The Financial System.....

The financial system constitutes the flow of capital, between individuals (personal finance), governments (public finance), and businesses (corporate finance). Although they are closely related, the disciplines of economics and finance are distinct.....

The "economy" is a social institution that organizes a society's production, distribution, and consumption of goods and services, all of which must be financed.

Generalizing, an entity whose income exceeds its expenditure can lend or invest the excess, intending to earn a fair return. Correspondingly, an entity where income is less than expenditure can raise capital usually in one of two ways:

(i) by borrowing, in the form of a loan (private individuals), or by selling bonds (may be government bonds or corporate bonds);

(ii) by a corporate selling equity, also called stock or shares (may take various forms: preferred stock or common stock). The owners of both bonds and stock may be institutional investors – financial institutions such as investment banks and pension fund – or private individuals, called private investors or retail investors.

The lending is often indirect, through a financial intermediary such as a bank, or via the purchase of notes or bonds (corporate bonds, government bonds, or mutual bonds) in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary earns the difference for arranging the loan. A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity.

Investing typically entails the purchase of stock, either individual securities, or via a mutual fund for example. Stocks are usually sold by corporations to investors so as to raise required capital in the form of "equity financing", as distinct from the debt financing described above. The financial intermediaries here are the investment banks, which find the initial investors and facilitate the listing of the securities (equity and debt); and the securities exchanges, which allow their trade thereafter, as well as the various service providers which manage the performance or risk of these investments.