The main financial market in the U.S. is the securities market. This is made up of stock, bond, and options markets. There are similar markets in most other major economies throughout the world. The common feature is that the price of an investment vehicle at any time is from an equilibrium between the forces of supply and demand. As new information about the returns and risk becomes available, changes in supply and demand could result in a new market price. The financial markets streamline the process of bringing the suppliers and demanders of funds together, and allow transactions to be made quickly and at a fair price. Suppliers of funds can transfer their resources to the demanders through financial institutions, financial markets, or in direct transactions. Financial institutions can participate in financial markets as either suppliers or demanders.
Suppliers & Demanders of Funds
Individuals, business, and government are key players in the investment process. Each one can be a supplier or demander of funds. In order for the economy to grow and prosper, funds need to be available to qualified individuals, business, and government. If individuals decided to hoard their extra funds instead of putting them in financial institutions or investing them in financial markets, then the individuals, business, and government in need of the funds would have a much harder time obtaining them. If this happened, consumer purchases, business expansion, and government spending would decline, and economic activity would slow.
Individuals- The individual’s role in the investment process is significant. They often demand funds in the form of loans to finance the acquisition of property-mostly automobiles, houses, and education. Even though their demand for funds is great, as a group, individuals are net suppliers of funds: meaning they put more funds into the financial system than they take out.
Business- Businesses usually require large sums of money to support operations. Business has both long and short term financial needs. They issue a variety of debt and equity securities to finance these needs. When they have excess cash they also supply funds. Overall, businesses in general are net demanders of funds.
Government– Federal, state, and local levels of government need vast sums of money to help finance long term projects to keep the government running and for the construction of public facilities. Sometimes, governments supply funds by making short term investments to earn a positive return on funds not being used at the time. Government is a net demander of funds. The government’s financial activities significantly affect the behavior of financial institutions and financial markets.
Types of Investors
Individual investors manage their own personal funds to achieve financial goals. They usually concentrate on earning a return on excess funds, building a source of retirement income, and providing security for their families. For individuals who lack time and/or expertise to make investment decisions for themselves often employ institutional investors-professionals who are paid to manage other people’s money. The professionals trade large amounts of securities for individuals, businesses, and governments. Institutional investors include banks, life insurance companies, mutual funds, and pension funds.