A financial system (within the scope of finance) is a system that allows the exchange of funds between lenders, investors, and borrowers. Financial systems operate at national, global, and firm-specific levels. They consist of complex, closely related services, markets, and institutions intended to provide an efficient and regular linkage between investors and depositors.
Contents
- Financial institutions
- Banks
- Non bank financial institutions
- Financial markets
- Primary markets
- Secondary markets
- Financial instruments
- Cash instruments
- Derivative instruments
- Financial services
- References
Money, credit, and finance are used as media 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 (operated by the government 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.
Financial institutions
Financial institutions provide financial services for members and clients.
Banks
Banks are financial intermediaries that lend money to borrowers to generate revenue. They are typically regulated heavily, as they provide market stability and consumer protection. Banks include:
Non-bank financial institutions
Non-bank financial institutions facilitate financial services like investment, risk pooling, and market brokering. They generally do not have full banking licenses or are not supervised by a bank regulation agency. Non-bank financial institutions include:
Financial markets
Financial markets are markets in which securities, commodities, and fungible items are traded at prices representing supply and demand. The term "market" typically means the institution of aggregate exchanges of possible buyers and sellers of such items.
Primary markets
The primary market (or initial market) generally refers to new issues of stocks, bonds, or other financial instruments.
Secondary markets
The secondary market refers to transactions in financial instruments that were previously issued.
Financial instruments
Financial instruments are tradable financial assets of any kind. They include money, evidence of ownership interest in an entity, and contracts.
Cash instruments
A cash instrument's value is determined directly by markets. They may include securities, loans, and deposits.
Derivative instruments
A derivative instrument is a contract that derives its value from one or more underlying entities (including an asset, index, or interest rate).
Financial services
Financial services are offered by a large number of businesses that encompass the finance industry. These include credit unions, banks, credit card companies, insurance companies, stock brokerages, and investment funds.