In financial study, we had studied the financial institution. So, what is financial institution? Financial institution is an institution that provides financial services for its clients or members. Financial institution engaged in financial services that related financial intermediaries, as part of the financial system. The financial services including banking, securities, insurance, funds and so on. Thus, financial intermediary institutions, including banks, securities companies, insurance companies, trust investment companies and fund management companies. The financial institutions most are controlled and supervised by the rules and regulations delineated by government authorities. Other way to define what financial institution such as transfer of capital between savers and those who need capital take place in the different ways. There are three types of ways to transfer the capital such as direct transfers of money and securities, investment banking house and financial intermediaries.
So, for financial institution, there are been categorized few majors type of financial institution, such as, deposit - taking, this institution is for banks, building societies, credit unions, trust companies, and mortgage loan companies to manage deposits and make loans. Next type of financial institution is pension providing institution. This institution is mean that any plan, fund, or scheme which provides retirement income such as the retired workers.
So, what actually the financial institution functions? The function of financial institution such as stock exchanges, commodity markets, futures, currency, and options exchanges are very important for the economy. These institutions are also responsible for maintaining liquidity in the market and managing price change risks. Other than that, this institution also contains investment opportunities to the people who are willing to invest and help business to be produced funds for some purpose. All in all, financial institution is playing an important role in economy, if without financial institution, many inconvenience and problems will occur.
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Based on the question - Identify and discuss three different ways for transferring capital or fund from savers to borrowers in the financial market, it needs to indentify the three different ways to transferring capital of fund from savers to borrowers in the financial market. First of all I need to talk about who are savers and who are the borrowers. In financial market, the savers is refers to those people who have extra money in their hand or in their bank. For the borrowers, it refers to the people who wanted to apply for loan from the savers. From this, we are known that the savers have extra money or funds to borrow to the borrowers and savers is the people who are deposit or invest the capital in order to gain interest, profit and dividend. On the other hand, the borrowers take loan from the savers and issue securities to the savers it is because they want to start their business especially business people, firms and company and borrowers is the people who are receive the funds or capital from savers and willing to pay the interest to savers. Next, How to transfer capital or funds from savers to borrowers in the financial market and what procedures or ways to transfer it?
Direct transfers of money and securities.
Direct transfer of money and securities will occur when a borrower sells their stocks or bond directly to the savers and without going through any type of financial institution. This is mean that the borrowers faced to faced to communicate to the savers ask for loan without go through an investment banking house or through a financial intermediary. Next, the borrowers deliver their securities and bonds to savers and the saver will buy the securities and bonds from the borrowers, in this progress, the saver will use funds or money to buy over the securities and bonds from the borrowers. For example, a firm are facing lack of capital and funds to operate the business, so it needs to take loan from the savers. So, the firm will dispatch a person to communicate to the savers to take loan from them. The firm will deliver the securities to the savers and finally will get the fund and capital if the savers willing to buy their securities and communication between them are succeeded. For direct transfers of money and securities, it has advantages and disadvantages. The advantages such as, save transaction cost due to without paying processing fee and commission to the middle man. Next is convenience, the borrowers no need to pass through any complicated procedures in bank, it just need to face to face to communicate to the savers. The disadvantage is lack of information. The saver do not understanding the borrower's background and stability, it will cause the savers lack of the borrower's information.
Investment Banking House
Investment banking house also part of the way to transferring capital or fund from savers to borrowers in the financial market. So, what is investment banking house? First, the function of investment banking house is help companies to acquiring funds. Apart of acquitting funds it also offers advices for a wide range of transactions a company might engage in. Next, investment banking house was an organization that underwrites and distributes new investment securities and help business gain financing. From here the underwriter will occur and will serves as an agency and promotes the issuance of securities. So, the borrowers can sell its stocks or bonds to the investment bank as in turn sell these same securities to savers. For example, the borrowers wanting to gain capital and funds, they go to investment bank to issue their bonds and securities. After the procedures, the bonds and securities have been sold by successfully. Then the underwriter or agency will provides information and details to the savers and provides some recommendation to them, if the savers are willing to buy the securities and bonds, the borrowers will gain the funds and capital.
From this way, it will contain advantage and disadvantage. For advantage such as, the borrowers can gain the capital and funds faster as they sold their bonds and securities to the investment bank this is because the underwriter will help the borrowers to process as fast as possible to find savers to buy over the securities and bonds. Other advantage is the savers can get more detail and information in clear from the investment bank to check the borrower's background and financial statement. For disadvantage such as, the savers will get risk as the agencies or underwriters provided some fake news and information to the saver in order to earn the saver's money.
Financial Intermediaries
The last way to transferring capital or fund from savers to borrowers in the financial market is financial intermediaries. A financial intermediary is a financial institution that accepts money from savers or investors and loans those funds to borrowers, thus providing a link between those seeking earnings on their funds and those seeking credit. Financial intermediaries include savings and loan associations, commercial banks, life insurance companies, credit unions, mutual funds, mutual saving bank and pension funds.
Furthermore, financial intermediary are specialized financial organization that facilitate the transfer of funds from saver to demander of capital. The function of financial intermediary is simply transfer money and securities between borrowers and savers as they literally create new financial products. Another function is the intermediary get funds from savers in exchange for its own securities and uses that money to purchase and hold the borrower's securities. The existence of financial intermediary greatly increases the efficiency of money and capital market.
Next the following are the explanation of classes of intermediaries.
Commercial Banks
Commercial banks it the department stores the finance which serve a wide variety of savers and borrowers. Commercial banks are providing some range of services such as stock brokerage services, insurance and so on. Commercial banks also are quite different from investment banks as commercial banks are lend money, whereas investment banks and helps the borrowers raise capital and funds from other parties such as savers.
Saving and Loan Associations
Saving and loan association are served the individual savers and borrowers, takes the funds of many small savers and then lend this money to home buyers or borrowers. Saving and load association have more expertise in analyzing credit, setting up loan and making collections than individual savers, so they reduce the costs and increase the availability of real estate loans. Thus, saving and loan association are holding large and diversified portfolio of loans and other assets. It spread risks in modes that would be impossible if small savers were making mortgage loans directly.
Mutual Saving Banks
Mutual saving banks was similar to saving and load association as mutual saving banks are operated primarily in the north eastern states, accepts savings primarily from individuals and lean mainly on a long-term basis to home buyers and consumers.
Credit Unions
Credit unions are a cooperative financial institution that the members are supposed to promoting thrift, providing credit at reasonable rates, and providing other financial services to its members. The member's saving is loaned only to other members generally for auto purchases, home improvement loans and home mortgages. Credit unions are often the cheapest source of funds available to borrowers.
2.3.5 Life Insurance Companies
Life insurance companies are function of taking savings in the form if annual premiums, invest these funds in stocks, bonds, real estate and mortgages. Make payments to the beneficiaries of the insured parties in finally.
2.3.6 Pension Funds
A pension fund is any plan, fund, or scheme which provides retirement income. This retirement plans funded by corporations or government agencies their workers by trust departments of commercial banks or by life insurance companies.
There are two plans for pension funds such as defined benefit plans and defined contribution plans. First, defined benefit plan is mean the employers guarantees the level of benefit that their employees will receive when the employees are being retire in certain age. Second, defined contribution plans is mean that the employers defined payment into plans. When their employees are retired, the employers are determined by the amount of assets in the plan to the retired employees.
2.3.7 Mutual Funds
Mutual funds are corporation that accept money from savers and then use these funds to buy stocks, long-term bonds, short-term debt issued by business or government. Mutual funds raise money by selling shares of the fund to the public, much like any other type of company can sell stock in itself to the public. Mutual funds also achieve economies of scale in analyzing securities, managing portfolio and buying or selling securities. Different funds are designed to achieve the objectives of different types of savers. So, there are literally much of different mutual funds with few of different goals and purposes.
In addition, financial intermediary most of the savers prefer lending short-term and most of the borrowers prefer borrowing long- term. That is why most intermediation is done indirectly, where intermediaries understand and reconcile the different needs of lenders and borrowers. In financial intermediary, it contains advantage and disadvantage. For advantage, such as cost advantage, cost advantage is over direct lending and borrowing as reconciling conflicting preferences savers and borrowers and risk aversion, to decrease the risk by intermediaries help for spread out. The disadvantage is, financial intermediaries always take a percentage of profits as part of any transaction they broker.
So the borrowers should choose the 3 out of 1 the best way to borrow the funds or capital. Based on the borrower's situation, the borrowers should find out what is the good way to solve their financial problems by selecting a right way to raise the funds. On the other hand, the savers should understand the financial institution and understanding what actually financial institutions are contains. So, the savers might prevent and reduce the risk due to invest or deposit.
Conclusion
In conclusion, the ways of transferring capital or fund from savers to borrowers in the financial market I had already done. So, there are three ways to transferring capital or fund from savers to borrowers such as, direct transfers of money and securities, investment banking house and financial intermediary. The savers and borrowers should choose a suitable way to invest or borrow based on their current situation. Besides that, the savers and borrowers also need to identify the risk in order to prevent and reduce the risk in different ways. The purpose of the savers is wanted to earn profit, interest and dividend; on the other hand the purpose of the borrowers is wanted to raise funds and capital. So, they have to through underwriter or without underwriters to achieve their wants.
In this assignment, I had learned many knowledge in financial such as the function of financial institution, the ways to transfer funds and capital between savers and borrowers and other. I get many useful information and details by doing internet research and referring the note given by the lecturer. So I was get many idea to solve this assignment question, I also gain many knowledge that I had never learned before, that is many benefit to me.
