Savings are initially what we call money (currency).
If savers keep their savings at home or in a safe and don't invest them, they are not fulfilling their role of financing the economy. Their savings will also lose value because of inflation.
On the other hand, if savers entrust their savings to the financial system, they will not only help to finance the economy, but they will also receive an income (a return) that will enable them to maintain or increase the value of their savings. The financial system converts savings into financial products.
In order to attract savings, the financial system issues products such as:
- A current account or term deposit;
- A retirement savings plan;
- Units in investment funds.
These resources are then invested through other financial products, such as:
- A 30-year home loan;
- A company's bond issue;
- A project finance loan to the state to build a new motorway.
The financial system operates in the financial markets. These are markets where financial products are bought and sold.
Financial markets can be divided into money markets and capital markets.