Financial markets and

Institutions
 FINANCIAL MARKETS
 FINANCIAL INSTITUTIONS
 FINANCIAL REGULATIONS
AN OVERVIEW OF FINANCIAL MARKETS
What is Financial Markets?
Structure of Financial markets?
 Instruments traded in Financial markets?
 Functions of Financial markets
What is Financial system?
Financial system (FS) – a framework for describing set
of markets, organisations, and individuals that engage
in the transaction of financial instruments (securities),
as well as regulatory institutions. - the basic role of FS
is essentially channelling of funds within the different
units of the economy – from surplus units to deficit
units for productive purposes.
What is Financial Markets?
Financial markets perform the essential function of
channeling funds from economic players that have saved
surplus funds to those that have a shortage of funds
At any point in time in an economy, there are individuals or
organizations with excess amounts of funds, and others with
a lack of funds they need for example to consume or to invest.
Exchange between these two groups of agents is settled in
financial markets
 The first group is commonly referred to as lenders, the
second group is commonly referred to as the borrowers of
funds.
What is Financial Markets?
There exist two different forms of exchange in financial markets. The
first one is direct finance, in which lenders and borrowers meet
directly to exchange securities.

Securities are claims on the borrower’s future income or assets.

Common examples are stock, bonds or foreign exchange

 The second type of financial trade occurs with the help of financial
intermediaries and is known as indirect finance. In this scenario
borrowers and lenders never meet directly, but lenders provide funds
to a financial intermediary such as a bank and those intermediaries
independently pass these funds on to borrowers.
Structure of Financial Markets
Financial markets can be categorized as follows:
Debt vs Equity markets
 Primary vs Secondary markets
Exchange vs Over the Counter (OTC)
 Money vs Capital Markets
 Debt vs Equity
Financial markets are split into debt and equity markets.

Debt titles are the most commonly traded security. In these arrangements,
the issuer of the title (borrower) earns some initial amount of money
(such as the price of a bond) and the holder (lender) subsequently
receives a fixed amount of payments over a specified period of time,
known as the maturity of a debt title.

 Debt titles can be issued on short term (maturity < 1 yr.), long term
(maturity >10 yrs.) and intermediate terms (1 yr. < maturity < 10 yrs.).

 The holder of a debt title does not achieve ownership of the borrower’s
enterprise.
 Common debt titles are bonds or mortgages.
 Debt vs Equity
Equity titles are somewhat different from bonds. The most common
equity title is (common) stock.

First and foremost, an equity instruments makes its buyer (lender) an

owner of the borrower’s enterprise.

 Formally this entitles the holder of an equity instrument to earn a share

of the borrower’s enterprise’s income, but only some firms actually pay
(more or less) periodic payments to their equity holders known as
dividends. Often these titles, thus, are held primarily to be sold and
resold.

 Equity titles do not expire and their maturity is, thus, infinite. Hence
they are considered long term securities
PRIMARY MARKETS Vs SECONDERY
MARKETS
Markets are divided into primary and secondary markets
Primary markets are markets in which financial
instruments are newly issued by borrowers.
Secondary markets are markets in which financial
instruments already in existence are traded among
lenders.
Secondary markets can be organized as exchanges, in
which titles are traded in a central location, such as a
stock exchange, or alternatively as over-the-counter
markets in which titles are sold in several locations.
MONEY MARKETS VS CAPITAL MARKETS
Money markets are markets in which only short term
debt titles are traded.
Capital markets are markets in which longer term
debt and equity instruments are traded.
INSTRUMENTS TRADED IN THE
FINANCIAL MARKETS
Most commonly you will encounter:
Corporate stocks are privately issued equity instruments,
which have a maturity of infinity by definition and, thus,
are classified as capital market instruments
Corporate bonds are private debt instruments which
have a certain specified maturity. They tend to be long-run
instruments and are, hence, capital market instruments
The short-run equivalent to corporate bonds are
commercial papers which are issued to satisfy short-run
cash needs of private enterprises.
INSTRUMENTS TRADED IN THE
FINANCIAL MARKETS
Most commonly you will encounter:
On the government side, the most commonly used
long-run debt instruments are Treasury Bonds or T-
Bonds. Their maturity exceeds ten years.

Short-run liquidity needs are satisfied by the issuance

of Treasury Bills or T-Bills, which are short-run debt
titles with a maturity of less than one year.
Functions of Financial markets
Borrowing and Lending
Financial markets channel funds from households,
firms, governments and foreigners that have saved
surplus funds to those who encounter a shortage of
funds (for purposes of consumption and investment)
Price Determination
 Financial markets determine the prices of financial
assets. The secondary market here plays an important
role in determining the prices for newly issued assets
Functions of Financial markets
Coordination and Provision of Information
The exchange of funds is characterized by a high
amount of incomplete and asymmetric information.
Financial markets collect and provide much
information to facilitate this exchange.
Risk Sharing
 Trade in financial markets is partly motivated by the
transfer of risk from borrowers to lenders who use the
obtained funds to invest
Functions of Financial markets
Liquidity
 The existence of financial markets enables the owners
of assets to buy and resell these assets. Generally this
leads to an increase in the liquidity of these financial
instruments.
 Efficiency
The facilitation of financial transactions through
financial markets lead to a decrease in informational
cost and transaction costs, which from an economic
point of view leads to an increase in efficiency.
FINANCIAL INSTITUTIONS
What are Financial Institutions?
Financial Institutions and their function
Types of Financial Institutions
What are Financial Institutions ?
A financial institution (FI) is a company engaged in
the business of dealing with financial and monetary
transactions such as deposits, loans, investments, and
currency exchange.
Financial institutions encompass a broad range of
business operations within the financial services sector
including banks, trust companies, insurance
companies, brokerage firms, and investment dealers.
Financial institutions can vary by size, scope, and
geography.
The term financial institution is a broad phrase
referring to organizations which act as agents, brokers,
and intermediaries in financial transactions. Agents
and brokers contract on behalf of others;
intermediaries sell for their own account. Financial
intermediaries purchase securities for their own
account and sell their own liabilities and common
stock
Brokers are agents who match buyers with sellers for
a desired transaction.
A broker does not take position in the assets she/he
trades (i.e. does not maintain inventories of those
assets)
 Brokers charge commissions on buyers and/or sellers
using their services
 Examples: Real estate brokers, stock brokers
Like brokers, dealers match sellers and buyers of financial
assets.
Dealers, however, take position in their assets, their trading.
 As opposed to charging commission, dealers obtain their profits
from buying assets at low prices and selling them at high prices.
 A dealer’s profit margin, the so-called bid-ask spread is the
difference between the price at which a dealer offers to sell an
asset (the asked price) and the price at which a dealer offers to
buy an asset (the bid price)
 Examples: Dealers in U.S. government bonds, Nasdaq stock
dealers
Types of Financial Institutions

Commercial Banks
A commercial bank is a type of financial institution
that accepts deposits, offers checking account services,
makes business, personal, and mortgage loans, and
offers basic financial products like certificates of
deposit (CDs) and savings accounts to individuals and
small businesses. A commercial bank is where most
people do their banking, as opposed to an investment
bank. 
Investment Banks
Investment banks specialize in providing services
designed to facilitate business operations, such as
capital expenditure financing and equity offerings,
including initial public offerings (IPOs). They also
commonly offer brokerage services for investors, act as
market makers for trading exchanges, and manage
mergers, acquisitions, and other corporate
restructurings.
Insurance Companies
Among the most familiar 
non-bank financial institutions are insurance
companies. Providing insurance, whether for
individuals or corporations, is one of the oldest
financial services. Protection of assets and protection
against financial risk, secured through insurance
products, is an essential service that facilitates
individual and corporate investments that fuel
economic growth.
Brokerage Firms
Investment companies and brokerages, such as
mutual fund and exchange-traded fund (ETF) provider
Fidelity Investments, specialize in providing
investment services that include wealth management
and financial advisory services. They also provide
access to investment products that may range from
stocks and bonds all the way to lesser-known
alternative investments, such as hedge funds and
private equity investments.