FINANCIAL

MARKETS
FINANCIAL MARKET DEFINE
• are institutions and procedures that facilitate transactions in all types
of financial claims.
FINANCIAL SYSTEM
• is the interaction of policy makers, monetary system, financial
institutions and financial market to expedite the flow of financial
capital from savings to investments
BROAD DEFINITION OF FINANCIAL
SYSTEM
A. Policy Makers have the power to alter the financial system by passing new laws and their
decisions can impact on the level of economic activity. An effective financial system must have
several sets of policy makers who pass laws and make decisions relating to fiscal and monetary
policies

B. Monetary System for creating and transferring money. It must provide an efficient medium for
exchanging goods and services.

C. Financial Institution that support capital formation either by channeling savings into investment
in physical assets or by fostering direct financial investments by individuals in financial institutions
and businesses. We refer to these activities as the savings-investment process.

D. Financial Markets are physical locations or electronic forums that facilitate the transfer of
financial assets amongst individuals, institutions, businesses and governments. Financial markets
provide the mechanism for allocating financial resources or funds from savers to borrowers.
Individuals make decisions as investors and financial managers.
TERMS TO DEVELOP FINANCIAL MARKET
SYSTEM
1. Real Assets are tangible assets that has an intrinsic value due to its substance and physical
properties.

2. Financial Assets is a liquid asset that gets its value from a contractual right or ownership claim.
Cash, stocks, bonds, mutual funds, and bank deposits are all are examples of financial assets.

3. Underwriting is the purchase and subsequent resale of a new security issue. The risk of selling
the new issue at a profitable price is assumed by an investment banker.

4. Secondary markets is the transactions in currently outstanding securities.

5. Indirect securities is the unique financial claims issued by financial intermediaries. Mutual fund
shares are an example.

6. Direct securities is the pure financial claims issued by economic units to savers. These can later
be transformed into indirect securities.
WAYS TO TRANSFER FINANCIAL CAPITAL
1. The direct transfer of funds
- Here the firm seeking cash sells its securities directly to savers who are willing to
purchase them in hopes of earning a reasonable rate of return.
2. Indirect transfer using the investment banker
- In a common arrangement under this system, the managing investment banking house
will form a syndicate of several investment banker. The syndicate will then sell the securities from
the firm that is in need of financial capital.

3. Indirect transfer using the financial intermediary

- This is the type of system life insurance companies and pension funds operate within. The
financial intermediary collects the savings of individuals and issues its own securities in exchange
for these savings

4. Electronic Fund transfer

- is a widely used method for moving funds from one account to another using a computer
network. Electronic funds transfers replace paper-based transfers and human intermediaries, but
provide the customer with the convenience of doing her own banking
COMPONENTS OF FINANCIAL MARKET
SYSTEM
1.Public Offering
A security offering where all investors have the opportunity to acquire a
portion of the financial claims being sold
2. Private Placement
A security offering limited to a small number of potential investors
3. Primary Markets
Those in which securities offered for the first time to potential investors.
4. Secondary Markets
Is represent transactions in currently outstanding securities.
5. Money Market
All institutions and procedures that facilitate transactions in short term credit
instrument
6. Capital Market
All institutions and procedures that facilitate transactions in long term
financial instruments.
7. Organized security exchanges
Formal organizations involved in the trading of securities. They are
tangible entities that conduct auction markets in listing securities.
8. Over the counter markets
All security markets except the organized exchanges.
is a decentralized market in which market participants trade stocks,
commodities, currencies, or other instruments directly between two parties
and without a central exchange or broke.