How does the financial system work?

Fsp Invest, 12 Dec. 2013

Tags: financial system, how does the financial system work, definition of the financial system

Every day you hear people talk about the financial markets, but how much do you really know about how the financial markets really work?
We’ve taken a moment to explain how the financial system and financial markets work.

The financial system defined
In essence, the financial system is the system that channels funds from lenders to borrowers.
In other words, it channels funds from net savers to net spenders.
So it plays an important role in allocating money to its most efficient use in the economy. 
There are always many competing demands and finding the most efficient use of funds is essential to a healthy economy. 
In a market economy like ours, the ‘price mechanism’ allocates funds.
You see, the forces of supply and demand within the financial market set prices. 
The scope of the financial system is global. 
And a number of components make it up. 
It has four elements: lenders and borrowers; financial institutions; financial markets and financial instruments. 

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