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The role of Financial Institutions in Financial Markets
The role of Financial Institutions in Financial Markets
Financial markets are preferably described as platforms on which buyers and sellers interact to accomplish various transactions. The transactions range from an exchange of bonds to currencies among other equities (Howells and Bain, 2007, 12). Sequentially, these differing transactions transform the available platforms into diversified markets, which include capital, money, bonds, derivatives and interbank markets among others. It is inarguable that financial markets fall in a vast range that ultimately requires control and guidance. These aspects are most preferably conducted via financial institutions, which exist in different forms, function with divergent goals and serve separate markets. The following brief will provide a clear reason behind the existence of financial institutions, the markets they serve, and to determine the link between their presence and the need people have towards them.
Types and Importance of Financial Institutions
Glen Arnold in his book, Modern Financial Markets and Institutions, elaborates the importance of comprehending the connection between financial institutions and the markets they serve (Arnold, 2012, 59). Hence, it is clear that financial institutions have a huge importance that is connected to the financial markets. Indeed, one of the factors that fuel the formation and existence of financial institutions is the need for proper financial control among individuals. Therefore, people’s needs tend to dictate the form a financial institution should take when it is in operation. Normally, individual customers have inadequate information about the financial ventures they engage or are interested in; hence, there is a dire need for guidance. Once individuals gather financial information, they end up feeling inadequate to execute a transaction. Hence, it is evident that people have high interests of engaging others in the financial markets, but they are not in a position to execute the transactions. At this point, financial institutions stand out as the most preferable choice to turn to for advice and help.
Various financial establishments exist for different purposes, which makes them valuable, and helpful (Arshadi, and Karels, 1997, 33). Commercial banks are examples of financial institutions whose purpose are needed, valuable, quantifiable, and serve different range of customers. The most and commonly utilized purpose of banks in the financial market is to provide safe depositing services to individuals. Security to valuables is something that individuals would find difficulty in achieving; thus, they take their valuables to commercial banks for safety purposes. In turn, this depicts that such a financial institution is in existence because people need it. Additionally, the banks earn interests and use the customer’s money to engage in various financial transactions such as exchange of currencies to generate profits. This case presents a situation of information asymmetries, where the bank has more information than its customers, but there is no manipulation from either side of the two parties. Apart from the aforementioned role, banks also play a vital role in acting as a payment agency where employers pay their employees via these institutions (Boakes, 2008, 9).
Apart from commercial banks, there are internet banks that are active in offering their services via online means. The key difference between these banks and the traditional commercial ones is that they are operated only on the World Wide Web. In addition, their services are faster and more reliable than the physical commercial banks. Just like other banks, the internet financial institutions rely on fees charged on people using their services for sustenance. Once investors transfer money through the internet bank, they incur charges that act as earnings for the institutions. Thus, these banks highly depend on the investments that people make through their banks. People, for example, those who are willing to make a transaction over the internet do not have much of a choice but to use these services. This makes both parties to depend on the other for functionality and efficiency. The internet banking provides the knowledge and services of transferring the funds while the investors finance the institutions.
The stock market is an extensively wide platform that individuals may fail to excel in if they would make an investment solely. Therefore, they require proper guidance, resources and representation to succeed in the stock market platforms (Rutterford, 2007, 70). This is ultimately and properly done by investment banks that link investors and issuers of securities, which range from ownership of companies to other properties. In cases where the investors are individuals, it is challenging for them to acquire the securities without aid and ample information. It is at this point that investment banks become handy in providing all the required information and other requisite resources to investors. The extent to which financial institutions can go in terms of their operations is dependent on the customers’ needs. Functionality of the two parties, investors and financial institutions, in the market, is dependent on each other. The purchase and sale of securities need to be done with proficiency, which investors can only find in the concerned financial institutions. The dependency is mutual because financial institutions would not exist if individuals would not have a need to buy or sell securities with the help of an establishment (Pilbeam, 2010, 88).
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