7/26/2019 business_breif_u06-2.pdf

1/154

One of the main features of globalisation is that capital can ow freely to and from almost

everywhere. People are always looking to place money where it will be most protable and earn

the greatest e ivesme. As an individual, you can put your money on depsiin a bank

and you will get iees. Your money is lent out to people, businesses and governments who

need it to nance their own projects, and the bank will make itsmoney on the difference between

what it pays out in interest on deposits and what it gets in interest from las.

You could buy some bdsand, as long as the organisation or country youve invested in by

lending it money doesnt defal, you will get your interest payments, and later your bonds will

eventually be repaid. Or you could buy some shaesand share in the protability of your chosen

company. In good times, the dividedswill be more than what you would get from bonds. In

addition, the shares themselves will increase in value, giving you a capial gaiif you sell them.

But if the company runs into trouble and goes bakp, you will be among the last to be paid

back and you may get only part of what you put in or you may lose all your money.

This is the ade-ffbetween isk and e. The higher the risk of your investment not being

repaid, the more you will want it to pay back in return on investment.Ivessuse the worlds

nancial markets to channel money into protable investment activities and projects. Bwes,

such as companies and governments, use them to nd capital on the best terms.

Most investors are not private individuals but isiislike baks, isace cmpaies,

mal fds(i ss in Britain)and pesi fds, who are, of course, investing the money

of private individuals indirectly. The markets they invest in include the meand cec

makes, sck makesfor shares (also known as eqiies), cmmdiies makesfor anything

from gold to pork bellies (used for making bacon), and ppe (buildings and land).

There are also markets for fesin currencies, equities, bonds and commodities: a future is a

xed-price contract to buy a certain amount of something for delivery at a xed future date. There

are markets for pisin currencies, equities and bonds. Here, an investor buys the right to buy

or sell a certain amount of these things at a certain price on a particular date in the future. This is

a form of betting on how prices will move.

Options and futures are types of deivaives. It was with derivatives that the cedi cchof

20078 began. Loans to borrowers in the US housing market were resold or seciised by thebanks who made the original loans:interest payments on the loans were used to pay investors

who were buying the related derivatives. But sb-pime borrowers were unable to repay the

original loans, and this led to the cllapseof a large number of banks and other nancial

institutions, with governments having to bail (rescue and assist) many of the remaining

banks. Following their traumatic experience, many banks are very reluctant to start lending again,

leading to dire consequences for economic activity.

Me ad sdesFollowing the credit crunch and its aftermath of the last few years, your students may have strong

views on the nancial system and the social usefulness or otherwise of some of its activities,

for example derivatives trading. As ever, discuss tactfully, especially if your students work in the

nancial sector.

read Michael Brett: How to Read the Financial Pages, Random House, new edition, 2003

Longman Dictionary of Business English,Pearson Education, 2nd edition, 2007

Graham Bannock: Penguin International Dictionary of Finance, Penguin, new edition, 2003

Graham Turner: The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic

Crisis, Pluto, 2008

business brief

BUSINESS

BRIEF

unIt 6 MonEy