What

is Finance?
focus on money
like economics, it talks about allocation of resources
the process of allocation occurs overtime returns are served in the future
But because there is future
there is uncertainty

Institutions (banks, savers, borrowers)

Creation of financial assets
Market for trading security
Investments
Concerned with individual assets
Construction of diversified portfoiios
Taxation and monetary policy affects investments
Corporate business finance
Emphasizes role of financial managers
1. Meet obligations as they come due
2. Determine best source of financing
3. Allocate resources among competing investments
Buying Stocks - Ownership
PSE (Philippines Stocks Exchange)

A cow. Cattle have been used as money at different points in history.

A stack of U.S. 20-dollar bills equal to the value of one cow.

Let's run down our list of characteristics to see how they stack up.

1. Durability. A cow is fairly durable, but a long trip to market runs the risk of
sickness or death for the cow and can severely reduce its value. Twenty-dollar
bills are fairly durable and can be easily replaced if they become worn. Even
better, a long trip to market does not threaten the health or value of the bill.
2. Portability. While the cow is difficult to transport to the store, the currency can be
easily put in my pocket.
3. Divisibility. A 20-dollar bill can be exchanged for other denominations, say a 10, a
5, four 1s, and 4 quarters. A cow, on the other hand, is not very divisible.
4. Uniformity. Cows come in many sizes and shapes and each has a different value;
cows are not a very uniform form of money. Twenty-dollar bills are all the same
size and shape and value; they are very uniform.
5. Limited supply. In order to maintain its value, money must have a limited supply.
While the supply of cows is fairly limited, if they were used as money, you can
bet ranchers would do their best to increase the supply of cows, which would
decrease their value. The supply, and therefore the value, of 20-dollar billsand
money in generalare regulated by the Federal Reserve so that the money
retains its value over time.
6. Acceptability. Even though cows have intrinsic value, some people may not
accept cattle as money. In contrast, people are more than willing to accept 20dollar bills. In fact, the U.S. government protects your right to use U.S. currency
to pay your bills.
7. Cognizibility easily recognize
8. Malleability- I believe it means it can be converted easily to other forms of money and the
supply can be expanded or contracted easily by the central bank

Money provides four key functions for an economy: (1) medium of exchange, (2) unit of
account, (3) store of value, and (4) standard of deferred payment. Medium of exchange
means that money is used to conduct transactions. Unit of account, also termed measure of
value, means that prices are stated in terms of money. Store of value means that value,
the satisfaction of wants and needs, can be stored over time using money. Standard of
deferred payment means that future payments, such as paying off a car loan, are also in
terms of the monetary unit.

Medium of Exchange
THE primary function of money is to act as THE medium of exchange. People use money to
buy and sell goods. Buyers give up money and receive goods. Sellers give up goods and
receive money. Money makes transactions easier because everyone is willing to trade
money for goods and goods for money.
To see why money makes transactions easier, consider a barter economy that has no
money, where one good is traded directly for another. The key to successful barter trades
is double coincidence of wants, each trader has want the other wants and wants what the
other has. Without double coincidence of wants, a barter economy can become exceedingly
inefficiency. Traders spend more time seeking trades and less time producing goods.
Suppose, for example, that Duncan Thurly heads into town with a basket full of handcrafted hamster hats (not hats made FROM hamsters, but hats made FOR hamsters) which
he hopes to trade for a pair of knickers--what others might call pants. If the local knickermaker (Kevin) needs hamster hats, the there is a double coincidence of wants and they are

ripe for a trade. However, if Kevin the tailor has no desire to acquire hamster hats, then
there is NOT a double coincidence of wants and Duncan does NOT get his knickers.
At least he will not get his knickers without spending some time, perhaps a great deal of
time, seeking to trade his hamster hats to someone else for a good that the tailor does
desire. Duncan might need to seek out dozens of other people, conducting dozens of
intermediate trades, before he finally has a good that can be traded for knickers. The time
he spends on barter trades is time that he CANNOT spend fabricating additional hamster
hats, to the loss of hamster owners worldwide.
Money eliminates the need for double coincidence of wants because EVERYONE is willing to
accept money in payment for goods. Duncan can trade his hamster hats for money (that is,
sell), trade this money for the knickers (that is, buy), then returned home for further
hamster-hat fabrication. With a generally accepted medium of exchange, trades are easier,
more efficient, and resources can spend more time doing production.

Unit of Account
The second function means that is money is being used as the common benchmark to
designate the prices of goods throughout the economy. Unit of account, or measure of
value, means money is functioning as the measuring unit for prices. In other words, prices
of goods are stated in terms of the monetary unit.
If Duncan Thurly is heading off to the market in search of hamster hats or tailored knickers,
then he will find each has a price in terms of the medium of exchange. If his society make
use of U.S. dollars, then hamster hats carry a U.S. dollar price. If he lives in a land that
uses German marks, then knicker prices are in terms of marks--German marks.
The reason is that sellers are willing to trade for, and buyers are willing to give up, THE
medium of exchange--money. That is why money is THE medium of exchange. It is used for
exchanges.
Using money as the unit of account for prices, however, also provides a measure of value-how much value buyers and sellers place on a good. If tailored knickers carry a $10 price,
while hamster hats go for $5 each, then this indicates a measure of the relative value of
each commodity--knickers have twice the value of hamster hats. Buyers are willing to give
up twice as much money to buy a pair of knickers as to acquire a hamster hat and sellers
incur twice the opportunity cost of producing a pair of knickers as that of hamster-hat
production.

Store of Value
The third function, store of value, emerges because money is one way of postponing the
satisfaction obtained from using or consuming goods until a later time. Value is obtained
from a good when it is consumed, when it is used to satisfy wants and needs. The value
from consuming goods can be stored in several different ways, one of the best is money.
Consider a few ways that Duncan Thurly might be able to store the value of a $2 hot fudge
sundae for one week.

First, he could buy a freshly fabricated hot fudge sundae for $2 and store this
product for seven days. Successful storage requires a freezer, especially during the
summer. Would this hot fudge sundae retain its full $2 value one week hence?
Probably not. The hot fudge is likely to be cold. The whipped topping is probably
unwhipped.

Second, Duncan could purchase a $2 gift certificate from the ice cream parlor, a
coupon that is tradeable for one hot fudge sundae. After a week, he can redeem the
certificate and enjoy his treat. In this case the value of the sundae is stored in the
coupon. While this is a relatively good store of value for the hot fudge sundae, it
ONLY stores the value of a hot fudge sundae. A hot fudge sundae coupon cannot be
used to store the value of other goods.

Third, he could take his $2, use it to purchase another good, like a book, hold onto it
for a week, sell it, then use the proceeds to buy a hot fudge sundae. Of course, if the
book is not very liquid, meaning that it cannot be easily converted into money, then
he probably will not end up with the $2 that he needs to buy his hot fudge sundae.
Storing the value of one good by purchasing then later selling another good is
seldom the best way to go.

Fourth, Duncan could simply keep $2 stashed away in his billfold, sock drawer, or
coffee can buried in his back yard. After one week, he can then amble down to the
ice cream parlor with this $2 in hand to make his hot fudge sundae purchase. In this
case, he has stored the delicious value of the hot fudge sundae in the form of money.

The problem with storing value in money is price changes. If the price of the hot fudge
sundae rises during this week, then Duncan's money becomes a less effective means of
storing value. As a general rule, price inflation is the nemesis for the store of value function
of money.

Standard of Deferred Payment

This fourth function means money is used as a standard benchmark for specifying future
payments for current purchases,that is, buying now and paying later. This function may
seem obscure, but it is a direct result of the store of value and unit of account functions.
A common example of deferred payments is a car loan. Duncan Thurly get a loan to buy a
car today, then pay off the loan with payments deferred into the future. The amount of
those future payments are stated in terms of money.
Using money as a standard of these deferred payments is a direct consequence of the unit
of account and store of value functions of money. If money is the standard for current
prices, then money is also the standard for future payments based on those prices. But, for
money to function as a DEFERRED payment standard, it must retain value, it must store
value. The key to storing value in money is price inflation.
This means that deferred payments need to anticipate future money values based on future
inflation. If inflation is, for example, 10 percent next year, then deferred payments need to
be adjusted for the resulting decline in money value. This inflation adjustment is
accomplished by through interest rates.

DEFINITION of 'Portfolio Investment'

A hands-off or passive investment of securities in a portfolio. A portfolio investment
is made with the expectation of earning a return on it. This expected return is
directly correlated with the investment's expected risk. Portfolio investment is
distinct from direct investment, which involves taking a sizeable stake in a target
company and possibly being involved with its day-to-day management.
BREAKING DOWN 'Portfolio Investment'
Portfolio investments can span a wide range of asset classes stocks, government
bonds, corporate bonds, Treasury bills, real estate investment trusts, exchangetraded funds, mutual funds, certificates of deposit and so on. Portfolio investments
can also include options, warrants and other derivatives such as futures, and
physical investments like commodities, real estate, land and timber.
The composition of investments in a portfolio depends on a number of factors,
among the most important being the investors risk tolerance, investment horizon
and amount invested. For a young investor with limited funds, mutual funds or
exchange-traded funds may be appropriate portfolio investments. For a high net
worth (HNW) individual, portfolio investments may include stocks, bonds,
commodities and rental properties.
Portfolio investments for the largest institutional investors such as pension funds
and sovereign funds include a significant proportion of infrastructure assets like
bridges and toll roads. This is because their portfolio investments need to have very
long lives, so the duration of their assets and liabilities match.

DEFINITION of 'Government Bond'

A debt security issued by a government to support government spending, most
often issued in the country's domestic currency. Government debt is money owed by
any level of government and is backed by the full faith of the government. Federal
government bonds in the United States include: the savings bond, Treasury bond,
Treasury inflation-protected securities (TIPS), and others. Before investing in
government bonds, investors need to assess several risks associated with the
country such as: country risk, political risk, inflation risk, and interest rate risk.