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FINANCIAL MARKETS AND INSTITUTIONS: IMPORTANT FUNCTIONS Economic system relies heavily on financial resources and transactions, and economic efficiency rests in part on efficient financial markets. Financial markets consist of agents, brokers, institutions, and intermediaries transacting purchases and sales of securities. The many persons and institutions operating in the financial markets are linked by contracts, communications networks which form an externally visible financial structure, laws, and friendships. The financial market is divided between investors and financial institutions. The term financial institution is a broad phrase referring to organizations which act as agents, brokers, and intermediaries in financial transactions. Agents and brokers contract on behalf of others; intermediaries sell for their own account. Financial intermediaries purchase securities for their own account and sell their own liabilities and common stock. 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 overlapping activities. The classification of financial market participants is outlined in Figure 1. Financial markets provide our specialized, interdependent economy with many financial services, including time preference, distribution of risk, diversification of risk, transactions economy, transmutation of contractual arrangements, and financial management. Time Preference Time preference refers to the value of money spent now relative to money available for spending in the future. Businesses are frequently making decisions among short-term and long-term uses of funds, and business executives must judge between outlays which provide a return in the near term and those which pay off many years from now. They must decide upon commitments requiring funds now and those requiring funds later, by allocating not only funds that they expect to receive currently, but also
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