 This module explains what is meant by finance and what is meant by financial system? So finance basically is when we are saying that we are studying finance it means that it helps us in understanding how people allocate scarce resources that are spread over time and it also helps us in understanding how the allocation of financial decisions are done and we need to understand that when we are talking about the financial resources or financial decision-making it is different from the conventional decision-making and there are two major factors that differentiate the financial decision-making from any other ordinary economic decision-making and those two major important components that differentiate the financial decision-making from the other decision-making is that in particular when we are dealing with financial decision-making it is spread over time. For example, I have invested my money in an economic activity and I am expecting that the return will come on monthly basis for the next two years or for the next ten years or for the next 20 years. So basically what I am going to make decision of is that the return which I am going to expect that will come in future and it is spread over time. Similarly, if somebody has invested in a certain industry or it has, he has established a firm. Again, when we are investing in a firm as a partner or as an individual who is owning the firm or as an entrepreneur, then again the firm's return will not come only once. So we are investing the money. Again, the investment will cannot be once either. So you may be required to invest in a firm over a span of time and similarly the return will not come in one time. There may be returns that will be spread over time. So you may get returns from investment in a firm or investment in a stock in unyearly basis or on monthly basis. So again, we need to understand that whenever we are undertaking the financial decisions, it is spread over time. So another important thing we need to understand is that financial decisions are carried out in a spectrum which is subject to uncertainty. We don't know what will happen tomorrow. So there may be a possibility that you have forecasted for example that you have analysed or made very good predictions. You have done a trend analysis and with the help of it, you got an idea that if we invest money in a bank or in a partnership and you are going to get an average return that is 6% or 8% or like for example 3.5% but there may be some unforeseen circumstances due to which your returns or profit's rate can exceed your expected return or fall. And again, there is another important aspect that is the inflation that when we are forecasting that for example in the next year, the inflation will be for example 5% but actually it turns out to be 6% or 7% then again when you are going to take into account the real value of your return, it may be different from what you expected. So when we are undertaking the financial decisions, we need to understand that they are spread over time and they are subject to uncertainty. So we need to be rational about these two aspects. The next important thing we need to understand is what is meant by a financial system. So when we are talking about a financial system, we need to understand that it comprises of four major components. The first thing is that we are dealing with some different sorts of markets in a financial system that comprise a financial system. In those markets, you can buy or sell stocks or bonds, you can exchange your assets or risks. So we have financial markets that are meant specifically for such purpose. Either you can do financial transactions or you can buy bonds. If you want to buy stocks, you can buy stocks or sell them. That those particular places can be termed as the financial markets. Apart from this, for the financial system, we see that there should be financial instruments. There are stocks, bonds, debentures, derivatives in financial instruments that comprise a financial system. The third important thing is financial intermediaries. In financial intermediaries, you have all kinds of banks, non-banking financial institutions. The way you can collect money in post offices, they will give you a rate of return or you buy insurance in an insurance company. So these also deal with finances. So they will be termed as financial intermediaries. And then we have the fourth very important component that makes up that financial system complete and that is the regulatory bodies. So regulatory bodies are always there that help in smooth running of a financial system. So we have, like in Pakistan, regulatory bodies come into state bank of Pakistan or central bank of any country. They will make such policies that will make the financial system smooth running. Or whatever changes are coming in them, according to them, they will adjust their policies so that smooth running of the financial institutions or financial system is there. So together, finance is meant by the allocation of the different types of funds which we have. And there are two important components, the time factor and the uncertainty. And then we have discussed that there is a financial system that covers the entire economy. And there are four major components of the financial system that covers the financial markets, the financial products, instruments. And we have then financial intermediaries and the regulatory bodies that controls the running of the financial system.