One very good importance of the financial institution is to connect savers to borrowers while they make profit and give you a percentage of it for keeping your money with them.
What has the bank been doing that makes people keep money with them instead of buying stocks and other financial instruments in the financial market
The bank is believed to give three benefits which are
- Low risk
- Interest from loans given to trusted borrowers if people save their funds
- Easy access to get loans when needed as well as easy access to withdraw and save funds when needed such as times of emergency.
A very good importance of a financial market is to bring buyers and sellers together to trade bonds, stocks and other financial instruments and assets.The market helps people to keep their funds while other take funds.
Money is as anything that can be used to settle debts, buy goods and pay for services. Money can be anything from liquid asset, cash, checking account and so on but money is not rigid asset such as buildings, because it can not be easily converted into liquid cash without much stress and high transaction.
Money must have the following characteristics to be acceptable;
- Generally acceptable
- Standardized quality
Since every country has their own denomination, it means they spend money in every country which is controlled by the government of the country through a central bank. The central bank influences the supply of money in the country, it serves as the federal reserve of the country. It's purpose is to grant emergency loan to commercial, industrial, mortgage, and other types of banks in the country, as well as regulate the supply of money in the country. The central bank can indirectly affect the interest rates, exchange rates, inflation, and the output growth rate of the country they are. The central bank is responsible for maintaining inflation rate in a particular country. The central bank affests the gross domestic product of a country indirectly when they are willing to encourage business cycle in the country. The Central bank also determines the interest rate of loans when people come to borrow.
Trade By Barter System
This was the very system used before the emergence of the bank. In this system, people have to exchange goods among themselves based on necessity. In barter, if i have a cloth and want to drink soda, I have to search for someone who wants produces soda and is willing to trade with me.
Trade by barter has it's own detriments which are;
- Double coincidence of wants.
- Difference in value of traded goods
- Rot of perishable goods
Stay Tuned for subsequent post on Introduction to Money and Finance.