Understanding the Financial System and Market Mechanisms
Financial System
A set of institutions that mediate between claimants and suppliers of financial resources.
Assets
Any asset with a market value is considered real wealth. Physical assets include homeownership, which provides property titles eligible for rent.
Financial Intermediaries
- Banking Institutions: Primarily banks and savings banks, empowered to create money.
- Non-bank Brokers: Insurance companies, leasing agencies, and factoring firms. These are not empowered to create money.
Objectives
- Promote private savings.
- Efficiently allocate financial resources to the needs of the economy, whether for individuals, companies, or public administrations.
Functions
- Resource Collection: Managing savings, current accounts, and deposit accounts.
- Lending: Providing credit.
- Additional Services: Credit or debit cards, transfers, and income tax declarations.
Other Financial Intermediaries
- Insurance Companies
- Mutual Funds or Pension Funds
- Leasing Institutions: Provide a special type of lease for movable or immovable property with the possibility of purchase upon completion. Options include acquiring the property, renewing the lease, or returning the goods.
- Factoring Institutions: Responsible for collecting bills and promissory notes to prevent defaults.
- Mutual Guarantee Societies
Money Supply
The amount of money available to economic agents in a specific economy. Classifications include:
- M1: Notes and coins in cash + money in current accounts.
- M2: M1 + money in savings accounts.
- M3: M2 + fixed-term accounts.
- ALP: M3 + other assets (stocks, treasury bills, government bonds).
Inflation and Interest
Interest rates vary based on:
- Risk: If risk increases, interest increases.
- Term: Longer timeframes increase interest.
- Liquidity: Short-term deposits lower interest; long-term deposits raise interest.
APR
The Annual Percentage Rate (APR) is an indicator that measures the profitability of products or the interest on loans, providing more complete information than traditional rates.
Financial Markets
Money Market
A wholesale market where low-risk financial products are traded due to their high liquidity and short-term maturity.
Capital Markets
Markets where financial assets with a maturity of more than one year (such as equities) are traded. These are divided into:
- Primary Market: Where a security is negotiated for the first time.
- Secondary Market: Deals with the sale of already issued securities (e.g., the stock exchange).