Concept Of Financial System

Financial system can be defined as processes and procedures used by a firm's management to exercise financial control and accountability. In other words, an information system comprised of one or more applications that are used for collecting, processing, maintaining, transmitting, and reporting data about financial events; supporting financial planning, accumulating and reporting cost information of financial statements can be described as financial system.

The principal role of a financial system is to bring together economic agents with surplus financial resources and those with net financial needs. The parties can be brought together directly or indirectly. The parties with excess financial resources directly finance those with financial needs are known as direct finance. If the parties with indirectly finance with financial needs through intermediaries are known as indirect finance.

Developing financial system is very important as financial systems and capacity help the organization to make sound decisions based on cash flow and available resources, monitoring funds, or comparing actual income and expenses versus budgeted amounts, helps managers ensure that the necessary funds are in place to complete an activity and etc.

Financial market is very important in financial system as it allows people to buy and sell financial securities, commodities, and other items of value at low transaction costs .

In financial market basically there are two markets- primary market and secondary market. Primary market is a market where new securities are sold. These new securities can be which are never existing before that is when a company become public for the first time or additional bond or securities that a company issues. The trading can be in two ways- underwrite and private placement. Let's say, 100,000 shares need to be issued. An investment bank will buy the entire 100,000 share at a negotiated price from the company.