WHAT IS FINANCIAL

SYSTEM?

 Financial Markets + Financial

Institutions + Financial Instruments
+Laws + Regulations => FINANCIAL
SYSTEM

Primary Function:
To move scarce loanable funds from
those who save to those who borrow
to make investments so tha To move
scarce loanable funds from those who
save to those who borrow to make
investments so that the economy can
grow and increase the standard of
living of the people.

 the economy can grow and increase

the standard of living of the people.

Funds Flow through the

Financial System
INDIRECT FINANCE

Financial
Intermediari
e

Surplus Units
Household
s
Business
Firms
Government
Foreigners

Funds

Financi
al
Market
s
DIRECT FINANCE

Funds

Deficit Units
Households
Business Firms
Government
Foreigners

What is Financial Market?

 A market in which financial assets such

as stocks, bonds etc. can be purchased
or sold.
Financial markets are the heart of the
global financial system, attracting and
allocating savings and setting interest
rates and the prices of financial assets.

Types of Financial Markets

Primary Vs Secondary
Markets:
A primary market is a financial market in
which new issues of a security, such as a
bond or a stock, are sold to initial buyers by
the corporation or government agency
borrowing funds.
.securities traded in the primary market for
the very first time are referred to as Initial
Public Offering (IPO).After the initial trading
the securities are no longer IPO and they go
for trading in secondary market.

 A secondary market is a financial

market in which securities that have
been previously issued (and are thus
secondhand) can be resold

Thing to remember: Secondary market

makes
the
financial
instruments
LIQUID!

Money Vs Capital Markets

The money market is a financial market in

which only short-term debt instruments
(maturity less than 1 year) are traded
Capital mark market in which longerterm debt (maturity of one year or
greater) and equity instruments are
traded.

Things to remember!
Money market securities generally have a
higher degree of liquidity and smaller
fluctuations in prices.
- Capital market securities are typically
expected to generate a higher annualized
return to investors.

Organized Vs OTC (Over the Counter)

Markets
Organized markets refer to a central
location where buyers and sellers of
securities (or their agents or brokers)
meet to conduct trades.
Ex: NEPSE, AMEX, NYSE etc.
OTC refers to securities market
where trade is undertaken via
telecommunication or IT networks.

Things to remember!
OTC markets are physically dispersed
markets in which market makers are in
communication by telephone or
electronically.

-- On an organized exchange, traders met

face to face on the trading floor where as in
OTC market, they bargain over the telephone
or other means of communication.

Spot Vs Futures Markets

A spot market is one in which assets or
financial services are traded for
immediate delivery.
A futures market is designed to trade
contracts calling for the future delivery of
financial instruments.

Open Vs Negotiated Markets

In open markets the securities are sold
to the highest bidder and are bought
and sold any number of times before
they mature and are paid off.
In negotiated markets, securities are
sold to one or a few buyers under
private contact.

Financial Institutions
A financial institution stands between
the lenders-savers and the borrowersspenders and helps to transfer funds
from one to the other. Hence, it is also
known as Financial Intermediary.

Types:
Depository Institutions
Commercial banks, S&Ls (Saving and
Loan Associations), Mutual Saving
Banks, Credit Unions
Contractual Savings Institutions
Fire and Casualty Insurance Companies,
Pension
Funds
and
Government
Retirement Funds

Investment Intermediaries
Finance Companies, Mutual Funds,
Money Market Mutual Funds
What are traded in Financial Markets?
Financial assets or financial
instruments are traded in financial
markets.

Money
marker
instruments=>
Treasury Bills, CD (Certificate of
Deposit), Commercial Paper, Banker's
Acceptances, Repos (Repurchase
Agreements), Fed funds, Eurodollars
etc.
CAPITAL MARKET INSTRUMENTS =>
Stocks, Mortgages, Corporate Bonds,
Government Securities, State and Local
Government Bonds etc.
DERIVATIVES MARKET INSTRUMENTS=>

Options, Forwards, Futures etc.

Thank you