Unit 1

Role Financial Markets

& Institutions

By: Pratap Shakya

 Concept of Financial System
• Financial System is a set of Financial Institutions,
Financial Markets, Regulatory Institutions and
Financial Instruments in order to transfer the funds
from surplus units to deficit units.
 Financial
Markets
Funds Funds

Households Households
Business Firms Business Firms
Government Government
Foreigners Foreigners

Funds Funds
Returns Financial
Intermediaries Returns
Functions of the Financial Markets
• Mobilization of Savings
• Facilitates price discovery
• Provides liquidity to financial assets
• Reduces the costs of Transaction
Contd.
Alternatively
Saving Function
Wealth Function
Liquidity Function
Credit Function
Payment Function
Risk Function
Policy Function
 Types of Financial Markets
• Money and Capital Markets
• Primary and Secondary Market
• Debt and Equity Market
• Derivative Market
 Types of financial markets
1. Primary and Secondary Market
1. Primary market is that type of market This is the market where securities are
where only new financial securities are traded and ownership transfer takes
issued. place from one investor to another.

2. This is the market for raising new This is the market for trading
capital by the corporations. outstanding securities among investors
themselves
3. In this market, the issuer could sell In this market, investors buy and sell
the securities to the investors directly the securities through security brokers
or with the help of investment bankers
and other financial intermediaries
4. The existence of this market The existence of this market facilitates
facilitates raising new capital for the to improve liquidity of outstanding
corporation. securities.
Contd.
5. Primary market is classified into : Secondary Market is classified into:
i. unseasoned market-IPO i. Organized stock exchange –
ii. Seasoned- Right and FPO NEPSE
ii. Over the counter market
(OTC)
 Contd.

Common Investors
Stock, Securities
Debentures, A B
Firms Bonds, etc Money
Money

Primary Market Secondary Market

 Contd.
2. Money market and capital market
1. Definition Financial market where short-
term securities (i.e. having less
than one year) are issued.
2. Trading materials Treasury Bills, Commercial
paper, certificates of deposits, etc
3. Principal Central Bank and Corporations
participants
Financial market where
long-term securities are
issued
Common stock, Preferred
stock, Bonds, Debentures,
Government Securities-
Treasury Bonds, Treasury
Notes, Savings Bond.
Development Bond
Stock Market, Individual
and Institutional Investors
 Contd.
3. Debt and Equity Market

4. Derivative Market
 Forward and Future contract
 Options
 Swaps
Financial Institutions:
which issue financial claims against themselves for cash.
Depositary Institutions
• Commercial Banks
• Thrifts Institutions
Savings and loan
associations
Savings Banks
•Credit Institutions
are the organization
Non-Depositary Institutions
1. Contractual Saving
Institutions
• Insurance Companies
• Pension Funds
• Finance Companies
2. Investment Funds
• Mutual Funds
Contd.
1. DEPOSITARY INSTITUTIONS
 Accept deposit from individuals and institutions and make
loans.
Functions of Depositary Institutions
 Offer Deposit Accounts
 Repackage Funds
 Accept Risk
 Have Expertise on evaluating Credit Worthiness
2. CONTRACTUAL SAVINGS INSTITUTIONS
• Acquire Funds at periodic intervals
3. INVESTMENT INTERMEDIARIES