4.4.1 Roles of Financial Markets Flashcards
What are the five functions of financial institutions?
a) Facilitating Saving
Banks and credit unions offer secure savings options like regular accounts, fixed deposits, and retirement accounts (e.g., IRAs). They safeguard funds, pay interest to encourage saving, and use pooled deposits to fund loans and investments, driving economic activity.
b) Lending to Businesses and Individuals
Financial institutions act as intermediaries, collecting deposits and lending to businesses and individuals. They assess creditworthiness, set loan terms, and direct funds toward productive uses like business expansion and home purchases, fostering economic growth.
c) Enabling Transactions
By providing services such as checking accounts, electronic transfers, debit/credit cards, and online payments, financial institutions facilitate secure and efficient transactions, supporting everyday economic exchanges.
d) Offering Forward Markets
These institutions provide forward contracts for currencies and commodities, helping businesses and investors hedge against price and exchange rate fluctuations, reducing financial risks in trade and markets.
e) Facilitating Equity Markets
Financial institutions enable stock trading through exchanges and brokerage firms, allowing individuals and institutions to invest in companies, earn returns, and support capital formation and resource allocation.
