Components of Financial System
The main components of financial system are financial institutions, financial markets, financial securities and financial services.
1. Financial Institutions:
Financial institutions act as a depositor and mobilizer of savings and as a supplier of credits or finance thereby supporting to circulate the fund in an economy. it also helps to utilize the collected funds in productive sectors. Financial institutions include Regulatory, intermediaries (i.e. Banking & Non-banking) and non-intermediaries.
Regulatory institution is the institution who is responsible to regulate and control the activities of other financial institutions. Central bank of each country work as a regulatory institution. For example, Reverse Bank of India, Nepal Rastra Bank, etc.
Intermediaries are those institutions who collects funds as a deposit or premium directly from the surplus units and supply to the deficit units as a loan or investment. Government, organizations, or individual may be both surplus units and deficit units.
2. Financial Markets:
Financial market, also known as security market, is a platform designed to facilitate the purchase and sell of financial securities such as shares, bonds, debentures etc. Financial market consists the issuing company, investment bankers, brokers, agents, and investors. There are two types of financial markets: primary and secondary market.
Primary and secondary market:
Primary market is that type of security market where newly issued financial securities are transacted. In primary security market, the investment bankers play the main role to issue the new securities of various companies by charging certain commission. Investment banker is an institution which plays the role of mediators between the company and the final investors. It helps the company to collect the required amount of capital by issuing their shares to the investors. Issuing company, investment bankers and investors are the major players of primary markets.
Secondary market, on the other hand, is the security markets where already issued financial securities are transacted. In secondary security market, you can buy various types of financial securities which had been already issued in the markets. Sellers, brokers, agents and investors plays major role in this type of markets.
Capital market and money market:
Capital market is that market where the long-term securities are traded. Equity shares, preference shares, long-term bonds, debentures etc. are the example of long-term financial securities which are traded in the capital market. Money market, on the other hand, is that market where highly liquid securities are traded. Basically, securities having maturity period of equal or less than one year are traded in money market. Treasury bills, certificate of deposit, commercial papers etc. are the example of short-term financial securities.
3. Financial Securities:
Security, also known as financial asset, is the legal document evidencing the investors’ right to receive prospective future benefits under stated conditions and to acquire or sell ownership interests. Financial securities are one of the best way to collect the required amount of capital for the company. Equity shares, preference shares, bonds, debentures, treasury bills, commercial papers, certificate of deposit, etc. are some of the example of financial securities. Financial securities may be short-term and long-term in nature. The financial securities having more than maturity period are termed as long-term securities and vice-versa.
4. Financial Services:
Financial services refers to the services provided by the banks, finance companies, non-banking financial institutions, pension funds, mutual funds, investment banks, underwriter etc.