Financial markets attract funds from investors and channels them to corporations—they thus allow corporations to finance their operations and achieve growth. Money markets allow firms to borrow funds on a short-term basis, while capital markets allow corporations to gain long-term funding to support expansion (known as maturity transformation). Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as
banks,
Investment Banks, and
Boutique Investment Banks can help in this process. Banks take deposits from those who have
money to save on the form of savings a/c. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of
loans and
mortgages. More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents, and where existing borrowing or lending commitments can be sold on to other parties. A good example of a financial market is a
stock exchange. A company can raise money by selling
shares to
investors and its existing shares can be bought or sold. The following table illustrates where financial markets fit in the relationship between lenders and borrowers:
Lenders The lender temporarily gives money to somebody else, on the condition of getting back the principal amount together with some interest or profit or charge.
Individuals and doubles Many individuals are not aware that they are lenders, but almost everybody does lend money in many ways. A person lends money when he or she: • Puts money in a savings account at a bank • Contributes to a pension plan • Pays premiums to an insurance company • Invests in government bonds
Companies Companies tend to be lenders of capital. When companies have surplus cash that is not needed for a short period of time, they may seek to make money from their cash surplus by lending it via short term markets called
money markets. Alternatively, such companies may decide to return the cash surplus to their shareholders (e.g. via a
share repurchase or
dividend payment).
Banks Banks can be lenders themselves as they are able to
create new debt money in the form of deposits.
Borrowers •
Individuals borrow money via bankers'
loans for short term needs or longer term mortgages to help finance a house purchase. •
Companies borrow money to aid short term or long term
cash flows. They also borrow to fund modernization or future business expansion. It is common for companies to use mixed packages of different types of funding for different purposes – especially where large complex projects such as company management buyouts are concerned. •
Governments often find their spending requirements exceed their
tax revenues. To make up this difference, they need to borrow. Governments also borrow on behalf of nationalized industries, municipalities, local authorities and other public sector bodies. In the UK, the total borrowing requirement is often referred to as the
Public sector net cash requirement (PSNCR). Governments borrow by issuing
bonds. In the UK, the government also borrows from individuals by offering bank accounts and
Premium Bonds. Government debt seems to be permanent. Indeed, the debt seemingly expands rather than being paid off. One strategy used by governments to reduce the
value of the debt is to influence
inflation.
Municipalities and local authorities may borrow in their own name as well as receiving funding from national governments. In the UK, this would cover an authority like Hampshire County Council.
Public Corporations typically include
nationalized industries. These may include the postal services, railway companies and utility companies. Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of
Foreign exchange markets. Borrowers having similar needs can form into a group of borrowers. They can also take an organizational form like Mutual Funds. They can provide mortgage on weight basis. The main advantage is that this lowers the cost of their borrowings. ==Derivative products==