Financial system plays an important role in the economy

The financial sector has six core functions that are important for both the company and the economy as a whole.

first Provision of payment services. It is uncomfortable, ineffective, and risky to make enough money to buy goods and services. Financial institutions provide an effective alternative. The most obvious examples include personal and commercial checks and checks, credit and debit card services; all of them are increasingly important, at least in modern industries, even in low-income countries.

2nd Appropriate savers and investors. While many people rescue, such as retirement and many investment projects, such as building a factory or expanding inventory delivered by a family micro-enterprise, all investors would have saved the project for the sake of the worst casualties. It is therefore important for savers and investors to somehow meet and agree on the terms of loans or other forms of financing. This can happen without financial institutions; Even in developed markets, many new entrepreneurs share a large proportion of the initial funds from family and friends. The presence of banks, later venture capitalists or stock exchanges, however, can greatly facilitate compliance in an efficient manner. Small savings simply deposit their savings and allow the bank to decide where to invest.

3rd Generate and distribute information. Man does not always think this way, but from a broad perspective of society, one of the most important tasks of the financial system is to generate and disseminate information. In daily newspapers (and increasingly on the internet) of developing countries, the prices of shares and bonds are familiar; these prices represent the average rating of thousands of investors, if not the millions, based on information available for these and all other investments. Banks also collect information about rental companies; the information received is one of the most important elements of the "capital" of the bank, although it is often unknown. In this regard, they said that financial markets are the "brains" of the economic system.

4th Efficient allocation of credit. The use of investment funds for uses with the highest rate of return allows the growth of specialization and division of labor that has already been recognized by Adam Smith as the key to the richness of nations.

5th Pricing, pooling and trading risks. Insurance markets provide protection against risks, as well as the diversity available at the stock market or banks. hitelszindikálások.

6th Increase the liquidity of the asset. Some investments are very long-lasting; in some cases – eg. a hydroelectric power plant – such investments can exceed a century. Sooner or later, investors in such plants will probably want to sell them. In some cases it may be difficult to find a buyer at the time you want to sell, such as retirement. Financial development increases liquidity by facilitating sales, for example, on the stock exchange or the syndication of banks or insurance companies.

Both technological and financial innovations control modern economic growth. Both were a necessary condition for the Industrial Revolution, as steam and hydropower required large investments in banking, finance and insurance innovations. Both are necessary for developing countries, as they continue to fight for economic development. But the efficient functioning of the financial system requires a prerequisite for macroeconomic stability.

Source by Rashid Javed

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