Six Parts of a Financial System

by Cindy Phillips; Updated September 26, 2017
A financial system is more complicated than handing over cash.

The act of sliding your debit card across the credit card swipe machine as you pay for your groceries is simple and takes only seconds. What can be mind-boggling is the path this seemingly simple transaction actually takes to ensure the vendor receives your payment. What goes on behind the scenes is known as the financial system.

Money

Money is the start of the financial system and the means for making purchases. Accumulating money is a determining factor in defining wealth. Those who store more money are wealthier than those who do not. The consistency of money has a tendency to morph based on changes in the financial system and technology.

Money was once defined by the precious metals silver and gold until it was replaced with the current paper and coin system. As technology evolves, money is being defined by electronic transactions. In the recent past, money was accessed by walking into a bank and handing the teller a withdrawal slip. Today, electronic funds are accessed by swiping credit and debit cards and the financial institutions do the rest.

Financial Instruments

Financial instruments are also known as securities, though the layman's terms are stocks, bonds, mortgages and insurance. At one time, the dealing and trading of stocks was typically limited to wealthy individuals who could afford to pay the costly fees charged by stockbrokers. In recent years, this practice has become more affordable with the introduction of mutual funds. Mutual funds pool the savings of a broad number of investors. By leveraging a high volume of buyers, more investors can purchase, trade and accumulate portfolios.

Financial Markets

Financial markets are trading houses that are dedicated to the purchase and sale of stocks and bonds, such as the New York Stock Exchange or the NASDAQ. Buyers and sellers gather at the market to determine buying and selling prices for securities, typically with assistance from a stockbroker. Markets continually fluctuate, resulting in inherent risks in the process.

Financial Institutions

The common term for financial institutions is banks. Though once a brick and mortar building that held money in vaults, modern financial institutions offer a variety of products and services including mortgages, insurance and brokerage accessibility. Financial institutions now compete in the financial market by offering one-stop shopping for financial transactions and advice.

Regulatory Agencies

Regulatory agencies were introduced by the government to monitor the activities of financial institutions and markets. Through examination and enforcement of strict guidelines, regulatory agencies supervise members of the financial system to ensure the safety of the public's money and investments. Government examiners review the systems in place at financial institutions and markets, and they teach and encourage best practices.

Central Banks

Almost every country in the world has a central bank that is integral to each country's government. The founding of central banks was originally a means to finance wars, but today's central banks control the availability of money and credit. They are integral to the stability of the country's financial system as they oversee national currency and its value. The U.S. Federal Reserve is one of the most important central banks in the modern world.

About the Author

Cindy Phillips began writing feature articles in 2007 with her work appearing in several regional newspapers. With more than 30 years experience in the corporate arena, her business expertise includes all aspects of marketing and management. Phillips earned a Bachelor of Arts in English education from SUNY New Paltz.

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