The Role of Money & Financial Markets

The Role of Money

Money is a medium of exchange, used to buy and sell goods and services in an economy.
It functions as a unit of account, allowing us to compare the value of different items.
Money is a store of value, meaning it can be saved and used to purchase goods or services later.
Money also serves as a standard of deferred payment, enabling people to borrow and repay in recognisable units.

Characteristics of Money

Money should be accepted widely as a form of payment.
It should be a durable item, not prone to physical wear and tear.
Money should be divisible, meaning it should be easy to partition without losing value.
It should be portable so that it can be carried around easily.
Money should be limited in supply to maintain its value.

Types of Money

Commodity money: this is when the money itself has value, like gold or silver coins.
Fiat money: this is money that has value because the government says it does, like banknotes and coins.
Electronic money: this is digital money stored and transferred electronically.

Financial Markets

A financial market is a marketplace where buyers and sellers trade assets such as equities, bonds, currencies and derivatives.
Primary markets are where new stocks and bonds are sold to raise money for firms.
In secondary markets, existing securities are bought and sold.
Capital markets are where long-term debt or equity-backed securities are bought and sold.
Money markets are where short-term debt securities, such as treasury bills and commercial paper, are traded.

Functions of Financial Markets

Financial markets act as an intermediary between borrowers and lenders, facilitating the exchange of funds.
They determine the price of securities through supply and demand.
Financial markets provide a mechanism for companies to raise capital for expansion or other needs.
They provide individuals and institutions with a place to invest surplus funds, potentially earning a return.
Financial markets contribute to the overall financial stability and health of an economy.

Understanding the role of money and financial markets is critical in economics. By facilitating trade, providing a system for measuring value, and fostering economic growth, these elements help underpin a functioning economy.