Essentials of Accounting and Finance

Assignment 1B

By

Ty Givens

Essentials of Accounting and Finance

May 14, 2017

Essentials of Accounting and Finance

     There are three primary that capital is transferred between savers and borrowers. The first type of transfer is called a direct transfer. This is when securities are transferred directly between a business and saver without going through a financial institution first. The second type of transfer is an indirect transfer. Indirect transfers go through an investment bank which underwrites the issuances of securities. The business sells its stocks to the investment bank which in turn sells those securities to savers. The last type of transfer is an indirect transfer made through a financial intermediary like a bank, insurance company or mutual fund. The saver deposits their money with the intermediary in exchange for securities. Then the intermediary uses that money to create new forms of capital (Brigham & Houston, 1998).

     When you need to borrow money, you can find a lender with extra funds in the financial markets. There are several types of financial markets, each one is made to serve a different type of consumer. The physical assets market is based on tangible items such as cars or computers. The opposite to this market is a financial assets market. Financial assets markets are based on stocks, bonds and mortgages. Another set of financial markets is spot markets versus futures markets. A spot market is a market in which assets are bought or sold “on the spot” (Brigham & Houston, 1998). A futures market is a market in which assets are agreed to be bought or sold at a future date. There are also money markets and capital markets. A money market is for short-term, highly liquid debt securities (Brigham & Houston, 1998). The counterpart to a money markets are capital markets. In capital markets the investments are intermediate or long term debt or corporate stocks (Brigham & Houston, 1998). Generally short-term means less that 1 year, intermediate-term means 1 to 10 years and long-term means more than 10 years (Brigham & Houston, 1998). Another pair of markets are primary and secondary markets. A primary market is one in which a corporation raises capital by issuing new securities (Brigham & Houston, 1998). In contrast, in secondary markets already existing assets are traded between investors after corporations have already issued them. The last set of markets are private and public markets. In a private market the transactions are between two private parties while in a public market standardized contracts are traded on organized exchanges (Brigham & Houston, 1998).

     As previously mentioned there are several financial markets. These markets are important in order for the economy to be healthy. Without these markets funds wouldn’t move between savers and borrowers. If the money moving between the two, companies can’t raise capital, savers looking to invest have would have no way to invest and borrowers wouldn’t have the funds to use for major purchases, such as cars or homes (Brigham & Houston, 1998). If assets are moving between savers and borrowers employment rates and productivity would be lower and the economy would stagnate.

    In recent years derivatives have been increasing in use. A derivative is a security whose value is derived from the value of another asset (Brigham & Houston, 1998). Derivatives open investors up to new opportunities but also new risks. Since the value of the asset is derived from the value of an underlying asset, the value may fluctuate with the market.

     There are several types of financial institutions. Each of these banks serve a different purpose. One type of bank is an investment bank. An investment bank is a type of bank that underwrites and distributes new investment securities to help businesses find financing. Another type of bank is a commercial bank. These are normal consumer banks like PNC or Bank of America that provides various services to both savers and borrowers. There are financial services corporations. This type of bank does investment, commercial banking and insurance among other things. Another financial institution is a pension fund. These are retirement plans funded by corporations or government agents and administered boy commercial banks or insurance companies (Brigham & Houston, 1998). Another type of fund is a mutual fund, which are corporations that accept money from savers then used those funds to buy stocks, long-term bonds or short-term debt instruments issued by businesses or government units (Brigham & Houston, 1998). There are exchange traded funds. They are like mutual funds as they are usually operated by mutual fund companies. Exchange traded funds buy a portfolio of stocks of a certain type then sell their shares to the public (Brigham & Houston, 1998). There are also hedge funds, which are unregulated mutual funds usually of worth over 1 million dollars. Lastly there are private equity companies. These organizations are similar to hedge funds but instead of purchasing stock, they purchase entire companies.

      There are two well known stock markets in which people buy, sell, and trade assets on. The NYSE and the NASDAQ. The New York Stock Exchange is a physical location exchange with an over the counter market. This means that the exchanges is in a tangible location where securities are exchanged in person. The second biggest stock market is National Association of Securities Dealers Automated Quotations is a dealers market in which everything needed to conduct securities exchanges is done digitally (Brigham & Houston, 1998).