Financial Intermediaries Role in the Financial Markets | Essentials of Investments | CFA

Summary

This educational session by Professor For Hat delves into the key players of the financial market, including households, firms, and governments, and their roles in capital supply and demand. The video explains how financial intermediaries like banks, investment companies, and venture capitalists facilitate transactions, manage risks, and provide valuable insights to investors. It also touches on the importance of diversification and economies of scale in reducing investment risks and the impact of financial intermediaries during the 2008 financial crisis.

Takeaways

• 🏫 The session is an educational lecture on the players in the financial market, typically covered in an investment course.
• 📚 The speaker encourages subscribing to their YouTube channel for more tutorials on accounting, auditing, tax, finance, and Excel.
• 👥 The three major players in the financial market are households, firms (companies), and governments.
• 💰 Households act as suppliers of capital by investing in securities, depositing money in banks, or buying stocks and bonds.
• 🏢 Firms are demanders of capital, needing funds for expansion and investments in property, plant, and equipment.
• 🏦 Banks and financial institutions serve as intermediaries, accepting deposits and lending money to borrowers, thus connecting suppliers and demanders of funds.
• 📈 Investment companies, including mutual funds and hedge funds, pool resources from many small investors to lend large sums and achieve diversification.
• 💼 Investment bankers specialize in the sale of new securities to the public through underwriting and advising on stock prices and interest rates.
• 💼 Venture capital firms invest in startup companies, often taking an active role in management and providing business advice.
• 📊 Financial intermediaries build expertise and economies of scale, offering services like research notes and databases to their clients.
• 🌐 The speaker's website offers additional resources for accounting education and professional certification preparation, such as the CPA exam.
• 📉 The next session will discuss the financial crisis of 2008, focusing on the role of financial intermediaries during the crisis.

Q & A

What are the three major players in the financial market?

The three major players in the financial market are households, firms (companies), and governments.

How do households act as suppliers of capital in the financial market?

Households act as suppliers of capital by depositing money in banks or purchasing securities issued by firms, which provides money to the market.

Why do firms need capital, and how do they obtain it?

Firms need capital to expand and invest in property, plant, and equipment. They obtain it by issuing securities, which are then purchased by households, providing the firms with the necessary funds.

What is the role of the government in the financial market?

The government can act as either a supplier or demander of capital, depending on its tax revenue and expenditure. It may issue Treasury bills, notes, and bonds to finance itself when it has a deficit.

Why are financial intermediaries important in the financial market?

Financial intermediaries are important because they facilitate the flow of funds between savers and borrowers, reducing the costs and risks associated with lending and borrowing.

What are some examples of financial intermediaries mentioned in the script?

Examples of financial intermediaries mentioned include banks, investment companies, insurance companies, and credit unions.

How do banks make money as financial intermediaries?

Banks make money by borrowing funds at a lower interest rate and lending them out at a higher interest rate, keeping the spread as profit.

What is a mutual fund and how does it provide diversification to investors?

A mutual fund is a type of investment vehicle that pools money from many investors to purchase a diversified portfolio of securities. It provides diversification by spreading investments across various stocks and industries.

What is the role of investment companies in the financial market?

Investment companies manage funds for investors, offering services like portfolio management and large-scale trading. They also provide research and advisory services to help investors make informed decisions.

How do investment bankers differ from commercial banks?

Investment bankers specialize in the sale of new securities to the public, often by underwriting new issues, and advising on the pricing of stocks or bonds, whereas commercial banks primarily deal with accepting deposits and providing loans.

What is the primary market and how does it relate to the financial market?

The primary market is where new issues of securities are offered to the public for the first time. It is a critical part of the financial market as it allows companies to raise capital by selling their stocks or bonds directly to investors.