Describe the idea of the financial system.
Any nation's ability to grow economically depends on the presence of a well-functioning financial sector. By combining savings and investing, it aids in wealth creation. A financial transaction between a lender and a borrower takes place inside a structured, regulated environment known as the financial system. It supports the welfare and standard of living of people in the nation by providing the required financial inputs for the production of goods and services.
The financial system is defined as follows:
The primary method through which funds are converted into instruments, in the words of Prasanna Chandra, is through the financial system, which consists of a range of institutions, markets, and instruments that are related in a systematic way.
The financial system's importance is as follows:
1. Financial
institutions are crucial for achieving economic development because they
encourage saving by providing enticing interest rates. Then, these savings are
put to use by financing to various companies engaged in production and
distribution.
2. It
assists in tracking business performance
3. It
connects investors and savers. The capital formation process is the name for
it.
4. It lowers
transaction costs and boosts returns, which encourages consumers to save more.
5. It aids
in determining monetary policy for the government.
Financial
System Constituents:
1. Financial organizations
It is
a firm engaged in the trade of handling financial and monetary issues, such as
deposits, loans, investments, and currency exchange. Through the issuance of
financial instruments, they are offering a range of services to promote
economic growth. Institutions that do banking and those that do not are further
separated.
a) Banking Organizations: They are an essential component of
economic growth. They are extremely important in the areas of public savings,
investments, and financing to businesses.
b) Institutions that are not banks:
They are the organizations and
establishments that offer specific banking and financial services without a
banking license. Like IFCI, IDBI, and LIC.
1. Financial sector: It is a market that deals with a
variety of financial products, including shares, debentures, bonds, etc., as
well as financial services, including merchant banking and underwriting. They
are further broken down into
a. Capital market: Institutional arrangement that allows
for the selling and trading of securities and allows for the borrowing of
medium- and long-term money. For instance, stocks, bonds, and debentures. Then,
they are separated into
Primary Market: The location where securities are
first offered for public subscription.
Pre-issued securities are
traded on a secondary market between investors.
a) The financial market
It is for short-term
funds, which work with financial assets with up-to-year maturities. They are
readily marketable and very liquid. For instance, business paper, treasury
bills, etc.
2. monetary services: The financial sector offers these
services. Typically, they are client-focused. Before deciding on their
financial strategy, they carefully consider the customer's needs, taking into
account factors like cost, liquidity, and maturity. For instance, an insurance
firm or a credit rating agency
1. Money-related items: it is any agreement that results in a financial liability for
one entity and an equity instrument for another. In the capital market, the
various instruments include shares, debentures, and bonds, while in the money
market, they include Treasury bills, commercial paper, certificates of deposit,
and repurchase agreements.
Remarks.
Usually, one
can access the money market in addition to the stock market. This money market
is regarded as a good location to store monies that will be needed soon. They
offer a range of services for private persons, businesses, or governmental
bodies, including high liquidity. The business might desire to invest money
over night and turn to the money market to meet its goals or to pay for any
necessary operating costs or working capital. Because of the safety of these
kinds of investments, people on fixed incomes frequently use the money market.
A market that is closely watched is the capital market. The general economic climate of the global markets is examined through an analysis of their daily movements.
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