An understanding of the financial system requires an understanding of the following concepts:
Financial rates of returns
In any financial transaction, there should be a creation or transfer of financial asset. Hence, the basic product of any financial system is the financial asset. A financial asset is one, which is used for production or consumption or for further creation of assets. For instance, A buys equity shares and these shares are financial assets since they earn income in future.
One must know the distinction between financial assets and physical assets. Unlike financial assets, physical assets are not useful for further production of goods or for earning incomes. It is interesting to note that the objective of investment decides the nature of assets. For instance, if a building is bought for residence purposes, it becomes a physical asset, if the same is bought for hiring it becomes a financial asset. Classification of Financial Assets:
Financial assets can be classified differently under different circumstances. Like:
(i) Marketable assets and (ii) Non-marketable assets
(i) Money/cash asset (ii) Debt asset and (iii) Stock assets
Marketable Assets: Marketable assets are those which can be easily transferred from one person to another without much hindrance. Example – Equity shares of listed companies, Bonds of PSUs, Government Securities.
Non-marketable Assets: If the assets cannot be transferred easily, they come under this category. Example: FDRs, PF, Pension Funds, NSC, Insurance policy etc.
Cash Assets: All coins and currencies issued by the Government or Central Bank are cash assets. Besides, commercial banks can also create money by means of creating credit.
Debt Asset: Debt asset is issued by a variety of organizations for the purpose of raising their debt capital. There are different ways of raising debt capital. Ex.- issue of debentures, raising of term loans, working capital advances etc.
Stock Asset: Stock is issued by business organizations for the purpose of raising their fixed capital. There are two types of stock namely equity and preference.
The term financial intermediaries include all kinds of organizations which intermediate and facilitate financial transactions of both individuals and corporate customers. Thus, it refers to all kinds of FIs and investing institutions which facilitate financial transactions in financial markets. They may be in the organized sector or in the unorganized sector. They may also be classified in to two:
Capital Market Intermediaries
Money Market Intermediaries. Capital Market Intermediaries:
These intermediaries mainly provide long term funds to individuals and corporate customers. They consist of term lending institutions like financial corporations and investment institutions like LIC.
Money market intermediaries:
Money market intermediaries supply only short term funds to individuals and corporate customers. They consist of commercial banks, cooperative bank.
Generally speaking, there is no specific place or location to indicate a financial market. Wherever a financial transaction takes place it is deemed to have taken place in the financial market. Hence financial markets are pervasive in nature since financial transactions are themselves very pervasive throughout the economic system. However, financial markets can be referred to as those centers and arrangements which facilitate buying and selling of financial assets, claims and services. Sometimes, we do find the existence of a specific place or location for a financial market as in the case of stock exchange.