Hi,
This is meant to be a useful introduction to the most important components of the financial system:
What is Asset?
Anything of value owned by a person or a firm.
Which are the most important assets?
1. Money
2. Stocks
3. Bonds
4. Foreign exchange
5. Securitized loans
What is a Financial Asset?
An asset that represents a claim on someone else for a payment. For instance, a bank checking account is a financial asset because it represents a claim you have against a bank to pay you an amount of money equal to the dollar value of your account.
What is a Security?
A financial asset that can be bought and sold in a financial market.
What is a Financial Market?
A place or a channel for buying or selling stocks, bonds and other securities.
A primary market is a financial market in which stocks, bonds, and other securities are sold for the first time.
A secondary market is a financial market in which investors buy and sell already existing securities.
What is Money?
Anything that is generally accepted in payment for goods and services or to pay off debts.
What is the Money Supply?
The total quantity of money in the economy.
What is Stock?
Stock means Financial securities that represent partial ownership of a firm; also called equities.
What is a Dividend?
A payment that a corporation makes to its shareholders.
What is a Bond?
A bond is a financial security issued by a corporation or a government that represents a promise to repay a fixed amount of money.
What is Interest Rate?
The cost of borrowing funds (or the payment for lending funds), usually expressed as a percentage of the amount borrowed.
What is Foreign Exchange?
Units of foreign currency.
What is Securitization?
The process of converting loans and other financial assets that are not tradable into securities.
What is Financial Liability?
A financial claim owed by a person or a firm.
For example, if you take out a car loan from a bank, the loan is an asset from the viewpoint of the bank because it represents a promise by you to make a certain payment to the bank every month until the loan is paid off. But the loan is a liability to you, the borrower, because you owe the bank the payments specified in the loan.
What is a Financial Intermediary?
A financial firm, such as a bank, that borrows funds from savers and lends them to borrowers.
What is a Commercial Bank?
A financial firm that serves as a financial intermediary by taking in deposits and using them to make loans.
Commercial banks play a key role in the financial system by taking in deposits from people like you and me and firms and investing most of those deposits, either by making loans to ordinary people and firms or by buying securities, such as government bonds or securitized loans. Most of the people unfortunately rely on borrowing money from banks when they purchase cars or homes. Similarly, many firms
rely on bank loans to meet their needs for credit.
What is a Portfolio?
A Portfolio is a collection of assets, such as stocks and bonds.
What is the Federal Reserve
The central bank of the United States; usually referred to as the Fed.
What is Monetary Policy?
The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.
What is the Federal Funds Rate?
The interest rate that banks charge each other on short-term loans.
What is Diversification?
Splitting wealth among many different assets to reduce risk.
What is Risk Sharing?
A service the financial system provides that allows savers to spread and transfer risk.
What is Liquidity?
The ease with which an asset can be exchanged for money.
