Financial markets perform the essential economic function of channeling funds from households, firms, and governments that have saved surplus funds by spending less than their income to those that have a shortage of funds because they spend more than their income.
Those (Household,Firms,Government) are the lender or savers at the left, and those who borrow funds to finance their spending, (the borrower or spenders) are at the right.
The principal lender or savers are households, but business enterprises and the government (particularly state and local government), as well as foreigners and their governments, sometimes also find themselves with excess funds and to lend them out.
The financial system matches savers and borrowers through two channels:
Function of Financial Intermediaries It stands between the lender-savers and the borrower-spenders and helps transfer funds from one to the other. A financial intermediary does this by borrowing funds from the lender-savers and then using these funds to make loans to borrower-spenders.
Function of Financial Market Financial markets are places or channels for buying and selling stocks, bonds, and other securities. Traditionally, financial markets have been physical places, such as the New York Stock Exchange, the London Stock Exchange. On these exchanges, stocks and bonds were traded by dealers who would meet face-to-face. Today most securities trading takes place electronically between dealers linked by computers and is referred to as OTC “over-the-counter” trading. NASDAQ, originally stood for the National Association of Securities Dealers Automated Quotation System, is an over-the-counter market on which the stocks of many high tech firms such as Apple and Intel are traded.
In Financial Market borrowers borrow funds directly from lenders selling securities (also called financial instruments), which are claims on the borrower’s future income or assets. Securities are assets for the person who buys them but liabilities (IOU's or debts) for the individual or firm that sells (issues) them.
Money, Banking, and the Financial System by
R. GLENN HUBBARD and ANTHONY PATRICK O’BRIEN
The Economic of Money,Banking and Financial market by