Financial markets

• Asset


  A resource (physical or otherwise) that can be sold for money
• Liability


  An amount owed by a business, either a current (short-term) or non-current (long-term) liability
• Money


  Primarily a medium of exchange or means of payment, but also a store of value
• The Bank of England has a monopoly over the issue of cash (although in other parts of the UK, Scottish and Northern Irish banks also have a limited ability to issue banknotes)
• Most modern money takes the form of bank deposits created by the private enterprise banking system
• Measure of value


  Money's function as the unit in which the prices of goods are quoted and in which accounts are kept
• Standard of deferred payment


  Money's function that allows people to delay paying for goods or settling a debt, even though goods or services are being provided immediately
• For most people, money comprises coins and Bank of England notes, and any funds on deposit in banks such as HSBC and Barclays. Residents of Scotland and Northern Ireland would also include notes issued by local Scottish and Northern Irish banks. Building society deposits as well as bank deposits are now also regarded as money
• Barter is inefficient because the time and energy spent searching the market to establish the double coincidence of wants results in unnecessary search costs (so-called 'shoe-leather costs') and transaction costs. These contribute to the production of a narrower range of consumer choice available in sophisticated monetary economies
• Money supply


  The stock of financial assets which function as money
• Narrow money


  The part of the stock of money (or money supply) made up of cash and liquid bank and building society deposits
• Broad money


  The part of the stock of money (or money supply) made up of cash, other liquid assets such as bank and building society deposits but also some illiquid assets
• Liquidity


  The ease with which an asset can be converted into cash without loss of value. Cash is the most liquid of all assets
• Narrow money measures


  MD, Mi
• Broad money measures


  My, M4
• Real money


  The part of the stock of money for money supply made up of cash, other liquid assets such as bank and building society deposits but also some illiquid assets
• Liquidity


  The ease with which an asset can be converted into cash without loss of value
• Cash is the most liquid of all assets
• Assets that generally can only be sold after a long, exhaustive search for a buyer such as houses and cars, are known as illiquid
• Liquidity is also affected by whether or not the conversion can take place at a pre-known value
• A share issued by a public limited company PLC is highly liquid in that it can quickly be sold on the stock exchange, but less liquid in the sense that the seller does not know the price the asset will fetch in advance of the sale, as the value of a share can rise or fall depending on how desirable that share is
• Goodhart's Law states that as soon as a government tries to control the growth of a particular measure of the money supply, any previously stable relationship between the targeted measure of money and the economy breaks down
• The more successful the Bank of England appears to be in controlling the rate of growth of the financial assets defined as the money supply, the more likely it is that other financial assets, regarded previously as near money outside the existing definition and system of control, will take on the function of a medium of exchange and become money
• Equity


  The assets that people own
• Debt


  People's financial liabilities, or money that they owe
• Positive equity occurs when what is owned is greater than what is owed
• Negative equity occurs when what is owed exceeds the value of what is owned
• Portfolio balance decisions involve choosing between holding physical assets (non-financial assets) and holding financial assets
• Liquidity


  The ease with which an asset can be converted into cash, and the certainty of what it will be worth when converted
• Bank deposits are not quite as liquid as cash, but they are sufficiently liquid to be treated as money
• Shares and government bonds (gilt-edged securities) are marketable (can be sold second hand on the stock exchange), but they are less liquid than money
• Unlike money, which earns little or no interest, shares and gilts generally hold out the prospect of providing a profit for their owners
• Treasury bills


  Short-dated government debt
• Commercial bills


  Short-term debt usually three months to maturity, bound by private businesses, which pays the holder a fixed rate of interest
• Money markets


  Provide a means for lenders and borrowers to satisfy their short-term financial needs
• Capital markets


  Where securities such as shares and bonds are issued to raise medium to long-term financing, and are traded on the second-hand part of the market
• Foreign exchange markets


  Global decentralised markets for the trading of currencies
• The main difference between a financial market and a market for a good, such as the car market, is that financial markets trade in financial assets and securities rather than physical goods
• Money markets provide mechanisms for banks to arrange their assets in terms of their liquidity or profitability, with highly liquid assets such as Treasury bills and commercial bills at the short end of the spectrum
• The London interbank market, in which the LIBOR interest rate is charged, has become extremely important in the operation of monetary policy