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  • Money serves three basic functions:

    1.Medium of exchange
    : because you can use it to buy the goods and services you
    want, everyone's willing to trade
    things for money.
    2.Measure of value
    : it simplifies the exchange process because it's a means of
    indicating how much something costs.
    3.Store of value
    : people are willing to hold onto it because they're confident that it will
    keep its value over time.

    The government uses two measures to track the money supply:

    includes the most liquid forms of money, such as cash and checking-account funds.
    M-2 includes everything in M-1 plus near-cash items, such as savings accounts and time deposits
    below $100,000.

    Financial institutions

    serve as financial intermediaries between savers and
    borrowers and direct the flow of funds between the two groups.

    Those that accept deposits from customers
    depository institutions

    include commercial banks, savings banks, and credit unions

    those that don't no depository institutions

    include finance companies, insurance companies, and
    brokerage firms.

    Financial institutions offer a wide range of services

    including checking and savings accounts, ATM services, and credit and debit cards. They also sell securities and
    provide financial advice.


    A bank holds onto only a fraction of the money that it takes in and lends the rest out to individuals, businesses, and governments. In turn, borrowers put some of these funds back into the banking system, where they become available to other borrowers.

    money multiplier

    effect ensures that the cycle expands the money supply.

    Federal Reserve System

    Most large banks are members of the central banking system

    The Fed's goals include

    price stability, sustainable economic growth, and full
    employment. It uses monetary policy to regulate the money supply and the level of interest rates.

    To achieve these goals, the Fed has three tools: can raise or lower reserve requirements—the percentage of its funds that banks must set aside and can't lend out; can raise or lower the discount rate—the rate of interest that the Fed charges
    member banks to borrow "reserve" funds; can conduct open market operations—buying or selling government securities on the open market.

    If a new business hopes to get funding, it should prepare a financial plan

    a document that shows the amount of capital that it needs for a specified period, how and where it will get it, and how and when it will pay it back.

    Common sources of funding for new businesses include

    personal assets, loans from family and friends, and bank loans.

    Financial institutions offer business loans with different


    short-term loan

    matures in less than a year

    intermediate loan

    matures in one to five years

    long-term loan

    matures after five years or more

    lines of credit

    that allow companies to borrow up to a specified amount as the need arises.

    Banks generally require security in the form of collateral

    such as company or personal assets. If the borrower fails to pay the loan when it's due, the bank can take possession of these assets.


    are wealthy individuals who are willing to invest in ventures that they believe will succeed.

    Venture capitalists

    though willing to invest larger sums of money, often want to cash out more quickly than angels. They generally invest in existing businesses with strong growth potential.

    initial public offering (IPO)

    Successful companies looking for additional capital might decide to go public, offering an initial sale of stock

    Securities markets provide two functions

    1.They help companies raise funds by making the initial sale of stock to the public.
    2.They provide a place where investors can trade previously issued stock.

    primary market

    Stock sold through an IPO is issued through

    investment banking firm

    Stock sold through an IPO is issued through a
    primary market with the help of

    secondary market

    Previously issued securities are traded, where the proceeds from sales go to investors rather than to the issuing companies.

    The best-known exchanges are

    the New York Stock Exchange, the American Stock Exchange, and the NASDAQ

    Securities and Exchange Commission (SEC)

    a government agency that is charged with enforcing securities laws designed to protect the investing public

    Stock market trends are measured by

    market indexes

    market indexes

    Dow Jones Industrial Average (DJIA), the NASDAQ Composite Index, and Standard & Poor's Composite Index (S&P 500)

    bull market

    When the stock market is enjoying a period of large increases in prices

    bear market

    When prices are declining

    equity financing

    Companies can raise funds through selling stock or
    through debt financing or issuing bonds

    Stock may be

    common stock or preferred stock

    Preferred stock

    is safer than common stock but it doesn't have the upside
    potential is safer than common stock but it doesn't have the upside potential


    vary according to a company's profitability, holders of preferred stock receive annual fixed dividends

    Most positions in finance fall into one of these three areas:

    commercial banking, corporate finance, and the investment industry.

    Finance professionals

    employed in commercial banking help clients obtain personal or business loans. They also invest the bank's excess funds.

    Those employed in corporate finance

    obtain and manage their employing company's
    cash, debt, and investments. They provide financial analysis and advice to management.

    Financial professionals in the investment industry

    provide financial advice to their clients and help them buy and sell stocks.

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