This document defines key terms related to finance and financial systems, including markets, institutions, instruments, and services. It describes how financial systems connect savers and investors, facilitating the flow of funds from areas of surplus to deficit. The formal financial system has four main components: financial institutions, markets, instruments, and services. It also outlines the major types of financial institutions, markets, instruments, and services.

1. By
Dr. DIVYA VIJAY
Faculty, Madurai Kamaraj University College, Madurai.

2. FINANCE: Management of Money or Fund.
MARKET: A Place where commercial dealings are conducted.
SERVICE: The action of helping or doing work for someone.

3. A regular gathering of people for the purchase and sale of
provisions, livestock, and other commodities.

4. Financial Market refers to a marketplace, where creation and trading
of financial assets, such as shares, debentures, bonds, derivatives,
currencies, etc. take place.

5.  Financial Services are required for mobilizing and
channelizing savings to productive activities for
producing final goods & services.
 Financial Services interlinks all the activities in a
financial system.

6. The financial system acts as a connecting link between savers of
money and users of money and thereby promotes faster
economic and industrial growth.
Thus financial system may be defined as “a set of markets and
institutions to facilitate the exchange of assets and risks.
It facilitates the flow of funds from the areas of surplus to the areas
of deficit. It is concerned about the money, credit and finance.
It consists of individuals (savers), intermediaries, markets and
users of savings (investors).

8. The formal financial system consists of four
components:
 1. Financial institutions
 2. Financial markets
 3. Financial instruments and
 4. Financial services.

10.  They are business organizations dealing in financial
resources.
 They collect resources by accepting deposits from
individuals and institutions and lend them to trade,
industry and others.
 Financial institutions mobilize the savings of savers
and give credit or finance to the investors.

11. On the basis of the nature of activities, financial
institutions may be classified into two
1.Banking financial institutions
• Banking institutions mobilize the savings of the
people.
• Provide a mechanism for the smooth exchange of
goods and services.
• Extend credit while lending money.
• Supply credit and create credit.

12. 2. Non-banking financial institutions
• The non-banking financial institutions also mobilize
financial resources directly or indirectly from the
people.
• Lend funds but do not create credit. Companies like
LIC, GIC,UTI, Development Financial Institutions.
• Non-banking financial institutions can be categorized
as investment companies, housing companies, leasing
companies, hire purchase companies, specialized
financial institutions

13. • Financial markets are the centres or arrangements that
provide facilities for buying and selling of financial
claims and services.
Financial markets exist wherever financial transactions
take place.
• Financial transactions include issue of equity stock by a
company, purchase of bonds in the secondary market,
deposit of money in a bank account, transfer of funds
from a current account to a savings account etc.

14. On the basis of maturity:
Classified in to Two
1. Money Markets
A market where short term funds are borrowed and lend is
called money market.
• It deals in short term monetary assets with a maturity
period of one year or less.
2. Capital Markets
• Capital market is the market for long term funds.
• Market deals in the long term claims, securities and stocks
with a maturity period of more than one year.

15. Treasury Bills (T-Bills)
The Treasury bills are issued by the Central Government and
known to be one of the safest money market instruments
available.
They carry zero risk, so the returns are not attractive. Also,
they come with different maturity periods like 1 year, 6
months or 3 months and are also circulated by primary and
secondary markets.
The central government issues them at a lesser price than
their face-value.
There are three types of treasury bills issued by the
Government of India currently that is through auctions
which are 91-day, 182-day and 364-day treasury bills.

16. Call Money Market
 Call Money is short term finance used for inter-bank
transactions. It has a maturity period of one day to fifteen days.
 The loans are of short-term duration varying from 1 to 14
days, are traded in call money market.
 The money that is lent for one day in this market is known
as "Call Money", and if it exceeds one day (but less than 15 days)
it is referred to as "Notice Money".
 Term Money refers to Money lent for 15 days or more in the
Inter Bank Market.

17. Bills of exchange or commercial bills
 A bill of exchange is a written order used primarily in
international trade that binds one party to pay a fixed sum
of money to another party on demand or at a
predetermined date.
 Bills of exchange are similar to cheque and can be drawn by
individuals or banks and are generally transferable
by endorsements (Legal Transfer).

18. Capital Market can be divided in to Three
1. Primary markets
 Primary markets are those markets which deal in the
new issue of securities.
 The markets where securities are issued for the first
time.
 Also known as New Issue Markets.

19. 2. Secondary Market
 Secondary markets are those markets which deal
in existing securities.
 Existing securities are those securities that have
already been issued and are already outstanding.
 Secondary market consists of stock exchanges

20. 3. Derivative Market
 The derivatives market is the financial market for
derivatives, financial instruments like futures contracts or
options, which are derived from other forms of assets.
 The most common underlying assets for derivatives are
stocks, bonds, commodities, currencies, interest rates, and
market indexes. These assets are commonly purchased
through brokerages.


21.  A financial instruments are monetary contracts
between parties.
 They can be created, traded, modified and settled.
 They can be cash, evidence of an ownership interest in
an entity or a contractual right to receive or deliver.

22. Short-term financial instruments last for one year or
less. Securities of this kind come in the form of T-bills and
commercial paper.
 Medium Term Financial Instruments last for 1 to 3 years.
Examples are Preference Shares, Debentures and bonds.
 Long Term Financial Instruments have a longer time span
varying from 1 to 30 years.
Examples are Leasing, Term Loans, Public Deposits, Bonds.

23.  A primary security is a share of stock of a corporation
that is issued and sold directly by the corporation in an
Initial Public Offering(IPO).
 A secondary security is a share of stock that has been
purchased by an investor (either directly from the
issuing corporation or from another investor) and sold
to another investor.


24. Innovative Financial Instruments
 Participation in equity (risk capital) funds
 Guarantees to local banks lending to a large number of
final beneficiaries, for instance small and medium-
sized enterprises (SMEs)
 Risk-sharing with financial institutions to boost
investment in large infrastructure projects
The aim is to boost the real economy through increasing
the access to finance for enterprises and industry
producing goods and services.

25. Services offered by financial and banking institutions.
Concerned with design and delivery of financial
instruments and advisory services to individuals and
business in the area of banking and related
institutions, insurance, financial planning,
investments etc…

26. Financial Services can be Classified in to Two
 Fund Based Services : Services that used to acquire
asset or fund for a customer.
Examples:
Leasing
Hire purchasing
Factoring
Forfeiting
Venture Capital
Mutual Funds

27.  Fee Based Services: Financial Institutions operate in a
specialized field to earn income in the form of
commission, brokerage, fee or dividend.
Examples
Issue Management
Portfolio Management
Corporate Counseling
Merchant Banking
Credit Rating

28.  The financial system of a country is an important tool
for economic development of the country.
 It helps in creation of wealth by linking the savings
with investments.
 It also facilitates the flow of funds from the
households (savers) to business firms (inventors) to
aid in wealth creation and development of both the
parties.