Complexities of the U.S. Financial System - Essay Example

The paper "Complexities of the U.S. Financial System" is a brilliant example of a term paper on finance and accounting. The financial markets in the United States play an intricate role in the economy, businesses, and individuals. “Financial markets help efficiently direct the flow of savings and investment in the economy in ways that facilitate the accumulation of capital and the production of goods and services” (Frbsf, 2005). Some of the instruments included in the financial markets include common stocks, preferred stocks, bonds, CD's, derivatives, and options. The most commonly utilized financial instrument is common stocks. Common stocks allow companies the ability to raise capital. Common stocks are sold in the open market. New companies in the market are able to raise money through initial public offerings (IPO), while established companies can raise money through secondary offerings. The second most commonly used instrument available bonds. Bonds are often referred too as commercial paper. A bond is a debt instrument sold in blocks of $1,000 that offers its buyers interest earnings every year. Upon maturity of the bond, the bondholder receives his principal back.

            The individuals within an economy benefit a lot from the existence of financial markets. The financial markets serve the role of being an investment mechanism for people who often used them as part of a person's retirement plan. When an individual buys common stocks the person gains ownership in the corporation. Common stocks appreciate over time which allows individuals the ability to earn capital gains. A common stock investor can also earn money through the payment of dividends. A con of common stocks is that they are the riskier type of investment an investor can make. The safest type of common stock an investor can select is blue-chip stocks. In order for an investor in the financial markets to minimize risk and optimize earnings, they must utilize a diversification strategy. Diversification implies investing money in different types of instruments. Putting all your money in one company is a high-risk proposition.

            The U.S. Federal Reserve is considered the central bank of the United States of America. Four of the  primary roles of the Federal Reserve are illustrated below:

• Influence money and credit conditions in the economy
• Supervise and regulate the banking industry
• Maintain stability in the financial system and contain systematic risk
• Operate and overseeing the nation's payment systems

(Federalreserve, 2014).

The Federal Reserve is very effective at controlling the flow of money within the nation and at ensuring that the banking industry operates efficiently looking out for the best interest of the customers.

The Federal Reserve chairman is the head of the central banking system of the United States. His leadership and guidance are imperative for the success of the Federal Reserve. The chairman must report twice a year the progress of the Federal Reserve to Congress. The Federal Reserve board plays a major role in the supervision and regulation of the U.S. banking system and bank holding companies. The board is responsible for the supervision of approximately 900 state member banks and 5,000 bank holding companies (Dummies, 2014).

            Interest rates affect and influence the economy in a variety of ways. When interest rates go down the real estate market booms because people are able to buy homes at a cheaper rate. Lower interest rate affects corporations positively because they are able to obtain funds at a cheaper rate. The interest rate affects spending. A rise in interest rates decreases spending in the economy. Changes in interest rates have global repercussions. Global investors are impacted by changes in interest rates because these players tend to buy more bonds when interest rates go up since the investment becomes more attractive.