Question

1- Option A: Identify 4 different types of financial intermediaries that channel funds into the capital markets and explain the function of these intermediaries and their relative importance.

2- Option B: Briefly but concisely describe 4 components of a good organized exchange.

Answer 1

1.Option A . Financial Intermediary is an organisation that acts like a broker between the parties involved in a financial transactions.

4 types are:

a.Commercial banks b.Investment banks c.Mutual funds. d. Pension funds.

a. Commercial banks is a institution which accepts deposits, provides loan and offers savings account, checking account services to individuals and small businesses.

It also provides interest to people who deposit the money. However the interest paid is less than other investment products.

It also charge interest rate to people who take loan from their bank.The interest rate charged is higher than paid by the banks.

Importance

It acts as a safe place for people to deposit their money also to take loan rather than depending upon others or other private companies.

b.Investment banks:

It is a financial intermediary that perform many complex transactions . Examples include JP Morgan, Goldman sachs

These acts as i)Financial Advisors to large institutional investors and provides them advice on variety of financial matters.

ii)assist in mergers and acquisitions:Helps to know the real value of the acquisition and helping involved parties to arrive at a fair price.

iii)As a analyst : It analyses the companies on fundamental,technical analysis and rates it accordingly and helps the traders to know if it has to be held, bought or sold.

c.Mutual Funds:

Are investments made by asset portfolio manager who pools our money along with other investors to provide investors either growth or income, into the portfolio consisting of securities which are either high cap small cap or medium cap funds.

Functions are their importance

To help and save time and money by carefully investing investors money by charging a premium amount. As its taken care by portfolio manager we dont have to look into each company but we have to select carefully the mutual fund plan according to the monthly budget we can afford. We can also buy the blue chip securities which otherwise could be very difficult to purchase.

d.Pension funds:Is a retirement income to the employee after the retirement. USA has the largest  pension funds.

Importance

1.It is like a regular income after retriement when the regular income from the job is absent, making up for this loss of income.The employer guarantees that the employee gets fixed income.The amount is based on the number of years of service and the level at which the employee works in the company.

2. It also provides the dependant with pension at a slight lower rate or provides lump sum at the members death.

3.

2. Option B :

Stock exchange is a place where the buying and selling of the private companies securities,government bodies securities  takes place in a systematic manner and according to the rules of that exchange.Here rule is strictly obeyed thats why it is organised. We can see the companies listed in the stock exchange on their website or business channels or sites like moneycontrol.com. 4 important components of the stock exchange are:

Organised market: Stock markets are responsible for smooth functioning of the transactions of the securities. It should not be treated as a place to gamble. It should be a platform where nit much of a speculation takes place and should be responsible to make profitable investment.Hence every stock exchange has a management commiitee to see if any kind of misconduct takes place. In India there is SEBI and in USA there is SEC(SEurities and exchange commission)

2.Listed securities are traded: As mentioned earlier only those securities listed on the exchange are tradeable.

3. Transactions only through Authorised members : Selling and purchase can be done only through authorised members or brokers.In India various banks have the platform to buy and sell shares for which they charge commissiion for every transaction.Eg. Icicicdirect,Zerodha (Charge only 20rupees per transaction unlike others).

4.Capital formation:It helps in collection of capital.It makes a person to accumulate wealth invest and make him to take risk and invest in the market.