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Afinancial system is a system that allows the exchange of funds betweenfinancial market participants such aslenders,investors, andborrowers. Financial systems operate at national and global levels.[1] Financial institutions consist of complex, closely related services,markets, and institutions intended to provide an efficient and regular linkage between investors and borrowers.[2]
In other words, financial systems can be known wherever there exists the exchange of a financial medium (money) while there is a reallocation of funds into needy areas (financial markets, business firms, banks) to utilize the potential of ideal money and place it in use to get benefits out of it. This whole mechanism is known as a financial system.
Money,credit, andfinance are used as media of exchange in financial systems. They serve as a medium of known value for whichgoods andservices can be exchanged as an alternative tobartering.[3] A modern financial system may includebanks (public sector or private sector),financial markets,financial instruments, andfinancial services. Financial systems allow funds to be allocated, invested, or moved between economic sectors, and they enable individuals and companies to share the associated risks.[4][5]
There are mainly four components of the financial system:
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Banks arefinancial intermediaries that lend money to borrowers to generate revenue and accept deposits . They are typically regulated heavily, as they provide market stability andconsumer protection. Banks include:[citation needed]
Non-bank financial systems facilitate financial services likeinvestment,risk pooling, andmarket brokering. They generally do not have full banking licenses.[6] Non-bank financial system include:[7]
Financial markets are markets in whichsecurities,commodities, andfungible items are traded at prices representingsupply and demand. The term "market" typically means the institution of aggregate exchanges of possible buyers and sellers of such items.
Theprimary market (or initial market) generally refers to new issues ofstocks,bonds, or other financial instruments. The primary market is divided in two segments, the money market and the capital market.
Thesecondary market refers to transactions in financial instruments that were previously issued.
Financial instruments aretradable financialassets of any kind. They include money, evidence of ownership interest in an entity, and contracts.[8]
Aderivative instrument is a contract that derives its value from one or more underlying entities (including an asset, index, orinterest rate).[9]
Financial services are offered by a large number of businesses that encompass the finance industry. These includecredit unions,banks,credit card companies,insurance companies,stock brokerages, andinvestment funds.
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