Understanding the classification of financial system

 

The financial system of a country refers to the various financial needs of economies different sectors and means and ways through which those needs can be met economically and efficiently.  Funds are needed to meet various monetary needs. The financial needs are usually met through different agencies and sources.

The financial system is divided into four components:

  • Financial markets
  • Financial institutions
  • Financial services and
  • Financial instruments

An efficient working of the financial system helps in smooth flow of funds to productive activities from investors. The financial market plays the most crucial role in helping both ends meet. There are various types of market exist.

Classification of the market

The market is broadly classified into the capital market, currency market and money market.

Capital market

The capital market helps in financing the long-term needs of the business. It facilitates lending and borrowing of long-term funds. It is further divided into 3 groups:

Corporate or industrial market- It is a market wherein the industrial securities are traded. The debentures, preference and equity shares and bonds of the companies are traded. In the primary market, the newly issued securities are traded and in the secondary market, buying and selling of secondary securities take place.

Long-term loan market- In this market, the banks and other financial institutions offer long-term loans. It is generally offered for the purpose of expansion, modernization, and business diversification.

Government securities market-In this market, the securities of the government are sold and bought. The securities will be issued in form of credit notes and bonds. These securities can be short-term or long-term.

Currency market

In this market, the currencies of the different countries are traded.  In last few years, a new market has emerged known as cryptocurrency market wherein the digital currencies known as bitcoin, litecoin, etc are traded. The trader has a choice to use the bitcoin trader software to help him with the transaction process.  You can gain all the information regarding the software in this post.

Money market

This market is into short-term funds that are for one year or less. Organized market and unorganized markets are the major classifications of the money market. Under unorganized market, you will find money lenders, indigenous bankers, etc.  They usually charge a high-interest rate.  In the organized market, there is a central authority who dictates the rules and regulations for the market to follow. The instruments dealt in this market are commercial paper, treasury bills, certificate of deposit, etc.