Year 1 · Foundations · Markets & Instruments
Financial System & Market Structure
Understand how money moves from savers to borrowers, how securities are issued and traded, and which institutions make modern markets function.
LEARNING OBJECTIVES
What you should be able to explain after this lesson
01
Explain the economic purpose of the financial system and why capital markets exist.
02
Distinguish primary from secondary markets and exchanges from OTC markets.
03
Identify the roles of investors, issuers, banks, brokers, dealers, market makers, clearing houses and custodians.
04
Read a basic bid-ask quote and connect spreads, liquidity and market depth.
05
Describe what happens between trade execution and final settlement.
CONCEPT MAPHow capital moves through the financial system
Why a financial system exists
CORE FACTS · SAME IN EVERY MODE
Some economic agents have surplus cash while others need funding. Finance connects the two.
Capital can flow directly through securities markets or indirectly through financial intermediaries such as banks and funds.
The system performs four core functions: funding, payments, risk transfer and price discovery.
A market price is not simply a fact about value; it is the clearing result of supply, demand, expectations, information, liquidity and constraints.
BeginnerTeaching style changes, knowledge does not.
Imagine a company wants to build a factory but does not have enough cash today. At the same time, households, pension funds and other investors have savings they want to put to work. The financial system creates the channels that allow those savings to fund productive activity. In return, investors receive a financial claim such as a bond or a share.
WORKED EXAMPLE
A household deposits $10,000 at a bank. The bank can use its funding base to make loans. Alternatively, that household can buy a corporate bond, funding the company through the capital market.
WHY MARKETS CARE
When confidence, liquidity or funding conditions deteriorate, this transmission mechanism can weaken. That is why central-bank liquidity, bank capital and market functioning matter during stress.
PROFESSIONAL VOCABULARYCapital allocation / allocation du capital Price discovery / découverte / formation des prix Financial intermediary / intermédiaire financier
Directing funds toward different uses or investments.
The process through which trading reveals a market-clearing price.
An institution that connects providers and users of capital.