Finance basics – Just another WordPress site Wed, 02 Mar 2016 16:34:37 +0000 en-US hourly 1 The European Central Bank Fri, 12 Jul 2013 08:39:40 +0000 European Central Bank

The European Central Bank is headquartered in Frankfurt, Germany.

The European Central Bank was established on 1st January 1998 and is headquartered in Frankfurt, Germany. The European Central Bank replaced the European Monetary Institute in June 1998. The European Monetary Institute was created by the Maastricht Treaty to prepare for the establishment of a transnational central bank, and a common monetary policy.

The European Central Bank is responsible for issuing the Euro as a common currency, defining the broad monetary policy of the Euro area, and making the necessary decisions for its implementation. That is, to keep the purchasing power of the Euro, and thus safeguard price stability and value in the region, which currently includes the 17 countries of the European Union introduced into the Euro since 1999.

The European Central Bank was based on the model of the German central bank, the Bundesbank, which was largely the creation of German ordo-liberals, who were a group of post World War II West German economists. The Bundesbank concept revolved around a market based economic system within a State created regulatory framework. The goal was to stimulate economic competition and maintain free markets that operated within a strong social, political and moral framework.

The European Central Bank is one of the seven central European Union institutions. Its main duty is to keep inflation under control and thereby stabilise prices, particularly within the Eurozone. The European Central bank ensurers that financial institutions and markets are properly supervised in order to maintain financial equilibrium. The European Central Bank works within the central banking system, which comprises the major banks in each of the 28 European Union countries. The European Central Bank’s mandate includes:

  • Regulating key Eurozone interest rates, and managing the supply of money to the zone.
  • Supervising the Eurozone foreign currency reserves, and trading currencies as necessary to balance exchange rates.
  • Tracking price trends and evaluating the risk to price stability.
  • Helping to ensure that payment systems operate smoothly, and overseeing the appropriate supervision of financial institutions and markets by national authorities.
  • Authorising central banks to issue Euro banknotes.
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Dealing with foreign exchange risk Sun, 03 Mar 2013 21:25:53 +0000 Also referred to as currency risk, foreign exchange risk refers to the probability of a business’ value depreciating due to the change in values of currency. Businesses that deal with export and imports are the ones mainly affected by value changes of currencies. Foreign exchange risk can also be referred to the risk a business has to deal with, closing a long or short position in another currency at a loss.

foreign exchange notes

Foreign exchange is, arguably, the largest market in the world.

Foreign exchange is, arguably, the largest market in the world. This market has a daily turnover of almost a trillion pounds. Therefore, any business that depends on two or more currency types, are likely to lose a lot of money when one of the currency depreciates. The currency exchange rates are affected by a number of things. Demand and supply of different currency types are the most influential factors of the rate of exchange. Politics can also greatly influence the foreign exchange rates.

Translation foreign exchange risk affects numerous businesses. Businesses that have assets abroad, and the base currency of the foreign country shifts unfavourably, will lose a lot of money. Yes, even if a firm is not ready to crystalise the asset in the short-run, such an unfavourable currency shift affects their overall net-worth. A business dealing with this kind of foreign exchange risk can do little about it. However, if the firm’s financial experts predict a large unfavourable currency rate shift, liquifying the asset as soon as possible is advisable.

Settlement risk is another foreign exchange risk. Firms that directly engage in selling and buying of currencies are most likely to be affected by this type of risk. A trading firm, or individual, must, therefore, be ready to deal with losses if their broker failed to honour their part of the deal. The bank you made a currency transaction with might also go bankrupt. Businesses can avoid dealing with this kind of foreign exchange risk by only dealing with credible banks, and brokers. Moreover, seeking expert advice is very important.

The IXE Financial Group is one of the best firms you can count on for advice. The Facebook presence of IXE Financial Group makes it easier to contact them!

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The causes and effects of Inflation Fri, 01 Mar 2013 13:36:35 +0000 Inflation has always been a key part of our economy, historically and financially. The so called ‘value of money’ is constantly changing, and in turn shaping our lives and society. We often hear a lot about inflation on the news, but what exactly is it?

a man rising coins symbolising inflation

Put simply, inflation is when the general price of goods and or services in a country rises.

Put simply, inflation is when the general price of goods and or services in a country rises. In times of inflation, things get more expensive to buy. In theory, this should also mean that the wages of the workers producing the goods increase as well.

Unfortunately, this isn’t always the case. Inflation is often a time when the CEOs and large corporations can take great advantage of inflationary crisis. In recent years, we’ve seen inflation across the US economy, yet we’ve also had the average wage stagnating. What does this mean for the workers? It means that things become more expensive to buy, and they don’t have more money to compensate for this rise in price. Generally, this can lead to a stagnation or decline in the standard of living.

How is it caused? The most prominent and relevant cause of inflation would be when extra money enters the economy. As the general money supply increases, prices become more affordable, so to facilitate this increased purchasing capacity – prices naturally rise. Be warned, this description is put quiet simply. There are hundreds of factors involved in inflation, it’s why it remains such an issue even to modern economists.

Inflation, in most cases, is best kept to a low rate. High inflation rates can have catastrophic effects on the economy and trigger a domino effect in a specific markets – just take a look at the housing bubble. A good examples of it’s dangers would be post-war Germany in the 1920s; it was said that a the price of a loaf of bread could be one dollar in the morning, and inflate to 5 dollars in the evening. Such economic uncertainty is never a good thing, and that’s why so much effort is put into controlling and managing the money supply in the economy.

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Bonds: What are they? Fri, 01 Mar 2013 13:35:59 +0000 What are Bonds? Simply put, they’re a loan that you give out to businesses or governments, that come with a promise that you’ll receive your initial money back in addition to any interest you might have earned. Governments and big businesses are always needing money to fund new projects and developments, and selling out bonds is one of the ways they can do this. In the investment world, bonds are considered to be one of the safest forms of investment. Unlike shares or stocks, bonds come with a guarantee; there is still risk to be had if you’re not buying bonds from a company/government with a proven track record.

USSR treasury bond (1982)

USSR treasury bond (1982)

These types of investment can be plotted into two different categories: government and corporate. Government bonds are considered to be less risky than corporate bonds; as it’s much more likely for a single company to default on it’s debts rather than an entire government. That being said, you should never assume that bonds come with a risk-free tag! It is fully possible for a government or a local establishment to delay or even default on all of their loans, which would render your investment worthless.

With great risk, comes great reward. Corporations are profit-driven machines that will do almost anything to generate some extra income. As a result of this, the interest rates from corporate bonds will typically be much higher than investing in a government alternative. Every company has a credit rating/history; such ratings will affect the risk and reward of each investment opportunity.

For those looking to invest their money in a moderately low-risk solution, then I recommend bonds as a brilliant way to earn some extra money. I also urge you to approach all kinds of investing with caution. There will be companies, and sometimes even local governments, that will try and convince you into a loan-investment which is less than secure.

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Barter – the modern, old-fashioned approach Tue, 08 Jan 2013 14:39:30 +0000 People traded with each other long before the invention of currency units and the corresponding modern corollaries such as direct debits and credit cards. In the old days people simply traded goods and skills they had for goods and skills they needed. It was known as the barter system and it was a fact of life which worked well for everyone from peasants to the elite.


While barter has many advantages, it is probably best suited to areas either where the exchange takes place rapidly or where prices remain relatively stable.

As the world moved away from artisan crafts and small-scale production towards an industrial society, barter began to fall out of favour. The scale of production and the quantity of raw materials required to sustain it made barter impractical given the limitations of transport and communications during the period. It was simply more practical to arrange the transport of cash over long distances that to try to use barter.

In due course of time transport and communications improved and there began to be an increasing emphasis on working faster and smarter instead of just harder. Companies began to realize that using barter allowed them to maximize their existing assets while preserving their cash-in-hand. An example of this would be a factory using barter to mop up excess inventory and keep production lines running, freeing up its cash reserves for future investment. The popularity of corporate barter has led to the creation of clearing houses to link businesses together.

While barter has many advantages, it is probably best suited to areas either where the exchange takes place rapidly or where prices remain relatively stable. In industries where prices (and therefore costs) can change rapidly, it can be difficult to negotiate appropriate long-term deals, which can result in one or both parties feeling that they have been short-changed.

The other key point of barter is that contracts must be drawn up with complete precision and clarity so that both parties fully understand and agree to the nature and duration of the arrangement.

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What Is a Rating Agency? Wed, 14 Mar 2012 10:11:51 +0000 Rating agencies play a vital role in the financial markets and can impact the value of investments. Understanding what rating agencies are and how they work is essential if you plan on becoming a successful investor.

Rating agencies play a very important role in the financial markets and can impact the value of many different types of investments on a regular basis. These agencies are supposedly unbiased and not affiliated with any particular investment or company.

What Rating Agencies Do

Rating Agency Cartoon

Rating Agency Cartoon

Rating agencies are independent companies that closely examined financial instruments and issue ratings based on their findings. The ratings that they issue give investors a starting point for determining the risk associated with a particular investment. For example, rating agencies issue ratings on mutual funds and bonds so that investors can gauge how much risk they are actually taking on when investing in a security.

Rating Agencies

Some of the most well-known rating agencies in the industry are Standard & Poor’s, Fitch and Moody’s. Their ratings are featured in many different financial publications such as the Wall Street Journal and Morningstar. If you’re thinking about investing in any mutual fund or bond, you should be able to find a rating for it from one of the three main credit rating agencies.


Although the rating agencies do issue ratings on most of the popular investments, you should not take what they say as 100 percent truth. These agencies have been wrong many times before and they will inevitably be wrong again in the future. For example, before the 2008 financial crisis, they played a role in the problem by issuing strong ratings to mortgage-backed securities that held toxic mortgages. They also had the highest rating possible on Lehman Brothers just hours before it went bankrupt during the crisis. With these facts in mind, you should take any rating that they issue with a grain of salt. Their ratings are only opinions and do not necessarily tell you how safe an investment is in the market.

These ratings can also have an impact on returns. For example, bonds that are rated highly pay lower amounts of interest because they are viewed as safer investments. Other bonds with lower ratings have to pay higher interest rates to attract investors.

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What are Bad Banks? Wed, 14 Mar 2012 09:51:55 +0000 The term “bad bank” can refer to a number of different financial institutions, including both failing banks and a special kind of state-guaranteed institution for non-performing assets. The first type may be responsible for financial crises, while the second is often suggested as a solution to one. Specially-created bad banks can help restore confidence in the financial industry and get economies out of a recession.

Bad Bank Performance

When banks manage their money poorly, they can end up creating a bad financial situation, not just for themselves, but for their customers and everyone connected to those customers. In cases where multiple banks start behaving badly, they can cause problems with whole economies.

Poor lending and investing practices resulted in the economic crash of 2008, for instance. This crash affected not just the US economy, but countries all over the world, in many different markets. It also reduced consumer trust in lenders and banking.

Bad Banks for Bad Assets

The phrase “bad bank” can also refer to a bank guaranteed by the state and created to hold non-performing, or toxic, assets. In some cases, a major bank may voluntarily split into a bad bank and a good bank, placing the toxic assets in the bad portion of the business.

These assets may include delinquent loans, mortgage-backed securities and other investments that aren’t currently worth their full amount. Placing these types of assets in bad banks allows other banks to remove the bad assets from their balance sheets. This lets the original bank focus more on lending and less on non-performing assets.

A bad bank is often created in times of economic crisis, and these institutions have been used in Ireland, Sweden and other countries, but are not common in the US. When a bad bank is created as a subsection of an existing bank, it is usually allowed to fail in order to bolster business for the good bank.

Government bad banks are operated somewhat differently. The country’s treasury department provides capital for the bad assets, purchasing them from failing financial institutions. The bad bank lasts for 5 to 6 years and attempts to resolve as many of the toxic assets as possible.

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What is an Investment? Tue, 13 Mar 2012 18:19:00 +0000 Understanding investments is a basic part of learning how to control your money. An investment can take many forms, but in general, an investment is any type of item that is purchased with the intent of the item returning a profit to the buyer, either through generating income on its own and/or selling the investment.



There are millions of investments available on the market today, resulting in many people having trouble selecting the investment that is right for them. Anyone who is considering where to place their money so that they can earn a return on it should research all of their options very carefully. There are a lot of choices, but only a few of them will be right for any particular investor.

A safe investment such as a savings account or government bond is typically recommended for people who have money that they cannot afford to lose. In fact, a safe investment is a good place to put an emergency fund and/or cash that needs to be readily available for immediate bills.

An example of a higher-risk investment is a mutual fund. These funds are conglomerations of many different types of stocks, allowing a person to make an investment in the stock market without having to choose just one or two companies. Despite this, however, a mutual fund is subject to large swings in value. In fact, it is not uncommon for its value to rise or fall by over ten percent on a weekly basis.

Finally, there are investments that are considered to be very high risk. These include buying and flipping real estate, purchasing art, and other so-called exotic investments. While there are thousands of these types of investments, they are considered to be very risky because of the high potential for an investor to lose all of his or her money.

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What is a Loan? Sun, 11 Mar 2012 15:23:32 +0000 Perhaps you are wondering how to finance a new car or home. Or maybe you want to go back to school, but just don’t have the money. Or an emergency situation pops up, and you need a little bit of extra cash in a pinch. Friends and family might suggest that you take out loans. But what exactly are loans? Where do you get loans, and how do you know if you meet the conditions required get approved for a loan? These are common questions that can be answered with some basic information.



A loan is any amount of money that is borrowed temporarily, and returned with the fulfillment of additional agreed upon terms. For example, lenders expect that a loan is not only paid back in full, but that it also will be paid back with an additional fee or with interest. Lenders are typically banks, private companies, or other financial institutions offering short-term loans.

Some lenders offer flat fees based on the amount of money borrowed and the number of days in which the money will be paid back. Other lenders charge an interest rate, which is a percentage of the original loan amount that will be paid in addition to the original amount. Over time, interest accrues, therefore a lower interest rate is more favorable for a borrower.

When requesting a loan, most lenders have some standard conditions required for approval. One common condition is a reputable credit score or credit report. Lenders may be hesitant to offer loans to people with records of delinquent payments, because this is a bigger risk than lending to someone whose record shows consistent payments. Credit histories can sometimes cause the interest rate to increase for loans. Other times, very poor credit situations can cause denial of loans.

Other lenders have more minimal conditions needed for loan approval. For example, instead of basing loan decisions primarily on credit history, some lenders require proof of employment as the primary requirement for a loan approval. Payday advances and cash advances are financial institutions that typically use this criteria in their lending process.

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Wall Street – The Symbol of Finance Tue, 28 Feb 2012 15:21:53 +0000 The Wall Street has become a symbol of international finance, as evidenced by the Occupy Wall Street movement, among others. This eight-block-long street runs from Broadway to South Street along the East River in the lower part of Manhattan. It’s home to the New York Stock Exchange, one of the most influential financial markets in the world, and is a major financial center. For better or for worse, many people regard it as interchangeable with the idea of big business.

Wall Street History

Wall Street Sign

Wall Street Sign

This street began as a minor street in Dutch New Amsterdam, and was the scene of President George Washington’s inauguration in 1789. It was originally a residential district, but business moved in during the 19th century.

By 1889, it was an important financial center. The first American stock report, “Customers’ Afternoon Letter,” renamed itself as “The Wall Street Journal,” and many major financial groups kept their offices there. It was one of the first locations for modern skyscraper construction. By the 1920s, Wall Street was synonymous with international finance. In the 21st century, this location is home to one of the biggest financial centers in the world.


The stock market has a huge influence on finances worldwide. A bad day in this market can cause other markets to plunge suddenly, as evidenced by many recessions throughout the 20th century. The market’s economy also has a significant effect on the lives of people in New York City, since it is a major employer and financial influence.

As of 2008, it was estimated that Wall Street was responsible for about a quarter of all the personal income earned in New York City, as well as about one tenth of the city’s tax revenues. The financial services industry, based out of Wall Street, accounts for less a twentieth of the jobs in New York, but pays more than a fifth of its wages.

Elitism of the Wall Street

Because it is so strongly associated with large financial firms and hugely successful businesspeople, Wall Street is also often connected with elitism. Wall Street is considered synonymous with corporate America and financial influences, which are sometimes thought to be in opposition to small or locally-owned businesses, referred to as “Main Street.”

Wall Street is a complicated location, associated with both prosperity and power as well as elitism and corruption. Regardless of how individuals think about it, however, it remains one of the most powerful and influential financial markets on the planet.

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