Financial Markets and Institutions Essay Example | Topics and Well Written Essays - 2500 words

Financial Markets and Institutions - Essay Example (Govori, 2005) The financial market is divided between investors and financial institutions. Financial institutions are organizations, which act as agents, brokers, and intermediaries in financial transactions - usually a bank that keeps custody of an investment or assets. Agents and brokers contract on behalf of others while intermediaries sell for their own account. For example, a stockbroker buys and sells stocks for us as our agent, but a savings and loan borrows our money (savings account) and lends it to others (mortgage loan). The stockbroker is classified as an agent and broker, and savings and loan is called a financial intermediary. Brokers and savings and loans, like all financial institutions, buy and sell securities, but they are classified separately, because the primary activity of brokers is buying and selling rather than buying and holding an investment portfolio. Financial institutions are classified according to their primary activity, although they frequently engage in overlapp ing activities. The types of instruments exchanged in financial markets include promissory notes, commercial bills or bank-accepted bills. Other types of securities include treasury notes issued by a government, commercial papers and certificates of deposits. Why do we need financial markets and institutions One of the indicative signs of a robust economy is a dynamic exchange or circulation of money by business and government activities. This is where the financial markets play a significant role. Financial markets facilitate the movement of funds from those who save money (meaning idle money) to those who invest money in capital assets. Financial markets mobilize funds and reallocate them to uses that generate better returns than can be achieved by the holders of the funds through securities traded in the financial markets. Simplistically, they provide a convenient place where savers can safely invest excess money and consumers can easily borrow funds and be used for various purposes to further fuel the economy of a nation. What role do they play in a nation's economy The financial markets and institutions play a number of important roles in the financial system. The financial markets price funds so that businesses and governments can make rational economic allocations of capital. Business and/or government may decide upon a time pattern for expenditures that does not necessarily coincide with their current or expected income flows. Financial markets allow time adjustments in the payments for goods. Without them, there would be no opportunity to earn interest on savings, and expenditures would be limited to current receipts and cash. Savings allows many consumers to postpone consumption and to receive returns from investments. Another important function of financial markets is that it distributes economic risks. On a larger scale, the financial markets transfer the massive risks from people actually performing the work to savers who accept the risk of an uncertain return. The chance of failure for a $500 million computer chips manufacturer may be divided among thousands of investors living and working all over the world. If the computer chips business fails, each investor loses only part of his or her