Financial Services Sector Market - Essay Example

Financial Services The Financial Services Sector provides a number of services necessary for a modern economy The financial service space is growing in a rapid pace. The industry comprises of a wide range of organisations which are meant to deal with the management of money. These organisations include financial institutions like banks, insurance companies, investment funds, personal finance companies, stock brokerages and government sponsored organisations. In today’s market these financial services are very much crucial for sustainable economic growth. Financial institutions provide a number of vital services which are meant to evaluate, allocate and monitor the capital usage. These are services which are used to maximisee the return with the minimisation of risk. By reducing the risk faced by the firms and individuals through some financial products like insurance, the financial services provide better security and financial well being which may eventually reflect in GDP statistics. The financial system has the responsibility to run payments mechanism which is inevitably important for the economy to function properly. Proper financial systems do all these efficiently at a lower transaction cost (Stiglitz, The opposition’s opening remarks). Innovations are very much inherent to the financial service system. Most of the innovations are to provide a better service at a lower cost, to have a better return at the lowest possible risk amount; hence contribute to the societal and economic well being. The GDP of any country captures this well being to a certain extent. There are certain innovations like venture capital firms which are there to facilitate funding for the budding enterprises. However some of these innovations have to face questions from some of the analysts. These questionable financial innovations are used, even to enhance the economic performance. Global companies are increasing using the swaps and other derivatives to minimise their financial and operational risks in the market. They are using financial instruments like interest rate swaps and exchange rate swaps to mitigate risks in cross border transactions. The contribution of these large industries to the country’s GDP is absolutely inevitable. Banks are used to keep deposits or savings in them. The amount of savings positively affects the GDP of any economy. Banks encourage people to keep more savings, so as it can accelerate the GDP growth. Investment, too, has a positive impact on the Gross Domestic Product of any economy. The other financial service organisations like stock brokers, capital market encourage investment and hence positively contribute to the GDP rate. Expenditure is one factor which also has a positive impact on the economy. With the innovations of credit cards, people are encouraged to spend more and hence contribute to the economic development. Moreover the technological and financial are supposedly bound to evolve together. Financial innovations are very much necessary to improve the wealth of the nations. As per Adam Smith, the essence of economic development lies in the enhancement of technological environment in any economy (Levine, The proposer’s opening remarks). With the evolvement of new technologies, there would be need for an enhanced financial system. In such a way the economic development, itself, makes the present financial system out of date. So without proper upgrading of the financial system, the superiority of the financial services declines, slowing down the economic growth. Report on Financial Services Themes Introduction The whole financial service sector operates within different financial functions including corporate finance, personal finance, investment banking and international finance. Each of them has certain contribution to the financial service sector. This report aims to discuss the financial service sector in accordance with the above functions. Financial services sector has an important role in the economic development. The report would discuss those roles considering different kinds of financial functions in financial services market. Corporate Finance Corporate Finance is mainly comprises of a number of activities stating from accounting, venture capital, strategic planning and corporate development. Accounting is an important functional activity in any organisation. The financial sectors just can not move without getting its accounting right. So there is no iota of doubt, that this part is essential for the financial as well as non financial organisations. There are many types of corporate finance activities, for which the enterprises take help of the financial services organisation providing consultation on the same. These activities include selling up a business, going for mergers or acquisitions. Even enterprises are now-a-days seek consultation on various type of activities starting from external audit till choosing on projects. These all services are offered by the financial service sectors. Even the enterprises look for venture capital firms to fund their tactical activities from setting up a business to expansion of the same. Most of these financial service organisations provide various advisory services to these enterprises. These advisory services include consultation on private equity and fund raising activities, Initial public offerings for the enterprises, portfolio management and other financial management consultancies. In any merger and acquisition there are a number of activities which need to be taken care of. The financial services organisation mostly acts as a financial intermediate in between the two parties involved in the merger and acquisitions (DePamphilis & Donald, Mergers, Acquisitions, and Other Restructuring Activities) . Starting from the valuation of the target firm to the implementation process, the financial service sector has all its presence in any stage of consolidation process. Initial public offering is a process where the activities starting from under writing of the offer till the execution of the process through the accumulation of the capital; all these activities take place in corporate financial department. These departments sometimes involve financial services organisations to outsource these works. Another responsibility of the corporate financial department is to mitigate the financial risk of an organisation with a thorough review of the investment it has made and is about to make. Risk management is one of the most important activities in an organisational space. In today’s competitive market, companies are more concerned about the risk they are taking while carrying on operational activities. An efficient risk management system can only enhance the overall financial services market, through the enhancement in return and mitigation of risk attached to it. Even the recent downturn has provided evidence that the financial services organisations must have a proper and qualified risk management system in place. Personal Finance Personal finance is the process of building up wealth by taking monetary decisions of the individuals and the respected families. It mainly addresses the means in which an individual can budget his or her expenses, savings. The planning of how to allocate monetary resources to different activities would also come under the domain of personal finance. Today people are more concerned about their futures. They now would like to know about several ways to enhance their wealth. This personal financial sector aims to help the clients to have a financially sound present and future of the clients. Credit card organisations, insurance, wealth management and investment advisory for the individuals are some of the activities which take place in personal finance domain. The personal finance sector mostly attains the retail clients and provides service for them. With the introduction of credit cards, people are now more inclined to buy things on his or her credit card rather than carrying out liquid cash for the same. This has reduced the hassles from the lives of many people and at the same time it has increased the amount of spending. In one point of view, this is quite beneficial for the economy as the gross domestic products considers the expenditure of the population. However, this also has increased the reckless buying behavior in the clients. In anyways the credit card organisations are making money as more and more people find carrying the credit card more comfortable rather than going out with liquid cash. Frankly speaking, the credit cards have introduced a new revolution in the world of expenditure. However at the same time, credit card companies must be aware of the fraudulent activities and take risk measurements to mitigate the default risk arising from situations where the clients do not want to or are unable to pay their huge credit card bills. In such case, if there is no proper risk management measurements considered, the default amount would go into the accounting book of the credit card organisations and would be considered as bad debt. Providing services while mitigating the risk of the organisations must be the aim of these credit card organisations. Insurance is there to provide protection to the individuals and organisations against risk and other implications (Learning and Skills Council, Sector Summary Report –Business Management –Financial Services). The insurance can be broadly divided into two types, life and non life insurances. Insurance has mitigated the risk of some unavoidable situations. People are now more concerned about their families in absence of them. Even they are worried about their own future financial states. In both the cases individuals consider insurance as a risk mitigating product. For the latter decision to have a financially sound future most of these individuals are seeking help form the wealth management companies. These companies analyse the client profile and then provide them services starting from creating budgets for them till to map their investment. The aim of these wealth management services is to meet the present and future financial needs of the clients. Investment Banking Investment banking comprises of various activities to assist the corporations and the governments to raise capital. Apart from that the investment bankers provide a wide range of services to the organisations including offering help in the mergers and acquisitions, planning out for initial public offerings. Further on the activities take on to services like market enhancements, trading of derivative and other fixed income securities, dealing in foreign exchange, equity securities and commodities. However the traditional investment banking was all about raising capital for the organisations. Investment banks often act as intermediate agents and underwriters of these mergers and acquisition of different organisations (Brigham & Daves, Intermediate Financial Management). These activities fall into the category of corporate finance. However most of the big companies outsource the activities to huge investment banking organisations. One behalf of the banking organisations and their clients, the investment banks are largely involved in buying and selling products, which are called market making activities. In market making activities the traders buy and sell financial products with an aim to make incremental amount of money in each trade. Structuring new financial products is also one of the activities of these investment banks. However, this structuring has been quite easy with the introduction of derivatives. Tactical financial advises on the strategies those should be adopted in specific market are also offered by the investment banks. Most of the times, the investment strategies would depend the firms. It is of great importance that how the se firms want to present itself in the market environment. These banks aim for the maximum return with a minimum risk on its balance sheet. Research is another division in any investment banking organisations. These researches would analyse the market or any given specific financial instrument to provide a report whether to buy or sell the same. This is mostly done for capital market trading to help the traders in trading. Investment banks also provide wealth management advisory activities for high net worth individuals. In short the investment banks have become an integral part of financial service sector with its wide range of products and services. International Finance As the globalization has been growing at its rapid pace, more and more companies are interested in crossing the borders for improved trading and business activities (Hayes, Introduction). However as the companies are crossing their borders more often, the need of international finance comes into picture. International trading, in today’s market scenario would include mergers and acquisitions, aligning with the international financial and companies’ regulations and mainly risk management. There are a certain number of financial risks applicable for every organisation. However the companies looking forward to the global expansion and the companies which have their cross border global presence are much more prone to the risk components. In case of mergers and acquisitions the investment banks, involved, are expected to be from the country where the organisations are supposed to expand their business in. These all activities would come under the corporate financial activities of the global organisations and would take various activities starting from the valuation of the target company, raising the funds, aligning the activities to the related financial laws of the foreign country, risk management and finally moving into merger with another party or going for acquisition of any company. The financial services organisations, which will service the global companies as an underwriter of their initial public issues or for the mergers and acquisitions, are also need to be aware of the international and country specific business propositions. Risk management is another important activity which is of utmost importance for the organisations operating worldwide. In today’s volatile market scenario, the main risk, which the global organisations are exposed to are the interest rates. Another risk which is quite inherent in any cross border trading is the exchange rate risk. To mitigate the risks, most of the global companies seek help of the financial instruments. The companies and financial services organisations mostly use swaps in this. After the recent downturn, most of the companies have stopped using the complex derivative products which used to be a great craze for the investment bankers to enhance the market and introduce new innovative products. Now most of the companies and financial service sectors prefer to have simple financial instruments on their portfolios and at the same time they are more inclined to enhance their risk management system to mitigate various risks including the risk of financial distress. Conclusion Financial services industry offers a wide range of products with a variation in clients starting from simple individuals to high net-worth, from local companies to the global ones. The financial sector encourages people to save, spend and invest and hence it has been a very crucial factor behind the economic development. The activities in financial sector can be attributed to different functional segments. However these financial functions are sometimes overlapping to each other. Each of these activities are inter linked to each other and would not be of much importance in isolation. All these activities together are responsible for maintaining the financial system of the economy. Overall the financial sector in any country has ensured the well being of the individuals, the organisations and of the governments presiding in that respective region. Reference Brigham, E. & Daves, P. (2007). Intermediate Financial Management. USA: Cengage Learning. Hayes, S. Introduction. (1997). Financial services: perspectives and challenges. USA: Harvard College. Levine, R. The proposer’s opening remarks. Februry 23, 2010. Financial innovation: Statements. March 22, 2010. < http://www.economist.com/debate/days/view/471/print> . Learning and Skills Council. Insurance. No Date. Sector Summary Report –Business Management –Financial Services. March 22, 2010. < . Stiglitz, J. The opposition’s opening remarks. February 23, 2010. Financial innovation: Statements. March 22, 2010. < http://www.economist.com/debate/days/view/471/print> . DePamphilis, Donald (2008). Mergers, Acquisitions, and Other Restructuring Activities. New York: Elsevier, Academic Press. Bibliography Rosenbaum, Joshua; Joshua Pearl (2009). Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions. Hoboken, NJ: John Wiley & Sons. Straub, Thomas (2007). Reasons for frequent failure in Mergers and Acquisitions: A comprehensive analysis. Wiesbaden: Deutscher Universitätsverlag. Read More