Financial Markets
Financial Markets: An economy’s financial system provides a mechanism for taking money from those who possess it and giving it to people who can use it most effectively. Therefore, a financial system that distributes money to those people and for those causes that will provide the best returns achieves the optimal allocation of economic resources.
The financial system is made up of the goods and services offered by financial institutions, such as banks, insurance firms, pension funds, structured exchanges, and the numerous other businesses that help to make transactions between people and businesses easier. A financial institution or several of them handle almost all economic transactions. They provide financial products like stocks and bonds, pay interest on bank deposits, make loans to reputable borrowers, and develop and operate the payment systems that are used in contemporary economies.
The following core goals of any contemporary financial system serve as the foundation for these financial products and services:
- Establishing a payment mechanism
- To make time worth money
To provide goods and services that reduce financial risk or reward taking risks in order to achieve desired goals
to gather and spread knowledge that enables for the most effective use of economic resources
to establish and maintain financial markets that offer prices that reflect the performance of investments, determine how resources are allocated moving forward, and uphold market-based economic stability
Parts of the Financial System
A system that allows money to be transferred between investors and borrowers is referred to as a financial system. An international, regional, or organisational level definition of a financial system is possible. The word “system” in “Financial System” refers to a collection of intricately intertwined economic institutions, agents, processes, markets, transactions, claims, and liabilities. The financial system is made up of five parts, which are described below:
Institutions of Finance
Making investors and borrowers meet guarantees the financial system runs well. Through the employment of various financial instruments and the assistance of several financial service providers, they directly or indirectly mobilise investor savings through financial markets. They can be divided into four groups: intermediates, non-intermediaries, regulators, and others. They provide services to businesses looking for guidance on a variety of issues, from restructuring to diversification plans. They provide a full range of services to businesses looking to raise capital from the market and manage their financial assets, such as deposits, securities, loans, etc.
Monetary markets
The market where financial assets are created or moved is known as a financial market. A financial transaction entails the creation or transfer of a financial asset as opposed to a real transaction, which involves exchanging money for actual products or services. A claim to the payment of an amount of money in the future and/or a recurring payment in the form of interest or dividend is represented by financial assets or financial instruments. Below are the four elements of the financial market:
A) Money Market
A wholesale debt market for short-term, low-risk instruments, the money market is very liquid. In this market, funds are offered for terms ranging from one day to one year. Generally speaking, the government, banks, and financial organisations control this market.
B) Capital Market
Long-term investments are financed through the capital market. The duration of the transactions in this market will be longer than a year.
C) Market for Foreign Exchange
The foreign exchange market deals with the multicurrency needs that are satisfied by currency exchange. The transfer of funds occurs in this market based on the applicable exchange rate. One of the most advanced and integrated markets on the planet is this one.
D) Credit Market
Banks, financial institutions, and nonbank financial institutions (NBFCs) provide short-, medium-, and long-term loans to businesses and individuals through the credit market.
Monetary instruments
This is a crucial part of the financial system. Financial assets, securities, and other kinds of financial instruments are the goods that are traded on a financial market. Since the needs of investors and those looking for credit varied, there are many different securities available on the market. They represent a claim on the future repayment of principal or the regular payment of an amount, such as interest or dividends. Examples include equity shares, bonds, and debentures.
Monetary services
It is made up of products and services offered by Asset Management and Liability Management Businesses. They assist in obtaining the necessary cash and ensure that they are invested effectively. They offer their expertise up to the stage of servicing lenders and help to decide the financing combination. They support lending and investing, making and authorizing payments and settlements, buying and selling assets, managing risk exposures in financial markets, and borrowing.
Leasing firms, mutual fund companies, merchant bankers, portfolio managers, bill discounting and acceptance businesses are a few examples. Numerous expert services are provided by the financial services industry, including credit rating, venture capital funding, mutual funds, merchant banking, depository services, book building, etc. Through the use of financial instruments, financial markets and institutions contribute to the operation of the financial system. They require a number of financial services in order to perform the tasks assigned to them. As a result, financial services are ranked as the financial system’s fourth most important element.
Money:
It is seen as anything that is accepted in exchange for goods and services or as payment for a debt. It serves as a store of value and a means of exchange. It makes it simpler to swap various commodities and services for cash.