CIE IGCSE Economics 0455 Section 3 - Units 15 and 16

UNIT 15 - BANKS Commercial Banks Commercial banks are private sector banks which aim to make a profit by providing a range of banking services. They are the high street banks that we are familiar with such as HSBC, Barclays and Citibank. Profit maximization is their main aim and they are usually privately owned. They traditionally make most of their money by offering savers a lower rate of interest than they charge for lending out that money to others as loans. Individuals and businesses are their customers and they provide a range of services: 

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Checking/current accounts: this is a standard account for depositing money in that allows you to access the money instantly if you need it. Due to the flexibility of this type of account the interest rates are usually very low.

Deposit accounts: interest is paid and customers consider this a way of saving.

Savings accounts: higher interest rates but customers can’t withdraw cash whenever they want to. They have a certain amount of times they can withdraw money for that account.

Overdrafts: a pre-agreed debt facility which allows customers to spend more than they have in their account.

Loans and mortgages: commercial banks offer a range of loans and mortgages that vary in the amount lent and the timescale for repayment.

Credit cards: most commercial banks have a link with a credit card company such as Visa or MasterCard and link these to your bank account.

Central Banks A central bank is a government owned bank which provides services to the government and commercial banks.   

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Central banks act as the government’s bank.

Operates as a banker to the commercial banks.

The Government’s tax receipts go into the central bank and its holds any gold and foreign currency reserves the government has.

They print the notes and coins and issue them They set the base rate of interest; this can be a powerful tool in managing the economy.

Central banks also play a very important role in regulating commercial banks and making sure that the banking system is functioning correctly.

In a financial emergency a central bank can act as a lender of last resort to a commercial bank that is in trouble.

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Manages the national debt as the central banks carries out the borrowing on behalf of the government by issuing government bonds.

Represents the government at meetings with IMF and World Bank.

What is Islamic Banking?

Islamic banking is a banking system that is based on the principles of Islamic law, also referred to as Sharia law, and guided by Islamic economics. Two basic principles behind Islamic banking are the sharing of profit and loss and, significantly, the prohibition of the collection and payment of interest by lenders and investors. Collecting interest is not permitted under Islamic law.

Bonds- A bond is a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds represent debt obligations – and therefore are a form of borrowing. If a company issues a bond, the money they receive in return is a loan, and must be repaid over time. The repayment of the loan also entails periodic interest to be paid to the lenders.

UNIT 16 – STOCK EXCHANGES A Stock Exchange is an organisation for the sale and purchase of shares and other securities. Stock exchanges play an important role in economies since they facilitate the buying and selling of shares in Public Limited Companies.

This enables companies to raise capital for investment. Stock exchanges regulate the selling of shares and provide a secure marketplace.

Only Public Limited Companies can trade shares on the stock exchange. To buy and sell shares companies and individuals must use a stockbroker. A stockbroker is someone who trades on stock exchanges on behalf of clients.

Functions of a Stock Exchange include:      

They provide a market for the buying and selling of shares in public limited companies (PLCs).

Enables companies to grow externally by merging or taking over another company.

Mobilise savings for investment.

Influence the use of savings.

A bull - someone who Protect those who buy shares. buys shares expecting Acts as an economic indicator – When share prices tend their price to rise to rise, we call it a bullish market. When share prices A bear - someone who tend to fall, we call it a bearish market. sells shares expecting their price to fall

Why buy shares?   

Dividend payments: these are financial payments to all shareholders by the company from some of the profits it has made.

Capital gains: the rising value of shares would mean that they could maybe sell their shares at higher prices in order to make a profit.

Gaining control of the company: big investors and companies may use the stock exchange to buy significant proportions of a company to gain influence in its management decisions or even to completely purchase it.

Yield- This is the dividend expressed as a percentage of the market price and represents the return on the money paid for a share.

Yield = Dividend per share ÷ Market share price × 100% Influences on Share Prices 

Interest rates – A rise in interest rates will likely reduce share prices as higher interest rates will encourage people to save more and borrow less. They will most likely place their money in their deposit or savings account rather than holding shares.

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A fall in interest rates will likely increase share prices as lower interest rates will encourage people to save less and borrow more.

Profit record – When the profits earned rise or are expected to rise, the price of shares jack up (increase) and vice – versa.

Government policies – A cut in corporate taxes will most likely increase share prices as people will now expect firms to be able to pay out larger dividends.

The issuing of new shares – When a business entity issues new shares, the supply of their shares increase resulting in a fall in their price.

Takeovers and rumours of takeovers – Buying up shares to gain control of a firm drive up their prices of shares.

Profit  

Profit is the reward of the factor of production enterprise. These profits are used to pay dividends and reward managers.

Retained profit– Profit which is not distributed to shareholders but kept back for spending on capital goods.