FINANCIAL SYSTEM
The market participants may include stock exchanges, investment banks, individual investors, insurance companies and other institutions. It functions at corporate, international and national levels and is governed by various rules dictating the eligibility of participants and the use of the money for different purposes. Apart from financial markets, financial institutions, financial services and financial assets services are the components of the financial system.
UNDERSTANDING
In any economy, the resources are limited with individuals having unlimited desires and wants. This issue, referred to as scarcity, is one of the significant drivers of an economy. Therefore, it challenges an economy in determining when, where and to whom to disburse its resources. Ultimately, it resulted in a financial system structure capable of efficiently allocating economic resources to boost up the growth. Also, it permits participant to m=take advantage of:
- Giving participants a way of interest earning in the form of time value (investing institutions)
- Insurance : assisting them against the financial risk
- Banks : Providing a path of making payments
- Credit agencies : Distributing and collecting financial information
- Government and Central Banks : Governing regulations for stability maintenance
- Financial Institutions and banks : Converting investments and maintaining liquidity into cash
COMPONENTS OF FINANCIAL SYSTEMS
There are several financial system components to make sure a smooth transition of funds between borrowers, lenders and investors.
1. Financial markets:
These are places where the shares, derivatives, bonds and commodities are traded i.e. exchange of assets takes place with lenders and borrowers.
It helps businesses to grow more and expand multifold by allowing investors to contribute to the capital. Investors invest in company stock with the expectation of it producing a return in the future. As the entity makes profit, it can then pass on the surplus to the investors.
2. Financial institutions:
These act as an intermediate between the borrower and the lender when providing financial services. This category includes:
- Insurance companies
- Banks
- Brokerage Firms
- Investment companies
3. Financial instruments:
Financial or tradable instruments enable investors to trade within the markets. These can include securities, cash, futures and options and bonds.
4. Currency or Money:
A currency is a mode/form of payment to exchange services, products and investments and holds some value to the society.
5. Financial services:
Financial services provide investors a way of managing assets and offering protection against systematic risk. These also ensure individuals have the apt amount of funds and capital in the most efficient investment alternative to promote growth. Insurance companies, banks and investment services would also be considered as financial services.
FUNCTIONS OF FINANCIAL SYSTEMS
1. Savings:
Public savings allow investors and businesses to invest in a range of investments and see it grow over a tenure. Borrowers can use them to fund new ventures and projects and increase future cash flows and in return they get a return on these investments.
2. Risk Management:
It protects investors from various financial risks through insurance and other types of contracts.
3. Liquidity:
The financial markets give investors the ability to reduce the systematic risk by offering liquidity. It hence allows for easy trade of assets when needed.
4. Payment system:
An efficient payment system allows merchants and businesses to collect money in return for their services or products. Payments can be made with cash, credit cards, checks and even cryptos in certain cases.
5. Government Policy:
Governments attempt to return or stabilise an economy by implementing specific policies to deal with the inflation, interest rates and unemployment.
