Financial institutions define as the financial securities of an individual provide financial service for clients or members to buy and sell the goods, such as stock exchange and commodity market. The primary functions provide by financial institutions is to transfer funds or capital to those are needed. It particularly relates the flow of funds which collects from lender or public to borrower to making a trade. The authority provided in financial institution most controlled and regulated by government.
In financial economics, holder can carries own assets to made financial service for business. Financial services including the business in moving, investing, lending of money and dealing financial instrument, these acting probably execute by financial intermediaries. Financial institutions exist because it efficiency to help an individual who are demand capital flow and from those can supply it for him or her immediately.
In financial institution there through three ways to transfer the capital or funds to those are needed, there are direct transfers of money and securities, investment banking house and financial intermediaries.
2.0 Body
Securities2.1 Direct transfers of money and securities
Direct Transfers
Borrowers
Savers
Funds
Diagram 1
Direct transfers define as an individual provide financial services to others without any taxes or penalties charges by mediator. It commonly exist two types of people, there are saver and borrower. Saver is the people those are surplus the money or funds that they are willing to lend it out to borrower. And the borrower commonly is someone who are achieve something or obtain funds and responsible to return it equivalently.
On diagram 1 show that the process transaction between saver and borrower does not through any type's financial institution intervene, it efficiency direct made transaction by moving or transfer the assets to one and others immediately, there are not mediator existing. Direct transfer money and securities methods are convenience and efficiency for an individual save the time to make the dealing process.
For example, in order cut down on transaction cost, borrower can direct communicate with saver making dealing process such as delivers the bond to borrower and direct receive the money without pay the intermediaries' fees or commission charges by mediator.
On the other hand, although direct transfer money and securities efficiency to save the cost of transaction, but it possibly more complex due making the decision. On my opinion, direct transfer may possibly more complex due to the information given by an organization, that because saver lack of advice from professional team member. Therefore, he or she might misdirected make investment to a company with not clearly about the background and stable of a company, it could create saver increase risk of taking loss when doing an investment.
2.2 Indirect Transfer through Investment Banking House
In financial institution, investment banking house is one of the ways to transfers the funds. Investment banking house is not a bank provide for individual to checking or making home loan, it define as the process provide by business entities which issue the news securities to public. Investment banking house frequently does the process acting by agencies or underwriter for a company and it efficient to help company obtain business financing.
Investment banking house include types of people, there are agencies and underwriter. These people are providing the expertise and offer advisory service to investor relate to the news securities such as stock or bonds of a company.
Business
Saver
Investment Banking House
Funds
Funds
Securities
Securities
Diagram 2
On diagram above show that when an organization wants to raise capital or funds on business, they can sends the securities and save money to investment banking house. When the investment banking house buys the securities from company, the executors as underwriter or agencies will sell it out at higher price to saver.
Investment banking house is one of the ways connect the need for money with the source of money. It provides efficiency service for an organization to obtain the financing. The reason is if company sell the stock or bonds to investment banking house can guarantee receive the funds or capital even though investment banking house does not sell all of the securities, it can help company save time and less costly than sell the securities direct to public.
Besides that, saver also gain benefit from the investment banking house, such as it provide professional opinion and information to investor more understand the stable or background of an organization. It can help saver decrease on risk taking during process investment making and also made investment analysis to saver confidence on investment activities.
An example of Merrill Lynch, founded on January 6, 1914 by Charles E. Merrill, and official change to Merrill Lynch & Co in 1915 after Merrill's friend, Edmund C. Lynch, joined him. Merrill Lynch independent its company on January 2009 acquisition by Bank of America and its continuing existence as the wealth management division of operate of subsidiary of bank of America, is a headquartered in New York City on the financial and insurances industry.
Moreover, investment banking house also facing several of risk by select the right offer price problem, that because its might fail to sell the news securities if the offer price for saver is too high. So that some underwriter may reduce the offer price, but it can cause loss for investment banking house and some underwriter may cheat or provide inaccurate information to saver in order to sell out.
Investment banking house is a very competitive business because if sell the price too low might facing flipping problem because of unexpected situation. Sometimes offer price of news securities rise quickly because it quickly sell out and supply limited, so that company might disappointed to set best offer prices in order to gain extra profit.
2.3 Indirect Transfer through Financial Intermediaries
Financial Intermediaries
The third ways transfer funds or capital is through financial intermediaries. Financial intermediaries define as a corporation that provide for an individual deficit funds or capital borrows from those people who are have surplus funds to savings or deposit it and going to invest the capitals on financial securities. It consists of 'channeling funds between surplus and deficit agents' to facilitate demander of capital receive funds from saver.
Intermediary securities
Intermediary securities
Saver
Borrower
Commercial Bank
Life Insurance Companies
Mutual Funds
Pension Funds
Credit Union
Saving & Loan Association
Funds
Funds
Diagram 3
On diagram 3 shows that channel of funds of saver indirectly provide funds to borrowers. The saver provides funds to financial intermediaries' institution, and then intermediary institution obtains funds from savers in exchange for its own securities. The intermediary institution will use these funds to purchase and hold businesses securities, and then lend the funds to borrower in form of mortgages.
Furthermore, function that include in financial intermediaries such as depository institution, convey obtain the funds deposit from public, such as commercial bank, charted bank, saving and loan association or credit union. Commercial bank provides transaction services which allow for public open deposit account, such as checking, savings and accept time deposit. It is a bank supply for public for lending funds or capital but not for companies to raise funds from others parties. Saver save the deposit and receive deposits interest and charges by borrower.
Saving and Loan Association (S&Ls) is an institution that accepts deposit or saving from saver and provide for public making business loan or mortgages services. Credit union is an institution that owned and controlled by members those use it service as well, it quite similar to a bank. The difference between bank and credit union is it service only serving for member, including home improvement loan or making mortgages and loan. It often is the cheapest source of funds available to individual borrowers.
Besides that, savings contractual institution refer to long term saving funded plan such as retirement savings and annuities, life insurance, funded unemployment benefits, gratuity, end of service indemnity or severance payments. Life insurance companies define operate as life insurance protecting and annuities for business or saver insured parties to avoid death or unexpected situation occur. It efficiency transfer risk from one to another, reduce risk transformation rate.
Pension funds establish for an individual making investment guarantee protection as retirement saving on future their life. It normally occurs for a company and its employees when employees retire can receive large amount of capital in retirement life, called as endowment insurance for saver.
Investment companies is a company issue the securities present by its shareholders who in turn share in the profit and losses in order to achieve the investment purpose, such as mutual funds. A mutual fund is registered investment companies govern between investors, government and businesses. It receives and manages money from investors, pooling it together to invest in securities to reduce risk by diversification.
The advantage of financial intermediaries is saver can share the risk taking on investment activities. An example, if saver loss large amount on stocks dividend when its share facing dilution, saver can through others institution to cover and it may help saver lower the amount of loss become a burden.
Moreover, liquidity is one of the advantages provide by financial intermediaries in order to facilitates saver exchange assets or securities into funds more efficiency. It can be an easy ways to help investor ability convert assets into funds than illiquid ones.
3.0 Conclusion
Financial institution provides responsibilities to transfer the funds from investor to companies to facilitate the cash flow of money smoothly to success. Public can through these three ways to make investment brought funds or loans services in financial economy in order to develop revenue and protect business in the future.
