What Are the Primary Elements and Functions of a Modern Financial System - Assignment Example

Title: Introduction to Finance Name: Institutional Affiliation: Tutor: Date: A financial system refers to a system that allows money to circulate between savers and borrowers. It is comprised of various elements which make it a system work. These elements need each other in order to function fully. It financial system can operate in a global perspective, regional perspective or a firm’s specific level (Gurusamy, 2008). Financial play a central role in the allocation of resources between various users in the financial sector. The elements of financial systems include; institutions, markets, instruments, services, practices and transaction. Financial institutions are composed of all the entities that deal with financial transactions. This transactions range from deposits made by people, investments and loans. The institutions which carry out this financial transactions are banks, insurance companies, trust companies and investment dealers. In the modern world, almost everyone is carrying out a financial transaction, this can be sending of money, borrowing of money, investing or even asking for loans. Since people depend on financial institutions, the security of the transactions is a major consideration. They are regulated by the government to make sure that the funds people work with are safe. There are of three types; depository instutions, contractual instutions and investment institutions. The function of financial instutions is to provide service to the intermediaries in the financial market. They are responsible for the transfer of funds from one entity to another. For example can be, from investors to organizations those who need the funds. Financial instutions also facilitate the distribution of money in the economy (Brown S, 1985). Markets is another element of financial system. A financial market is a place where people can trade. The exchange of goods and services are the major activities that take place in a financial market. It is through markets that there is possibility of exchange of goods for value. The financial market provide a place where buyers and sellers can participate in the trade of commodities and services like bonds, equities, currencies and derivatives. The financial market is characterized by having, rule which regulate it, transparent pricing, costs and forces which determine the prices of securities. Financial markets are available in diverse regions in the world. An example of a financial market in the New york stock exchange which handle trillions of dollars. Example of financial markets are, bond markets, capital markets, stock markets and cash or spot markets. A financial instrument is a document representing a jurisprudence involving monetary value. Financial markets can be classified as equity based which represents the ownership of assets or debt based which represent the ownership of a loan which has been made. Financial instruments have unique characteristics, this is because they outline rules which are made by different persons making different contracts. They also have unique structure. The function of financial instruments is to allow the efficient flow of capital which is made by investors in the world (Franklin, 2001). Financial services are economic activities which are provided by the finance industry. This include, organizations that manage monetary terms including banks, credit cards companies, accountancy companies and insurance companies. There variety of financial service undertaken by these instutions. For example, commercial banking services, which helps other business to raise money. Another function of financial service is keeping of money safe and withdrawing when requested. The insurance if cheque book in financial institutions is also another financial service. Transfer of funds is also another financial service which is an element of financial system (sanford, 2004). Financial practice is a guidelines around which financial institutions should perform their services. This includes a code of conduct which provides the basic procedures which should be followed when performing financial services. The function of financial practices e is to set a basis for the operations of financial services to be conducted. The last one is financial transactions are the exchange of goods and services which are performed in the financial institutions. This goods and services are assets like cars, mortgage among other assets. In your own words discuss the function and purpose of both the primary and secondary markets in a modern financial system. In the modern financial markets there exists two categories of financial markets. There is the primary market transaction and secondary market transaction. For the primary market transaction market, transactions are made to create a new financial instrument. A primary market is where securities are established or else are created. In the primary market, stocks and bonds are sold to the public for the first time. In other terms, primary markets can be termed as initial public offering. The purpose of primary markets is to earn money through the selling of securities. Primary markets are also used to raise capital. This is when the government wants to raise capital. The government issues bonds. The secondary market deals with the securities that are already issued in the market. The securities which are purchased in the primary markets are sold to the secondary market. The value of securities which are to be resale I the secondary market depends on the fluctuating interest rates. The purpose of secondary market is to offer long-term investment (srinivasan, 2006) Identify and explain in your own words the various categories and types of financial instruments used in a typical modern financial system in a developed country. A financial instrument is a tradable asset of any kind. Financial instruments are categorized into two. This is cash instruments and derivative instruments. In the first category which is the cash derivative, the value of the financial instruments id determined by the markets. The cash derivatives can also be divide into those that are readily transferable and other like loans that are the transfer has to be agreed on. The other category is the derivative instrument. This financial instruments derives its value from the underlying entities such as asset, index ad interest rate. Financial instruments can also be categorized according to the asset class. In this category , there is equity based and debt based. The equity based reflects ownership of the issuing entity while the debt based reflects loan the investor makes after the issue of the entity. What are the advantages and disadvantages of the publically listed corporate form? Discuss briefly in your own words. There are many advantages of a company going public. These advantages include; Financial capability of the company when is increased when the company decides to be public. This financial benefit is in form of raising capital which can be used to fund capital expenditure , fund research and development of even pay for debts. When the company goes public, its awareness in market is acquired. Many investors are able to know the company. This is because many companies try to advertise their products and make them know to large pool of customers. As the company is known by a lot of customers in the financial market, the market share increases. Increase in market share means greater profitability. The separation of stakeholders and the management allows for professional management. This is because, there is no disturbance or questioning of the decisions which the management make in managing the company. Within a public listed corporate, there is the advantage of corporate governance. This means that, there defined procedure which that matters are carried out in a transparent way and there is accountability of all the parties involved. The disadvantages of publicly lusted corporate include; The cost for complying with the rules and regulations set when joining a public corporate may be very high for smaller companies making it very hard for them to join. Public companies are faced with pressure from the public which can make them to focus more on the short term profits rather than long-term profits. Because of the pressure from the public, the decisions taken become questionable since they are only intended to boost earning. Another disadvantage is that, public companies are required to be audited by an external auditor and the information given to the public. This can make the information given be used by the competitors (Davis, 2010). Discuss in your own words the importance of accurate and timely information flow for stock market efficiency. The disclosure of timely information ensures investors’ confidence in the fairness and soundness of the investors in the market. Timely information is important to investors because of the large impact of information which occurs minute by minute and which changes the corporate environment. Having timely information enable the investors to make strategic decisions on when and where to invest their money to gain the maximum benefits (Staff, 2006) The fact that new information is reflected on the stock exchange market poses a challenge on the decision to be made concerning the information. Having timely and accurate information enables the investors to make decisions concerning where to invest their money (Dubey & Ritesh Kumar, 2013). Identify and explain in your own words the roles that ASIC and the ASX play in the Australian stock market? The ASIC is the regulator of financial services in Australia. The ASIC ensures that there is fair and transparency in the economy to uphold the reputation on the economy and provide confidence to the investors and customers (staff, 2014). The ASIC sets up and administers the Australian securities and investment commission carrying most of the work under the corporates act of 2001 The ASIC disseminates timely information to the investors to help them in their decision making. They improve the performance of the financial system in Australia (Role of ASIC, 2014). The ASX provides information on about the stock exchange market. References Brown S, W. (1985). Using Daily Stock returns, the case of event studies. Journal of Financial Economics,, Volume 31, Number 2, 471-483. Davis, G. (2010). Reimagining the corporation . Michigan: Ross school of business. Dubey & Ritesh Kumar. (2013). IMPACT OF INFORMATION FLOW ON STOCK MARKET MOVEMENT: EVENT STUDY ON THE DISSEMINATION OF TIMELY INFORMATION IN INDIAN ECONOMY. proceedings of ASBSS, 20(4). Franklin, A. (2001). Comparing financial services and systems. cambridge, MA 02142-1493, USA: MIT press. Retrieved from www. Gurusamy. (2008). financial services and systems. McGraw hill. Role of ASIC. (2014, 7 11). Retrieved from asic.gov.au: asic.gov.au/about-asic/what-we-do/our-role/ sanford. (2004). the opportunity. decisions conference (p. 11). Newyork : McGraw Hill. srinivasan, S. (2006). Role of the secondary market. Demand media. Staff. (2006, January 15). Tokyo stock exchange. Retrieved from www.tse.or.jp: www.tse.or.jp/english/rules/td/index.html staff. (2014). ASX market indexes. Australia: ASX news. Read More