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Markets - Coursework Example

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Finance Questions Question 1 When we talk about capital markets, the firms and individuals present there usually borrow on a long-term basis. This means that there are either people who want to spend more than they presently earn (deficit units) or those who spend lesser than their current income, namely surplus units…
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Download file to see previous pages The latter performs the process of lending after purchasing securities from the market instead of directly giving out loans. These include insurance companies, investment trusts, pension funds, mutual funds and so on. The major outcome of financial intermediaries is to ensure that at all times there is a steady flow of funds, including cash, which moves smoothly from the surplus units to the deficit units. This in turn will result in regular investments to boast the economy and help support the growth of activities in the market in general. By doing so the ideal funds will be utilized in the best way, which otherwise would have generated only a marginal interest. Financial intermediaries who match the lender with the borrower help both by reducing their transaction costs. They also provide in-depth information to their clients to provide them with the best available source of investing their money. Information costs are substantially costs are reduced for both parties, namely the lender and the borrower, since they don’t have to spend resources from their own end to dig out extensive information. Hence, it is not surprising to know that in United States alone roughly 24.4% of firm investment was financed through bank loans that were taken from 1970 – 1985. (Gorton & Winton, 2002) This proves that bank loans (financial intermediaries) are the primary source of external financing globally no matter whether it is a developing or a developed country. Therefore, one can state that ‘financial intermediation is the root institution in the savings-investment process’. (Gorton & Winton, 2002) An outcome of this is that a large number of individuals and firms come together to make this happen, so that in case if one party fails to give a loan, another is available to support that. The huge pool ensures a constant availability of both capital and expertise which is available for all. The whole process can be summed up as ‘a value-creating economic process.’ (Scholtens & Wensveen, 2003) It can be concluded that financial intermediaries are not only providing a place for investors to borrow from, rather their role is more diverse and comprehensive. They are constantly and actively working to offer products that an individual investor can barely provide to a saver. This is the advantage of ‘cover for risk’, the basic reason behind why every saver will trust in a financial intermediary. Question 2 Stock markets all around the globe are the ideal modes of generating funds for businesses or companies that want to fulfill their capital requirements. It provides a very comprehensive way for investors to choose from a variety of stocks that best suit their needs (mainly risk and return). Any investor can select his own set of stocks of as many companies as he like and create a portfolio to reduce his risk in the market. One of the major roles of stock markets in the financial system is to provide the feature of liquidity. This means that an investor can at any given time trade his security for cash when the market is operating. (Rohit, 2008) The incentive offered by this feature makes it a very promising driver of growth in an economy. The amount of trade or activity going on ...Download file to see next pagesRead More
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