WHAT IS FINANCIAL MARKETS?

Financial markets - in which funds are transferred from people who have an excess of
available funds to people who have shortage of funds.

 The existence of financial market is beneficial even if someone borrows for a purpose
other than increasing production in a business.

 Financial markets are thus essential to promoting economic efficiency

 FUNCTION OF FINANCIAL MARKETS
Financial markets perform the essential economic function of channeling
funds from households, firms, and governments that have saved surplus
funds by spending less than their income to those that have shortage of
funds because they wish to spend more than their income.

Why is channeling of funds from savers to spenders so important to the

economy?

It is because people who save are frequently not the same people have
profitable investment opportunities available to them, entrepreneurs.
FLOWS OF FUNDS THROUGH THE FINANCIAL
SYSTEM

Indirect finance

Financial
Funds intermedia Funds
-ries

Funds
Borrower-
Lenders-Savers Spenders
1. Households Financial 1. Business firms
2. Business Firms Funds Markets Funds 2. Government
3. Government 3. Households
4. Foreigners 4. Foreigners

Direct finance
WHAT IS THE DIFFERENCE BETWEEN THE INDIRECT FINANCE AND DIRECT FINANCE
?

Indirect finance – is the method of financing where borrowers borrow

funds directly from the financial market without using a third party
service, such as financial intermediary.

Direct finance – is the method of financing where borrowers borrow

funds from the financial market through financial intermediary.
THANK YOU