The National Teachers Collage

629 J.Nepomuceno St., Quiapo, Manila

WRITTEN REPORT FOR

FINANCIAL MARKETS AND FINANCIAL

INTERMEDIATION

Presented to
THE NATIONAL TEACHERS COLLEGE

In Partial Fulfillment
of the Requirement of the Course
PRINCIPLES OF ECONOMICS & LRT

SUBMITTED BY:
JOAN PAULINE R. ORLAIN

SEPTEMBER 14, 2018

 The National Teachers Collage
629 J.Nepomuceno St., Quiapo, Manila

Financial Markets and Financial Intermediation

Financial markets
• A 'financial market' is a market in which people trade financial securities and derivatives
such as futures and options at low transaction costs. Securities include stocks and bonds,
and precious metals.

Types of financial markets

• Capital markets which consist of:
• Stock markets, which provide financing through the issuance of shares or common
stock, and enable the subsequent trading thereof.
• Bond markets, which provide financing through the issuance of bonds, and enable
the subsequent trading thereof.
• Commodity markets, which facilitate the trading of commodities.
• Money markets, which provide short term debt financing and investment.
• Derivatives markets, which provide instruments for the management of financial risk.
• Futures markets, which provide standardized forward contracts for trading products at
some future date; see also forward market.
• Foreign exchange markets, which facilitate the trading of foreign exchange.
• Spot market
• Interbank lending market

Raising capital
• Financial markets attract funds from investors and channel 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).
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
 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.
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.
 Governments often find their spending requirements exceed their tax revenues.
 The National Teachers Collage
629 J.Nepomuceno St., Quiapo, Manila

Financial intermediary
• A financial intermediary is an institution or individual that serves as a middleman among
diverse parties in order to facilitate financial transactions. Common types include
commercial banks, investment banks, stockbrokers, pooled investment funds, and stock
exchanges.

Functions performed by financial intermediaries

1. Creditors provide a line of credit to qualified clients and collect the premiums of debt
instruments such as loans for financing homes, education, auto, credit cards, small
businesses, and personal needs.
 Converting short-term liabilities to long term assets
2. Risk transformation
 Converting risky investments into relatively risk-free ones.
3. Convenience denomination
 Matching small deposits with large loans and large deposits with small loans

Advantages and disadvantages of financial intermediaries:

There are two essential advantages from using financial intermediaries:
 Cost advantage over direct lending/borrowing.
 Market failure protection; The conflicting needs of lenders and borrowers are reconciled,
preventing market failure
The cost advantages of using financial intermediaries include:
1. Reconciling conflicting preferences of lenders and borrowers
2. Risk aversion intermediaries help spread out and decrease the risks
3. Economies of scale - using financial intermediaries reduces the costs of lending and
borrowing
4. Economies of scope - intermediaries concentrate on the demands of the lenders and
borrowers and are able to enhance their products and services

Various disadvantages have also been noted in the context of climate finance and development
finance institutions. These include a lack of transparency, inadequate attention to social and
environmental concerns, and a failure to link directly to proven developmental impacts.

Types of financial intermediaries

 Banks
 Mutual savings banks
 Savings banks
 Building societies
 Credit unions
 Financial advisers or brokers
 Insurance companies
 Collective investment schemes
 Pension funds
 cooperative societies
 Stock exchanges