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Financial System

Financial System Components


Financial Markets a market where financial instruments are
traded; a place where people buy and sell financial instruments;

Financial Institutions very many different definitions but the
simplest one is: a business that specializes in transferring funds
from savers (those with surplus of funds) to those with deficit of
funds;

Financial Instrument = Financial Asset = Paper Asset = Security =
Financial Claim = Investment; major types of financial instruments
are:
1. Stocks (representing equity);
2. Bonds (representing debt) they have a special name FI
Securities;
3. Currencies financial instrument issued by the central bank
and circulating as money.


Financial Markets Functions
Facilitate the flow of capital from savers to the
users of capital.

Well-functioning markets promote economic
growth.
How does the Financial System work?
Surplus of Funds
Households
Businesses
Government
Foreign Investors
Deficit of Funds
Households
Businesses
Government
Foreign Investors

Financial
Markets
Financial
Intermediaries
Direct Financing
Indirect Financing
Capital Flow Capital Flow
Capital Flow
Capital Flow Capital Flow
Direct vs. Indirect Financing
Direct financing direct transfer of money and securities =
direct transfer of funds from those with surplus to those who
have deficiency;

Indirect financing more important than the first category;
transfer of funds with the help of a financial intermediary
which is a financial institution.
Financial Intermediaries
(Indirect Financing)
Financial Markets
(Direct Financing)
Investors (Borrowers) Savers (Creditors)
Types of Markets
Spot markets and futures markets
Money markets and capital markets
Primary markets and secondary markets
Private markets and public markets
Physical assets markets and financial assets market
Debt markets and equity markets
Exchange traded markets and OTC markets

A publicly traded company is considering to offer to the public a
new bond issue. On which type of market is it going to trade
these instruments?
Types of Financial Institutions
Investment banks
Commercial banks
Financial services corporations
Credit unions
Pension funds
Insurance companies
Mutual funds
Exchange traded funds
Hedge funds
Private equity companies
Venture funds
Brokerages

Money Market Instruments
Treasury bill
Fed Funds
REPO
Negotiable CD
Commercial papers
Bankers acceptance
Eurodollars

Capital Market Instruments
Debt Instruments
o Treasury notes and bonds
o Mortgages
o Municipal bonds
o Corporate bonds
o Lease

Equity instruments
o Common stock

Hybrid instruments
o Preferred stock
o Convertible bonds


Recent Trends
Technology and computrization
Globalization
Deregulation
Competition
Complexity
Speed
Financial Conglomerates
Derivatives
Speculation

How does a stock quote look like?

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