The term "finance" in our simple understanding it is perceived
as equivalent to 'Money'.
But finance exactly is not money, it is the source of providing
funds for a particular activity.
Thus finance does not mean the money with the
Government, but it refers to sources of raising revenue for the
activities and functions of a Government.
The word "system", in the term "financial system", implies a set
of complex and closely connected or interlined
institutions, agents, practices, markets, transactions, claims, an
d liabilities in the economy.
The financial system is concerned about money, credit and
finance-the three terms are intimately related yet are somewhat
different from each other
Financial markets: institutions through which savers can
directly provide funds to borrowers. Examples:
– The Bond Market
A bond is a certificate of indebtedness.
– The Stock Market.
A stock is a claim to partial
ownership in a firm.
Financial intermediaries: institutions through which savers can
indirectly provide funds to borrowers. Examples:
– Mutual funds: institutions that sell shares to the public and
use the proceeds to buy portfolios of stocks and bonds
• The amount of money that is left over after personal expenses
have been met can be positive.
• For those who tend to rely on credit and loans to make ends
meet, they will have negative savings.
• Savings can be turned into further increased income through
An investment is a monetary asset purchased with the idea that
the asset will provide income in the future or appreciate and be
sold at a higher price.
These are the business organizations that act as mobilizes of
savings, and as purveyors of credit or finance
Also provide various financial services
Deal in financial assets such as deposits, loans, securities
These assets can be seen on the asset side of the balance
sheet of banks or any other financial institutions.
1. Banking financial institutions
Which participate in the economy’s payments system i.e.,
They provide transaction services
Their deposits liabilities constitute a major part of the national money supply
2. Non-banking financial institutions
Which act as mere purveyors of credit and they will not create. e.g., LIC, UTI, IDBI
•Financial intermediaries are those institutions which intermediate between savers and
•Non-financial intermediaries are those institutions which do the loan business but their
resources are not directly obtained from the savers.
•e.g., LIC, GIC, IDBI, IFC, NABARD.
Facilities the flow of savings into investment against capital formation
Financial markets are the centers or arrangements that provide facilities for buying and
selling of financial claims and services
The participants in the financial markets are corporations, financial
institutions, individuals and the government
Either directly or through brokers and dealers in organized exchanges or off-
1. Debt market: The debt market is the financial
market for fixed claims like debt instruments
2. Equity Market: The equity market is the
financial market for residual claims i.e., equity
1. Money markets
o A market where short-term funds are
borrowed and lent is called ‘money
2. Capital Markets
o Capital markets deal in the long-term
claims, securities, and stocks with a
maturity period of more than one year.
1. Primary markets
• Which deal in the new financial claims
or new securities, and, also known as
new issue markets
2. Secondary market
• Which deal in securities already
issued or existing or outstanding
1. Cash/spot market
Stocks are sold for cash and delivered
immediately after the purchase or sale of
2. Forward or future market
Buy and sell stocks/ commodities, contracts
and the delivery of securities occurs at a
pre-determined time in future.
1. Organized markets
The financial transactions which take
place within the well established
2. Unorganized markets.
The financial transactions which take
place without systematic and orderly
structure or arrangements
Which are used for raising resources for corporate activities
That are used for raising capital through the capital market are known as ‘capital
Preference shares, equity shares, warrants, debentures and bonds
That are used for raising and supplying money in short period not exceeding one year
through various securities are called ‘money market instruments’
For example, treasure bills, gilt-edge securities, state government and public sector
instruments, commercial paper, commercial bills etc.
1. Financial institutions serve individuals and institutional investors.
2. help to raise the required funds and assure the efficient deployment of funds.
3. extend their service up to the stage of servicing of lenders.
4. provide services like bill discounting, factoring of debtors, parking of short-term funds
in the money market, e-commerce, securitization of debts
5. provide some specialized services like credit rating, venture capital financing, lease
financing, factoring, mutual funds, merchant banking, stock lending, depository, credit
cards, housing finance, and merchant banking