Activity 5 - Financial System

 Hello, everyone. Here is my reflection on the financial system and the way it is distributed, its elements and so. Please leave a comment and share with me your thoughts 😉

What is Finance?

Is a big amount of money exchanged it is usually handled by the government or large companies.

 

What is Financial System?

Are made of different intricate and complex models that link financial institutions and markets to provide financial services for various operatives. They take control of the transactions and exchange of money between servers, investors, lenders, and borrowers.

 

What are the functions of a financial system?

- It provides payment system for the exchange of goods and services in the economy.

- It provides the mechanism to pull the funds in terms of household savings for corporate investments.

- It provides the financial capital for long-term capital formation for the government and business organizations.

- It facilitates the investors and other market participants to liquidate their investments alternatives like stocks and bonds etc.

- It provides the avenues for managing the risks faced by the market participants.

- It takes of both short-term and long-term needs of the market participants.

- It supplies the required financial capital to government for public expenditure on the social welfare activity, infrastructure development etc.

- It provides the price information which helps to coordinate the decentralized decision-making process in the various sectors.

- It helps in reduction of the asymmetric information and moral hazard problems which in turn facilitates in reducing the transaction costs.

- It creates different investment opportunities for the investor to maximize their return.

- It helps in efficient allocation of financial resources.

- It plays a significant role for economic growth as it helps to create the demand and supply of the funds through which the interest rates are determined in various markets. Changes in interest rates affect the money supply, inflation rate and the possibility of the foreign investments.

 

How are the main types of financial institutions categorized? Describe each one.

- Intermediaries Vs. Non-Intermediaries: The first one intermediates between savers and investors; they lend money as well as mobilize savings. And the non-intermediaries loan business but their resources are not directly obtained from the savers.

- Central Banks: This are the ones responsible for the oversight and management of all other banks.

- Credit Unions: Credit unions serve a specific demographic per their field of membership, such as teachers or members of the military.

- Investment Banks and Companies: Investment banks do not take deposits; instead, they help individuals, businesses and governments raise capital through the issuance of securities.

- Brokerage Firms: Brokerage firms assist individuals and institutions in buying and selling securities among available investors.

- Mortgage Companies: While most mortgage companies serve the individual consumer market, some specialize in lending options for commercial real estate only.

 

Which are the main classes of financial instruments issued in a financial system? Describe them in detail.

- Cash Instruments: These are financial instruments with values directly influenced by the condition of the markets.

- Derivative Instruments: Derivative instruments are financial instruments that have values determined from underlying assets, such as resources, currency, bonds, stocks, and stock indexes.

- Foreign Exchange Instruments: These are financial instruments that are represented on the foreign market and primarily consist of currency agreements and derivatives.

 

What are the distinctions between various types of financial markets according to their function? Explain them.

- Stock Markets: Stock markets, or equities markets, are used by companies to raise capital via an initial public offering (IPO), with shares subsequently traded among various buyers and sellers in what is known as a secondary market.

- Over-the-Counter Markets: OTC markets and the transactions that occur on them are far less regulated, less liquid, and opaquer.

- Bond Markets: The bond market sells securities such as notes, and bills issued by the United States Treasury.

- Money Markets: This involves large-volume trades between institutions and traders.

- Derivatives Markets: Is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index).

- Forex Market: Is the market in which participants can buy, sell, hedge, and speculate on the exchange rates between currency pairs.

- Commodities Markets: Commodities markets are venues where producers and consumers meet to exchange physical commodities such as agricultural products, energy products, precious metals, or "soft" commodities.

- Cryptocurrency Markets: These exchanges host digital wallets for traders to swap one cryptocurrency for another, or for fiat monies such as dollars or euros.

 

What does the “flow of funds” refer to? Explain in detail. 

I s the net of all cash inflows and outflows in and out of various financial assets. Fund flow is usually measured on a monthly or quarterly basis. The performance of an asset or fund is not considered, only share redemptions, or outflows, and share purchases, or inflows.

 

Write a final reflection on the topic, mentioning what were the most important aspects you learned.

This topic was very interesting because it gives you a new perspective of hoy the financials are controlled or supervised and how to classify each one. Knowing how the Financial System is distributed and what are the instruments needed to do it. There are a lot of institutions and each one has their own activities and way to manage their finances.