Banking system

Central banks differ from normal banks which take deposits and make loans to customers. Activities and functions of central banks usually consist in controlling the economy at large and the state banking system.

The most effective way to control the economy is to increase or decrease the amount of normal banking operations – making loans and taking deposits. This leads to the increase or decrease of the country’s money supply through the mechanism of reserve requirements. Normal banks are required to keep about 10% of their funds on reserve with a central bank. When a central bank decides to increase the money supply it can reduce reserve requirements for normal banks allowing them more of their funds to lend to businesses and customers. This leads to the increase of the money supply and stimulates economic growth.

Central banks can also control the money supply by raising or lowering interest rates. When interest rates are high, the economic growth begins to slow down. When interest rates are low, the economy grows quickly.

The most important way of controlling the money supply is through open market operations, where a central bank buys or sells large amounts of securities, such as government treasury bonds, in the open market. Buying securities the central bank pumps money into the economy because money held at a central bank is not considered part of the money supply.

So, a central bank acts as a banker to the government and to the banking sector, coordinates the country’s monetary policy, supervises the banking system, provides a stabilizing influence on the country’s economy.

Company finance and stock markets

Ownership in a company is certified through shares. The part of the capital of the company which belongs to the owners (shareholders) of the business, is called equity capital or share capital. When the company makes a profit, its owners share in the benefits by receiving a dividend. If shareholders sell their shares the buyer may pay more or less then the face value because the price of shares depends on whether the company is doing well or badly.

The key factor in owning any company is limited liability. When a company goes bankrupt, the owners never pay its unpaid bills. The worst that can happen to investors in a limited liability company is losing their initial investment if the company fails.

There are public and private companies. Public companies are large and their shares are traded on stock exchanges. Smaller companies are private.

Securities of all kinds (stocks, shares and bonds) are traded at the Stock Exchange. People dealing for other people on the Stock Market are called brokers. There are two kinds of speculators on the Stock Exchange: the so called “bulls” and “bears”. “Bulls” are speculators who buy business shares in expectation of a price rise. “Bears” sell business shares in expectation of a fall in prices.

Every stock market in the world has at least one index. It is used to represent the stock market as a whole and to track the prices of the most prestigious blue-chip stocks.

For businesses and governments in many countries around the world corruption is the way of life. Corruptive businesses and governments may be involved in money laundering practices. A money laundering scheme is the process that turns illegally earned funds (“dirty money”) into “respectable” money. Swiss banks accounts are usually used for money laundering because the money passed through a respectable Swiss bank is accepted anywhere in the world.