Financial Systems
A financial system is an arrangement wherein the financial Institutions (i.e, Banks, Brokerage Firms, Insurance Companies, Investment Companies) facilitate the transfer of funds between borrowers, lenders and investors. The major goal of a proper financial system is to efficiently distribute economic resources and contribute a smooth service to market participants (i.e, Investment Banks, Individual Investors, stock exchanges, Insurance companies, Brokerage firms). A financial system functions at corporate, National, and International levels by following the government’s set of rules and regulations.
The primary responsibility of any financial system is to serve a smooth operation for market participants and protecting Market participants from financial risks.
The money flow from the lender/investor to the borrower in two ways:
(i) Market Based:
In this way, Trading securities such as stocks are bonds that are used as a medium to flow the funds.
(ii)Centrally-Planned:
In this way, Governing authority or central planner makes the investment decision.
Different Financial Components Contribute to Proper Functioning of Financial System:
- Financial Institutions
- Financial Markets
- Financial Instruments
- Financial Services
Financial Institutions: Financial Institutes are the intermediaries and provide a safe and secure option for investors, borrowers, and lenders to save, invest and borrow money wherever, whenever they require by following the government’s set of rules and regulations.
Financial Institutions include,
(i) Banks
(ii) Insurance Companies
(iii) Investment Companies
(iv) Brokerage Firms
Financial Markets:
In these places, the exchange of assets happenings through stocks, bonds, derivatives, and commodities between borrowers, lenders, and investors.
Financial Markets help businesses to grow rapidly. Also, helps investors to invest in the business and gain profits.
Financial Instruments:
Financial Instruments allow individuals to trade in the financial markets. These financial instruments include Money, Shares, Bonds.
Financial Services:
Financial services help to track money, shares, bonds owned by investors and also provide a safe platform for investors to trade.
Banks, Insurance Companies, Investment Companies, Brokerage Firms provide financial services.
Financial System is a necessary element in the economy, A good and well designed Financial System helps to achieve the goal of Market Participants.
