Financial Market and Institutions Quiz

Study Notes

Financial Markets and Institutions

Financial system is a framework for describing a set of markets, organizations, individuals, and regulatory institutions that engage in the transaction of financial instruments (securities).
The basic role of the financial system is to channel funds from the surplus units to the deficit units in the economy for productive purposes.
The financial system of a country is classified into two components: Financial markets and financial institutions.

Financial Markets

Financial markets are markets where funds are transferred from people who have surplus or excess of available funds to people who have a shortage or deficit.
Financial markets perform the essential function of channeling funds from the surplus units (household, firms, and governments) to those having a shortage of funds (deficit units).
There are two different forms of exchange in financial markets:
- Direct finance – lenders and borrowers meet directly to exchange securities.
- Indirect finance – lenders and borrowers exchange funds or securities through financial intermediaries.

Classification of Financial Markets

Financial markets can be categorized as:
- Primary vs Secondary Markets
- Money vs Capital Markets
- Debt vs Equity markets
- Organized Exchange vs Over the Counter (OTC)

Primary Market vs. Secondary Market

Primary markets are markets in which financial instruments (stocks or bonds) are newly issued by borrowers.
Secondary markets are markets in which financial instruments already in existence are traded among lenders/investors.

Money Markets vs. Capital Markets

The money market is where financial instruments with high liquidity and very short maturities are traded.
A capital market is a financial market in which long-term debt or equity-backed securities are bought and sold.

Debt Market vs. Equity Market

The debt market is the market where debt instruments are traded.
Debt instruments require a fixed payment to the holder, usually with interest.
The equity market (often referred to as the stock market) is the market for trading equity instruments.

Financial Institutions

Financial institutions are what make financial markets work.
They can be considered as financial intermediaries that collect funds from lenders and channel those funds to borrowers.
Financial intermediaries are firms whose primary business is to provide customers with financial products and services that cannot be obtained more efficiently by transacting directly in securities markets.

Functions of Financial Institutions

Lower transaction costs
Economies of scale
Liquidity services
Reduce risk
Risk sharing
Diversification
Reduce asymmetric information
Specialize on services
Increase market efficiency

Importance of Financial Markets and Institutions

Financial markets and financial institutions are crucial in our economy.
They help channel funds from savers to investors through financial innovation and risk management, thereby promoting economic efficiency.

Major Financial Institutions in Malaysia

Major financial institutions in Malaysia include:
- Bank Negara Malaysia (Central Bank) (Regulatory body)
- Commercial banks
- Investment banks
- Non-bank Financial Institutions
  - Development Finance Institutions
  - Provident and Pension Funds
  - Insurance Companies
  - Saving Institutions
  - Unit Trusts
  - Factoring and leasing Companies
  - Venture Capital Companies

Description

Test your knowledge of financial markets and institutions in Malaysia, covering topics such as money, banking, and financial markets. Based on the course BWFF3033, this quiz assesses understanding of key concepts and principles.