The Roles of Financial Market and Financial Institutions

Financial Market:
Financial Market, in very crude terms, is a place where the savings from various sources like households, government, firms and corporate are mobilized towards those who need it. Alternatively put, financial market is an intermediary which directs funds from the savers (lenders) to the borrowers. In other words, financial market is the place where assets like equities, bonds, currencies, derivatives and stocks are traded.

Some of the salient features of financial market are:

Transparent pricing Basic regulations on trading Low transaction costs Market determined prices of traded securities

Basic Functions of Financial Market:

Six key functions of Financial Market are 1. Borrowing & Lending: Financial market transfers fund from one economic agent (saver/lender) to another (borrower) for the purpose of either consumption or investment. 2. Determination of Prices: Prices of the new assets as well as the existing stocks of financial assets are set in financial markets. 3. Assimilation and Co-ordination of Information: It gathers and co-ordinates information regarding the value of financial assets and flow of funds in the economy. 4. Liquidity: The asset holders can sell or liquidate their assets in financial market. 5. Risk Sharing: It distributes the risk associated in any transaction among several participants in an enterprise. 6. Efficiency: It reduces the cost of transaction and acquiring information.

Major Players in Financial Market:

The main participants in the financial market are as follows:

BANKS: Largest provider of funds to business houses and corporate through accepting

deposits.
INSURANCE COMPANIES: Issue contracts to individuals or firms with a promise to

refund them in future in case of any event and thereby invest these funds in debt, equities, properties, etc. FINANCE COMPANIES: Engages in short to medium term financing for businesses by collecting funds by issuing debentures and borrowing from general public.

MERCHANT BANKS: Funded by short term borrowings; lend mainly to corporations for

foreign currency and commercial bills financing. COMPANIES: The surplus funds generated from business operations are majorly invested in money market instruments, commercial bills and stocks of other companies. MUTUAL FUNDS: Acquire funds mainly from the general public and invest them in money market, commercial bills and shares. GOVERNMENT: Authorized dealers basically look after the demand-supply operations in financial market. Also works to fill in the gap between the demand and supply of funds.

Components of Financial Market:

The financial market can be classified into several sub-types. The components are: 1. CAPITAL MARKET: It consists of stock market and bond market. Works by issuing common stock or bonds. 2. COMMODITY MARKET: Provides for trading in commodities. 3. MONEY MARKET: Facilitates short-term debt financing and investment. 4. DERIVATIVES MARKET: Specializes in financial risk sharing and risk management. 5. FUTURES MARKET: Issues contracts for trading commodities at some future date. 6. INSURANCE MARKET: Also specializes in re-distribution of various risks. 7. FOREIGN EXCHANGE MARKET: Specializes in trading of foreign exchange and international currencies.

Financial Institutions:
Financial institutions are those organizations that are involved in providing various types of financial services to their customers. The financial institutions are controlled and supervised by the rules and regulations delineated by government authorities. Some of the financial institutions also function as mediators in share markets and debt security markets. There the principal function of financial institutions is to collect funds from the investors and direct the funds to various financial services providers in search for those funds.

These are the various Financial Institutions:

Banks: Banks are financial intermediary that accepts deposits and channels those deposits
into lending activities, either directly or through capital markets. They connect customers with capital deficits to customers with capital surpluses. Stock Brokerage Firms: The stock brokerage firms are those entities that are responsible for helping the investors put their money in the stock market. Non Banking Financial Institutions: Financial institutions are those organizations that are involved in providing various types of financial services to their customers. The financial

institutions are controlled and supervised by the rules and regulations delineated by government authorities. Building Societies: Darlington Building Society is one of the top building societies in the UK and offers a range of mortgage and investment products. The society principally serves Country Durham, North Yorkshire and Tees Valley. Darlington Building Society is a mutual organization and doesn't have any outside shareholders. Asset Management Firms: Asset Management firms are companies that invest its clients' pooled fund into securities that match its declared financial objectives. This is a list of top asset management firms of the world. Asset management companies provide investors with more diversification and investing options than they would have by themselves & attain their investment goals by proper management of assets. Credit Unions: The credit unions are the co-operative financial institutions that are owned by the members of the union. The major difference between the credit unions and banks is that the credit unions are owned by the members unlike banks. Insurance Companies: Insurance is a form of risk management, primarily used to hedge against the risk of a contingent or an uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment.

Financial institutions deal with various financial activities associated with bonds, debentures, stocks, loans, risk diversification, insurance, hedging, retirement planning, investment, portfolio management, and many other types of related functions. With the help of their functions, the financial institutions transfer money or funds to various tiers of economy and thus play a significant role in acting upon the domestic and the international economic scenario. For carrying out their business operations, financial institutions implement different types of economic models. They assist their clients and investors to maximize their profits by rendering appropriate guidance. Financial institutions also impart a wide range of educational programs to educate the investors on the fundamentals of investment and also regarding the valuation of stock, bonds, assets, foreign exchanges, and commodities. Financial institutions can be both private and public in nature. The most common forms of financial institutions can be categorized into the following types:

Business finance company Mortgage finance company Car finance company Personal finance company Personal loan finance company Home finance company Corporate finance company

Thus, it can be concluded that a financial institution is that type of an institution, which performs the collection of funds from private investors and public investors and utilizes those

funds in financial assets. The functions of financial institutions are not limited to a particular country, instead they have also become popular in abroad due to the growing impact of globalization.

Roles of Financial Institutions

The roles of financial institutions are regulated by the international laws as they are operational in more than one country. The shareholders or the owners of the financial institutions are national governments of the countries. The financial institutions (FI) are getting involved in the conflicting situations very easily due to various international laws. It is widely believed that structural and political concerns of the countries cause obstacles to the development of roles of international financial institutions. This is caused mainly due to the international humanitarian laws. On the other hand, it is also believed that the roles of international financial institutions in the international community help them to make contribution to the enforcement and implementation of the international humanitarian laws. It is also helpful to enforce the law against those who are suspected of committing atrocities. The International Monetary Fund (IMF) and World Bank are the specialized financial agencies of the United Nations that function as independent international organizations. Their functionalities are not bound by the UN decisions but are regulated by the UN Security Council resolutions. The decisions made by the FIs may be significantly influenced by the international humanitarian law violations. The humanitarian law violations are licit economic concern to the FIs and that should not be excluded from its consideration as political issues. It is also argued that FIs need to consider international humanitarian law issues in some circumstances to fulfill their authorizations. The violations of rights under humanitarian laws can give insight into how the governments will handle the international obligations like loan agreements with the IMF or the World Bank. It is also seen that human rights violations during the conflicts can affect the economic growth of a country. It may also affect the state's ability to service its debts, financial success of development programs and also the FI's ability to supervise and manage the projects. Having information about such humanitarian law violations will thus help FIs to ensure that they can fulfill their authorizations.