Introduction to Finance and Financial Systems

Primary Market: Comparable to the new car market; represents newly issued stocks.
Secondary Market: Comparable to the used car market; involves already issued stocks that investors buy and sell.
- Example: Stocks purchased by individual investors through platforms like Robinhood are typically in the secondary market.
- Stocks bought here are not newly issued by companies.
Initial Public Offering (IPO): A good example of the primary market.
- Definition: An IPO is when a company offers its shares to the public for the first time.
- Typically, individual investors like retail investors do not have access to IPO shares; these are reserved for institutional investors, often facilitated through investment banks.

Classification of Financial Institutions:
- Financial institutions can be categorized primarily into banks and non-banks.
- Banks: Institutions that accept deposits from customers.
  - Examples of deposit-taking institutions:
    - Commercial Banks: e.g., Chase Bank.
    - Savings and Loan Associations: Institutions focusing on savings deposits and home loans.
    - Credit Unions: Member-owned institutions providing savings and financial services.
    - Mutual Savings Banks: Less commonly known institutions that also accept deposits.
- Non-Bank Financial Institutions: Entities like investment banks, pension funds, and insurance companies do not accept deposits; hence, they operate under different regulations than traditional banks.
  - Characterized by less government regulation than banks due to the lack of deposit-taking.

Definition of Finance: The process of channeling funds from savers to borrowers.
- Distinction between short-term and long-term financing.
- Types of Financing:
  - Direct Financing: Involves exchanges directly between savers and borrowers in financial markets.
  - Indirect Financing: Involves financial intermediaries (such as banks) between savers and borrowers.
Importance of Direct vs. Indirect Financing: Direct financing plays a more significant role in capital generation than indirect financing.

Legal Tender: Currency recognized by law for the payment of debts.
- Approximately 96% of transactions in the U.S. are conducted using legal tender.
Characteristics of Money:
- Medium of Exchange: Must be widely accepted for goods and services.
  - Examples from history include salt, shells, and cigarettes used in specific contexts.
- Unit of Account: Used to measure and compare the value of goods and services.
  - Different currencies represent value in different regions.
- Store of Value: Money must retain value over time, allowing purchasing power to be preserved for future use.
  - High inflation negatively impacts this function by diminishing the value of currency.

Issuers of Money: In the U.S., the Federal Reserve System issues paper currency known as Federal Reserve Notes.
- Central banks aim to maintain the stability of the economy by regulating money supply and controlling inflation.