Role of Theu.S. Financial System

Role of the U.S. Financial System

The role of the U.S. financial system is of a vast significance when corporations are in the quest to raise capital to increase its business. “Financial markets are the meeting place for people, corporations, and institutions that either need money or have money to lend or invest.” (Block & Hirt, 2005). There are many functions of the financial markets that are utilized in the efforts to raise capital. Some of the functions are considered short term while the others are regarded long term. The short term methods are more frequently utilized by many corporations because long term methods acquire much more awareness, investigation, and constraint. This paper will describe how a corporation raises short term and long term capital through the markets in the U.S. financial system.

A corporation has five different sources for raising capital. Those sources include the issuance of bonds, preferred stock, and common stock, borrowing, and utilizing profits. Corporations may utilize their own profits for both short term and long term goals. Some corporations may disburse most of their profits out by distributing dividends to the firm’s shareholders or they may only pay out half of their profits and use the other half to pay for its operations and expansion. According to Vasudevan (2000), “Investment bankers can play many roles in the underwriting of security issues including production and certification of information, provision of interim capital, and/or supplying distribution and marketing skills.” Investment bankers also act as intermediaries through the allocation of capital. An investment banker’s role involves raising debt and equity capital in search for the best return for its clientele including corporations.

A corporation depends on the financial markets to supply the funds for short term operations. The money markets deal with short term securities and have a life of one year or less. The securities in the money markets may include commercial paper sold by corporations to finance their day to day operations, or certificates of deposits (CD) with maturities of less than one year which are sold by banks, as well as treasury bills. A corporation may go to the markets and raise financial capital either by borrowing money through a debt submission of short term records or corporate bonds, or by promoting ownership in the corporation through the issuance of common stock. Corporations can raise short term capital by obtaining a loan from the banks or further lenders. When corporations borrow money, it is usually to finance operations or inventories. “If a company is in good financial health, it can raise capital by issuing common stock. Typically, investment banks help companies issue stock, agreeing to buy any new shares issued at a set price if the public refuses to buy the stock at a certain minimum price.” (About.com: Economics, 2008).

The capital markets deal with long term securities and have a life of more than one year. The capital markets include securities such as government bonds, corporate bonds, preferred stock, convertible securities, and common stock. These long term securities consist of the corporation’s capital structure and are found under long term liabilities and equities on a balance sheet. Bonds are debt means that have a fixed life and must be paid