver low rewards
• Gilts and corporate bonds 


  gilts: Investor lends money to the gov for a set term in return for a fixed rate of interest paid each year and a return of the investment at the end

  corporate bonds: loans to large companies. risk is that the loans arent paid back
• Property 


  Commercial Property - shops, factories Etc .

  between bonds and shares in terms of risk and reward
• Uk shares 


  Companies offer shares to investors to raise money to invest in the business

  the risk factor will vary depending on Size and success of company
• Oversea shares 


  Shares in major countries such as China, India and Russia are seen as risky because of the lack of uk influence , political interference , economic history etc
• Specialist investments 


  Involve gambling on the future price of shares
• What makes up attitude to risk

  • Risk tolerance
  • capacity for loss
• Short term planning 


  One week - 12 months

  main concern is to set up a system to be sure we can pay all expenses.

  we know what we will be committed to spending. easy to keep track
• medium term planning 


  Objectives could include: holiday , college etc

  similar saving accounts to those with short term objectives
• Long term planning 


  Will Vary with each individual and their objectives. priorities might change
• Annual equivalent rate 


  The equivalent interest rate restated for the nominal rate if we allow for the effect of compounding over the year
• Notice account 


  A savings account that requires the account holder to give notice if they wish to take money out.
• Payday lenders 


  Provides a short term loans to people who need to borrow until their next payday when the loan should be payed back.
• A budget surplus 


  Income is more than expenditure
• A budget deficit 


  Expenditure is more than income
• Cash flow forecasting 


  Movement of money in and out of an account
• Low interest rates


  Savings may not build up as quickly as expected
• Inflation


  General increases in the price of goods and services over time
• How to work out the average rate of inflation

  1. Calculate the average percentage increase over a month or a year

  2. If the rate of inflation is lower than before, inflation is falling

  3. If the rate of inflation is higher, inflation is rising
• Deflation


  Prices are falling over time, not good for the country's economy as it encourages people to save more