Overview of Financial Markets, Institutions and Money

Topics: Financial markets, Bank, Economics Pages: 4 (1193 words) Published: March 16, 2015
Overview of financial markets, institutions and money
1. Explain the role of the financial system and why it is important to individuals and to the economy as a whole The financial system consists;
i) Financial markets (markets for buying and selling financial instruments) Money market and capital market
Primary and secondary market
Creation of Financial assets (shares, bills, notes)
Trading of financial assets
ii) Financial Institutions
Banks, finance companies, credit unions
Invest in financial assets (loans, shares, properties)
Provide financial services
iii) Money
Act as medium of exchange, represent the store of wealth
The role of the financial system is to gather money from SSUs and transfer it to DSUs in the most efficient way possible The larger the flow the more effectively the funds are allocated, the greater is the accommodation of individual preferences and willingness of business people to invest in firms Financial markets have 5 functions;

1) To facilitate the flow of funds (From lenders to borrowers) 2) To provide the mechanism to settle transactions (through payment system; BPAY or ATM) 3) To generate and disseminate information (Market release announcements on firms earning) 4) To provide the means to transfer and manage risk (Insurance products, securitization) 5) To provide ways of dealing with incentive problems (information asymmetry: continuous disclosure regulation)

Features of the financial system
Money is aggregated in small amounts and loaned in large amounts Competitive: competition amongst banks will drive up the deposit rates (saving) and push down the financing rates (lending) Bank's profit comes from the interest rate differential (Spread) between the depositors Financial instruments: issued by a party raising funds, acknowledging a financial commitment and entitling the buyer to specified future cash flows Double coincidence of wants satisfied: a transaction between two parties that meets...
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