Financial system arose along with the country itself and is inextricably linked with its activity. With the help of financial system country collects and uses money for particular needs. Moreover, financial system includes monetary relations between state and enterprises, state and people, between enterprises and within them. In a modern financial system all funds are flowing from objects that have a surplus of funds to those who experience scarcity of them. In case an enterprise decides to use bank in order to receive financial funds, such scheme is called indirect or bank-based system, while direct system omits using money from banks (Bank, 2016).
Financial Institutions
One of the fist financial institutions one may think of is a commercial bank. People regularly use this type of bank to pay for stuff they purchase and other common things. Such banks must be authorized by law in order to receive money from businesses and individuals and also to give them loans ("What Are Commercial Banks? - Definition, Roles & Functions - Video & Lesson Transcript | Study.com", 2016). The main functions of commercial markets are: saving money, receiving deposits and paying interests to depositors, lending money, taking care of individuals or enterprises account. One of the important roles that bank plays is payment agent between countries and within one country. Commercial banks can also arrange wire transfers with other institutions.
After Great Depression in 1933 USA government decided to separate investment banks from commercial banks, in order to increase the regulation of financial system (Invetopedia, 2012). Investment bank usually takes care of businesses and some governments. Their services may include underwriting debt and some corporate reorganization, also investment banks may act as broker for institutional clients. In case required investment banks can also provide financial advisory services to companies.
The next type of financial institution is an insurance company. These companies collect premiums from a large group of people who want to protect themselves against particular lost. In case any insurance situation company pays for claims that arise.
Another type is brokerages. These organizations act as an intermediary between buyers and sellers in order to make sure that transaction is secure. They receive their income in form of commission after transaction was completed successfully.
Investment companies are corporations or trusts through hich individuals invest in professionally managed portfolios of securities (Investopedia, 2012). There are also nonbank financial organizations that are not exactly banks, but they can provide some of the same services as banks do.
Financial Markets
Financial markets are markets, in which financial assets can be bought or sold. Any enterprise, country or organization needs funds to be able to function normally. In case it does not have its own funds to satisfy needs, enterprise should borrow theis money. Individuals, businesses or governments who have an access of unspent money and are interested in lending them are called surplus units, while others who borrow them in order to fulfill their spending plans that access their income, are called deficit units (Scribd, 2016). These names are very logical as one has surplus of financial resources, while other experiences deficit. However, it is not the only thing that surplus unit can do. Usually, these units may also spend the surplus to buy some new goods, materials or technologies to increase and develop. However, lending money is also a good option, as one has a chance to receive an interest rate from borrowed money every period. One of the nice representatives of surplus units is a household. Households usually have more income than it is necessary to purchase required goods, products and others. That is why they are usually the ones who borrow money.
Talking about deficit units, one usually thinks about government. Unfortunately economy of the country cannot always earn as much as needed to fulfill all the required improvements. Therefore, government of the country usually borrows money from others, who have higher income. Indeed, government should spend a lot of money to support its population, keep roads in good conditions and so on. However, this activity cannot bring sufficient income that is why it should loan some funds.
Differentiate Between Money and Capital Markets
Despite the fact that words “money” and “capital” have similar meaning, difference between money and capital market is significant. Capital market is one where both separate individuals and institutions trade financial securities. This is usually done in order to raise their funds. This market is composed of both primary and secondary markets. There is no secret that in order to grow each corporation and government requires some capital to finance its operations and invest in interesting projects. To gain this capital company raises amount of its money by selling securities on the capital market.
Differentiate Between Primary and Secondary Markets
Primary market deals with new securities on an exchange (Investopedia, 2012). These markets mostly deal with cases when investment bank sets a beginning price range for security and then consider selling it directly to investor. Only on the primary markets investors have chance to take part in new security issuance. The issuing company will receive cash after the sale and later on has chance to use these money to expand business. While on the secondary market investors can purchase securities from other investors. In this case money usually go to previous investor rather than company itself. Significant difference between these markets is also the fact that price on primary markets is often set beforehand, while in the secondary market it is due to supply and demand for the security or asset.
Conclusion
Financial markets and institutions are very important parts of our everyday life. We deal with basis literally on every step. People purchase goods, download programs to their phones and they use credit cards to pay for all these actions. Even when you pay with cash it also involves financial system and bank. Living in the modern country means facing with financial markets. Therefore, it is important to understand at least basic terms in order to feel confident in the modern world of money.
References:
Bank, E. (2016). The role of financial markets for economic growth. Ecb.europa.eu. Retrieved 4 March 2016, from https://www.ecb.europa.eu/press/key/date/2001/html/sp010531.en.html
Scribd,. (2016). Role of Financial Markets and Institutions. Retrieved 4 March 2016, from http://www.scribd.com/doc/21436770/Role-of-Financial-Markets-and-Institutions#scribd
Investopedia,. (2012). Types Of Financial Institutions And Their Roles - Complete Guide To Corporate Finance | Investopedia. Retrieved 4 March 2016, from http://www.investopedia.com/walkthrough/corporate-finance/1/financial-institutions.aspx
What Are Commercial Banks? - Definition, Roles & Functions - Video & Lesson Transcript | Study.com. (2016). Study.com. Retrieved 4 March 2016, from http://study.com/academy/lesson/what-are-commercial-banks-definition-roles-functions.html
