Financial System
1. What is a financial system and what are its constituents?
One way of knowing the economic development of a nation is by examining the financial system of the country. The more matured the financial system, the more developed is the economy. Such is the importance of the financial system, as it acts as a bridge between the surplus owners of funds and the people who are in need of funds.
A financial system facilitates the movement of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various financial institutions (such as banks), markets (such as stock markets), regulatory bodies (such as RBI) and depositors (majorly common public).
Financial Markets
Financial markets are the places where financial assets are created and/or transferred. Financial transactions involve creation of a financial asset, commonly known as financial instruments, and also transfer of the financial asset. Financial instrument is a claim to the payment of a sum of money in the future and /or periodic payment in the form of interest or dividend.
Money Market- The money market is where low-risk, highly liquid, short-term instruments are created and traded. Funds are available in these markets for a single day up to a year. Main participants of this market are mostly government, banks and large financial institutions.
Capital Market - The capital markets finance long-term investments. The instruments created here are high risk and high return instruments. The transactions taking place in this market will be for longer durations, typically more than 2 years.
Forex Market - The Forex market deals with exchange of currencies, at a price (called as exchange rate) determined by the demand and supply of a particular currency. Depending on exchange rate, the transfer of funds takes place in this market. This is one of the most developed and integrated markets across the globe.
Credit Market- In credit markets, all the participants of the
One way of knowing the economic development of a nation is by examining the financial system of the country. The more matured the financial system, the more developed is the economy. Such is the importance of the financial system, as it acts as a bridge between the surplus owners of funds and the people who are in need of funds.
A financial system facilitates the movement of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various financial institutions (such as banks), markets (such as stock markets), regulatory bodies (such as RBI) and depositors (majorly common public).
Financial Markets
Financial markets are the places where financial assets are created and/or transferred. Financial transactions involve creation of a financial asset, commonly known as financial instruments, and also transfer of the financial asset. Financial instrument is a claim to the payment of a sum of money in the future and /or periodic payment in the form of interest or dividend.
Money Market- The money market is where low-risk, highly liquid, short-term instruments are created and traded. Funds are available in these markets for a single day up to a year. Main participants of this market are mostly government, banks and large financial institutions.
Capital Market - The capital markets finance long-term investments. The instruments created here are high risk and high return instruments. The transactions taking place in this market will be for longer durations, typically more than 2 years.
Forex Market - The Forex market deals with exchange of currencies, at a price (called as exchange rate) determined by the demand and supply of a particular currency. Depending on exchange rate, the transfer of funds takes place in this market. This is one of the most developed and integrated markets across the globe.
Credit Market- In credit markets, all the participants of the