Foreign Exchange Market



The financial system consists of financial markets and financial institutions. Financial market is a general term that includes a number of different types of markets for the creation and exchange of financial assets, such as stocks and bonds. Financial institutions are firms such as commercial banks, credit unions, insurance companies, pension funds, and finance companies that provide financial services to the economy. The distinguishing feature of financial institutions is that they invest their funds in financial assets, such as business loans, stocks, and bonds, rather than real assets, such as plants and equipment. The critical role of the financial system in the economy is to gather money from people and businesses with surplus funds to invest and channel money to those who need it. Businesses need money to invest in new productive assets to expand their operations and increase the firm's cash flow, which should increase the value of the firm. Consumers, too, need money, which they use to purchase things such as houses, cars or to pay college tuition bills. A well-developed financial system is critical for the operation of a complex industrial. Highly industrialized countries cannot function without a competitive and sound financial system that efficiently gathers money and channels it into the best investment opportunities.
As stated above, one important function of the financial system is to direct money to the best investment opportunities in the economy. If the financial system works properly, only business projects with high rates of return and good credit are financed. Those with low rates of return or poor credit will be rejected. Thus, financial systems contribute to higher production and efficiency in the overall economy. The system moves money from lender-savers (whose income exceeds their spending) to borrower-spenders (whose spending exceeds their income)]...