A financial system is a system that allows the exchange of funds between

financial market participants There are two basic financial market participant distinctions, investor vs. speculator and institutional vs. retail. Action in financial markets by central banks is usually regarded as intervention rather than participation. Supply side vs ...

such as

lenders A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...

investor An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Typ ...

s, and

borrower A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this ...

s. Financial systems operate at national and global levels. Financial institutions consist of complex, closely related services, markets, and institutions intended to provide an efficient and regular linkage between investors and borrowers. In other words, financial systems can be known wherever there exists the exchange of a financial medium (money) while there is a reallocation of funds into needy areas (financial markets, business firms, banks) to utilize the potential of ideal money and place it in use to get benefits out of it. This whole mechanism is known as a financial system. Money, credit, and finance are used as media of exchange in financial systems. They serve as a medium of known value for which goods and

services Service may refer to: Activities * Administrative service, a required part of the workload of university faculty * Civil service, the body of employees of a government * Community service, volunteer service for the benefit of a community or a p ...

can be exchanged as an alternative to

barter In trade, barter (derived from ''baretor'') is a system of exchange in which participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money. Economists distingu ...

ing. A modern financial system may include

banks A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

(public sector or private sector), financial markets, financial instruments, and financial services. Financial systems allow funds to be allocated, invested, or moved between economic sectors, and they enable individuals and companies to share the associated risks.

The components of a financial system

There are mainly four components of the financial system: # Financial markets - the market place where buyers and sellers interact with each other and participate in the trading of bonds, shares and other assets are called financial markets. # Financial assets - the products which are traded in the financial markets are called financial assets. Based on different requirements and credit seekers, the securities in the market also differ from each others. # Financial institutions - financial institutions are acting as a mediator between the investors and borrowers. They provide financial services for members and clients. It is also termed as financial intermediaries because they act as middlemen between the savers and borrowers. The investor's savings are mobilized either directly or indirectly via the financial markets. They offer services to organisations who want to raise funds from markets and take care of financial assets (deposits, securities, loan, etc). # Financial services - services provided by assets management and liabilities management companies. They help to get the required funds and also make sure that they are efficiently invested. (eg. banking services, insurance services and investment services)

Banks

Bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

s are

financial intermediaries A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds ...

that lend money to borrowers to generate revenue and accept deposits . They are typically regulated heavily, as they provide market stability and consumer protection. Banks include: *Public banks * Commercial banks *

Central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...

s *Cooperative banks *State-managed cooperative banks *State-managed land development banks

Non-bank financial institutions

Non-bank financial institutions facilitate financial services like investment,

risk pool A “Risk pool” is a form of risk management that is mostly practiced by insurance companies, which come together to form a pool to provide protection to insurance companies against catastrophic risks such as floods or earthquakes. The term is als ...

ing, and market brokering. They generally do not have full banking licenses. Non-bank financial institutions include: * Finance and loan companies * Insurance companies * Mutual funds

Financial markets

Financial markets are markets in which securities,

commodities In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a co ...

, and fungible items are traded at prices representing supply and demand. The term "market" typically means the institution of aggregate exchanges of possible buyers and sellers of such items.

Primary markets

The primary market (or initial market) generally refers to new issues of stocks, bonds, or other financial instruments. The primary market is divided in two segment, the money market and the capital market.

Secondary markets

The secondary market refers to transactions in financial instruments that were previously issued.

Financial instruments

Financial instruments are

tradable Tradability is the property of a good or service that can be sold in another location distant from where it was produced. A good that is not tradable is called non-tradable. Different goods have differing levels of tradability: the higher the co ...

financial

asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...

s of any kind. They include money, evidence of ownership interest in an entity, and contracts.

Derivative instruments

A derivative instrument is a contract that derives its value from one or more underlying entities (including an asset, index, or

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...

Financial services

Financial services are offered by a large number of businesses that encompass the finance industry. These include credit unions,

bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the o ...

companies, insurance companies, stock brokerages, and investment funds.

References

{{DEFAULTSORT:Financial System Banking