Economics  FINANCIAL INSTITUTIONS


FINANCIAL INSTITUTIONS

The Bank of England is the central bank of the United Kingdom. It was established in 1694 and nationalised in 1946.

Functions of the Bank of England

The Money Market

The money market arranges large-scale short-term loans (up to three months) and is mainly used by commercial banks and discount houses.

The Stock Exchange

The London stock exchange is the centre of the capital market and provides large-scale long-term loans for companies and the government.

New Share Issues

Firms can raise money for expansion by reinvesting profits or arranging a loan through a bank. However, a company wanting to raise millions of pounds' worth of capital may consider going public, ie becoming a public limited company. The firm prepares a prospectus stating the history and aims of the company and inviting the public to buy shares.

A public limited company can raise further capital through a rights issue when shareholders are invited to buy new shares at a discount on the current stock market price.

An alternative method of raising money is to issue debentures. A debenture is a loan to a company paying a fixed rate of interest. Second-hand debentures can be bought and sold on the stock exchange.

Table 12.1 Types of share

Type 

Dividend 

Vote 

Order of dividend payment 

Ordinary or equities 

Depends on size of profits 

1 per share 

Paid last 

Preference 

Fixed but no profit means no dividend 

None 

Paid first 

Cumulative preference 

Fixed but lost dividends made up 

None 

Paid first 

Organisation of the Stock Exchange

In 1986 the stock exchange underwent a radical change in organisation (the 'big bang'):

Changes in Share Prices

An increase in the demand for a share will raise its price. This may be the result of a possible takeover bid, increased profits or because the economy is booming.

A speculator buys or sells shares hoping to make a quick profit. There are three sorts:

  1. A bull buys shares now expecting share prices to rise.

  2. A bear sells shares now expecting share prices to fall.

  3. A stag buys new share issues expecting their price to rise.

Functions of the Stock Exchange

Other Financial Institutions

A number of specialist institutions lend for special purposes:

There is an increasing trend for financial institutions to extend the scope of their business. As a result of the Building Societies Act (1986) they are now able to offer a wide range of financial services. However, many Building Societies have converted to Plcs as they feel that they are unable to compete fully if they retain their mutual status. This process was started with the conversion of the Abbey National to a Plc. These conversions have resulted in substantial windfall payments during the 1990s and helped contribute to the recovery in retail sales in the middle of the 1990s.



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