Financial system is the organised framework of markets, intermediaries, authorities and instruments.
The Financial system, in a developed economy, is the structure though which financial activity (supply/demand) is performed.
3 basic needs are satisfied by Financial system: monetary settlement of trade , transfer and management of risks and transfer of funds from surplus to deficit entities/units (saving management and investment financing).
The Financial system: financial resources : efficiency/effectiveness
The key function of financial markets is channeling funds from households,firms and govt who have saved (spending less than their income) to borrowers-spenders (shortage of funds,firms and govt). There are direct and indirect way of financing
Scope and Structure of the Financial System
Financial system allows efficient and purposed accumulation of financial resources (capital) and allocation of savings among different possible investment solutions
Financial system efficiency: ability to incentive's market operators to maximize volume of available resources, to activate channels/networks of transfer of those resources allowing investment financing with higher returns at given risk appetite (efficient allocation).
Type of Financial Markets (FMs): direct finance
Debt and Equity Markets:
· Bonds/CPs: contractual obligations fixed amount to pay by borrower (maturity)
· Equities: claims to share in the net income and assets of a business
Primary and Secondary Markets (new and resold securities)
Secondary Markets: Exchange and OTC Markets (one location vs. different locations dealers stand ready to buy/sell to anyone who comes and contacts them)
Money and Capital Markets (short-term instruments vs. long-term instruments).
