In the finance market, organization or people that are lack of money can be borrow money from those having money to lend out in the financial market. They are many different of finance market due to different type of people needed in different situation. The financial market are to deal with different types of financial instruments such as stocks or shares, bonds, notes, mortgages and other claim on real assets.
Finance market operate as the spot market and future market. Spot market happens when the deals being brought or sold for on the spot delivery. Future market happens when the deals being brought or sold for on the future delivery at future date that is determined. Firstly, money markets happens when the financial market dealing with short- term, highly liquid debt securities in which funds are borrowed or loaned for short period of time that are not less than one year. The capital market is the financial market dealing with stocks or shares, intermediate or long-term debts in which funds are borrowed or loaned for long period of times especially more than one year.
Mortgage market is the financial market dealing with loans on residential, commercial, industrial real estate and farmland. The consumer credit markets is the financial market dealing with loans on autos and appliances or can be used in education ,vacation and so on. The primary market is the financial market in which corporations raise capital by issuing new securities or new shares.
The secondly market is the financial market in which the existing and already outstanding securities or other financial assets are traded among investors after they have been issued by the corporations. The initial public offering market (IPO) is the finance market which the firm or corporations “go public”by offering securities or shares to the public for the first time. Lastly, private market is the financial market in which the transactions are worked out privately and directly between two parties without going to public where the transactions may be structured in any manner that appeals to the two parties. Example of private market is bank loan and placement of debts with insurance companies.
There are three ways for transferring capital or fund from savers to borrowers in the financial market. Firstly, a direct transfer from savers to borrower. It takes place when a business corporation sells its stocks or bonds directly to savers. It is without going any type of financial institution. The business corporation acts as a borrower whereas saver acts as a money leader. Thus, the business corporation delivers its securities to savers then savers will give back the money to the business corporation after a moment. By this, the fund or capital is directly transferred from savers to business corporation. The direct transfer from savers to businesses corporation are possible and do occur on occasion.
But, it is generally more efficient for a business to enlist the services of an investment banking house such as Merrill Lynch. This type of organization help the corporations design securities with features that are currently attractive to investors. Then, it will buy these securities from the corporations and resell them to savers. This process is really one primary market transaction although the securities are sold twice. By this, the investment banker acts as a facilitator to help transfer capital form savers to businesses. Savers Borrower Dollars Secondly, an indirect transfer from savers to borrowers through investment banking house.
Investment banking house is an organization that underwrites and distributes new investment securities and helps businesses to obtain finance. This method takes place when an investment banking underwrites the issuance of corporation’s securities. At this times, the investment banking house serve as a middleman . Therefore, it can be facilitate the issuance of corporation’s securities by purchasing the securities of corporation. Then, it is resell to the same securities of the corporation to savers so that the money paid back by the savers for purchase the securities of corporation are passed by the investment bank. Next, it is received by the corporation which acts as a borrower. Thus, the corporation ‘s securities and the savers’ money merely conducted through the investment banking house. By this, the capital or fund is indirectly transferred through investment banking house from savers to corporation which acts as a borrower. Securities Securities Investment Banking House Savers Business Dollars Dollars Lastly, an indirect transfer from savers to borrowers through a financial intermediary. A financial intermediary is specialized financial firms that used to facilitate the transfer of funds from savers to demanders of capital.
This method is takes place when a financial intermediary like a bank or a mutual fund obtains fund from savers. It is to issue its own securities or certificate of deposit to savers. Therefore, the financial intermediary will uses the fund that is collected from savers to purchase and to hold the securities of other corporations as investments. In this condition, the capital or fund is transferred from savers to financial intermediary when savers pay money to financial intermediary in exchange for receiving certificate of deposit or securities issued by the financial intermediary.
Next, it is return back the financial intermediary will further transfer this fund to other corporation by paying money out of the fund to purchase securities of other corporation. But, most of the savers prefer to hold certificate of deposit and the securities of financial intermediary. It is because the savers think that they are safer and more liquid than mortgages and loans. It definitely cause financial intermediaries greatly increases the efficiency of money and capital markets. The financial intermediaries do more simple than transfer money and securities between firms and savers. It help to create new financial products. The financial intermediaries are generally large due to gain economies of scale in analyzing the creditworthiness of potential borrowers, in processing and collecting loans, pooling risks and helping individual savers diversify by that is “not putting all their financial eggs in one basket”. Moreover, a system of specialized intermediaries can put money into banks and get both interest income.
This system is a convenient way of making payments for checking or can put money into life insurance company. Then, it can get both interest income and protection for the customer’s benefit. Intermediary’s securities Savers Business’s securities Financial Intermediary Business Dollars Dollars An investing banking house is an organization that underwrites and distributes the new issue of business corporation’s securities to assist corporation. It is help to obtain fund for financing. Examples of investment banking house are Merrill Lynch and Morgan Stanley Dean Witter. They are mainly in foreign country. In Malaysia, there are consist of CIMB Bank, Maybank , Affin and so on. There are various type of financial intermediaries for the fund transfer form savers to borrower. Firstly, commercial banks are traditional “departmental store of finance”which acts as a wide variety of savers and borrowers. In past times, commercial banks were the major institutions that handled checking accounts and through which Fedcral Reserve System expanded the money supply.
Now, commercial banks are providing an ever-widening range of services. There are include stock brokerage services and insurance. Commercial bank are lend out money to borrowers whereas investment banks assists business corporation to raise capital or fund from savers. Secondly, savings and loan associations are tranditionally served individual savers and residential and commercial mortgage borrowers . Iit is collect funds from many small savers and then lend out this money to house buyers and other types of borrowers The most significant economic function of savings and loan association is used to create liquidity in capital market.
Then, mutual savings loan are similar to savings and loan associations. It is to accept savings from individuals and then lend out money mainly on a long-term basis to house buyers and consumers. The credit unions are cooperative associations whose members are supposed to have a common bond . So, the unions collect savings from members and then loan to other members who need funds to finance their auto purchases, house improvement and house mortgage. It is often the cheapest source of funds available to individual borrowers. Pension funds are retirement plans that are funded by government agencies or corporations for their worker and administered. It is done by the trust departments of commercial banks or by life insurance companies. Pension funds invest primarily in bonds, stocks, mortgages and real estate. Next, life insurance companies done by agent to collect savings in the form of annual premiums.
These, the funds is invested in stocks, bonds, real estate and mortgages. Finally, it make a payments to the beneficiaries of the insured parties.
Recently, life insurance companies also had to offer a many variety of tax-deferred savings plans designed to provide benefits to the participants when they retire. Lastly, mutual funds is formed when they collect funds from savers to used buy stocks, long term bonds and short-term debt instruments issued by businesses or government units. They pool funds from all savers so that can reduce risks by the investment diversification. Economics of scale achieved in analyzing securities, managing portfolios, buying and selling securities.
Different mutual fund are to meet the objectives of different types of savers for different purposes. Bond funds for who desire safety, stock fund for used as interest bearing checking accounts like money market funds.
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