Financial Markets and Assets

This article covers how companies raise money. As we discussed, this can be done by issuing stocks and bonds. Of course, those are not the only ways for a business to raise capital. Another option is borrowing from banks. There is an ongoing debate as to whether traded loans should be considered debt securities or not. For loans to be considered tradable debt instruments, the following criteria need to be considered:

  • "Loans which have become negotiable de facto should also be classified under securities other than shares" [1993 SNA (para. 11.75)]
  • "Loans that have become marketable in secondary markets should be reclassified under securities other than shares and should be valued on the basis of market prices or fair values in the same manner as other types of securities other than shares" [GFSM 2001 (para. 7.111)].

How do bonds differ from bank loans?

The Role of Financial Markets

In any given period, some households, businesses and governments earn more income than they spend. What do they do with their savings? Usually, it doesn't make sense to put savings under your mattress or bury them in your backyard. Neither of those options will help your savings grow.

Other households, businesses and governments spend more than they earn. Households borrow money for new homes and new cars. Businesses borrow money to finance new physical capital investments. Governments borrow money to finance budget deficits. Where can these households, businesses and governments find the money to finance their expenditures?

The answer to each of these questions is financial markets. Financial markets are where savers put their savings to work and borrowers find funding to borrow. In this section, we will provide an overview of financial markets to provide context for the subsequent discussion of money and the banking system.

Source: Steven Greenlaw and Lumen Learning, https://courses.lumenlearning.com/wmopen-macroeconomics/chapter/introduction-to-financial-markets/
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