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.
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.
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;
sell for their own account.
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 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