The beginning of each kind of business needs to have capital. If a business without capital, then the business might not be able to operate normally. However, the capital for a business is very important. So, these funds are come from organization and people that with surplus funds and these funds of them might come from the profit or salary. The investor willing to spend money for those capital it is because they looking for the revenue.
Due to the people or organization have surplus of money and willing to inject the money to the market in order to gain revenue, therefore, financial institution are existing in the market in order to collect money funds from the public and inject the money to the financial assets for example bonds, loan, deposit.
There are the three ways for the savers to inject their funds to the market. First of all is direct transfer. Savers can directly buy the securities from the organization, when the savers buy the share or bonds, then the money directly inject to the organization and automatically the money become as capital for the organization. Second is indirect transfer through the investment banker. Business firm can sell the company securities to the investment banking firm and get money from the banker. After that, the banker will sell the securities to savers in order to get money.
Besides, the thirdly way for the savers to inject their funds to the market is indirect transfer using the financial intermediary. The intermediary obtains funds from savers in exchange for own securities. The intermediary then uses this money to purchase and then hold the business's securities.
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2.1 Direct Transfers
Figure A
The figure above shown is the first ways to transfer money from the savers to business firm and it call as direct transfers. The figure show clearly about the saver is giving money to the business and the business return the securities of the company to the savers. Besides, direct transfer mean the trading between savers and business firm do not include any middleman therefore it will be more save cost it is because do not have middleman to charge and it also more save time and efficiency in the dealing process.
Even though this ways are more save cost for borrowers and saver but there also existing something bad for the savers. Direct transfer it does not include the intermediary, then when savers invest into business firm, savers might lack of advice from the intermediary and it might causes losses for the savers it is because the savers not clear for the company's background. Beside, some of companies intend to cheat people in order to get money, so in this situation, savers might be cheated if savers do not check companies background before invest.
2.2 Indirect transfer through investment banking houses
Figure B
The Figure B showed the process of indirect transfers through investment banking house. Investment banking house defined as an organization that underwrites and distributes new investment securities and help business obtain financing and it called middleman between savers and borrowers and facilitates the issuance of securities.
The advantages for the savers to buy securities from the investment banking houses is savers can directly get advice from the investment banking houses. Therefore, the savers can more clear about the company background or the stability of the organization then the savers can invest within lower risk.
On the other hand, not only the savers can get advantages but also the business firm which need financial resources. Organization or company can sell their securities to the investment banking houses to get the capital or funds. The benefit for organization is the organization can directly get the capital and funds even though the securities haven't sold.
When the investment banking houses bought the securities from organization or company, the banker need to hold it and until the securities sold but actually the investment banking houses will buy in lower price and sell it on higher price with same quantity to savers in order to gain profit. Therefore the investment banking houses are holding the risk; it is because securities of a company or organization are flexible.
2.3 Indirect Transfers through a Financial Intermediary
Figure C
Figure C showed about the how the savers inject the funds to business firm through financial intermediary. Savers can invest their funds to financial intermediary to get the intermediary's securities. Business firm can also sell the securities to financial intermediary in order to get capital or funds. For example, a saver might deposit dollars in a bank, receiving from it a certificate of deposit, and then the bank might lend the money to a small business as a mortgage loan. Thus, intermediaries literally create new forms of capital. In this case, certificates of deposit, which are both safer and more liquid than mortgages and thus are better for most savers to hold.
Financial intermediaries are specialized financial firms that facilitate the transfer of funds from savers to demanders of capital. Financial intermediary can be commercial banks, saving and loan association, mutual savings banks, credit unions, life insurance companies, mutual funds or pension funds.
Commercial bank is the normal bank that serves savers and borrowers. Commercial bank provides variety of services about finance like saving and borrowing and also including stock brokerage services and insurance. On the other hand, commercial banks are very different between investment banks. Investment bank is obtaining the capital or fund from the public to help organization or company raise capital at the same time the organization are giving securities to the investment bank. But commercial bank is lending money to the borrowers.
Besides, saving and loan association was also under financial intermediary institution. Saving and loan association is served individual savers and residential and commercial mortgage borrowers after that take fund of many small savers and then lend this money to home buyers and other type of borrowers. By law, saving and loan association must have at least 65 percent of lending mortgages and other consumer loans.
In addition, mutual funds are similar to saving and loan association. Mutual savings bank accepts savings primarily from individuals, and lends mainly on a long-term basis to home buyer and consumers. For example, Z want to buy a house and Z do not have enough money to pay, and then Z can lend money from mutual savings banks by the way the mutual savings banks can gain some interest.
Next, credit union is cooperative association whose members are supposed to have a common bond, such as being employees of the same firm. The member's savings are loaned only to other members, generally for auto purchases, home improvement loans, and home mortgages and this financial intermediary institution is often the cheapest source of funds available to individual borrowers. Besides, life insurance companies is also serve to take savings in the form of annual premiums, invest these funds in stock, bonds, real estate, and mortgages and finally make payment to the beneficiaries of the insured parties.
On the other hand, pension fund is to point to retire can use of funds and it funded by corporations or government agencies for their workers and administered primarily by the trust department of commercial banks or by life insurance companies. There are two plans for pension funds first is benefit plans and second is contribution plans. Benefit plans is defined as the employer specifies or guarantees the level of benefits the employee will receive when he or she retires and contribution plans is defined as the employer make specified or defined payments into plans. When the employee retires, his or her are determined by the amount of assets in the plan.
Lastly, Mutual funds are corporation that accept money from savers and use that money to buy stocks and it issued by business or government units. Financial intermediary institution is the existence of intermediaries greatly increases the efficiency of money and capital markets.
3.0 Conclusion
In short, capital or funds are very important for a business firm, without it the business firm can not to expend and it will lead to the market problem such as poor in technology. On the other hand, people who invest into business firm is not only helping the business firm but it also helping themselves in order to gain interest from their investment, but there was also contain some risk, so as a smart investor must be think clearly before invest.
