A. Financial Institutions
Financial institutions are intermediaries that channel funds from savers to borrowers. They can be broadly classified as:
- Banks:
- Commercial banks: Accept deposits, provide loans, and offer payment services.
- Central banks: Regulate monetary policy and oversee financial stability (e.g., the Reserve Bank of India or the Federal Reserve).
- Non-Banking Financial Institutions (NBFIs):
- Includes insurance companies, pension funds, mutual funds, and leasing firms.
- Focuses on long-term financing and investments.
- Investment Institutions:
- Hedge funds, private equity firms, and venture capital firms channel funds to high-risk, high-reward ventures.
- Regulatory Bodies:
- Ensure stability and transparency (e.g., Securities and Exchange Board of India (SEBI), US Securities and Exchange Commission (SEC)).
B. Financial Markets
Financial markets facilitate the buying, selling, and trading of financial instruments. They can be categorized as:
- Money Market:
- Deals in short-term instruments like treasury bills, certificates of deposit, and commercial paper.
- Provides liquidity and short-term financing.
- Capital Market:
- Divided into primary (new securities) and secondary (trading existing securities) markets.
- Long-term instruments include stocks, bonds, and debentures.
- Foreign Exchange Market:
- Facilitates the trading of currencies, crucial for international trade and investment.
- Derivatives Market:
- Trades financial instruments like futures, options, and swaps to hedge risks.
C. Financial Instruments
Financial instruments represent contracts or assets traded in financial markets. Key types include:
- Equity Instruments:
- Stocks represent ownership in a company and provide dividend income.
- Debt Instruments:
- Bonds, debentures, and treasury bills represent loans from investors to issuers, offering fixed returns.
- Derivatives:
- Financial contracts derived from underlying assets (e.g., options, futures).
- Hybrid Instruments:
Combine features of debt and equity, such as convertible bonds and preference shares.