The_Role_of_Financial_Institutions_in_Financial_Markets_Paper

The Role of Financial Institutions in Financial Markets Paper Many businesses have to use their capital to borrow money for improvements or new investments. Commercial banks, mutual funds, and investment banks are used for this purpose. The financial markets help to determine rates to use for the loans or deposits used by the borrower. The paper will discuss commercial banks, mutual funds, and investment banks and the financial markets: capital, futures, and money market used. Commercial Banks Commercial banks are a part of the largest group of depository institutions. They are measured by their asset size and perform functions similar to savings institutions and credit unions. Savings institutions accept deposits (liabilities) and make loans (assets). The difference of these institutions is in the composition of assets and liabilities. Commercial banks have several types of non-deposit sources of funds. Loans include consumer, commercial, and real estate. Commercial banking activity is also regulated separately from the activities of savings institutions and credit unions. Within the banking industry there is a significant variation among the structure and composition of the assets and liabilities of the different sizes of banks. Businesses, governments, and sometimes individuals borrow or lend funds for short periods of time (Kidwell, Blackwell, & Whidbee 2008). Commercial banks provide transactional, savings, and money market accounts and accepts time deposits. The Glass–Steagall Act was introduced to the U.S. Congress to require banks to engage only in banking activities, whereas investment banks were limited to capital market activities (EHow 2011). Like the bank I work for, many banks offer both commercial and retail banking services. Commercial banks use the money market. Treasury bills, negotiable CD’s (Certificate of Deposits), commercial paper, and federal funds are the major instruments of money markets (Kidwell et al 2008). Mutual funds are open-ended investment companies that started in 1924 and were used to alleviate the redemption problem. Mutual Funds A mutual fund guarantees that investors in the fund can redeem some or all shares at net asset value on any day if notified. Mutual funds became popular because it guarantees investors could redeem shares. It does not guarantee redemptions and market prices for fund shares might diverge from fund NAV (Kidwell et al 2011). Mutual funds are most popular in the investment company. It invests highly in marketable assets such as U. S. stocks and bonds that can be sold quickly if the funds need cash to meet requirements. The futures market has people trade contracts for future delivery of securities, commodities, or value of securities sold in the cash market. An open-ended mutual fund (the major type of mutual fund) continuously stands ready to sell new shares to investors and to redeem outstanding shares on demand at their fair market value (Kidwell et al 2008). These funds provide opportunities for small investors to invest in financial securities and diversify risk. Mutual funds are also able to generate greater economies of scale by incurring lower transaction costs and commissions than are incurred when individual investors buy securities directly (Kidwell et al 2008). Investment Banks Investment banks have few restrictions on the range of activities in which they can engage. These banks provide funding for the majority of new businesses. If loans form a substantial reserve of capital, they make business loans possible. The need to see a profit returned from their investments makes banks more likely to use their money in the wisest way possible, producing the maximum economic growth for the whole of society (EHow 2011). Investment banks bring new debt and equity securities issued by private firms or governmental units to market. Underwriting, distribution, trading and brokerage, private placements, mergers and acquisitions, and capital markets are just a few of the options investment banking offers. Capital markets begin when capital goods are financed with stock or long-term debt instruments. Compared to money market instruments, capital market instruments are less marketable; default risk levels vary widely between issuers and have maturities ranging from five to 30 years (Kidwell et al 2008). The markets discussed were capital, money, and futures. Commercial banks, mutual funds, and investment banks use these markets to conduct business. Among these markets, stocks and bonds are created and traded, debt is financed and invested, and trading is used to generally create profits. Lenders give money with conditions borrowers must use to pay back the money lent with interest. In some cases the borrower is not just an individual but a business or government. References Kidwell, D. S., Blackwell, D. W., Whidbee, D. A., & Peterson, R. L. (2008). Financial institutions, markets, and money (10th ed.). Hoboken, NJ: Wiley. EHow. Retrieved October 31, 2011. http://www.ehow.com/info_8039280_role-financial-institution.html