What are Financial Transactions?
Financial transactions are any type of conversion of cash or goods between people or other organizations. Financial transactions are important because they are a way of storing value in a person, company or organization. Financial transactions can be done by the transfer of money between two people directly. According to Fintalent’s financial transactions consultants, it can also be done electronically by a bank transfer or over an ATM machine. Financial transactions are important because they affect how people view their wealth and what they value in life.
Financial transactions are how people store value. When a person saves up money, they are doing a financial transaction. Their money is stored in the bank and then other people can deposit those same dollars into the same account or withdraw them out of the account if they have that person’s banking information. This is an example of how financial transactions are used to store value in an individual or organization.
Financial transactions affect how people think about wealth and what they value in life. People that do not make as much money can also go out and buy things like cars, homes, boats, etc.. All of these things use money, which is why they are financial transactions.
There are many types of transactions that have emerged in finance over time: payments, securities offerings and exchanges / secondary markets, collections and recoveries among others. The types of transactions that we focus on in this module are:
- Transaction: A financial transaction is a payment made to an account for a specific amount of money. It can take the form of a transfer by a bank from one account to another or it can be made through electronic means (e.g., through smart phones, online payments, debit cards, etc.) and may involve both cash and non-cash assets (e.g., stock certificates).
- Financial transaction: A financial transaction does not necessarily have to have cash involved and can be conducted without it (see below) as long as other assets are involved and financially significant in the same amount.
- Payment: A payment is an action in which a person (the payer) delivers money or other financial assets to a recipient in accordance with an obligation.
- Payment system: A payment system is any mechanism for conveying cash (money), tokens (as in tokens used as fare media on public transport), or other media of exchange from one party to another. The term also encompasses the set of procedures, management, policies and technologies that facilitate the transfer of funds between individuals and organizations.
- Cash transactions: A cash transaction refers to one where at least one of the two parties involved uses physical cash – coins and banknotes – to settle accounts.
- Electronic payments: An electronic payment is one of a number of ways of transferring money or a financial asset between two parties electronically, i.e., without any physical movement of cash.
- A bank transfer (also known as wire transfer or ACH transfer in the US) is an electronic funds transfer from one bank account to another. The funds are electronically transferred across international financial networks, governed by international banking rules established by the Committee on Payments and Market Infrastructure (CPMI) and the International Organization of Securities Commissions (IOSCO). These are part of what is known as the Basel framework and are being incorporated into national laws.
- A bank account is a facility offered by a bank to financial institutions and individuals that enables the customer to make payments and receive money into or withdraw from the account.
- A payment instruction is an instruction given to a bank by an individual or entity requesting that a pre-agreed payment be made from one account to another.
- A corporate action: A corporate action refers to the direct transfer of value (e.g., shares, bonds) as distinct from related changes in equity or capital in a company, for example through options and warrants, such as an up-listing or downlisting.
- A securities transaction: A securities transaction is a trade in either shares or bonds between investors, such as an IPO (initial public offering), secondary market (preliminary trading), and the trading of unlisted shares.
- A swap: A swap is two parties agreeing to exchange financial instruments for a predetermined period of time without any actual transfer taking place. It does not involve the transfer of cash between parties. Contracts for Difference (CFDs) are an example of this type of contract since they are exchanged with no cash actually changing hands.
- A futures contract: A futures contract is a standardized forward contract between two parties. It is an agreement wherein one party agrees to take delivery of a specified amount of a specified commodity at some point in the future, with reference to the prevailing market price at that time. The second party agrees to pay an agreed fee for holding the specified amount of the specified commodity until the delivery date arrives. Due to its standardized nature and its ability to be traded over-the-counter, contracts for futures contracts have become increasingly popular in recent years. Some other terms commonly used are forwards, forwards-on-yield, forward exchange rate agreement, and forward exchange trade.
- An option: An option is a contract whose main feature is that the buyer has the right, but not the obligation, to purchase (or sell) under predetermined terms at a specified price, on or before a certain date. Different types of options include:
Financial Transactions: Summary
Financial transactions are any type of conversion of cash or goods between people or other organizations. It is the process of moving money from one person to another, and sometimes even to non-human organizations. People often associate certain values with financial transaction, such as corporate profits and personal purchases alike. It is important because without it, people would not be able to keep or multiply their money. Financial transactions are how people store value. When a person saves up money, they are doing a financial transaction. Their money is stored in the bank and then other people can deposit those same dollars into the same account or withdraw them out of the account if they have that person’s banking information. This is an example of how financial transactions are used to store value in an individual or organization. Financial transactions affect how people think about wealth and what they value in life. People that do not make as much money can also go out and buy things like cars, homes, boats, etc.. All of these things use money, which is why they are financial transactions.
