Financial System

What is a
Financial System?

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What is Financial System?

Financial System is a system that gels together Financial Participants,

Markets, Products, and Services.

PARTICIPANTS MARKETS PRODUCTS SERVICES

FINANCIAL SYSTEM

Geographical Classification

Regional Domestic International

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What is Financial System?

It plays an important role in the growth of the economy by

Influencing economic performance and economic welfare.

This is achieved by financial

infrastructure, in which entities with
Predominantly channels funds between funds allocate those funds to those who
lenders and borrowers, which encourages the have potentially more productive ways
movement of funds in an economy. to invest those funds.

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Goal of Financial System

The primary goal of a financial system is

accelerated growth of an economy.
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Financial Markets Infrastructure

Financial Markets Infrastructure

Financial market infrastructure that is resilient and effective has

many benefits:
• Enhances the stability of the financial system.
• Reduces transaction costs in the economy
• Promotes the efficient use of financial resources
• Improves financial market liquidity and facilitates the conduct
of monetary policy

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How Financial System Work?

Indirect Finance

Financial
Funds Intermediaries Funds

Funds

Lenders Borrowers
Savers Spenders
Households Financial Households
Funds Funds
Business markets Business firms
Governments Governments
Foreigners Foreigners
Direct Finance

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Functions of Financial System

Functions of a Financial System

Facilitate the flow of funds

in order to finance Play the role of Monitor and regulate the
investments by intermediaries and thus participants in the
corporations, governments determine the flow of financial system.
and individuals. funds.

Stock market Banking sector

Firms Bond market

Governments
Short term fixed securities market

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 Structure of
Financial System

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Structure of Financial System

Financial
Financial Market
Instruments
Financial
Participants
Financial
Regulator

Financial
Services

The financial system of an economy consists of five main components.

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Structure of Financial System

Financial System

Financial Financial Financial Financial Financial

Market Instruments Participants Regulator Services

Derivatives
Capital Market Money Market FX Market
Market

Primary Secondary Treasury Certificate Call/Notice Commercial

Market Market Bills of Deposit Money Papers

Debt Equity
Market Market
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Structure of Financial System

Financial System

Financial Financial Financial Financial Financial

Market Instruments Participants Regulator Services

Insurance & Govt.

Stocks Bonds Debentures
Pension securities

Foreign Money Market

Derivatives Warrants Commodities
Exchange Instruments

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Structure of Financial System

Financial System

Financial Financial Financial Financial Financial

Market Instruments Participants Regulator Services

Retail /
Investment Mutual/Hedge Stock
Corporate Government Depository
Banks Funds Exchanges
Banks

Insurance
Retail Clearing
& Pension Registrars Brokers Custodian
Investors Houses
Co’s

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Financial Market

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Financial Market

A market where financial instruments

are traded in order to raise capital.

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What is Financial Market?
A market where investors and borrowers can trade in financial securities, commodities and
other fungible items at low transaction costs and at prices that reflect the demand and
supply.

Shares

FINANCIAL
MARKET

Company Investor

Cash

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Financial Market

The market for such securities could be short term,

medium term or long term capital.

Short
Term
Capital

Medium
Term
Financial Capital
Role of Market
Facilitator

Long
Term
Capital

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Financial Market

MARKET
SUPPLY
MARKET External Socio-
Political Factors
DEMAND

Prices
• In Financial Markets having transparent pricing, regulations, costs and fees
and market forces determine the price.
• Investors have access to a large number of financial markets and exchanges
representing a vast array of financial products.

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Few Facts

1 Financial market determines the growth of the economy by allowing

the transfer of money between savers and borrowers.

A Financial Market is a place where financial instruments are traded.

2
3 Financial Instruments would be stock, bond, insurance policy,
government securities and debentures.

A financial market facilitates transactions between buyers and sellers,

as well as between producers and consumers. 4
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Top Financial Centers as of 2013

New York
London
Hong Kong
Singapore
Zurich
Tokyo
Seoul
Boston
Beijing
Mumbai

ANZ Report
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Features of Financial Market

The market comprises of exchanges

which are:
• Physically located
• Virtual / Online

PRICING ECONOMIC GROWTH

• Transparent pricing Most economies have financial market as these
• Basic regulations on trading, have become an integral part of overall economic
costs and fees growth. However, few of these markets are small
• Market forces determining the with lesser participants, wherein exchanges like
prices of securities that trade NYSE and NASDAQ have investors present globally.
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Functions of Financial Market
Financial markets provide the following three major economic functions:
Price Discovery
Liquidity
It means that It provides an
transactions between opportunity for
buyers and sellers of investors to sell a
financial instruments in financial instrument,
a financial market since the buyers and
determine the price of sellers meet at a
the traded asset. centralized location to
trade (Stock
Exchanges).
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Reduction of
Transaction Costs
Due to the
centralization of the
markets, all the
intermediaries have to
provide competitive
charges for their
services, which in-turn
reduces the transaction
costs for the
participants.
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Importance of Financial System

Vital to the functioning of the industry as the instruments help raise long term capital.

FINANCIAL MARKETS 2010

$ 1643 Trillion

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Top Financial Centres As Of 2015

New York London Hong Kong Singapore

Beijing Mumbai

Zurich Tokyo Seoul Boston

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