Role of Us Financial System

Role of the US Financial System

A financial market is a market in which financial assets are traded. It enables the exchange of previously issued financial assets, borrowing and lending by facilitating the sale by newly issued financial assets. Examples of financial markets include the New York Stock Exchange (resale of previously issued stock shares), the U.S. government bond market, and the U.S. Treasury bills auction (The Economics of Money, Banking, and Financial Markets).

A financial market keeps in mind six basic functions which they need to facilitate:

• Price Determination: One of the key features of a financial market is to determine the price of financial assets which already exist in the stock as well as ones which are issued recently.

• Borrowing and Lending: This includes the relocation of funds for investment or for utilization from one particular agent to another. Usually the borrowers are organizations or individuals in need of funding or for investments and the lenders are usually those who have cash in excess which can be utilized for investing.

• Information Aggregation and Coordination: For a financial market to function smoothly, it is important for there to be a channel through which there is a communication and coordination of information regarding the values of financial assets and the movement of funds from the lenders to the borrowers.

• Risk Sharing: They allow a hand over of risk from the investors to the entities which provide the fund for the investment to take place.

• Liquidity: It is important for the financial market to accommodate the will of the investors. For this, they need to provide the holders of financial assets with an opportunity to sell their assets again or to liquidate them.

• Efficiency: For a financial market to observe all the above functions there needs to be an immense coordination to reduce the costs of transactions and information (The Economics of Money, Banking, and Financial Markets).

Financial institutions are institutions that participate in financial markets, and thereby participate in the creation and/or exchange of financial assets. In the United States, financial institutions can be classified into four categories: brokers, dealers, investment bankers and financial intermediaries. Leading investment banks include Merrill Lynch, Salomon Smith Barney, Morgan Stanley Dean Witter and Goldman Sachs. The duty assigned to the investment banker is to keep in contact with the every client, giving each of them their time and advice. Along with this, they need to take care and form new clients as well as manage the old ones. Because investment bankers need to secure new clients, it is essential that they look for new opportunities for existing clients (Investment Banker, Stock Market Basics Website). They serve three functions. The first is an advisory function. They will work with a firm wishing to go public for the first time, an Initial Public Offering (IPO), or with established companies wanting to raise additional capital through a new stock or bond issue (Foundations of Financial Management, 11th ed.). As advisors, they will assist the company with its filings, help the firm to establish the offering price of the stock or the coupon rate of the bond and will go with the CEO and CFO to brokerage firms to market the offering. As distributers, they play the role of the wholesaler for brokerage firms and dealers who will further sell the securities to individual investors. The most important function of investment banking is that of underwriter (Contemporary Financial Management, 7th ed.). The investment banking firm, or the syndicate if the offering is large, will buy the securities from the issuing company and then sell them to the public. This holds an advantage for the issuing company as it eliminates the risk which will enable them to receive a set price and can plan accordingly.

There is no one best method of raising capital. Financing methods will vary as a result of legal, legislative and economic changes (Capital Sources for Your Business, Home-Based Business Fact Sheet). For a small business there are a number of debt financing options available which include private placement of bonds, convertible debentures, industrial development bonds, and leveraged buyouts. Loans can be classified as long-term which have a maturity longer than one year, short-term with a maturity shorter than two years, or a credit line catering for more immediate borrowing needs. They can be endorsed by co-signers, guaranteed by the government, or secured by collateral such as real estate, accounts receivable, inventory, savings, life insurance, stocks and bonds, or the item purchased with