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Financial intermediation theories
Financial intermediation
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1. What are the economic functions financial intermediaries perform?
Financial intermediaries provide two important advantages to savers. First, intermediaries provide many loans, so the few that fall short do not impact as much as a the loss faced by an individual with few loans. They provide a platform to incur less risk to each individual. Another reason financial intermediaries reduce risk is that by making many loans, they learn how to better predict which of the people who want to borrow money will be able to repay. Someone who does not specialize in this lending may be a poor judge of which loans are worth making and which are not, though even a specialist will make some mistakes. A second advantage of using a financial intermediary is they have the ability to convert assets into liquid (useable) money. Although the intermediary may use its funds to make illiquid loans, its size allows it to hold some funds idle as cash to provide liquidity to individual depositors.
Financial intermediaries help large numbers of people to use financial markets with a minimal amount of risk involved. Although these intermediaries are important in the macroeconomic functioning of the economy, they are usually stable and change only slowly.
2. What is the role of broker in the financial market?
Futures brokers have different licensing requirements and training than stockbrokers. A futures broker must have a Series 3 license, while a stockbroker is required to have a Series 7 license. Some brokers are dually licensed, so they can broker both kinds of financial instruments. The principles for selecting any broker are the same: know what your trading goals are, and look for the right fit.
Before you can make a trade in the futures or options on futures markets, you must open an account through a licensed Series 3 commodity brokerage representative.
It is generally believed that the broker serves only as an intermediary in securities trading, with commissions as his return. In fact, however, for this commission, the broker has to be responsible to their clients for accuracy, starting from opening the trading account until completing clearing and settlement. In order to receive their commission, a broker is responsible for carrying out and executing securities trading efficiently, delivering the securities payment to the seller and passing the scrip to the buyer on time, and providing the securities depository services and ensuring that the client's securities trading account is always correct.
In 1850, the Lehman bros. and Richard s. fuld jr. started their business of small buying and selling cotton shop. With the pace of time their business and their ambitions grew up, and opened the Futures trading venture in US. With efforts the firm moved to dealing of commodities with merchant banking. The success of bank was up to at mark.
Although only required to discuss two associations this writer thought it was important to discuss the SEC as they are directly connected to FINRA in that they take litigation cases, and fraud cases from FINRA and follows up on whether any security laws or criminal laws were broken. Once they investigate the wrong doing they proceed with the corrective action that best suits the offense not excluding criminal prosecution and jail time. According to the Securities and Exchange Commission (2014) website the mission of the SEC is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation”. The SEC was created to ensure that all investors big or small have a fair and unbiased account of a companies transactions and current state of affairs.
Custody Services: Prime brokers take custody of the hedge fund's securities and cash, providing fund managers with the ability to engage in securities trading with multiple brokerage firms while keeping the fund's assets in one centralized account.
Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
The stock market plays a significant role in the health of the economy; the economy has to be strong for a country and its citizens to prosper. In 1929 over a period of two weeks 30 billion dollars disappeared from the U.S. economy, this was the event that started the greatest period of human hardship of the twentieth century known as the great depression. On October 19,1987 the Dow Jones industrial average plunged almost a third of its value. Many investors went completely bankrupt after one day of trading. Both of these crashes came without warning in booming markets are the currently booming markets heading for a collapse? The current market resembles both 1929 and1987 markets but there is a smaller possibility for collapse.
If financial markets are instable, it will lead to sharp contraction of economic activity. For example, in this most recent financial crisis, a deterioration in financial institutions’ balance sheets, along with asset price decline and interest rate hikes increased market uncertainty thus, worsening what is called ‘adverse selection and moral hazard’. This is a serious dilemma created before business transactions occur which information is misleading and promotes doing business with the ‘most undesirable’ clients by a financial institution. In turn, these ‘most undesirable’ clients later engage in undesirable behavior. All of this leads to a decline in economic activity, more adverse selection and moral hazards, a banking crisis and further declining in economic activity. Ultimately, the banking crisis came and unanticipated price level increases and even further declines in economic activity.
What do you understand by the phrase “stakeholder analysis”? Attempt a stakeholder analysis of an organisation that you are closely associated with.
In general, financial interconnectedness refers to relationships between economic mediators that are created through financial transactions and supporting arrangements. The term interconnectedness refers specifically to linkages between and across financial institutions i.e. banks and non-banks, providers of financial market infrastructure services i.e. payment, clearance and payment systems and finally vendors and third parties supporting these bodies. Interconnectedness is a very broad concept. For example, banks which lend or borrow from other banks become interconnected to one another through interbank credit exposures. Contractual obligations amongst financial institutions; such as ownership, loans, derivatives etc. creates interconnectedness among them as well. When firms invest in the same asset, they also become interconnected because of having common exposures to that specific asset. In highly or dense interconnected financial system, distress in one entity most of the times transmits to other
The financial manager is responsible for giving financial advice and support to clients and colleagues that will enable them to make good business decisions. Particular work environments differ considerable and involve both public and private sector organizations such as retailers, corporations, financial institutions, charities, and even small manufacturing companies and schools (Financial Manager, 2011).
...n the stock broker is in full control they are trust worthy enough to make the right decisions to increase your profits from your investment. By giving the broker all your information with no type of legal limits, they can do whatever they feel like. The broker can give you improper investment advice, make unsuitable decisions, commission churning, hide prices, and not diversities your portfolio. At the end all these occurrences can affect your profit to increase the stock broker’s profit. When you are dealing with investors (stock brokers) you should do a great amount of research. The research will pay off at the end because you will know the surface of the stock market and its ways. You should always get a copy of an original copy. When signing documents you should always sign in black pen. The stock market can either make or break you; it is just how you play it.
Functions performed by financial intermediaries can be categorized into three functions; (1) maturity transformation, (2) risk transformation, and (3) convenience denomination. With maturity transformations, intermediaries convert short-term liabilities to long term assets. This conversion is common with banks and other institutions that provide liquidity for entrepreneurs, giving a short term debt a match with a long term loan. Rather than constantly evaluating short term loan options and rolling over the debt balance, a longer term commitment is able to be made that locks in a lower rate to benefit all parties. Additionally, intermediaries can provide risk transformation, which offer the ability to convert risky investments into relatively risk-free by lending to multiple borrowers to spread the risk. By pooling the funds of multiple investors, the intermediary – such as a mutual fund – inherently provides diversification and tolerance against a single investment producing undesirable results. Finally, convenience denomination is provided by an intermediary. With a large quantity of deposits being held at a financial intermediary, they are able to match small deposits with large loans, and larger deposit...
...each renewal term of their license plus one core class. It does not cost much for classes and fees. The most important requirement to become a real estate agent is that a person needs to have extremely good communication skills. An agent must find a broker to work under, before they can begin selling houses.
The biggest stock exchanges are the New York Stock Exchange and NASDAQ. The New York Stock Exchange is a large building in Lower Manhattan that does auction-style trading with a lot of face to face interaction through specialists, brokers, and buyers. There are upper floors in this exchange on which specialists determine the prices of all the stocks. This information then travels to the brokers who work auctions face to face with buyers in order to sell the stocks. America’s biggest companies, like Coca-Cola and McDonald’s, sell their stocks through this exchange. NASDAQ is a virtual stock exchange with no physical building. This exchange was created during the 1970s but began thriving during the tech boom of the 1990s. The tech boom helped this exchange become the home of more technological companies li...
The intensely competitive, action-oriented, profit-hungry world of investment banking can seem like a bigger-than-life place where deals are done and fortunes are made. Investment bank includes but is not limited to bringing an established company to the market, by that I mean taking company with the capabilities but not capital of expanding, and raising money through other investors or the stock market (IPO) for a commission, I chose this field because of my personal experience with my father and his company, I’ve seen him go from starting off as a cold calling broker, to running a brokerage firm, to starting a brokerage firm, all the way to having his own investment firm. I feel like I would do better with jobs where you set your own hours and work at your own pace. A lot of the work is commission based so the more your work the more you make, this would also benefit me because it would drive me to work more, money is my motivation. To be hired you will need good people and communication skills, highly analytical skills, high ability to synthesize and high creative ability. You will also need experience in modeling, valuing companies, and financial accounting.
Never have I ever climbed a mountain peak. As a child, I imagined myself conducting expeditions in deep-frozen pathways, leading amateur explorers to the top of the world, and instructing rookies in surviving harsh blizzards. Even though slightly altered, my childhood dream has been achieved. I led a team of fellow classmates, in my Strategic Management course, to the success summit of a financial competition. Over the course of a semester, I and my teammates were supposed to create and manage a company of the IT industry, in a computer-simulated environment, along with other four rival teams. I dealt with strategy and financial matters of our virtual enterprise, while my colleagues were working on marketing and manufacturing. During the four months of the exercise, I have experienced finance from various aspects: capital budgeting, through selecting favorable investment for upcoming quarters; debt management, by assessing the necessary amount and efficiency of loans; profitability analysis and dividend policy, which had been used to compile the company’s general performance index. Working in a multinational team, which included an American, a Norwegian and a Moldovan, strengthen my negotiations skills, as well as flexibility and cooperation. But above all, this experience intensified my passion for finance. Of course, a pleasant bonus was the fact that, in the end, our company’s financial performance was six times the performance of second-best team.