WHY STUDY

FINANCIAL MARKETS
AND INSTITUTIONS?
Chapter #1
By;
Sajad Ahmad

What is Financial Market?

All institutions and procedures
for bringing buyers and sellers of
financial instruments together is
called financial market.
Financial Markets are the markets in

which funds are transferred from

people who have an excess of available
funds to people who have a shortage
Financial Markets are important in
channeling funds from people who do
not have a productive use for them to
those who do

TYPES OF FINANCIAL
MARKETS
DEBT MARKET
STOCK MARKET
FORIEGN EXCHANGE MARKET

DEBT MARKETS and

INTEREST RATES
Debt Markets, also often referred to generally

as the Bond Markets. are especially important

to economic activity because they enable
corporations/ governments to borrow to finance
their activities
Bond Markets are the markets where interest
rates are determined
A bond is a debt security that promises to make
payments for a specified period of time
A security ( also called a financial instrument )
is a claim on the issuer's future income or
assets

THE INTEREST RATES

The interest rate is the cost of borrowing or the

price paid for the rental of funds which is

usually expressed as a percentage
Interest Rates are important on a number of
levels
On a personal level, high interest rates could
deter you from buying a house or a car because
the cost of financing it would be high
Conversely, high interest rates could encourage
you to save because you can earn more
interest income by putting aside some of your
earnings as savings

THE STOCK MARKETS

The Stock Markets are the markets in which

claims on the assets and earnings of

corporations ( share of stock ) are traded
A common stock ( typically just called a stock)
is a security that represents a share of
ownership in a corporation
It is a claim on the earnings and assets of the
corporation
Issuing stock and selling it to the public is a way
for corporations to raise funds to finance their
activities

THE FORIEGN EXCHANGE

MARKET
For funds to be transferred from one country to

another, they have to be converted from the

currency in the country of origin ( say $ ) into
the currency of the country they are going to
( say Euros )
The foreign exchange market is where this
conversion takes place
It is where the foreign exchange rate, the price
of one country's currency in terms of another, is
determined

Why Study Financial Markets?

Financial markets, such as bond and stock
markets, are crucial in our economy.

These markets channel funds from

savers to investors, thereby promoting
economic efficiency.

Market activity affects personal wealth,

the behavior of business firms, and
economy as a whole

Why Study Financial Markets?

Well functioning financial markets, such

as the bond market, stock market, and

foreign exchange market, are key factors
in producing high economic growth.
We will briefly examine each of these

markets;

WHY STUDY FINANCIAL

INSTITUTIONS
Financial Institutions are the institutions

that make financial markets work

Financial Institutions are the
intermediaries, that take funds from the
people who save and lend it to people
who have productive investment
opportunities.

STRUCTURE OF THE
FINANCIAL SYSTEM
If you wanted to make a loan to IBM or

General Motors or any other company ,

for example, you would not go directly to
the president of the company and offer a
loan. Instead you would lend it to such
companies indirectly through financial
intermediaries institutions such as
commercial banks, insurance
companies, leasing companies etc

CENTRAL BANK / COMMERCIAL

BANKS/ OTHER INSTITUTIONS
Central Bank, the government agency

responsible for the conduct of monetary

policy, which in Afghanistan is the Da
Afghanistan Bank.
Commercial Banks, are the financial
institutions, that accept deposits and
make loans
Other financial institutions include
Leasing Companies, Insurance
Companies, etc

Why Study Financial

Institutions?
We will also spend considerable time
discussing financial institutions. These
institutions play a crucial role in improving the
efficiency of the economy. We will look at:
1. Central Banks and the Conduct of

Monetary Policy

2. Structure of the Financial System

Helps get funds from savers to investors

Why Study Financial

Institutions?
3.

Banks and Other Financial Institutions

Includes the role of insurance companies,

mutual funds, pension funds, etc.

4.

Financial Innovation

Focusing on the improvements in technology

and its impact on how financial products are
delivered

5.

Managing Risk in Financial Institutions

Focusing on risk management in the

financial institution.

END OF CHAPTER #1