Finance is a system that involves the exchange of funds between the borrowers and the lenders and investors. It operates at various levels from firms to global to national levels. Thus, there are many complexities involved in it related to markets, institutions, etc. An introduction to finance will provide a basic idea of how the finance sector in general works in India.
Introduction to Finance
In the finance system, credit, money, and finance are used as a medium for various exchanges. So, they work as a known value for which the services and goods are exchanged.
Thus, in modern systems, banks financial instruments, financial markets, and services are included. Also, this system allows for the funds invested, allocated, and moved within a smooth process.
There are various components of financial systems. They are:
Financial institutions include banks and other nonfinance banking institutions. It is a company that is engaged in the business of dealing with monetary and financial transactions like loans, deposits, and investments.
It comprises various banking operations like trusting the companies, brokerage firms, insurance companies, and dealers. A bank is a financial institution that is legally allowed to borrow and lend money.
Along with these banks also provides financial services like an exchange of currency, wealth management, and safe deposits. Generally, banks are categorized into 2 types. Investment banks and commercial banks. While non-banking financial institution or NBFCs do not have a banking license.
Furthermore, they are not supervised by any national or international regulatory body. NBFCs generally function services such as risk management, market borrowing, investment, etc.
Browse more Topics under Financial Banking Institutions In India
- Financial Institutions for Agriculture
- Financial Institutions for Industries
- Financial Institutions for Specific Areas
- Non-Banking Financial Company
- Financial Inclusion
- Financial Stability and Development Council
- Co-operative Marketing
The economic services that are provided by financial institutions and covers a broader aspect of money like managing money, banks, credit cards, debit cards are called financial services.
Also, the other financial services that are offered by the institutions are consumer finance, stock brokerage, investment funds, and many more.
Financial markets consist of 2 types of market, primary market, and the secondary market. This is a broad term used to describe a marketplace where equities, currencies, and bonds are traded. So, in the primary market, the exchange for the government, companies, are done by the new companies. Thus, this is done through equity-based or debt-based securities.
Also, this process is facilitated by the investment banks that have set a beginning price and are overseeing a sale for its investors. Once the sale is completed, it is further overseen by the secondary market.
The secondary market comes after the primary market. Also, this is a marketplace where investors buy and sells the securities that are already owned by them.
Financial instruments are the assets which can be traded in the market. They can also be a form of package which is traded. Most financial instruments provide an efficient flow to facilitate the transfer of capital.
Thus, this asset can be of any form from cash to a contractual right to receive and deliver the cash. They are usually monetary contracts between the two firms. Also, these instruments can be modified, traded, or settled.
The cash instruments are the instruments whose value is directly determined by the market. They can also be securities which are tradable and transferable.
This includes deposits and loans. While for derivative instruments, the value is derived from more than one underlying commodity, currency, precious metals, bonds stocks, etc.
Practice Questions on Introduction to finance
Q. In terms of market capitalization, which is the number one bank in India?
A. ICICI bank B. Axis bank C. HDFC bank D. SBI bank
Answer: A. ICICI bank
Q. Which bank is the largest shareholder of a nationalized bank?
A. SBI bank B. RBI C. NABARD D. None
Answer: D. None
Q. _________ is not considered to be a money market instrument.
A. Shares and bonds
B. Commercial paper
C. Treasury bills
Answer: B. Commercial paper