Question

• Identify the different types of financial markets and financial institutions, and explain how these markets and institutions enhance capital allocation.

Answer 1

Financial market:- It is the market where capital is raised and various types of financial securities are traded. It gives borrowers and lenders a platform for trading.

Financial markets are categories on the basis of security traded and the maturity time of the securities.

• Spot markets and Future market.
• Capital market and Money market.
• Primary and secondary market.
• Private and public market.

Financial institutions:- They are the intermediaries who provide their services to the financial markets. Actual trading and capital allocation is take place with the help of financial institutions.

Financial institutions are categories on the basis of role of finance they providing such as capital appreciation, Credit analysis, Portfolio development etc.

• Commercial banks.
• Financial service Corporation.
• Investment Banks
• Pension funds.
• Credit unions.
• Mutual funds.
• Life insurance companies.
• Exchange traded funds.
• Private equity companies.

Enhancement of capital allocation

Several individual, corporate houses or any government institutions that have surplus amount know as savers or lenders , want to increase their ideal surplus money . They all want to earn interest amount and enhance their surplus amount. Borrowers are those who need money for the time being and they are willing to pay interest on the amount. Different kind of financial markets provide them platform to exchange their needs while enhancing their capital. Financial institutions provide various mode of capital exchange between borrowers and savers or lenders of money. Capital can be transfer by various means such as:-

• Direct transfer of funds in the market by purchasing securities in stock market.
• Indirect transfer through investment banks
• Capital transfer through financial intermediaries.