Editing Financial system

{{Short description|System that allows the transfer of funds}}
{{Refimprove|date=November 2015}}

A '''financial system''' is a system that allows the exchange of funds between [[financial market participants]] such as [[lenders]], [[investor]]s, and [[borrower]]s. Financial systems operate at national and global levels.<ref>{{cite book
  | last1 = O'Sullivan
  | first1 = Arthur
  | author-link = Arthur O'Sullivan (economist)
  | first2 = Steven M. | last2 = Sheffrin
  | title = Economics: Principles in Action
  | url = https://archive.org/details/economicsprincip00osul
  | url-access = limited
  | publisher = Pearson Prentice Hall
  | year = 2003
  | location = Upper Saddle River, New Jersey 07458
  | pages = [https://archive.org/details/economicsprincip00osul/page/n567 551]
  | isbn = 0-13-063085-3}}</ref> Financial institutions consist of complex, closely related services, [[market (economics)|market]]s, and institutions intended to provide an efficient and regular linkage between investors and borrowers.<ref>Gurusamy,
 S. (2008). 
[https://books.google.com/books?id=nPOSoSoRnycC&dq=set+of+complex+and+closely+interconnected+financial+institutions,+markets,+instruments,+services,+practices,+and+transactions&pg=PA3  ''Financial Services and Systems''] 2nd edition, p. 3. Tata McGraw-Hill
 Education. {{ISBN|0-07-015335-3}}</ref>

In other words, financial systems can be known wherever there exists the exchange of a financial medium (money) while there is a reallocation of funds into needy areas (financial markets, business firms, banks) to utilize the potential of ideal money and place it in use to get benefits out of it. This whole mechanism is known as a financial system.

[[Money]], [[Credit (finance)|credit]], and [[finance]] are used as media of exchange in financial systems. They serve as a medium of known value for which [[Good (economics)|goods]] and [[Service (economics)|services]] can be exchanged as an alternative to [[barter]]ing.<ref>{{Cite web|title = Back to Basics: What Is Money? - Finance & Development, September 2012|url = http://www.imf.org/external/pubs/ft/fandd/2012/09/basics.htm|website = www.imf.org|access-date = 2016-01-10}}</ref> A modern financial system may include [[banking|banks]] (public sector or private sector), [[financial market]]s, [[financial instruments]], and [[financial services]]. Financial systems allow funds to be allocated, invested, or moved between economic sectors, and they enable individuals and companies to share the associated risks.<ref>{{Cite book|title = Comparing Financial Systems|url = https://books.google.com/books?id=w6dxLY_RH_oC|publisher = MIT Press|date = 2000-01-01|isbn = 9780262011778|language = en|first1 = Franklin|last1 = Allen|first2 = Douglas|last2 = Gale}}</ref><ref>{{Cite web |title=Financial Systems |url=https://openknowledge.worldbank.org/bitstream/handle/10986/5984/9780195216066_ch04.pdf}}</ref>

==The components of a financial system==

There are mainly four components of the financial system:

# Financial markets - the market place where buyers and sellers interact with each other and participate in the trading of bonds, shares and other assets are called financial markets.
# Financial instruments - the products which are traded in the financial markets are called financial instruments. Based on different  requirements and credit seekers, the securities in the market also differ from each others.
# Financial institutions - financial institutions are acting as a mediator between the investors and borrowers. They provide financial services for members and clients. It is also termed as financial intermediaries because they act as middlemen between the savers and borrowers. The investor's savings are mobilized either directly or indirectly via the financial markets. They offer services to organisations who want to raise funds from markets and take care of financial assets (deposits, securities, loan, etc). 
# Financial services - services provided by assets management and liabilities management companies. They help to get the required funds and also make sure that they are efficiently invested. (eg. banking services, insurance services and investment services)

== Banks ==
[[File:Bank account (UML class diagram).svg|thumb|UML class diagram depicting a banking system]]
[[Bank]]s are [[Financial intermediary|financial intermediaries]] that lend money to borrowers to generate revenue and accept deposits . They are typically regulated heavily, as they provide market stability and [[consumer protection]]. Banks include:{{Citation needed|date = January 2016|reason = Not mentioned in other references of article; no basis for information. Kept list, as it seemed accurate and is not a pressing issue.}}
*Public banks
*[[Commercial bank]]s
*[[Central bank]]s 
*Cooperative banks
*State-managed cooperative banks
*State-managed land development banks

== Non-bank financial system ==
[[Non-bank financial system]]s facilitate financial services like [[investment]], [[risk pool]]ing, and [[Stockbroker|market brokering]]. They generally do not have full banking licenses.<ref>{{Cite book|title = Development and Regulation of Non-Bank Financial Institutions|url = http://elibrary.worldbank.org/doi/abs/10.1596/0-8213-4839-6|publisher = The World Bank|date = 2002-03-05|isbn = 978-0-8213-4839-0|doi = 10.1596/0-8213-4839-6|last1 = Carmichael|first1 = Jeffrey|last2 = Pomerleano|first2 = Michael|hdl = 10986/15236}}</ref> Non-bank financial system include:<ref>{{Cite web|title = Online Manual - BSA InfoBase - FFIEC|url = http://www.ffiec.gov/bsa_aml_infobase/pages_manual/olm_091.htm|website = www.ffiec.gov|access-date = 2016-01-10|archive-date = 2019-02-01|archive-url = https://web.archive.org/web/20190201015331/https://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_091.htm|url-status = dead}}</ref>
* Finance and loan companies

=== Financial markets ===

[[Financial market]]s are markets in which [[Security (finance)|securities]], [[Commodity|commodities]], and [[Fungibility|fungible]] items are traded at prices representing [[supply and demand]]. The term "market" typically means the institution of aggregate exchanges of possible buyers and sellers of such items.

==== Primary markets ====
The [[primary market]] (or initial market) generally refers to new issues of [[stock]]s, [[Bond (finance)|bonds]], or other financial instruments. The primary market is divided in two segments, the money market and the capital market.

==== Secondary markets ====
The [[secondary market]] refers to transactions in financial instruments that were previously issued.

=== Financial instruments ===
[[Financial instrument]]s are [[Tradability|tradable]] financial [[asset]]s of any kind. They include money, evidence of ownership interest in an entity, and contracts.<ref>{{Cite web|title = Accounting for Financial Instruments|url = http://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1351027210037|website = www.fasb.org|access-date = 2016-01-10}}</ref>

==== Derivative instruments ====
A [[Derivative (finance)|derivative instrument]] is a contract that derives its value from one or more underlying entities (including an asset, index, or [[interest rate]]).<ref>{{Cite web|title = Understanding Derivatives: Markets and Infrastructure |publisher = Federal Reserve Bank of Chicago|url = https://chicagofed.org/publications/understanding-derivatives/index |access-date = 2016-01-10}}</ref>

== Financial services ==
[[Financial services]] are offered by a large number of businesses that encompass the finance industry. These include [[credit union]]s, [[bank]]s, [[credit card]] companies, [[insurance]] companies, [[Brokerage firm|stock brokerages]], and [[Investment management|investment funds]].

==See also==
*[[Global financial system]]
*{{slink|Finance#The financial system}}
*[[Financial services]]
*[[Financial market]]
*[[Circular flow of income]]

==References==
{{Reflist}}

{{DEFAULTSORT:Financial System}}
[[Category:Financial systems| ]]
[[Category:Banking]]