4.4.1 Role Of Financial Markets Flashcards
1
Q
What roles do financial markets perform?
A
- to facilitate saving
- to lend to businesses + individuals
- to facilitate the exchange of goods + services
- to provide forward markets in currencies + commodities
- to provide a market for equities (stocks + shares)
2
Q
What are markets?
A
- where buyers + sellers meet
- can be online
3
Q
What are the four main financial products?
A
- saving products
- borrowing products
- investment - e.g. stocks + shares (equities)
- insurance products - transfer risks
4
Q
What are commercial banks?
A
- financial institutions which provide a link between savers + borrowers —> also known as financial intermediaries
- financial intermediaries include building societies as well
- the banks make a profit by charging a higher interest rate to borrowers on loans + overdrafts than they pay savers on their deposits
5
Q
Commercial bank examples
A
- Santander
- Barclays
- HSBC
- Lloyds
6
Q
Online only bank example
A
First direct
7
Q
How do commercial banks function?
A
- often said banks borrow short and lend long = often accept small, short term deposits from individual savers + lend long in the form of mortgages + business loans
- high street banks appear on the high street in the form of branches - typically numbers are reduced in order to save money as more customers are encouraged to use online banking
8
Q
What are other services provided by commercial banks?
A
- providing debit + credit cards
- providing foreign exchange to customers
9
Q
What were the leading banks in 2022?
A
- Barclays = 48 million customers
- HSBC = 39 million
10
Q
What market structure are banks classed as?
A
- oligopoly
- this could give rise to certain types of market failure e.g. asymmetric info, marketing rigging (collusion)
11
Q
Impact of loans
A
- an increase in banks lending will increase money supply
- other things being equal = downward impact on interest rates
12
Q
Impact of loans (macro)
A
- more loans will increase AD = increase in consumption + investment
- multiplier effect = stimulates further rounds of spending
- may reduce unemployment + stimulate economic growth BUT could lead to inflation
13
Q
What are the functions of money?
A
- medium of exchange = used to pay for goods + services (allows specialisation)
- store of value = retains value over time (allows saving)
- measure of value = allows comparison
- standard of deferred payment = money can be used to settle debts in the future
14
Q
How does money facilitate the exchange of goods + services?
A
- money allows specialisation + division of labour
- individuals work to earn money + then demand goods + services from other firms + providers
- this allows individuals to focus on doing what they are better at + then buy goods/services with money
- firms can use the money to buy machinery + technology + train workers = increases productivity = improves specialisation
15
Q
How does money facilitate division of labour?
A
- work is divided into seperate smaller tasks + workers focus on their particular task
- without money there would tend to be subsistence production where individuals produce goods + services for themselves
16
Q
How does money allow for specialisation + international trade?
A
- firms + countries can specialise in what they are good at producing (comparative advantage) + sell these goods/services both at home and abroad+ abroad in the form of exports
- improvements in living standards due to increased trade + a wider choice of goods/services would not have been possible without money
17
Q
What are forward currency markets?
A
- where firms buy their currency in advance
- firms buy the currency at a fixed price for purchase in the future
- this helps firms have more certainty e.g. over costs of their imports
18
Q
What are
A
19
Q
Why do exporters/importers use forward markets?
A
- exporters to guard against appreciation of the currency
- importers to guard against depreciation
- by buying in the forward markets businesses know the amount of money they will receive (exporter) or pay (importer) in pounds
20
Q
What are forward commodity markets?
A
- companies agree a price today for a transaction at an agreed date in the future
- a commodity market is a market that trades in primary economic sector rather than manufactured goods
- commodities are products that are all the same so it makes no difference from whom you buy it from = therefore has a market price
21
Q
Difference between hard + soft commodities
A
- hard = natural resources that must be mined or extracted e.g. gold, rubber, oil
- soft = agricultural products e.g. corn, wheat, coffee, sugar
22
Q
Who usually uses forward commodity markets?
A
- farmers often use forward contracts as hedges against falling prices = lock in their revenue for the year
- many businesses seek to hedge against uncertain input costs
- an airline can purchase oil to offset increasing oil prices
23
Q
Benefit/cost of a forward commodity market?
A
- when the price of the asset rises over the period of time + is more than the agreed price = buyer gains
- if the prices fall + is less than the contracted price = seller gains
24
Q
What is a currency market?
A
- a marker where currencies (foreign exchange) are traded
- there is no single currency market = it is made up of the thousands of trading floors
25
How do currency markets work?
- gains or losses are made from the movement of exchange rates —> speculative activity in the currency market is often high
- speculation = traders buy a currency if they think it will appreciate since trade is with the intention of financial gain rather than use the asset
26
What is the spot exchange rate?
The price of a currency to be delivered now, rather than in the future
27
What is equity?
- retained profits + share capital are e.g.s of equity capital = what the company owns
- companies e.g. plc can raise finance by issuing shares = equity finance as the shareholder becomes part owner of the business
- equity finance involves giving the provider of funds an ownership stake in the enterprise + share of future profits
28
What is debt finance?
- when a company or govt raise finance by borrowing e.g. through bonds or loans from banks
- the interest on debt is a fixed cost for the business which has to be paid before profits are calculated + dividends are paid to shareholders
- debt also includes the funds that firms borrow directly from banks + other financial institutions such as loans + overdrafts
- the govt. + larger corporations issue bonds to raise finance
29
What is a capital market?
- provides medium to long term finance to firms + govt.
- these finances are raised by issuing shares, corporates bonds + loans from banks
30
What is a corporate bond?
- bonds issued by companies
- they carry more risk but offer more reward then govt bonds
