Understanding the Financial System and Corporate Finance
The Financial System
The financial system refers to a composite structure managed by intermediary groups and regulated by credible agencies. It allows public savings to be channeled toward the financing of private consumption, business investment, and public spending.
Non-Bank Financial Intermediaries
- ICO: An atypical financial intermediary that does not capture public resources in general.
- Insurance Companies and Private Pension Funds: These complement public pension retirement pay and Social Security.
- Investment Companies and Funds: Investment groups where investors gain better access to the stock exchange.
- Leasing Companies: A financing system where a company can incorporate a capital asset in exchange for periodic lease payments.
- Other Intermediaries: Factoring companies, money market intermediaries, mutual guarantee companies, and the stock exchange.
The Stock Exchange
The Stock Exchange consists of civil associations of public service. Its main objective is to facilitate the negotiation of any value in a competitive, orderly, and continuous manner.
Functions of the Stock Exchange
- Determine the price and value of securities based on supply and demand.
- Report on prices, variations, and transaction volumes.
- Ensure fast execution and settlement of purchase and sale transactions.
- Monitor the performance of companies and brokers.
Securities
- Fixed Income: Represents a portion of a loan granted to a specific business or public administration.
- Equities: The most popular are shares, which represent a portion of a company's capital.
- Stock Index: An indicator of market evolution based on the price behavior of representative titles, chosen according to their liquidity.
Corporate Finance
Financing Methods
- Self-Financing: The most stable resources available to a company. These do not need to be returned during the company's lifetime and are not subject to interest payments (e.g., owner contributions and reserves).
- External Financing: Used when companies require more resources than self-financing provides. This includes trade credit, loans, borrowings, and spontaneous funds.