Introduction to Financial Systems

and Financial Markets

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- Consists of a variety of institutions, markets and
instruments related in a systematic manner and
provide the principal means by which savings are
transformed into investments.
- The system that allows the transfer of money
between savers and borrowers.
- is a set of institutions, such as banks, insurance companies and
stock exchanges that permit the exchange of funds.
- Exist on firm, regional, and global levels. Borrowers, lenders,
and investors exchange current funds to finance projects, either
for consumption or productive investments, and to pursue a
return on their financial assets.
- The financial system also includes sets of rules and practices that
borrowers and lenders use to decide which projects get financed,
Key Takeaways:
01 A financial system is a set of global,
regional, or firm-specific institutions
practices used to facilitate the exchange of
funds.
02 Financial systems can be organized using
market principles, central planning, or a
hybrid of both.
03 Institutions within a financial system include
everything from banks to stock exchanges
and government.
-STOCK refer
MARKETS/ broadly to any
EQUITY MARKET/ SHAREmarketplace
MARKET are where the trading of
where individual and institutional investors come together to buy and
securities
sell shares occurs, including the stock market, bond
in a public venue.
BOND MARKET often called the DEBT MARKET, FIXED-INCOME
market,
MARKET, or CREDIT MARKETforex market,
– It is a marketplace derivatives market, and
where investors
buy debt securities that are brought to the market by either
commodities.
government entities or corporations.
FOREIGN EXCHANGE MARKET – is an over the counter (OTC)
global marketplace that determines the exchange rate for currencies
-aroundIttheisworld.a Participants
market formarkets
in these creation
can buy, sell, and exchange of financial
exchange, and speculate on the relative exchange rates of various
assets.
currency pairs.
DERIVATIVES MARKET – refers to the financial market of financial
instruments such as future contracts or options.
COMMODITY MARKET – is a marketplace for buying, selling, and
trading raw materials or primary products.
 Financial markets play a vital role in facilitating the
smooth operation of capitalist economies by allocating
resources and creating liquidity for businesses
and entrepreneurs. The markets make it easy for buyers
and sellers to trade their financial holdings.
Financial markets create securities products that provide
a return for those who have excess funds
(Investors/lenders) and make these funds available to
those who need additional money (borrowers).
On the basis of maturity of claims
 CAPITAL MARKET MONEY MARKET
DEFINITION Market where long-term securities Market where short-term borrowing
are issued and traded lending of securities takes place
MATURITY One year or more, may even be Up to one year
indefinite
LIQUIDITY Comparatively lower High liquidity

RISK FACTOR Comparatively higher Lower risk

RETURN ON Comparatively higher Lower than that of capital markets

INVESTMENT

CREDIT Treasury bills Government securities

INSTRUMENTS Commercial papers Shares
Municipal Notes Bonds
Money funds Debentures
Repurchase agreements Currencies
Swaps Derivatives
Capital Markets are financial markets for the buying
and selling of long-term debt or equity-backed
securities. The primary role of the capital market is to
raise long-term funds for governments, banks, and
corporations while providing a platform for the
trading of securities.
Securities that are traded in Capital Market include
stocks, bonds, debentures, etc. The maturity period
of securities in Capital Market is more than one
year or irredeemable (i.e. without maturity).
Capital Market is divided into two major
categories: Primary and Secondary Market.
 Money Market is a market for short-term
financial assets that can be turned over
quickly at a low cost. A short-term financial
asset in this context may be construed as any
financial asset which can be quickly
converted into money with minimum
transaction cost within a period of one year.

Trade Credit, Commercial Paper, Certificate of Deposit, Treasury Bills

are some examples of the short-term debt instruments. Money Market
securities are very liquid in nature, and hence, their redemption
period is restricted to one year. Although the return of investment in
money market securities are low compared to Capital Market
securities, they are comparatively safer than Capital Market securities.
Trading in Money Market takes place off the exchange, i.e. Over the
Counter (OTC) between two parties.
On the basis of seasoning of claims
PRIMARY MARKET
The market where a company raises capital for the first time is known as
the primary market. Companies issue IPO (initial public offering) in the
primary market only. The market offers an opportunity for investors to
buy securities directly from the issuing company. By buying securities or
stock from the primary market, investors help companies to raise
capital. So, the overall capital that the company has on the balance
sheet includes the contribution from the investors in the primary market.
SECONDARY MARKET
Shares that the company issued in the primary market get listed on
the secondary market. Secondary markets allow retail investors to
invest in the securities and earn a profit. Investors in the secondary
market trade between themselves, and there is minimum or no
interface of the issuing company.
On the basis of structure of arrangements