WHY STUDY
FINANCIAL MARKETS
AND INSTITUTIONS?
Chapter #1
By;
Sajad Ahmad
What is Financial Market?
All institutions and procedures
for bringing buyers and sellers of
financial instruments together is
called financial market.
 Financial Markets are the markets in
which funds are transferred from
people who have an excess of available
funds to people who have a shortage
Financial Markets are important in
channeling funds from people who do
not have a productive use for them to
those who do
TYPES OF FINANCIAL
MARKETS
 DEBT MARKET
 STOCK MARKET
 FORIEGN EXCHANGE MARKET
DEBT MARKETS and
INTEREST RATES
 Debt Markets, also often referred to generally
as the Bond Markets. are especially important
to economic activity because they enable
corporations/ governments to borrow to finance
their activities
 Bond Markets are the markets where interest
rates are determined
 A bond is a debt security that promises to make
payments for a specified period of time
 A security ( also called a financial instrument )
is a claim on the issuer's future income or
assets
THE INTEREST RATES
 The interest rate is the cost of borrowing or the
price paid for the rental of funds which is
usually expressed as a percentage
 Interest Rates are important on a number of
levels
 On a personal level, high interest rates could
deter you from buying a house or a car because
the cost of financing it would be high
 Conversely, high interest rates could encourage
you to save because you can earn more
interest income by putting aside some of your
earnings as savings
THE STOCK MARKETS
 The Stock Markets are the markets in which
claims on the assets and earnings of
corporations ( share of stock ) are traded
 A common stock ( typically just called a stock)
is a security that represents a share of
ownership in a corporation
 It is a claim on the earnings and assets of the
corporation
 Issuing stock and selling it to the public is a way
for corporations to raise funds to finance their
activities
THE FORIEGN EXCHANGE
MARKET
 For funds to be transferred from one country to
another, they have to be converted from the
currency in the country of origin ( say $ ) into
the currency of the country they are going to (
say Euros )
 The foreign exchange market is where this
conversion takes place
 It is where the foreign exchange rate, the price
of one country's currency in terms of another, is
determined
Why Study Financial Markets?
Financial markets, such as bond and stock
markets, are crucial in our economy.

These markets channel funds from
savers to investors, thereby promoting
economic efficiency.

Market activity affects personal wealth,
the behavior of business firms, and
economy as a whole
Why Study Financial Markets?
 Well functioning financial markets, such
as the bond market, stock market, and
foreign exchange market, are key factors
in producing high economic growth.
 We will briefly examine each of these
markets;
WHY STUDY FINANCIAL
INSTITUTIONS
 Financial Institutions are the institutions
that make financial markets work
 “Financial Institutions are the
intermediaries, that take funds from the
people who save and lend it to people
who have productive investment
opportunities”.
STRUCTURE OF THE
FINANCIAL SYSTEM
 If you wanted to make a loan to IBM or
General Motors or any other company ,
for example, you would not go directly to
the president of the company and offer a
loan. Instead you would lend it to such
companies indirectly through financial
intermediaries institutions such as
commercial banks, insurance
companies, leasing companies etc
CENTRAL BANK / COMMERCIAL
BANKS/ OTHER INSTITUTIONS
 Central Bank, the government agency
responsible for the conduct of monetary
policy, which in Afghanistan is the “Da
Afghanistan Bank”.
 Commercial Banks, are the financial
institutions, that accept deposits and
make loans
 Other financial institutions include
Leasing Companies, Insurance
Companies, etc
Why Study Financial
Institutions?
We will also spend considerable time
discussing financial institutions. These
institutions play a crucial role in improving the
efficiency of the economy. We will look at:
1. Central Banks and the Conduct of
Monetary Policy
2. Structure of the Financial System

Helps get funds from savers to investors
Why Study Financial
Institutions?
3.
Banks and Other Financial Institutions
 Includes the role of insurance companies,
mutual funds, pension funds, etc.
4.
Financial Innovation
 Focusing on the improvements in
technology and its impact on how financial
products are delivered
5.
Managing Risk in Financial Institutions
 Focusing on risk management in the
financial institution.
END OF CHAPTER #1