Financial system

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A financial system (within the scope of finance) is a system that allows the exchange of funds between lenders, investors, and borrowers. Financial systems operate at national, global, and firm-specific levels.[1] They consist of complex, closely related services, markets, and institutions used to provide an efficient and regular linkage between investors and depositors.[2]

Money, credit, and finance are used as media of exchange in financial systems. They serve as a medium of known value for which goods and services can be exchanged as an alternative to bartering.[3] A modern financial system may include banks (operated by the government or private sector), financial markets, financial instruments, and financial services. Financial systems allow funds to be allocated, invested, or moved between economic sectors. They enable individuals and companies to share the associated risks.[4]

The Components of a Financial market[edit]

Financial institutions[edit]

Financial institutions provide financial services for members and clients. They are typically regulated heavily, as they provide market stability and consumer protection. Financial institutions include:[citation needed]

Non-bank financial institutions[edit]

Non-bank financial institutions facilitate financial services like investment, risk pooling, and market brokering. They generally do not have full banking licenses or are not supervised by a bank regulation agency.[5] Non-bank financial institutions include:[6]

Financial markets[edit]

Financial markets are markets in which securities, commodities, and fungible items are traded at costs representing supply and demand. The term "market" typically means the aggregate of possible buyers and sellers of such items.

Primary markets[edit]

The primary market is used for new issues or financial claims. Financial instruments such as stocks and bonds are often sold through primary markets. this is also known as the initial market

Secondary markets[edit]

The secondary market is the market in which financial instruments that have been issued previously are sold are found

Financial instruments[edit]

Financial instruments are tradable assets of any kind. They include money, evidence of ownership interest in an entity, and contracts.[7]

Cash instruments[edit]

A cash instrument's value is determined directly by markets. They may include securities, loans, and deposits.

Derivative instruments[edit]

The value of derivative instruments is variable and derived from one or more underlying entity (including an asset, index, or interest rate).[8]

Financial services[edit]

Financial services are offered by a large number of business that encompass the finance industry. These include credit unions, banks, credit card companies, insurance companies, stock brokerages, and investment funds.


Banks are financial intermediaries that lend money to borrowers to generate revenue. They are often regulated heavily as a result of their importance in the financial system and the number of risks they face.

See also[edit]


  1. ^ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 551. ISBN 0-13-063085-3. 
  2. ^ Gurusamy, S. (2008). Financial Services and Systems 2nd edition, p. 3. Tata McGraw-Hill Education. ISBN 0-07-015335-3
  3. ^ "Back to Basics: What Is Money? - Finance & Development, September 2012". Retrieved 2016-01-10. 
  4. ^ Allen, Franklin; Gale, Douglas (2000-01-01). Comparing Financial Systems. MIT Press. ISBN 9780262011778. 
  5. ^ Development and Regulation of Non-Bank Financial Institutions. The World Bank. 2002-03-05. doi:10.1596/0-8213-4839-6. ISBN 978-0-8213-4839-0. 
  6. ^ "Online Manual - BSA InfoBase - FFIEC". Retrieved 2016-01-10. 
  7. ^ "Accounting for Financial Instruments". Retrieved 2016-01-10. 
  8. ^ "Understanding Derivatives: Markets and Infrastructure - Federal Reserve Bank of Chicago". Retrieved 2016-01-10.