Financial Markets and Financial Intermediaries

Last Updated: 22 Jun 2020
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Financial markets refer to mechanisms that allow individuals to trade on financial securities such as bonds and stocks with the sole aim of facilitating the growth of business investors to increase their incomes and wealth (Madura, 2008, p. 26). In a much broader perspective, they are known to be the markets used by business investors for exchange of credit and capital throughout the business ventures. The financial markets can be classified into the capital market that deals with long term debt instruments and the money market that deal with short term debt market.

In the present world economies the financial markets are basically the bond market, the commodities market, stock market, and the foreign exchange market (Jaffee & Dwight, 1999). Financial intermediaries are the financial institutions that act as the middlemen between the financial lenders and the financial borrowers, such institutions are for example; the brokerage companies, insurance companies, banks, finance companies, and credit unions among others (Bhole & Mahakud, 2009, p. 5).

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These institutions get money from the investors and give loans to the borrowers thus availing a link between the people looking for credit and those looking for earnings. The two sectors, financial markets and financial intermediaries play a critical role in the business industry because of their major roles played to the investors and entrepreneurs in the whole economy. It is important therefore to determine the roles played by the two sectors to the investors and the economy and also the relationship created between them and finally their importance in the financial world (Bhole & Mahakud, 2009, p.

11). It is important to understand that in the marketplace the main question that is dealt with is how to sufficiently supply a given commodity and meet a particular demand for the good or service. In the financial markets, supply comes from businesses and investors while the demand mainly comes from the government and the substantial companies with large financing requirements. This relationship is better practiced in the financial markets as a platform for the interplay of these parties in the transaction of business (Allen & Gale, 2003).

The financial markets provide a place and platform where the money which is the most important element is made available to make business transactions active and circulate throughout the economy (Levine, 1995, p. 25). Banks have a role of transforming the short term resources which are the current accounts into long term and medium term resources that is the bank loans. Therefore, the banks provide a very important link between the businesses and the households thus acting as an important role in the financing of the business sector and the economy as a whole.

The banks play a role of distributing all the monies that are being deposited by the customers on their current accounts and then avail loans to the interested borrowers. This means that the banks exist with a major aim of creating money sand making it available for lending. In addition to that, large companies and even the government cannot really rely on the loans for their operations (Levine, 1995, p. 18). Therefore, they have to find out mechanisms that they obtain their long term financing options, the debts with long maturities; these can be obtained outside the bank into the financial market.

The financial market extends to the institutional investors who are responsible to draining the public savings and investing them in more profitable activities. Some of these institutional investors include the insurance companies, retirement funds, pension funds, and the fund managers among many others. They have a major role to play in the economy and the financial markets by availing the money deposited as savings by the customers who are basically the public into incentives that are most profitable.

The institutional investors contribute to the existence of the financial markets by buying securities from companies that are in need of financing. Among the securities issued include the long term borrowing bonds and the equity capital (Levine, 1995, p. 21). This means that money is being made available to those in need of funding from the savers and thus facilitating the circulation of money in the whole economy, one of the main goals of the financial institutions. The investors in the business market are in need of someone who acts as a broker in the business transactions being carried out.

This therefore, means that they need a broker in certain transactions such as buying of securities in the stock market (Allen & Gale, 2003). The brokers are the financial intermediaries in the financial market who provide a link between the entrepreneur and the source of funding who are the financial institutions. Some of the activities being carried out by these brokers are for example; trading directly in the financial market and the stock exchange market since they have a direct link with these institutions that an individual investor.

This makes it easier for the investor to trade effectively and incurring fewer costs as compared to when he would have traded directly with these institutions in the financial market (Levine, 1995, p. 26). In additional to the above, the brokers are beneficial to any individual investor since they have the ability to participate in the financial markets and are able to oversee each transaction, that is from placement to execution, and also provide the individual investors with relevant information and advice in better decision making about their investments.

There are a number of important functions that are being carried out by the financial market to the individuals, companies and the government as a whole. It is evident that the financial markets are necessary platforms needed by the banks and other financial institutions in implementing their monetary policy decisions. This is because they provide information necessary for the implementation of such decisions such as the marginal lending, and the management of equity in the market operations (Jalan, 2006).

This information among many others is essential for the financial institutions and the banks thus making the existence of the financial market a very important element in the economy and the existence to be strong and effective (Jaffee & Dwight, 1999). The financial markets act as the funding agents of the government. This is affected by the government involving itself in the treasury and bond transactions and participating in the implementation of the debt management strategies and also in the control over the dealers in the bond market.

The government also takes the financial market as a platform for management of the investments portfolio in the whole economy and also the corporations for the public deposits. In addition to the above, the financial markets are of importance to the government as they provide information about the market and to assist the government in the implementation and reinforcement of the important decisions in about the whole economy performance (Mayer & Vives, 1993, p. 156). It also provides services of custody and settlement availed to the government and banks in carrying out their activities.

The financial markets act as the financial intermediaries in any growing or developed economy. The funds that are in surplus are transferred from the savers in excess to those in need of money through the financial markets. This is because those who save are not the ones that have the important investment opportunities and ideas (Mayer & Vives, 1993, p. 156). Therefore, the financial markets take the role of intermediation of the two parties and enhance trade to be carried out more effectively.

The existence of the financial markets and intermediaries provide the investors with lower trading costs as compared to when they were non existing. Involvement in these markets will help the investors to manage their own financial wellbeing in the most appropriate way (Jalan, 2006). This has led to the increase in the preference of many individuals in the financial market and thus facilitating their existence further. In addition to the above, the investors are being awarded the opportunity to diversified and wide business opportunities in the financial market.

This is as a result if the competition being provided in the financial markets which leads to a wider variety of investment choices that better fit the investors’ needs. This makes many individuals to actively get involved in the financial market and thus facilitating its growth. Finally, the financial markets provide the potential investors with a greater accessibility to the credit facilities. This makes it possible for these investors to get an attraction to participate in the market and thus facilitating its growth (Bhole & Mahakud, 2009, p.

45). The financial markets and intermediaries also have participated a lot in the business world and incentives. First, it provides business incentives with greater accessibility to a wide range of capital opportunities at the lowest cost. Such capital opportunities are for example, the bonds, stocks, and mutual funds. This range of capital is according to the reach, taste and preference of a business individual thus influencing their active involvement in the financial market.

These markets also provide the investors and business incentives with maximum amount of information which gives them the ability to give better approximation and accuracy of the set prices. This is due to the increased transparency and improved price discovery which is provided in the financial markets (Mayer & Vives, 1993, p. 158). To the side of the government and the economy as a whole, the financial markets provide much improved benefits. These markets are increasingly popularising and many companies and investors are turning to them for better financial needs.

This however, from another point of view provides increased employment opportunities and the growth of the economy. This is because they allow for small and medium sized firms to expand and provide room for more employment (Jalan, 2006). This is why most governments prefer the financial markets and financial intermediaries because of such treasons. One of the major reasons for the existence of the financial markets is because of the government intervention. The government intervenes in the financial markets through many ways.

For example a government may decide to select good firms in an industry and on the other hand force other firms out of the business industry; these are those with unlawful operations. The government can implement policies and regulations that otherwise maintain better operation of the business entities in the industry (Madura, 2008, p. 21). Fines are imposed for the financial institutions and also other business entities that throughout the economy and also the financial sectors. The government therefore involves itself in adequate regulation of the participants in the financial markets.

This is to overcome the problems that may arise from bad participators and thus enhancing the consumer confidence in the financial markets and also reducing the moral hazard effects by improving the consumer knowledge on the financial markets. This type of regulation by the government in the financial markets has not only improved the consumer confidence but also it has strengthened the existence of the financial markets and financial intermediaries in the present time and also from the past (Jalan, 2006).

Therefore, from the above descriptions, it has been noted that the financial markets have so far been essential for the operation of many sectors of the economy that is the individuals, business incentives, companies, and even the government as a whole. This improved relationship has led to an increase in the rate of participation of these sectors in the financial markets thus facilitating their survival in the economy. Financial intermediaries also as part of the financial market are seen to have a direct impact on relatively every sector in the economy.

Their role as the main bridge between the lenders and borrowers is the most important reason as to why every sector of the economy participates in this platform. The associated advantages advanced to potential investors, companies, and the individuals have led to the increased goodwill of these financial markets and financial institutions thus increasing the participation of the various sectors. Finally, due to the government intervention and involvement in the operation of the financial markets and the financial intermediaries has improved the confidence of participants and hence strengthening its existence in the economy.

Bibliography: Allen, Franklin & Gale, Douglas, 2003. Financial intermediaries and markets. Retrieved August 19th, 2010, from: http://finance. wharton. upenn. edu/~allenf/download/Vita/finintermed. pdf Bhole, L M & Mahakud, Jitendra, 2009. Financial Institutions and Markets. New Delhi: Tata McGraw-Hill. Jaffee, Dwight & Russell, Thomas 1999. Financial markets and financial intermediaries: the case of Catastrophe Insurance. Retrieved August 19th, 2010 from, http://faculty. haas. berkeley. edu/jaffee/papers/nber99.

pdf Jalan, Karna, 2006. Role of financial intermediaries in the 21st Century. Retrieved August 19th 2010 from, http://www. indianmba. com/occasional_papers/op125/op125. html Levine, Ross, 1995. Stock market development and financial intermediaries: stylized facts. London: World Bank Madura, Jeff, 2008. Financial markets and institutions. Mason, OH: Thomson Higher Education Mayer, Colin & Vives, Xavier 1993. Capital markets and financial intermediate. New York, NY: Cambridge University Press.

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Financial Markets and Financial Intermediaries. (2018, Mar 28). Retrieved from

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