Financial management principles and practices

Financial Management

The Role of Financial Intermediation in the Modern World

Financial intermediation is the complex concept associated with the distribution of money within any given economy. Evidence of financial intermediation exists since early antiquity, but its role has exponentially grown since then. This basically means that, despite the occurrence of technological advancements, the highly developed modern world continues to heavily rely on financial intermediation to insure a sufficiency of liquidities as fuel for economic prosperity. Financial intermediaries generally attract money deposits from the population and offer them in the form of loans to economic agents that invest the money into economic growth. The field also deals with operations on financial markets, such as the trading of stocks, forex and a multitude of financial products (Allen and Santomero, 1996).

The question that could easily be asked by any individual refers to the necessity of financial intermediation in this highly developed modern world. The answer is a simple one, and based on the most outstanding roles played by the process. These roles and the reasons why financial intermediation is still required are succinctly presented below:

The players in the economic field as extremely diverse and divided by different goals, operational activities or the need to subject to varying regulations; financial intermediaries offer them a common background in which they can make decisions that help the establishment of their diverse goals

They ensure that there are sufficient liquidities within markets and industries; they also ensure that the borrows will pay their money bank and by this represent mechanisms of delegated monitoring and commitment insurance

They produce information and support the process of decision making; they stimulate either consumption or savings, as the economic state demands (Gorton and Winston, 2002).

2. Types of Investment Funds and Their Investment Objectives

The international legislation relative to mutual funds is relatively scarce and each country established its own laws. India is for instance organizing its mutual funds onto three categories, based on their structure, their investment objectives and by other criteria (Nature Magics, 2009). The most common forms of mutual funds within the United States are those organized by investment objectives. They are as follows:

Money Markets -- they are interested in investing in high quality short-term securities as their main objective is that of safety in investments; it aims to offer an even distribution of income and a security that the principal would not decrease in value

Growth -- this category of mutual funds generally purchases stocks from the well established organizations and is interested in long-term gains rather than a stable income

Aggressive Growth -- similar to growth funds in the meaning that it looks for long-term gains rather than stable incomes, but it will also invest in small size companies or other types of companies that are generally frowned upon; the degree of risks within these funds is as such higher

Income -- this type of mutual funds invests in stable securities as its aim is to offer its investors a reliable income; income mutual funds vary in terms of risks associated based on the credit quality of the institution issuing the securities, interest rates or maturity of the security

High Income -- these funds strive to offer increased levels of income for their customers and will as such invest in junk bonds; they reveal higher rates of risk

Balanced? -- these mutual funds seek the balance between their financial gains and income stability objectives. "A balanced fund seeks to provide long-term growth through its equity component as well as income to be generated by the portfolio's debt securities" (Galvin).

3. Factors Generating Changes in the U.S. Secondary Market for Common Stock

The exchange of financial products expanded significantly since the 1960s as a direct consequence of the growing interest in stocks, bonds and other types of investments. Trading financial products is no longer destined only for specialized investors, but also for the general public and the growing interest of the public generated major changes. Then, the volatility of the initially issued securities also increased as these could be sold and purchased more times. This movement also led to the expansion of the secondary market for common stocks, but also to a growing need for a stricter and clearer legislation.

Third, another factor generating change was the growing number of securities that were issues and could be traded. Secondary markets for instance also "exist for other securities as well, such as when funds, investment banks, or entities such as Fannie Mae purchase mortgages from issuing lenders" (Investopedia, 2009). The increasing circulation of these new mortgage securities (and the more recent mortgage-backed securities) led to a sustained growth of the secondary market. Fourth, the secondary market itself constituted a force for future changes. With high rates of success and the creation of well paid additional jobs within the economy, the secondary market generated a growing need for expansion and the inclusion of more and more participants, both financial specialists as well as clients.