The good functioning of an economy depends on the proper functioning of the country\'s financial market and financial institutions. Both these are involved in the financial transactions that take place in the economy. Financial transactions take place through exchange of funds. There are two ways in which the exchange of funds can take place. They are: Direct exchange and Indirect exchange. Direct exchange takes place when the buyers and the sellers meet each other directly and exchange their securities.For example: Stocks or bonds Indirect exchange takes place when the buyers and sellers do not meet each other directly. They carry out their financial transaction through a financial institution. For example: Bank The financial market and financial institution have the main function of transferring the funds from people who have excess funds to people who have shortage of funds. Some functions are common for both financial markets as well as financial institutions. They both are involved in the borrowing and lending of funds. They help in transfer of risk of the financial asset from the seller to the buyer. They both help in providing information to the buyers and sellers about the financial assets. However, there are also some functions that are unique to each. Financial markets determine the price of the financial asset based on the demand and supply forces. Financial institutions help to lower the transaction costs and also reduce the assymetry of information about financial assets. The financial institutions also provide specialized services to th buyers and sellers. Thus, it can be said that in the financial system, the financial market and financial institutions have an important role to play. Direct exchange takes place through financial market while indirect exchnage takes place through financial institutions. Solution The good functioning of an economy depends on the proper functioning of the country\'s financial market and financial institutions. Both these are involved in the financial transactions that take place in the economy. Financial transactions take place through exchange of funds. There are two ways in which the exchange of funds can take place. They are: Direct exchange and Indirect exchange. Direct exchange takes place when the buyers and the sellers meet each other directly and exchange their securities.For example: Stocks or bonds Indirect exchange takes place when the buyers and sellers do not meet each other directly. They carry out their financial transaction through a financial institution. For example: Bank The financial market and financial institution have the main function of transferring the funds from people who have excess funds to people who have shortage of funds. Some functions are common for both financial markets as well as financial institutions. They both are involved in the borrowing and lending of funds. They help in transfer of risk of the financial asset from the seller to the buyer. They both help.