Role of the US Financial Systems

Essay by hanaahmedCollege, UndergraduateB, March 2007

download word file, 3 pages 4.1

As the Corporation size starts to expand a growing need to raise the short term and long term capital becomes one of the most basic of all business activities. In this paper we will discuss the role of U.S. financial markets, the role of investment bankers, and the sources of capital available to corporations. Corporations can raise capital through bank loans, private venture capitalist and when those resources are exhausted a corporation can turn to the public market and sale stocks, bonds and other securities. (SIFMA, 2006)A financial market as explained by Mishkin in Introductory notes of Financial Market "is a market in which financial assets are traded. In addition to enabling exchange of previously issued financial assets, financial markets facilitate borrowing and lending by facilitating the sale by newly issued financial assets."(Tesfatsion, 06)"Financial markets serve six basic functions. These functions are briefly listed below:•Borrowing and Lending: Financial markets permit the transfer of funds (purchasing power) from one agent to another for either investment or consumption purposes.

•Price Determination: Financial markets provide vehicles by which prices are set both for newly issued financial assets and for the existing stock of financial assets.

•Information Aggregation and Coordination: Financial markets act as collectors and aggregators of information about financial asset values and the flow of funds from lenders to borrowers.

•Risk Sharing: Financial markets allow a transfer of risk from those who undertake investments to those who provide funds for those investments.

•Liquidity: Financial markets provide the holders of financial assets with a chance to resell or liquidate these assets.

•Efficiency: Financial markets reduce transaction costs and information costs."(Tesfatsion, 06)Major players in Financial Market are brokers, investment bankers, dealers and financial intermediaries. Brokers serve the purpose of facilitating trade by locating a seller (or buyer) to complete the desired transaction. Examples of...