Financial Market and Institute Assignment

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Financial Market And

Institute Assignment.

Name: Aliya Sheikh


Class: B.com(H)
Semester: Vth
Submitted to: Dr.Sandhya Joshi
Date: 30th August, 2020.
Question 1: What do you understand by Financial System? Discuss various functions of Financial System.

Answer: A 'Financial system' is a system that allows the exchange of funds between financial market
participants such as lenders, investors, and borrowers. Financial systems operate at national and global
levels. They consist of complex, closely related services, markets, and institutions intended to provide an
efficient and regular linkage between investors and depositors.

In other words financial system can be known where ever the exist the exchange of financial
medium(money) while there is an reallocation of funds into the needy areas (financial markets, business
firms, banks) to utilize the potential of ideal money and place them in use to get benefits out of them.
This whole mechanism is known as financial system.

Money, credit, and finance are used as medium of exchange in financial systems. They serve as a
medium of known value for which goods and services can be exchanged as an alternative to bartering. A
modern financial system may include banks (public sector or private sector), financial markets, financial
instruments, and financial services. Financial systems allow funds to be allocated, invested, or moved
between economic sectors. They enable individuals and companies to share the associated risks.

Various functions of Financial System:

 Financial system works as an effective conduit for optimum allocation of financial resources in
an economy.
 It helps in establishing a link between the savers and the investors.
 Financial system allows ‘asset-liability transformation’. Banks create claims (liabilities) against
themselves when they accept deposits from customers but also create assets when they provide
loans to clients.
 Economic resources (i.e., funds) are transferred from one party to another through financial
system.
 The financial system ensures the efficient functioning of the payment mechanism in an
economy. All transactions between the buyers and sellers of goods and services are effected
smoothly because of financial system.
 Financial system helps in risk transformation by diversification, as in case of mutual funds.
 Financial system enhances liquidity of financial claims.
 Financial system helps price discovery of financial assets resulting from the interaction of buyers
and sellers. For example, the prices of securities are determined by demand and supply forces in
the capital market.
 Financial system helps reducing the cost of transactions.
Question 2: Financial Market and Financial Institute plays an important role in the Financial System. Do
you agree? Explain.

Answer: A financial market is a broad term describing any marketplace where buyers and sellers
participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial
institutions are the core factor and the core media of Financial Markets. There are two forms of market:

 Perfect Market
 Imperfect Market

Perfect Market:

There all information about any securities for sale in primary and secondary markets would be
continuously and freely available to investors.

Imperfect Market:

There buyers and sellers of securities do not have full access to information and cannot always break
down securities to the precise size they desire. Financial institutions are the media or intermediary
section between financial markets and investors. Investors invest in financial markets or borrowers raise
capital or fund from financial markets through financial institutions. So without financial institutions, the
information and transaction costs of financial market transactions would be excessive. Financial
institutions are classified into two groups:

 Depository Institutions
 Non-Depository Institutions

Financial institutions include banks, credit unions, asset management firms, building societies, and stock
brokerages, among others. These institutions are responsible for distributing financial resources in a
planned way to the potential users.

There are a number of institutions that collect and provide funds for the necessary sector or individual.
On the other hand, there are several institutions that act as the middleman and join the deficit and
surplus units. Investing money on behalf of the client is another of the variety of functions of financial
institutions.

Role of Financial Institutions

The primary functions of financial institutions of this nature are as follows:

 Accepting Deposits
 Providing Commercial Loans
 Providing Real Estate Loans
 Providing Mortgage Loans
 Issuing Share Certificates

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