The paper 'Elements and Role of Modern Financial System' is a wonderful example of a Finance and Accounting Assignment. The primary function of a modern financial system is facilitating investment by providing a platform for the transfer of resources from those with excess funds for investment to those requiring more funds to invest. The different components making up the financial system ensure that different financial activities are implemented harmoniously at all stages of the financial system (Neave, 2009). A modern financial system has got five components with each having its crucial role.
The financial system will not operate if any component is not in place. Elements of a financial system Central bank: The central bank serves as the government’ s bank with the duty to regulate and supervise the country’ s financial system (Neave, 2009). It is responsible for executing the monetary and financial policies towards promoting economic growth and stability. Banking system: Banks accept deposits and credits. By giving credit to creditworthy borrowers, the money is convertible to a stable monetary base by the acquisition of physical assets (Moser & Schips, 2013). Public finance: This is the proper and effective management of public finance in raising revenues controlling expenditure and servicing of the public debts. Strong currency: Strong money or strong currency is important to a country with a developed economy.
When the currency is not strong, as it happens during inflation, the economy is affected negatively. Well-functioning securities market: A modern financial system will require securities to finance government and business enterprises by facilitating the issue of new bonds, equity share. The security market provides liquidity for acquiring financial instruments/bonds. Securities are the major element in the financial system as noted in developed regions such as Europe (Moser & Schips, 2013).
However, that does not mean the elements can be listed in any order since all are mutually dependent on each other and self-reinforcing. Functions and purpose of primary and secondary markets Capital markets are markets where one can sell or buy stock, equity, securities, and debt instruments such as bonds. In the capital market, there two types of markets namely; primary and secondary. Each has got different functions from the other. The primary market is where a company brings a new issue of shares to the general public for subscription to raise funds for their long-term capital requirement.
This is also known as the floating of IPO (Neave, 2009). Primary markets act as a catalyst in the mobilization of savings in the economy. The secondary market is a capital market where equity shares, debentures, bonds, commercial papers, and treasury bills are sold to investors. Trading can be through an auction market, over the counter, or through the stock exchange. Primary and secondary markets interrelate in their functionality. Primary market act as a supplier of funds to the investors through the sale of IPOS (Arvai & Heenan, 2008).
Primary markets are used to analyze the market situation by scrutinizing the financial securities that are floated compared to the ones that are sold. Primary markets are an item for attracting the general public to invest more in the capital market as the first issue of shares is in low transaction units. This attracts potential investors from the public.
Arvai, Z. & Heenan, G. (2008). A Framework for Developing Secondary Markets for Government Securities. Geneva: International Monetary Fund.
Kim, Y. (2003). Local Government Finance and Bonds Markets. New Delhi: Asian Development Bank.
Moser, T. & Schips, B. (2013). EMU, Financial Markets and the World Economy. London: Springer.
Neave, E. (2009). Modern Financial Systems: Theory and Applications. New York: John Wiley & Sons.
Papadopoulos, P. (2011). Role and Function of Stock Markets. Michigan: GRIN Verlag.