Financial System
The financial system consists of the flows of capital that take place between individuals
and households (personal finance), governments (public finance), and businesses
(corporate finance). "Finance" thus studies the process of channeling money from savers
and investors to entities that need it. Savers and investors have money available which
could earn interest or dividends if put to productive use. Individuals, companies and
governments must obtain money from some external source, such as loans or credit,
when they lack sufficient funds to operate.
In general, an entity whose income exceeds its expenditure can lend or invest the
excess, intending to earn a fair return. Correspondingly, an entity where income is less
than expenditure can raise capital usually in one of two ways: (i) by borrowing in the
form of a loan (private individuals), or by selling government or corporate bonds; (ii) by a
corporation selling equity, also called stock or shares (which may take various forms:
preferred stock or common stock). The owners of both bonds and stock may be
institutional investors – financial institutions such as investment banks and pension
funds – or private individuals, called private investors or retail investors.
The lending is through a financial intermediary such as a bank, or the purchase of notes
or bonds (corporate bonds, government bonds, or mutual bonds) in the bond market.
The lender receives interest, the borrower pays a higher interest than the lender
receives, and the financial intermediary earns the difference for arranging the loan. A
bank aggregates the activities of many borrowers and lenders. A bank accepts deposits
from lenders, on which it pays interest. The bank then lends these deposits to
borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their
activity.
Investing typically entails the purchase of stock, either individual securities, or via a
mutual fund for example. Stocks are usually sold by corporations to investors so as to
raise required capital in the form of "equity financing", as distinct from the debt
financing described above. The financial intermediaries here are the investment banks.
The investment banks find the initial investors and facilitate the listing of the securities,
typically shares and bonds. Additionally, they facilitate the securities exchanges, which
allow their trade thereafter, as well as the various service providers which manage the
performance or risk of these investments. These latter include mutual funds, pension
funds, wealth managers, and stock brokers, typically servicing retail investors (private
The financial system consists of the flows of capital that take place between individuals
and households (personal finance), governments (public finance), and businesses
(corporate finance). "Finance" thus studies the process of channeling money from savers
and investors to entities that need it. Savers and investors have money available which
could earn interest or dividends if put to productive use. Individuals, companies and
governments must obtain money from some external source, such as loans or credit,
when they lack sufficient funds to operate.
In general, an entity whose income exceeds its expenditure can lend or invest the
excess, intending to earn a fair return. Correspondingly, an entity where income is less
than expenditure can raise capital usually in one of two ways: (i) by borrowing in the
form of a loan (private individuals), or by selling government or corporate bonds; (ii) by a
corporation selling equity, also called stock or shares (which may take various forms:
preferred stock or common stock). The owners of both bonds and stock may be
institutional investors – financial institutions such as investment banks and pension
funds – or private individuals, called private investors or retail investors.
The lending is through a financial intermediary such as a bank, or the purchase of notes
or bonds (corporate bonds, government bonds, or mutual bonds) in the bond market.
The lender receives interest, the borrower pays a higher interest than the lender
receives, and the financial intermediary earns the difference for arranging the loan. A
bank aggregates the activities of many borrowers and lenders. A bank accepts deposits
from lenders, on which it pays interest. The bank then lends these deposits to
borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their
activity.
Investing typically entails the purchase of stock, either individual securities, or via a
mutual fund for example. Stocks are usually sold by corporations to investors so as to
raise required capital in the form of "equity financing", as distinct from the debt
financing described above. The financial intermediaries here are the investment banks.
The investment banks find the initial investors and facilitate the listing of the securities,
typically shares and bonds. Additionally, they facilitate the securities exchanges, which
allow their trade thereafter, as well as the various service providers which manage the
performance or risk of these investments. These latter include mutual funds, pension
funds, wealth managers, and stock brokers, typically servicing retail investors (private
