Financial markets are to deal with different types of financial instrument such as stocks or shares, bonds, notes, mortgages and other claims on real assets as well as with the derivative securities or commodities whose values are derived from changes in the prices of other assets. Financial market and physical asset market both also can operate as the spot market or future market. Spot market refers to the deals being bought or sold for on the spot delivery within a few days whereas future market refers to the deals being bought or sold for on the future delivery at some future date such as six months or a year into the future. Furthermore, there are some major financial markets such as money markets, capital markets, mortgage markets, consumer credit markets, primary markets, secondary markets, initial public offering market and private market.
On the other hand, there are three different ways in which capital or fund can be transferred between savers and borrowers. These are explained as direct transfer from savers to borrowers, indirect transfer from savers to borrowers through investment banking house and the last one is indirect transfer from savers to borrowers through a financial intermediary.
What meant by investment banking house? Mean that investment banking house is an organization that underwrites and distributes the new issue of business corporations’ securities to help corporation obtain fund for financing. The investment banking house operates by purchasing all of the new security issue from a corporation at one price and selling the issue in smaller units to the investing public at a price sufficiently high to cover expenses of sale and earn profit. Examples of investment banking house are Merill Lynch and Morgan Standley Dean Witter.
Besides that financial intermediary is talking about are specialized financial firms that facilitate the transfer of funds from savers to demanders of capital or borrowers. Financial intermediary is the institutions which are intermediaries between savers and investors, moving the fund between the two. Examples include banks, insurance companies, credit unions, mutual funds, finance companies and others. Since the financial intermediaries are generally large, they gain economies of scale in analyzing the creditworthiness of potential borrowers, in processing and collecting loans, and in pooling risks. So that it helping individual savers to diversification their fund investments.
There are seven types of the financial intermediaries. There are including commercial banks, savings and loan associations, mutual savings fund, credit unions, pension funds, life insurance companies and mutual funds. Commercial banks are type of financial institution and intermediary. That is provides transactions, savings and money markets accounts and that also accepts time deposits. Let say, at historically, commercial banks were the major institutions that handled checking accounts and through which Federal Reserve System expanded or contracted the money supply whereas commercial banks are providing an ever-widening range of services including stock brokerage services and insurance at nowadays. Otherwise, Commercial banks are quite different from investment banks because commercial banks lend out money to borrowers however the investment banks assist Business Corporation to increase capital or fund from savers.
Next, savings and loan associations have traditionally served individual savers and residential and commercial mortgage borrowers. They collect funds from many small savers and then lend out this money to house buyers and other types of borrowers. Thus, the most significant economic function of savings and loan association is to create liquidity in capital market.
Besides, mutual savings fund are similar to savings and loan associations which accepts savings from individuals and usually lend out money on a long-term basis to house buyers and consumers.
The credit unions are set up to serve a smaller operation or specific group like employee of a particular firm or company. These are cooperative associations whose members are supposed to have a common bond so that 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. Credit unions are often the cheapest source of funds available to individual borrowers.
Pension funds as forms of institutional investor, which are collect pool and invest funds contributed by sponsor and beneficiaries. Let say pension funds are retirement plans funded by corporations or government agencies for their workers and administered primarily by the trust departments of commercial banks or by life insurance companies. Bonds, stocks, mortgages and real estate are invested by primarily in pension funds.
Moreover, insurance companies will concentrate on fulfilling the insurance needs of community. For examples, life insurance companies are collect savings in the form of annual premiums and then invest these funds in stocks, bonds, real estate and mortgages and finally make payments to the beneficiaries of the insured parties. While life insurance companies have also offered a variety of tax-deferred savings plans designed to provide benefits to the participants.
Lastly, is talking about mutual funds. These organizations satisfy the needs of individual investors through pooling resources from a large number with similar investment goals and risk. The resources collected are invested in the capital market and money market securities and returns generated are distributed to investors. Such as they collect funds from savers and then use these funds to buy stocks, long-term bonds and short-term debts instruments issued by businesses or government units. They also achieve economies of scale in analyzing securities, managing portfolios, buying and selling securities. Accordingly, there are bond funds for those who desire safety, stock funds for those who are willing to accept significant risks in the hope of higher returns, and other funds that are used as interest bearing checking accounts such as money market funds. There are different mutual funds with different goals and purposes.
