4.4.1 - Role of Financial Markets Flashcards
Name the five roles of financial markets
1.) Facilitate saving
2.) Lend to businesses and individuals
3.) Facilitate the exchange of good and services
4.) To provide forward markets in currencies and commodities
5.) To provide a market for equities
Explain ‘facilitate saving’
. Commercial banks allows savings by allowing individuals to open up a savings account to keep their money safe and to provide a rate of return on money assets in the form of interest rates
Explain ‘lend to businesses and individuals’
. Commercial banks use funds from savers to lend to individuals and firms.
. Individual who needs loans to buy houses, cars, etc AND firms who need loans to finance investment expenditure can receive such finance from a commercial bank
Explain ‘Facilitate the exchange of goods and services
. Financial institutions play a role in creating payment systems for goods and services
. Central banks mint coins and print paper money
. Retail bank offer cheque services, debit cards and credit cards
Explain ‘provide forward markets in currencies and commodities’
A forward market is used for trading assets and currencies at a fixed price at a future date, which can allow a guaranteed price for the future creating stability
Example :
. Farmer may agree to sell 10 tonnes of crop at £50 for delivery in six months time to get a guaranteed price
. Foreign exchange such as euros can also be sold forward
Explain ‘provide a market for equities’
. The equity market is also called the stock market; it refers to the trade of shares.
. Equity market provides access to capital for firms, which can be used to for further investment into capital and growth
. It also allows investors to gain returns of the investment in the form of dividends
Define financial market
. A place where buyers and sellers meet to buy or trade services or assets
Define Dividends
A dividend is a share of the firm’s profits given to the shareholders
Types of financial institutions
Commercial Bank - Provide services to businesses such as lending
Retail Bank - Provide services to individuals such as saving, lending, mortgages, etc.
Investment Bank - Trade in bonds, shares, foreign exchange
Central bank - See 4.4.3
Type of markets
Money market - financial market that provide short term borrowing, usually defined as up to a year e.g. bonds (debt capital)
Capital Market - financial market that provide long term borrowing and lending, usually defined as over a year e.g. bonds (debt capital) and shares (equity capital)
. Foreign Exchange markets
Define debt capital and equity capital
Debt capital - any financial asset that pays back in interest, due to borrowing e.g. bond
Equity capital - A stake or share in a business. The return is not a interest rate but a dividend e.g. shares
