Diving into financial management
I have basically finished all of my mandatory courses at my home university and I decided to dive into new subject areas during my studies in Mataró. Although my primary subject is software development, I thought it would be useful to take some business related courses as well. One of them is Financial Management, which I am taking this term. In the first unit, we went through topics such as the financial role of the company, financial markets, assets, and spending units.
Financial market and assets
The financial market can be described as a place or mechanism where financial assets are bought and sold and where their prices are determined. Financial assets are non-physical assets whose value comes from a contractual claim rather than from physical worth, like gold or land.
Examples of financial assets include:
- Stocks (equity): ownership shares in a company
- Bonds (debt): loans to a company or a government
- Bank deposits: cash deposits held at a bank
- Derivatives: assets whose value is derived from an underlying asset (such as futures or options)
There are basically two main factors that determine the value and expected return of a financial asset. The first is supply and demand. In simple terms, lower supply combined with higher demand leads to higher asset values, while higher supply and lower demand lead to lower values. The second factor is risk. Higher risk is associated with a greater possibility of higher returns, while lower risk usually implies lower expected returns.
Spending units
The financial market connects two kinds of economic agents. Surplus spending units, which earn more than they spend and deficit spending units, which spend more than they earn during a given period. To finance their deficits, deficit units may issue debt or equity. In this setup, surplus units act as buyers of financial assets, while deficit units are sellers. Overall, spending units can include the public sector, companies, households and even other countries or international organizations.
Here’s a simple example. A new company may need funding, while an investor has excess funds and seeks future returns. These two units meet in the financial market. If the transfer of funds happens directly between them, it is called a direct transaction. Alternatively, the transaction can be indirect, meaning that a financial intermediary, such as a bank, stands between the buyer and the seller. In that case, funds flow from the buyer to the bank and then to the seller as a loan, for example. The seller provides financial assets to the bank and the buyer earns interest from the bank.
Main functions of financial market
Below are some of the main functions that financial markets perform.
- connect the economic units that supply and demand funds
- assign prices to financial products
- facilitate the liquidity of assets and economy in general
- reduce the terms and intermediate costs
More broadly, we can talk about the financial system, which consists of institutions, markets, and instruments that facilitate the flow of funds from savers to borrowers. Its main goal is to efficiently allocate financial resources and risks within the economy.
Classification of financial markets
Financial markets can be classified in several ways. Below are some common classifications with brief explanations.
-
Asset transformation
- A bank transforms a person’s bank deposit into a loan for someone else
-
Market structure (how sellers and buyers meet)
- Direct search: trying to find each other directly (inefficient and slow)
- Broker market: agent matches seller and buyer (e.g. eToro, Nordnet, broker doesn’t own the assets)
- Dealer market: participants trade with a market maker who owns the assets and takes risk (e.g. NASDAQ, JPMorgan)
- Auction market: all orders are centralized and matched automatically (e.g. NYSE)
-
Degree of formalisation
- Organized (e.g. NYSE)
- Over-the-counter (OTC)
-
Term of the assets
- Spot contract: immediate delivery and payment, the spot price is the current price
- Forward / futures contract: agreements to buy or sell an asset at a specified price on a future date
-
Phase of negotiation
- Primary market: e.g. company itself issues shares to investors, for example when listing to stock market
- Secondary market: e.g. investors buy and sell stocks, company gets zero
-
Asset type
- Money market: short term debpt, <1 year
- Capital market: stock marker, bond market
- Foreign exchange market: e.g. Forex, currencies
- Commodities market: raw materials
- Cryptocurrency market: digital assets
- Derivatives market: futures and options
Charasteristics of Financial Market
These characteristics can be seen as quality indicators of a financial market.
-
Transparency: how visible and accessible information is, such as real-time prices and company disclosures
-
Freedom: how prices are determined, whether by supply and demand or through controls and interventions
-
Depth: the number of buyers and sellers in the market; deeper markets tend to be more stable, while shallow markets experience sharper price movements
-
Efficiency: how quickly and fully information is reflected in prices; insider information can reduce market efficiency
The goal of financial management in company
At its core, financial management aims to maximize the value of the company. Generally this means maximizing shareholder value, as shareholders are the residual owners who bear the highest risk. However, a broader and more modern view also considers stakeholder value, taking into account employees, customers, suppliers and society to support long-term sustainability. These objectives influence key financial decisions such as managing the cost of capital, maintaining financial stability through a balanced capital structure and addressing agency conflicts between managers and shareholders. In practice, the financial manager’s role is reflected in three main decision areas which are investment decisions (where to allocate capital), financing decisions (how to fund those investments), and dividend decisions (how to distribute or retain earnings).
Published 1/13/2026 by Otto