Money is mainly used for two types of transactions. One is the role of the purchase price of real property, that is, in the transaction of goods and services, and the other is lending and borrowing by itself without actual transfer. When a person buys a household item with his income and pays for it, it is called physical distribution, and lending the remaining 1 million won after spending the income to a needy person is called financial distribution. Such financing of funds is done not only by individuals or companies, but also by governments and also often between countries in today's global financial environment. If we define finance, it can be said that "the mutual flow of excess funds and scarce funds between economic actors".
Before the introduction of monetary economy in human history, it was very difficult to find a partner to exchange goods in a barter economy. Similarly, financial transactions are difficult if there is no market to exchange excess funds and insufficient funds, or if there is no means of closing the transaction. The amount you want to lend and the amount you want to borrow will be different, and the period you can lend and the period you want to borrow will not match. Determining the interest rate that is the cost of financing will not be an easy task. It is also true that there are default concerns about whether funds can be recovered on the due date when the credit status of the counterparty is unknown.
Therefore, the presence of a market and an intermediary is necessary to carry out smooth financial transactions. Intermediate instruments in financial transactions are called financial assets or financial products, which include deposits (loans), shares, bonds, insurance, currency and derivatives. Today, financial institutions that broker financial products are becoming specialized and the financial market is expanding into an abstract market that transcends time and space with the development of information and communication instead of staying in a market in a geographical sense.
Direct financing for stocks and bonds, indirect financing for bank loans
Finance can be generally divided into private finance and public finance. If private finance is pre-modern and non-institutional finance, public finance refers to institutional finance that is regulated by the government.
Borrowing food in the spring and repaying it in the harvest, or forming a guild to borrow money, are examples of private finance. The private loan business, which is currently popular among the poor credit class, is also a form of private financing. On the other hand, public finance can be said to be done in institutional financing where there are financial products and financial institutions and there are government institutional devices for the financial market and market health.
Direct financing is a direct transfer of funds between a money provider and a money consumer, and indirect financing is a transaction in which funds are not directly transferred between the two. A clear example of direct financing is the issuance of securities (stocks and bonds). The money applicant receives the required funds instead of delivering the issued securities to the fund provider. For example, if A acquires securities issued by Company B, A's funds are transferred directly to Company B. Financial transactions with loan sharks and between individuals such as relatives are also direct financing, as funds are transferred directly in exchange for debt certificates.
A common example of indirect financing is financial transactions through banks. When Mr. C makes a deposit, the funds are transferred from Mr. C to the bank, but the bank is not the final consumer of the funds. Now, if Mr. D, the consumer of money, takes a loan from the bank, the funds will be transferred from the bank to Mr. D. This financing is indirect in the way that Mr. C's deposit is not directly related to Mr. D's loan. .
It should be noted that not all intermediaries go through indirect finance. In direct financing, transactions are often conducted through intermediaries such as securities firms. A securities firm is simply a broker to facilitate transactions, but a bank ultimately transfers funds by making independent financial transactions such as deposits and loans.
Functions of financial markets
Financial market functions in which financial transactions are conducted can be broadly divided into six categories.
The first one is the function of money transfer, which transfers additional funds to the person in need of funds and transcends amount, time, place, boundary and issue. The second is the financial product pricing function, which determines the price of financial products such as interest rates according to supply and demand in the market. When the demand for a financial product increases, its price increases and when the supply increases, the price of the financial product decreases. The third function is to increase liquidity. Suppose an individual or a company buys shares with additional funds. When funds are needed after the passage of time, the funds can be recovered at any time by selling stocks in the financial market, thus increasing the liquidity of financial assets.Fourth, risk management performance. Market participants with low risk aversion receive a high premium (reward) for accepting risk, while market participants with high risk aversion can reduce risk by diversifying their investments in different financial products. . The fifth is the function of providing financial information, which allows anyone to easily access market information, thereby avoiding the loss caused by lack of information and saving the cost and time of information acquisition. The last one is the function of market discipline, which promotes market health by regulating the behavior of market participants. For example, corporate stocks and bonds, government bonds, etc. are valued based on price in the financial market.In other words, the securities of poor companies and governments should bear higher financing costs (higher interest rates) than the securities of good companies and governments.
The financial market can be divided into a short-term financial market that collects short-term operating funds of less than one year and a long-term financial market that attracts long-term investment funds of one year or more. In addition, the financial market in a broad sense includes the currency market and the derivative market. Depending on the product, they can be classified into notaries that manage deposits and loans, securities companies that issue and distribute stocks and bonds, insurance companies that manage insurance products, and asset management companies that manage funds. did In this financial market, not only individuals (households), companies (including financial institutions) and the government, but also foreign investors are present.
There is a saying that the level of development of a country corresponds to the level of development of the financial market. The development of the financial market is the core of economic development, because it can provide the necessary industrial funds for the development of the national economy through the financial market. Today, New York, London, Tokyo, Zurich and Singapore have a high position as international financial markets. In the case of Korea, the domestic financial market shows rapid growth, but Seoul has yet to occupy a position as an international financial market. I look forward to the day when Seoul takes a place in the international financial market along with the internationalization of the won.
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