Financial System

• Cash.

• Bank deposits.

• Mutual funds.

• Future contracts.

• Equity instruments of an entity.

• Stocks.

• Bonds.

TYPES

PROS

• Easy conversion of liquid financial assets into money.
• Appreciation in value happens to some financial assets.

PROS

&

CONS

CONS

• Financial assets which are highly liquid have little appreciation.
• Financial assets that are illiquid are harder to convert to cash.

Basic

This is the Circular Flow Matrix that represents the flow of money, goods and services in a very simplified way.

BASIC

Savings & Investments

SAVINGS

& INVESTMENTS

Savings

=> leakage

Investment

injection <=

• Households’ income divides in:

- consumption.

- savings.

*Bank stores the savings

→ borrowers ask for loans that

come from individual’s savings

→ borrowers (usually businesses)

invest with that money in the

market => injection.

• Businesses’s revenue is divided in:

- income/factor payments.

- savings.

* Savings are withdrawn from the circular flow of income => leakage

(This is the flow that only shows savings and investments)

GENERAL

GENERAL

This model includes not only Savings and Investments (highlighted) but also Taxation and Government actions as well as iMports and eXports. All these factors play a role in the economy and the flow of income of a society.

BANKS

• for-profit institutions with lower interest rates, higher fees but more accessible and convenient in terms of location, access …

• provide similar services compared to Credit Unions such as checking and savings accounts, loans and business accounts.

CREDIT UNIONS

• cooperative financial units that generally excel in customer service having the not-for-profit status.

• usually have higher interest rates and lower fees.

• provide similar services compared to banks like facilitating lending and borrowing of funds to provide financial assistance to its members.

SAVING LOAN ASSOCIATIONS

S&L

• financial institution that focuses on helping people to get residential mortgages (long term loans to pay a house to live in and not rent or use for commercial purposes).

FINANCE COMPANIES

• engaged in financial activities such as loans and advances, acquisition of shares, stock …
• They provide services such as advancing loans to clients at a very high rate of interest.

MUTUAL FUNDS

• company that collects money from various investors and invests it in securities such as stock, bonds and short-term debt.

• Investors buy shares from those mutual funds to ensure their ownership of part of those funds and a capital gain in the long run.

LIFE INSURANCE COMPANIES

LIFE INSURANCE COMPANIES

• companies that provide insurance policies to the insured/policyholder to secure them against death, accidents, risks …

• The money (in the form of premium (amount paid periodically)) is invested into profitable business/investments to gain returns.

FINANCIAL ADVISERS & BROKERS

ADVISERS / BROKERS

• Broker: is paid (usually) a commission to act as an intermediary between an individual that wants to invest in the market and a securities exchange (the market itself that can only be accessed by members of that exchange).

• Advisers: are paid a flat fee to advise a client on securities and/or manage certain things that they want to do with those securities.

PENSION FUNDS

• system in which government entities collect money from every person’s salary per month and invest it in different schemes to gain profit. In exchange, this money with interests is then returned to every person once they are retired.

OTHER FINANCIAL INTERMEDIARIES

OTHERS

PROS

CONS

RISKS

• When you buy any bond, fund, or equity, you always have a type of risk to win or lose a % of your money invested.

• Different types of investments have different types of risks.

• The bigger the risk is the more you can win or lose.

• The smaller the risk is the less you can win or lose.

• There are many different types of risks:

- When a company shuts down equities will always be payed back last,

- The risks of the changes of currencies if you have invested in a foreign company

- Risks of interests

- Inflation

- Changes of taxes

LIQUIDITY

• The willingness of people to sell and by many different equities from many different sectors.

• A liquid equity is an equity which people are always willing to sell or invest in different amounts, it is easy to pair a seller and an investor and vice versa.

• There is a big turnover for the equity.

• An illiquid equity is an equity that people aren’t willing to sell or invest in any amounts, it is hard to pair a seller with an investor or an investor with a seller.

• There is only a small turnover for the equity.

• Liquidity is also the speed in which you can sell an equity (or any good or service) and receive your money or how long it takes you to buy equity (or good or service), you have been searching for.

• The difference between the recent market values for the equity you bought and the money the equity cost you (cost includes the gross buying value + buying costs: the money you pay for the company to buy the equity for you).

• Portfolio market value → the money invested in the portfolio.

• Equities normally pay shareholder dividends if the company made a profit during the year.

• Bonds normally pay interests after a period of time

RETURN

BIBLIOGRAPHY

• https://www.investopedia.com/terms/f/financialasset.asp
• http://www.yourarticlelibrary.com/economics/money/circular-flow-of-money-with-saving-and-investment-money/10909
• https://slideplayer.com/slide/4153412/
• https://www.economicsonline.co.uk/Managing_the_economy/The_circular_flow_of_income.html
• https://theinvestorsbook.com/financial-intermediaries.html
• https://www.thestreet.com/personal-finance/credit-unions-vs-banks-14626262
• https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-1
• https://www.investopedia.com/articles/investing/071515/investment-advisor-versus-broker-how-they-compare.asp
• https://www.youtube.com/watch?v=WlgMgppUx_Y
• Interview of the Chief Internal Auditor of Concorde Securities INC.

(www.con.hu/en/)