Financial Markets and Institutions - Essay Example

Financial markets and institutions Name Affiliation Table of contents Executive summary…………………………………………………………………….pg3 Introduction…………………………………………………………………………….pg4 Financial institutions and roles they play in the US economy………………………..pg5 Financial institutions and roles they play in the US economy………………………..pg10 Emerging trends in financial institutions and market…………………………………pg12 Conclusion…………………………………………………………………………….pg12 References list…………………………………………………………………………pg14 Executive summary Financial market and institutions is worth dissection owing the fact that it has direct impact to the Americans and the nation at large. Financial institutions such as the central bank, insurance companies influence every bit of life in United States, and therefore, it’s pivotal to evaluate in pursuant of a better and effective institutions. On the other hand, financial markets such as capital markets are instrumental in public investment since they give the public a chance to invest in private and public companies hence alleviating their economic status. The constellation of financial markets and financial institutions builds a strong economic boost which raises capital for corporate and the government. Financial Markets and Institutions Introduction Financial Market refers to any marketplace where sellers and buyers usually participate in trade of essential assets for instance currencies, equities, bonds, and derivatives. A good financial is supposedly marked, pricing regulations, transparent pricing, fees and costs, and forces of the market which determine the prices of securities in that particular trade. Financial markets are different in operation and this varies from country to country (Friedman, 2008).). Some of the financial market may only allow participants who meet set criteria which may involve, the amount of money of has, the geographical location of the investor, profession and knowledge of the participants sums up all. Financial markets are found almost in every nation of the world though they vary on size. Some are small in size with few participants while others like the (NYSE) and the renowned Forex markets usually trade in trillions of dollars a day. Most of these financial markets exhibit periods of heavy trading and great demand for securities and at these particular times, they may rise to a level which is beyond historical norms. However, the converse is also true where they may fall beyond any past experienced level. All these dynamics can be attributed to the cases of demand, employment levels, and tax rates among other factors (Friedman, 2008). Financial institutions are establishments that usually carry out financial transactions such as loans, investments, deposits among other activities. A financial institution is a crucial entity as it impacts directly on the lives of people. Everything from exchanging currencies, making deposits, loans and grants are under financial hence masking them crucial for the purpose of the business. We have different types of financial institutions which include; banks, insurance companies, investment banks among other organizations. Financial institutions and the role they play in the US economy. Commercial banks: These are banks which accept cash for deposit and provide security to their customers as per the agreement. Keeping physical cash proves to be difficult and risky for customers, therefore they opt to save their money in banks. Risks involved in handling liquid cash include; theft, fire, impulse buying and loss of interest. All these are factors which prompts the citizens to opt the commercial bank (Zecchini, 2004). Transactions are also made easier since the banks can easily provide means of paying which is effective and efficient. For instance, the check-bankers check makes it possible to make huge payments which would be difficult when using liquid cash. Moreover, some transactions can be made through debit cards which are provided by the commercial banks. This in turn responds positively towards the economy of the country. Loaning is also another crucial role that the commercial bank plays. The bank can give loans to individuals and institutions and this translates to increased revenue. The growth of per capita income is directly influenced by the invested money (loans) which in turn boosts the income of the citizens F., E. (2009).Consequently, the increased per capita income translates to increased deposits to the banks which culminate to profits and economic growth. This proves that commercial banks are instrumental organizations in growth of American economy. Commercial banks themselves make money in the long run and creating revenue for the government. When the commercial banks are borrowing at a lower rate from the central bank and lending the money at higher rate to the citizens, they make profit which translates to increased revenue for the government (Zecchini, 2004). Commercial banks also play the role of payment agents between individuals and between nations. They do so by issuing checks and debit cards which act as the means of payment. If a debit card or check does n bear the name of a bank cannot be accepted simply the banks acts as legal guarantee that the presented check or debit card is valid. For instance, if you want to make payments and the check does not have the name of the bank, it would be impossible because merchants will not accept the check. Therefore, checks are instrumental when making payments. Wire transfer is also another form of payment that bank facilitates. It occurs most in transactions that are international. Let’s say a merchant is paying documents which are abroad and wants them to be shipped in US. Wire transfer would be the convenient mode of payment since it involves a click of the button and the payments are made. Therefore, commercial banks are crucial in the economy since they reduce the bulkiness that would be involved when making payments. Investment banks: These are also other forms of financial institutions which have enabled the US economy to be where it is today. Investment banks emerged as a result of the sto9ck market crash which happened in 1929.The crash culminated to the Great depression which prompted the US government to enhance strict rules in the regulation of the financial market. As a result, the 1933 Glass-Steagall Act was formed which led to the separation of the commercial bank and the investment bank. Investment banks may be known as “banks” but their function is much more different from the so called deposit gathering commercial banks. An investment bank is usually a financial intermediary that is entitled to different functions which are government and business oriented. Some of the key services that the bank provides include; underwriting debt and the equity offerings, it acts as the intermediary between the investing public and the company that issuing the securities, making of the markets, facilitating cases of amalgamation and mergers among other corporate reorganizations. The bank has also been to known to act as a broker for institutional clients during IPOS. Research and financial advisory is also another role that is carried out by these banks. In regards to F., E. (2009).the main focus of these investment banks is focusing on initial public offerings (IPOS).Initially the bank could not deal with the general public though some big names in the banking industry such as Citi group, JP Morgan Chase Bank are known to own commercial banks. In comparison with commercial banks, they have fewer restrictions compared to the commercial banks. Investment banks normally work under the supervision and management of regulatory bodies such as Securities and Exchange Commission, FINRA, and Treasury. Insurance companies: These are companies that usually pool the risk together by collecting premiums from a considerable huge group of people who want to protect themselves against losses. Some of these losses include; car accident, death, lawsuit, fire, illness, disability, among others. Insurance companies spearhead the management of risks and in the long run they maintain wealth (Manzi, N. and Michael, J 2012).When the company has insured many people, the company can run profitably while at the same time paying for claims that may arise at any case. These companies use statiscal data to estimate their given loses at a particular class. They work on the premises that not all individuals who are insured will suffer death or death and therefore count on a profit. They are crucial institutions which ensure that the wealth of individuals is maintained as it ought to be. Brokerages: A brokerage firm acts as the intermediary among the buyer and the seller.The brokerage companies are compensated through commissions after transactions have been successfully carried out. For instance, during stock trade, the buyer or seller will pay transaction fee for the brokerage company to facilitate execution of trade. A broker firm can either be discount or full service depending on the nature of trade (Manzi, N. and Michael, J 2012).Firm which is full service brokerage provides advice on investment, portfolio of management and execution of trade. In return to the executive services, customers may end up paying significant commissions for each trade. On the other hand discount brokers allow investors to perform their research on investment and make their independent decisions. Since the services offered by the brokerage discount are fewer, the discount also is little compared to what is given to the other group. Investment companies: Investment companies are corporations or trust where by individuals invest in diversified areas which are professionally managed. They do so by pooling their funds with those of other investors. Contrary to the normal circumstance where an individual can buy stock and bonds, the investor purchases securities through a package product which is more like a mutual fund. Basically, there are three types of investment companies; namely Unit Investment trusts (UITs), face amount certificate companies and finally the managed investment companies (Zecchini, 2004). However, in as much they are different; they have some aspects which are common. Some of the common characteristics of such companies include; In regards to Manzi, N.& Michael, J (2012).Professional management-This is where by the management is formed by professionals or people who are professionally trained.Specific investment objective-The investors here are specific in terms of what they want. They will only invest in what they perceive to be profitable. Diversification in large number of securities-The investors will invest heavily on securities since the pooled finances are adequate for that particular purpose. The interest is undivided proportional to the shares that one holds in the company-Here the company will not divide the interest depending on the number of shares that one holds.Other financial institutions include the non bank financial institutions which include the following; Savings and loans: Savings and Loans are also known as the S&Ls or the thrifts. They usually resemble the banks in many ways. Most of the consumers do not get the difference between commercial banks and S&Ls though there is a great difference. According to Law on Sacco’s, such companies must have at least 65%in lending mortgages be based on residential mortgages though other types of lending are allowed. The S&L emerged as a result of exclusivity of the commercial banks. Initially commercial banks could only lend to the rich and these discouraged the other people hence they formed the S&Ls. They could offer lower lending rates compared to commercial banks and therefore empowering that group of people. However, one of the greatest limitations is membership (Friedman, 2008). The church could form its own Sacco and other members of the public could not acess the Sacco. Role of Financial Markets in the Economy As posited earlier, financial markets is a wide term which refers to any market place where sellers and buyers meet to participate in the trade of currencies, bonds derivatives among other assets. Financial markets are different and they play significant role in the economy. They are crucial since they form the form the backbone of trade. Investors usually have access to large number of financial exchanges and markets which represents a vast array of the financial products. The common d finance includes the capital markets (Zecchini, 2004). Capital markets: A capital market is that which institutions and individuals trade in financial securities. Organizations which are public and private usually sell securities on capital markets in attempt to raise funds for their organizations. Therefore, capital market comprises of both the primary and secondary markets. Any given government requires funds to engage in long-term investments as well as to facilitate its operations (Friedman, 2008). In order to that the government or company may sell the securities, stocks and bonds in the name of that company. These stocks and bonds are bought and sold in the capital markets. Stock markets usually allow the investors to transact shares in the companies which trade their companies publicly. These are some of the most important areas of market economy since they provide companies with capital while the investors get a share of ownership in the company. The gains of the new owners are determined by the potentiality of that company to grow. This stock market can be divided into two; primary market and the secondary market. Primary market involves a situation where new issues are made while the secondary market is the subsequent issuances (Future of oncology: strategic forecast and investment blueprint, 2004).). Bond markets: A bond is an investment where an investor loans certain amount of money to the corporate or government. The entity of borrowing may decide to do so for a specific period of time and it earns a fixed interest. Bonds are usually used by companies, states, municipalities, and the U.S government. Jeff M (2012).They are used to finance various projects and activities which are beneficial to the state. Bonds can be sold and bought by various investors on the credit market all around the world (Future of oncology: strategic forecast and investment blueprint, 2004).). This kind of market is referred to as debt, fixed income market or credit. The bonds are mainly divided inform of municipal bonds, corporate bonds and finally the U.S treasury bonds. The treasury bills and bonds are commonly referred to as the treasuries. Money markets: The money market is usually a segment of the financial market where by financial instruments which high liquidity and short in maturity are traded. Money market is usually used by the participants as a way of borrowing and lending in the short term i.e. from few days to at most a year. The money market securities usually consist of the negotiable certificates of deposits (CDSs), U.S treasury bills, commercial paper, multinational notes, euro dollars, bankers’ acceptance, and municipal notes among other documents. Money market investments are also known as the cash investment because they mature in short time. Purchasing CDs as a way of parking money in short term as a result of the high liquidity which they may have. However, there are many risks in the money market which should be known by the investor. The risk of default is on securities such as the commercial paper should be taking into account Jeff M (2012).Cash or spot market: When one invests in the cash or “spot “market, there is likelihood of lucrative opportunities for big gains as well as big losses. In the cash market arena, the goods are sold for liquid cash and they are delivered instantly. In the same breathe the contracts are bought and sold in the market are effective instantly. The prices are usually settled in cash on the spot at the current market prices. This distinguishes them from other markets where trades are determined by forward prices. Emerging trends on financial market and institutions The financial market and institutions have been changing over within the entire decade. For instance, the great depression affected America’s economy and this lead to significant changes in financial institutions and market respectively (Friedman, 2008). Consequently, the Glass-Steagal was formulated which aided in separation of investment banks and the commercial banks. More also, regulations are enhanced in the opening and operating the capital markets authority. Initially a company could easily become a stock broker but after the act, restrictions are enhanced which deter many investors to join the lot. Restrictions in financial institutions were not left behind and for one to open a bank, huge capital has to be paid to the central bank and this deters many investors from joining the fields. However some S&Ls have been growing to an extent that they become big financial institutions which are recognized. Conclusion In conclusion, it’s evident that financial institutions and market are crucial in the economy of the developed and developing countries. Financial institutions are generally charged with the responsibility of depositing and lending money to individuals. The essence of lending money helps the public to grow economically through accessing loans which in turn boost their businesses. On the other hand, the financial markets are outlets of investment where the public can buy securities, bonds, bills among other investments. It opens a fair ground where the public can own a share of the public and private companies. For instance, the capital market provides a platform where everybody can invest irrespective of race or nationality. In view of the above it should be note that financial market and institutions are paramount in every country and they should be alleviated if not cherished. References Friedman, D. (2008). Morals and markets an evolutionary account of the modern world. Basingstoke: Palgrave Macmillan. Jeff M (2012).Financial Markets and Institution. Cengage Learning EMEA Publishers.UK Zecchini, S. (2004).The role of international financial instituions in the transition process. S Amazon Publishers New York City. F., E. (2009). Fundamentals of Financial Management. Cincinnati, Ohio: South-Western College Pub. Manzi, N. and Michael, J 2012, Capital Gains Taxation: Federal and State, House Research. Read More