The economy of every country would crumble to pieces if there was not central bank to manage its state. Original purpose of the central bank was to be the bank of government, but is later broaden its reach and became a bank for bankers a well. It provides services to all other commercial banks, and it also provides liquidity. But those are just side jobs that every central bank does, its role is more important than that.
Central bank looks over economic state of the country through monetary policies, increasing and decreasing the supply of money when it is needed, interest rates, and overlooking the financial system of the state to maintain steadiness of all financial institutions as well as markets. One other thing that separated central bank form other banks is that central bank doesn’t work to attain any form of profit. If it does attain profit it is turned to the government.
Central banks have four major objectives, and their existence serves to maintain those objectives at the places where they will increase the strength of the country as much as it is possible.
Inflation can become burden that will pull economy of the country to the bottom, and central bank is responsible for keeping that inflation low and stable. If inflation rises the money loses its value, and that causes chains of results that destroy. Inflation must be low, 1 to 3 percent, and its growth must be as slow as possible, but it must not stop. Deflation can kill economy as well, and deflation should b e used as a tool only if inflation has risen too much. By-product of deflation is loss of work places, in other words unemployment.
Economic growth and employment are objectives that are very high on the list for central banks. Growth must be as high as possible and central banks will work to increase it as much as they can. If economic growth stops buying power of customers drops as well, and that causes weakening of the currency. It can eventually lead to increase in the unemployment which is a strong sign that economy of the country is stumbling. Central bank’s objective is to increase employment as much as possible, aiming to neutralize unemployment completely.
Financial stability is important, and central bank aims to keep it so due to financial intermediation being the driving factor that brings lenders and borrowers together. If there is instability in financial institutions then those people will avoid them due to fear of increased risk that accompanies unstable institutions.
Stability of the exchange rate is secondary objective of a central bank (its place on international trade) because domestic state of the currency is more important. But it is different for some countries. Countries that are just emerging on the international aim to strengthen the place of their currency on the market, while other countries aim towards internal goals.
One more information, sites like 24option may boast with trading which is regulated by some random regulations by certain central banks themselves. Info like that should be taken with reservation, a lot of reservation.
Every financial transaction carries risk of loss, which prompts investors to acquire data about possible gains. This is done to determine whether transaction is worth the risk. Every financial transaction has to follow rules, procedures as well as legal requirements that may present a barrier to some forms of investments. Financial system has a task and duty to institutionalize common financial transaction ( to bring down laws that will determine rules on which such transactions can be done ), and to create financial instruments that have similar characteristics ( futures and options ). Financial system also has to provide market information ( that is current and relevant ) in order to allow the investors to make assessment of their investment performance.
Assessment of a performance is done very frequently, and it is common thing. For instance, banks will assess whether their possible borrowers have means of returning the money before they lend it to them. It is same with credit rating agencies, which assess companies and other organizations and determine the rate of their bonds. These things as well as other factors like news about different companies are all factors that influence prices of stocks on financial markets.
Financial markets are created by products and services all of which are offered for sale, and which are exchanged for a number of different things ( profit, interest, capital gains etc. ). Main role of the financial market is to provide information on prices which determine further allocation of economic resources. It is quite simple, when you compare two companies that place their products on the market, the company that produces more desired product will sell more and therefore be more successful. When investors see that they will invest their money in the company that sells more which will lead to further growth of that company. This causes expansion of that company and its stocks gain value as long as it is expanding.
Most important rule is that these financial markets must be fair. This is done through enforcement of rules and regulation brought by laws that are all focused on fair trade. If a market is not fair some will flourish and gain profit with small risk, while others will lose money on increasing rate which will force them to leave that market and pull out all of their resources. End result of that is not good for anyone, except for those that gained profit. Market will suffer from this due to reflux of resources that happens when many bigger players leave market due to its unfairness. Laws are made to make all markets fair, and laws against things like isider trading are being brought and updated on regular basis to make all market a level ground for all participants. Still, not all financial markets are regulated, and some of them are not called financial markets at all. Best binary option robot is a software that belongs one of those markets, binary options trading market. This area of trading is highly unregulated and there are a lot of scam sites and software that lurk in that part of financial world.
Risk is all around is, and some of it is not avoidable. Of course there is a great number of risks that can be avoided, but by doing that we would avoid many good things that might happen. Take a stock trader for example. To avoid a chance of loss, you can stop trading, but if you don’t trade you can’t profit, and without profit through that you will have to find another job that carries its own set of risks.
That is why there are other ways to manage risk, whether to prevent it, control it or lower the size of it. We are like that, we must risk if we want to prosper, and in order to lower the chance of loss we find different ways to do it. Best kind of risk management is to limit the amount of loss while pushing your luck to the limit.
Risk control, or loss control can be done through prevention of the loss or reduction of the loss, former one prevents any loss, while later one reduces amount of loss you have to suffer. Best example of risk prevention can be seen in driving under alcohol influence. If you drive drunk you increase a chance of loss, and to prevent that you don’t drink when you drive. To reduce the amount of risk you drive slower, so if something happens damage is reduced.
Risk retention is a way of risk control from within, which is done due to the price of the insurance or if insurance can’t be bought. These risks occur on more regular basis than other risks, but their severity is low if risk retention is on high level.
Passive risk retention comes from lack of knowledge that a risk exists, or the knowledge of risk exists, but magnitude of it is not viewed as it should be. Here are two examples of passive risk. First is smoking. People smoke without full knowledge of possible damages it can do to them. Then we have speeding. People think that they can handle greater speed better than others, so the risk that comes with it is reduced to them. This is a mistake because that can result in both financial loss through tickets form police and greater damages done by collision. Higher the speed of the vehicle the chances for avoidance of loss when something happens is lower.
In finance world there is a risk management method called hedging. To explain it in few words is hard, because it is a complicated thing. But I will try. Hedging is an act of putting a put call on a stock which will reduce loss if it comes to it. There is high number of hedge types, even articles like Best Binary Options Brokers site introduce their own kind of hedging. How trustable are they it is about you, readers to research and find out.
In the world of finance every action carries a certain amount of risk, and that risk can represents the loss. There are few different ways risk is categorized, and through those ways many types of risk can be named. I will talk about one such categorization, a basic one in fact, which will encompass causes of the risk and parties that are affected by it.
First there is pure risk, which offers no possibility of gain, only loss or no loss. This risk has 3 categories of its own, legal, property and personal, and it can be insured due to possible application of law of large numbers which is used to estimate future loss size and possibility.
Personal risk is the simples form of risk and it affects only one person, and it can come in the form of death, illness or disability, for example.
Property risk is a bit more complicated, but in reality it affects other personel and property. Property loss is also more complicated because it involves two types of losses, direct and consequential (indirect). Damage done to the property is considered as a direct loss, while damages that are created through direct loss ( lack of property that causes damages later in time ).
Legal risk is a property risk that can cause financial or other damages through court procedure. In most cases it will, either because you are found fully or partially responsible to loss via malpractice or neglect or other such thing, or simply by paying expenses for the court procedure. This is why insurance is important, because they will cover those expenses and you will avoid losses to your pocket.
Speculative risk is different from pure risk because there is a possibility of gain, for example you can look at financial markets. There is no way to insure this kind of risk because people are willingly risking their finances for a chance of profit on those markets. Similar can be said for all trading types, and especially for high risk trading that can be done through sites like banc de binary, a binary options trading which carries a lot of risk.
This can of risk is not insurable because it has tendency to generate greater amount of loss than profit, and it offers no profit for insurance companies. To avoid this kind of risk, and this kind of loss people only need to stop risking their money on financial markets ( which is easy to say, but hard to do due to chance to gain large amount of profit through that kind of trading.
All businesses and organizations that are in some way involved in distribution or collection of money are considered as financial institutions. They have methods and procedures that makes them able to collect money (from depositors) and distribute that money to borrowers. They are also responsible for creation of financial securities and financial markets where other parties can meet and exchange money, products and services. All of those institutions can be divided in depository and non-depository institutions.
Depository institutions are all institutions that allow deposits of the money to be made ( banks and credit unions). They collect money from their depositors, and lend that money to their borrowers. Lending money carries many risks, main one being the ability of the borrower to pay back that money. That is why it is best to leave lending to banks and other credit unions. They will assess the situation of the borrower and determine how much they are willing to risk on that particular party.
Depository institutions offer convenient ways to carry out payments. Money can be transferred by multiple ways including wire transaction, credit, debit cards and so on, so the need to carry large amounts of money in your pockets is a thing of past. International banks are depository institutions that offer few more services apart from aforementioned, services like foreign exchange, currency converting and so on.
There are more categories of non-depository institutions than there is depository, but they have lesser rights, and are less powerful in the terms of amount of money that goes through them. These institutions collect money in the form of premiums and contributions or by selling different purposed securities after which the money is used for investment in the hope of higher return.
Insurance companies pool money that they gain by selling insurance. That money is used to pay premiums to people that suffer disasters from events that are not really common. But not everything can be insured. If you happen to be one of the people that have stumbled on article like 24option review and got entangled in that which ended with the loss of data from your credit card and eventually money you had on your account, no insurance will be able or willing to cover that.
Pension funds collect money from workers, or businesses that pay them for workers which they invest further on. That money is later used to pay those workers when they retire in the form of regular income. Governments are responsible for creation of pension funds, but in some cases that is done by businesses or labor unions. This type of income that workers get is excluded from taxes because the taxes were applied when they paid that money to the fund.
Securities firms provide ground for other parties to trade securities, invest money in different financial markets, which is done through information they provide. These firms also provide settlement and clearing systems for the investors to ease their trading.
Finance companies sell securities to the other businesses, after which they lend money to other businesses and individuals at increased interest rate. Their profit cvan be found in the difference between two interest rates.