Banks are financial institutions that accept deposits and make loans, such as commercial banks, industrial banks and credit unions.
1-banks play a role as a financial intermediate, it links between those who wants to save money (savers) and those who want to invest money, so they should give people interest to put their money in the banks which is a safe place, financial intermediation is an important activity because it channel funds from people who do not have productivity use from them.
2-they play an important role in determining money supply in economy, banks are major determinant of money supply.
Money supply is the money in circulation and bank deposits, all types of deposits are major determinants for money supply.
Making loans by commercial banks, they create checking deposits, which are major components in all money supply.
3- They are one source of the rapid financial innovation that expands the ways or invents ways to invest money and make higher profit.
Why we study financial markets?
Bonds:
Gives you rate of interests similar to loans, irrespct to financial institution to the firm (a debt security that promises to make payments periodically from a certain period of time.)
Share:
Part of the capital of the firm gives profit (if there is profit) and gives loss if there is loss
Stock:
A security that is a claim on the earning and assets of the corporation.
Security:
A claim on borrowers future income that's paid by the borrower to the lenders also called financial instrument.
There are 3 markets:
1-Bond market:
is important to economic activity because it enables the corporations or governments to borrow to finance their activities and also because it's where interest rates are determined and interest rates are very important for all of us because they affect the decisions of consumption, saving and investment.
Bond's market determines the price of bonds.
2- Stock market:
Is the market where the claims on the earning of corporation are traded, it's the place where people can get rich quickly.
Stock prices have been extremely fluctuated and in turn, affect the size of our wealth and our willingness to spend.
The stock market also affects the investor's decision because the price of shares affects the amount of funds that can be raised by selling newly issued stock to finance investment spending.
Stock market determines the price of stock.
3- Exchange rate market:
Foreign exchange market is one where foreign exchange rate is the price of one country's currency (domestic currency) in terms of another (foreign currency)
+ Exchange rate market:
It is the market in which we deal in with foreign markets.
Ex: the exchange rate of the U.S $ is measured as the value of American dollar in terms of a basket of foreign currencies.
-the exchange rate of the dollar fluctuates over time, which affects the American economy.
When the dollar is strong, American consumers will benefit because foreign goods will be cheaper while American business will hurt by cutting both domestic and foreign sales of their products, also, some jobs will be eliminated and the weakness of the dollars has had the opposite effect.
There is no place for exchange rate market; any contact between buyers and sellers is a market in economics.