INTRODUCTION

Financial markets have been growing rapidly over the last 30 years or so. They provide a wide range of financial instruments for different purposes. The objective of this chapter is to present a gentle introduction to financial institutions, financial markets, financial instruments and portfolio management.

FINANCIAL INSTITUTIONS, FINANCIAL MARKETS AND FINANCIAL INSTRUMENTS

A growing and prosperous economy is characterized by a strong financial system. Well-functioning financial markets and institutions are necessary for enabling companies to raise funds for financing capital expenditures and for individuals to save funds for future use. There will be an efficient flow of funds from suppliers to demanders in an economy with well-organized financial markets and institutions.

Often it may be necessary for businesses, individuals and governments to raise money. Individuals and organizations currently possessing surplus funds can accumulate funds for future use. In order to make some future investments as a part of its expansion activities, a business house may need to raise money. A firm desiring to establish a new plant may need money to meet its fund requirements. A government may have to borrow funds for providing a public good. A family might have to take loans from banks to bear its children's education expenses or to purchase a home. A young graduate may need to raise funds to start a new business. There is definitely a cost associated with this and this cost is the return that a saver expects to receive on his surplus funds.