Understanding Money Functions and Stock Market Dynamics

Functions and Demand for Money

Key Functions of Money

• Medium of Exchange: Without a universal means of payment, transactions would be limited to the exchange of goods, i.e., barter.
• Store of Value: Money is a durable asset that allows the holder to defer the decision to use it and store it as desired.
• Unit of Account: The economy measures the value of things in monetary terms, enabling comparisons and associations between them.

Factors Influencing Money Demand

• Average Price Level: If the price level rises, people will demand more money to maintain their purchasing power.
• Real Income and Wealth: An increase in income or wealth increases people's purchasing power and, consequently, their demand for normal and luxury goods.
• Market Interest Rate: The interest rate and money demand are inversely proportional. If the interest rate is low, it is less worthwhile to keep money in the bank earning minimal interest; instead, people prefer to hold it as cash.
• Risk: The greater the risk associated with the return on assets, the greater the amount of money demanded.

Understanding the Stock Exchange

Stock Exchange Definition

Stock exchanges are public service civil associations. Their main objective is to facilitate the competitive and continuous trading of securities.

Main Stock Exchange Securities

• Bonds: Their remuneration is a fixed rate agreed upon at the time of issue.

  Types of Bonds by Maturity:

  • Bonds
  • Promissory Notes
  • Obligations
• Equities (Shares): These do not guarantee future income but can offer higher returns than fixed income.

  The most important are shares, which are equal parts of a company's share capital (money contributions from partners). They grant their owners economic and management rights.

  • Quoted Value: The value at which shares are bought or sold.
  • Dividends: Returns from a share.
  • Number of Shares: Calculated as Equity / Par Value per Share.

Stock Market Index

A stock market index is an indicator of market evolution based on the price behavior of the most representative securities, chosen according to their degree of liquidity.

Functions of Stock Exchanges

• Determine the price and value of securities based on the laws of supply and demand.
• Inform on prices, their variations, and transaction volumes.
• Ensure prompt execution and settlement of various buy and sell transactions.
• Monitor the performance of companies and securities dealers.