The structure of financial markets and assets

• Medium of exchange


  Without money, transactions were conducted through bartering. Goods and services were traded with other goods and services, but people did not always get exactly what they wanted or needed. The goods and services exchanged were not always of the same value, which also posed a problem. Exchange could only take place if there was a double coincidence of wants, i.e. both parties have to want the good the other party offer. Using money eliminates this problem.
• Measure of value (unit of account)

  Money provides a means to measure the relative values of different goods and services. For example, a piece of jewellery might be considered more valuable than a table because of the relative price, measured by money. Money also puts a value on labour.
• Store of value


  Money has to hold its value to be used for payment. It can be kept for a long time without expiring. However, the quantity of goods and services that can be bought with money fluctuates slightly with the forces of supply and demand.
• Method of deferred payment


  Money can allow for debts to be created. People can therefore pay for things without having money in the present, and can pay for it later. This relies on money storing its value.
• Money supply


  The stock of currency and liquid assets in an economy. It includes cash and money held in savings accounts.
• Narrow money


  Physical currency (notes and coins), as well as deposits and liquid assets in the central bank.
• Broad money


  Includes the entire money supply. Cash could be in restricted accounts, which makes it hard to calculate the money supply. It includes liquid and less liquid assets.
• Money market


  Liquid assets are traded. It is used to borrow and lend money in the short term.
• Capital market


  Equity and debt instruments are bought and sold. These can then be put to long-term productive use by firms and governments.
• Foreign exchange market


  A market where currencies are traded, mainly by international banks. It determines what the relative value of different currencies will be.
• Financial markets


  • To facilitate saving
  • To lend to businesses and individuals
  • To facilitate the exchange of goods and services
  • To provide forward markets in currencies and commodities
  • To provide a market for equities
• Debt


  Money which has been borrowed from a lender, which is usually a bank. There is little flexibility, and the loan is later repaid with interest.
• Equity


  A stock or security which represents interest in owning e.g. a firm, a car or a house. It is when there is no outstanding debt, such as when a loan for a car or a mortgage has been fully paid off. The owner's equity is then the car or the house, which can be sold for cash.
• Market interest rates increase

  Bond prices decrease
• Market interest rates decrease


  Bond prices increase
• Firms can raise finance by

  • Issuing shares
  • Issuing corporate bonds
  • Borrowing from a bank
• Coupon


  An interest payment to the bondholder between the date of issue and the date of maturity.
• Maturity


  The period of time for which the financial asset is outstanding. When it finishes and has been repaid, it has matured.