I.

INTRODUCTION:

Financial system is a network of financial system is a network of financial

institutions, financial markets, financial instruments and financial services to

facilitate the transfer of funds. It defined as a set of markets and institutions to

facilitate the exchange of assets and risks.

Financial Market is a broad term used to describe any forum where buyers and

sellers meet to trade assets, usually financial securities such as stocks, bonds,

currencies, options, and derivatives. Financial markets facilitate the interaction

between those who need capital with those who have capital to invest.

The markets are where businesses go to raise cash to grow. It’s where companies

reduce risks and investors make money. Simply put, businesses and investors can

go to financial markets to raise money to grow their business and to make more

money, respectively.

Repurchases reduce the number of outstanding shares, which is something that

investors often feel will drive up share prices. This assumes demand for the shares

will not be diminished by the action.

II. BODY/DISCUSSION
 This report addresses several important concepts in Financial System and

Financial Market. The earlier highlights the features and functions of financial

system, its components, institutions, services, and financial instruments. The latter

covers the functions and types of financial market.

Features of Financial System

 Financial system provides an ideal linkage between depositors and investors ,

thus encouraging both savings and investments

 Financial system provides an ideal linkage between depositors and investors ,

thus encouraging both savings and investments

 Financial system provides an ideal linkage between depositors and investors ,

thus encouraging both savings and investments

 Financial system provides an ideal linkage between depositors and investors ,

thus encouraging both savings and investments

The basics of the Financial System

Participants in the Financial System

 Households : Net savers

 Non-financial corporations: Net users (borrowers).

 Governments: Net borrowers

 Financial Corporation : Slightly net borrower, but almost breakeven

Functions of Financial System

Capital Transfer in a Financial System (from savers to borrowers)

 Direct Transfer - is also called a trustee-to-trustee transfer since the

individual does not receive the money, but instead, the two financial

institutions facilitate the transfer on behalf of the employee.

 Indirect Transfer - involve an intermediary. An example of this type of

transfer is purchasing stocks through a stock broker or investing through an

exchange. The money is not provided directly to the corporation but instead

runs through an intermediary.

Components of Financial System

 Financial Institution – are those organizations that are involved in

providing various types of financial services to their customers. The

financial institutions are controlled and supervised by the rules and

regulations delineated by the government authorities. These are the

various financial institutions: banks, stockbrokerage firms, credit unions

and insurance companies.

 Financial Services - are a broad range of more specific activities such

as banking, investing, and insurance , mortgage services, credit rating

services and many more.

Some of the companies that provide financial services:

Banks - one of the biggest financial services companies of the world.

Services include depository services, lending services, credit card facilities

 and more. These services are provided both the individuals and the

commercial sector.

Insurance Companies - provide the clients with risk coverage services.

These services are designed to cover a number of risks that are related to

an individual’s life, property and many more.

Credit Rating Agencies - are those firms that evaluate different types of

financial services companies. These rating are based on on a number of

factors like the kind of services, risk factors involved with the services,

customer facilitation and more.

 Financial Instruments - is a legal document identified by cheques, drafts,

bonds, shares, bill of exchange, futures o options contracts etc. , which

has a monetary value . The agreement is signed between two parties

regarding payment of money with specific conditions. Categories of

financial instruments are equity based, debt based and foreign exchange

instruments.

Types of Financial Instruments

 Mutual Funds - it is an investment scheme in which group of people

collectively invests funds with a pre determined objective

 Bonds - are debt based financial instruments, bearing interest on

maturity.
  Cash Equivalents - the name itself suggests that this is the most liquid

investment option. These are the assets that can readily converted into

cash.

 Deposits - These are investment avenues where surplus funds are

invested in banks or post offices

Functions of the Markets

The role of financial markets in the success and strength of an economy cannot be

underestimated. Here are four important functions of financial markets:

1. Utilize Savings

As mentioned in the example above, a savings account that has money in it should

not just let that money sit in the vault. Thus, financial markets like banks open it up

to individuals and companies that need a home loan, student loan, or business loan.

The financial markets initiate the proper utilization of individual savings to generate

profit by investing it in the right place.

2. Determines the price of securities

Investors aim to make profits from their securities. However, unlike goods and

services whose price is determined by the law of supply and demand, prices of

securities are determined by financial markets.

3. Provide liquidity to financial assets

Buyers and sellers can decide to trade their securities anytime. They can use

financial markets to sell their securities or make investments as they desire.

The financial market facilitates the quick conversion of securities or commodities into

cash as and when required by the investor.

4. Reduce Transaction Cost

In financial markets, various types of information regarding securities can be

acquired without the need to spend.

Since the information of the financial instruments or assets is available free of cost

on the financial markets, it lowers the cost of acquisition and selling of the

securities.

Types of Financial Markets

1. Stock Markets
These are venues where companies list their shares, which are bought and sold by

traders and investors. Stock markets, or equities markets, are used by companies to

raise capital and by investors to search for returns.

Stocks are forms of ownership of a public corporation that are sold to investors

through broker-dealers. The investors profit when companies increase their

earnings.

Stocks may be traded on listed exchanges, such as the New York Stock Exchange

(NYSE), Nasdaq, or the over-the-counter (OTC) market. Most stock trading is done

via regulated exchanges, which plays an important economic role because it is

another way for money to flow through the economy.

Typical participants in a stock market include (both retail and institutional) investors,

traders, market makers (MMs), and specialists who maintain liquidity and provide

two-sided markets. Brokers are third parties that facilitate trades between buyers

and sellers but who do not take an actual position in a stock.

When stocks are bought at a cheaper price and are sold at a higher price, the

investor earns from the sale.

Note: Over-the-Counter Markets

An over-the-counter (OTC) market is a decentralized market—meaning it does not

have physical locations, and trading is conducted electronically—in which market

participants trade securities directly (meaning without a broker). While OTC markets

may handle trading in certain stocks (e.g., smaller or riskier companies that do not

meet the listing criteria of exchanges), most stock trading is done via exchanges.

Certain derivatives markets, however, are exclusively OTC, making up an essential

segment of the financial markets. Broadly speaking, OTC markets and the

transactions that occur in them are far less regulated, less liquid, and more opaque.

2. Bond Markets

A bond is a security in which an investor loans money for a defined period at a pre-

established interest rate. You may think of a bond as an agreement between the

lender and borrower containing the loan's details and its payments. Bonds are

issued by corporations as well as by municipalities, states, and sovereign

governments to finance projects and operations. When organizations need to obtain

very large loans, they go to the bond market. When stock prices go up, bond prices

tend to go down. There are many different types of bonds, including Treasury

Bonds, corporate bonds, and municipal bonds. The bond market is also called the

debt, credit, or fixed-income market.

In a bond market, investors buy bonds from a company, and the company returns

the amount of the bonds within an agreed period, plus interest.

3. Money Markets

Involves short-term debt or investments with maturities of less than a year.

Typically, the money markets trade in products with highly liquid short-term

maturities (less than one year) and are characterized by a high degree of safety and

a relatively lower interest return than other markets.

4. Derivatives Markets

A derivative is a contract between two or more parties whose value is based on an

agreed-upon underlying financial asset (like a security) or set of assets (like an

index). Rather than trading stocks directly, a derivatives market trades in futures

and options contracts and other advanced financial products that derive their value

from underlying instruments like bonds, commodities, currencies, interest rates,

market indexes, and stocks.

Futures markets are where futures contracts are listed and traded. Unlike forwards,

which trade OTC, futures markets utilize standardized contract specifications, are

well-regulated, and use clearinghouses to settle and confirm trades. Options

markets, such as the Chicago Board Options Exchange (Cboe), similarly list and

regulate options contracts. Both futures and options exchanges may list contracts on
various asset classes, such as equities, fixed-income securities, commodities, and so

on.

5. Commodities Markets

Commodities markets are venues where producers and consumers meet to

exchange physical commodities such as agricultural products (e.g., corn, livestock,

soybeans), energy products (oil, gas, carbon credits), precious metals (gold, silver,

platinum), or "soft" commodities (such as cotton, coffee, and sugar). These are

known as spot commodity markets, where physical goods are exchanged for money.

A commodity market is where companies offset their futures risks when buying or

selling natural resources. Since the prices of things like oil, corn, and gold are so

volatile, companies can lock in a known price today. There is a commodities futures

market wherein the price of items that are to be delivered at a given future time is

already identified and sealed today. Since these exchanges are public, many

investors also trade in commodities for profit only. For example, most investors have

no intention of taking shipments of large quantities of pork bellies.

One example is oil. It is used for transportation, industrial products, plastics,

heating, and electricity generation. When oil prices rise, you'll see the effect in gas

prices about a week later. If oil and gas prices stay high, you'll see the impact on
food prices in about six weeks. The commodities futures market determines the

price of oil.

Another important commodity is gold. It's bought as a hedge against inflation. Gold

prices also go up when there is a lot of economic uncertainty in the world. Still,

many people look at gold as a safer alternative to cash or currency.

6. Forex Market

The forex (foreign exchange) market is where participants can buy, sell, hedge, and

speculate on the exchange rates between currency pairs. The forex market is the

most liquid market in the world, as cash is the most liquid of assets.

This market affects exchange rates and, thus, the value of the dollar and other

currencies. Exchange rates work on the basis of demand and supply of a nation’s

currency, as well as of that nation’s economic and financial stability.

As with the OTC markets, the forex market is also decentralized and consists of a

global network of computers and brokers worldwide. The forex market is made up

of banks, commercial companies, central banks, investment management firms,

hedge funds, and retail forex brokers and investors.

+Cryptocurrency Markets
Thousands of cryptocurrency tokens are available and traded globally across a

patchwork of independent online crypto exchanges. These exchanges host digital

wallets for traders to swap one cryptocurrency for another or for fiat monies such as

dollars or euros.

Because most crypto exchanges are centralized platforms, users are susceptible to

hacks or fraudulent activity. Decentralized exchanges are also available that operate

without any central authority. These exchanges allow direct peer-to-peer (P2P)

trading without an actual exchange authority to facilitate the transactions. Futures

and options trading are also available on major cryptocurrencies.

III. SUMMARY & CONCLUSION

The financial system is a key part of our economy. It includes, for example, banks,

insurance companies and financial markets. The financial system helps money flow

through the economy when and to where it is needed. For this essential function to

work well, we need the financial system to be stable. Thus we concluded that a

financial system play a vertical role in the economic growth of a country. Financial

market also plays an important role in markets because it provides information

about companies which is helpful to the investors and also helps investors to know

how they will invest. 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.

REFERENCES:

https://www.investopedia.com/terms/f/financial-market.asp

https://www.occ.treas.gov/topics/supervision-and-examination/capital-markets/financial-
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%20place,who%20have%20capital%20to%20invest.

https://marketbusinessnews.com/financial-glossary/financial-market/

https://www.thebalancemoney.com/an-introduction-to-the-financial-markets-3306233

https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/
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