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Ways Of Transferring Capital From Savers To Borrowers Finance Essay

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Find the most recent financial statements for two companies of same industry which are listed in KLSE (Kuala Lumpur Stock Exchange). Evaluate the financial position and performance for each of these two companies using accounting ratio analysis. You are required to compute and compare the accounting ratios between these 2 companies, and conclude the results of your findings. The limitations or problems of using accounting ratios for performance analysis should be included in your conclusion.

Identify and discuss three different ways of transferring capital or fund from savers to borrowers in the financial market.

1.0 Introduction

What is accounting ratios? Accounting ratios are the ratios which used in calculation and indicate the relationship between figures from the financial statements of a company. The financial statements are the statements that summarized a company's activities either quarterly or annually. It consists of a profit and loss account and a balance sheet. In accounting, accounting ratios are often used in interpreting and evaluating a company's overall financial condition and business performance. Accounting ratios are classified into 5 categories for measuring 5 different aspects of business performance. The 5 aspects are shown as follow:

Profitability of company

Liquidity of company

Asset management of company

Debts management and capital gearing of company

Market value of investment to ordinary shareholders / common stockholders

1.1 Profitability of company

Gross profit markup

Gross profit markup (%) = Gross Profit x 100

Cost of goods sold

Gross profit margin

Gross profit margin (%) = Gross profit x 100

Net sales value

Operating profit margin on sales

Operating profit margin (%) = Operating profit before interest and before taxation x 100

Net sales value

Profit margin on sales

Profit margin on sales (%) = Net income available to common stockholders x 100

Net sales value

Basic earning power (BEP)

Basic earning power (BEP) = Operating profit before interest and before taxation x 100

Total assets

Return on total assets (ROA)

Return on total assets (ROA) = Net income available to common stockholders x 100

Total assets

Return on total equity (ROE)

Return on total equity (ROE) = Net income available to common stockholders x 100

Common equity

1.2 Liquidity of company

Current ratio / Working capital ratio

Current ratio / Working capital ratio = Current assets

Current liabilities

Liquid ratio / quick ratio / acid-test ratio

Liquid ratio / quick ratio / acid-test ratio = Liquid assets

Current liabilities

1.3 Asset management of company

Inventory turnover or stock turnover

Inventory turnover or stock turnover = Cost of sales

Average stock value

Fixed asset turnover

Fixed asset turnover = Net sales

Fixed assets net book value

Total assets turnover

Total assets turnover = Net sales

Total assets

Debtor ratio

Debtor ratio = Debtor

Credit sales

Debtor payment period

Debtor payment period = Debtor x 365 days/ 52 weeks / 12 months

Credit sales

Days sales outstanding (DSO)

Days sales outstanding (DSO) = Debtor x 365 days

Credit sales

1.4 Debts management and capital gearing of company

Debts ratio

Debts ratio = Total debts

Total assets

Capital gearing ratio

Capital gearing ratio = Prior charge debts capital

Total capital

Debts equity ratio

Debts equity ratio = Total debts

Common Equity

Times interest earned

Times interest earned = Profit before interest and before taxation

Interest charges

Creditor ratio

Creditor ratio = Creditor

Credit purchase

Creditor payment period

Creditor payment period = Creditor x 365 days / 52 weeks / 12 months

Credit purchase

1.5 Market value of investment to ordinary shareholders/ common stockholders

Earnings per share

Earnings per share = Net income available to common stockholders

Number of ordinary shares in issue

Price / Earnings ratio

Price / Earnings ratio = Market price per ordinary share

Earnings per share

Dividend cover

Dividend cover = Earnings per share

Net ordinary dividend per share

Earning yield

Earning yield = Gross earnings per share x 100

Market price per ordinary share

Dividend yield

Dividend yield = Gross ordinary dividend per share x 100

Market price per ordinary share

Price / cash flow ratio

Price / cash flow ratio = Market price per ordinary share

Net cash inflow per ordinary share

Market price / book value ratio

Market price / book value ratio = Market price per ordinary share

Net book value per ordinary share

1.6 Company's background

Gamuda was incorporated on 6 October 1976. It was listed on the main board of the Kuala Lumpur Stock Exchange (KLSE) on 10 August 1992. In Malaysia, Gamuda is a leading infrastructure group. It has a wide range of business activities all over the world. Its core competencies are engineering and construction, infrastructure concessions, and also township development. Besides, they have mega projects such as internationally acclaimed SMART (Stormwater Management and Road Tunnel), intra-urban highways, Kaohsiung Mass Rapid Transit System in Kaohsiung, Taiwan, and so on.

On the other hand, WCT was incorporated on 14 January 1981 as WCT Earthworks & Building Contractors Sdn Bhd. Then, it went public on 1 April 1994 and listed on the Kuala Lumpur Stock Exchange (KLSE) on 16 February 1995. The business nature of WCT Berhad contains engineering and construction, property development, and also assets management. The business coverage of WCT is in Malaysia and abroad. Its projects and services include F1 & international racing circuit, international airport, hydroelectric dam, township planning & development and so on.

Then, the next step is applying the accounting ratios to calculate the 2 companies's business performance. The companies are Gamuda Berhad and WCT Berhad. In order to compare these 2 companies, the selection is inter-firm which is comparing based on the industry average. It is because they have the same business nature. Before doing comparison, a person must obtain the financial statements of a company. In general, the financial statements are released in annually basis, but some of the companies are quarterly basis. Financial statements are the vital resource for a researcher used to calculate and compare the companies' business performance. The financial statements adopted from Gamuda Berhad's annual report 2010, whereas WCT Berhad is 2009. Figures inside the income statement and balance sheet are used in apply to the accounting ratio in calculating purposes. After done the calculation, there is a standard weigh available in each accounting ratio to interpret the data. Each answer generated is referring to the weigh in comparison and generate a comment. These 2 annual reports of Gamuda and WCT are adopted from their official website in the column of the investor relations. The website address of Gamuda is http://www.gamuda.com.my, whereas website address of WCT is www.wct.com.my.

1.7 Calculation worksheet

Types of ratio

Calculation of Gamuda Berhad

Calculation of WCT Berhad

Profitability

Gross profit markup (%)

= Gross profit x 100

Cost of goods sold

= RM 422976000 x 100

RM 2032167000

= 20.81 %

= RM 354659000 x 100

RM 4311943000

= 8.23 %

Gross profit margin (%)

= Gross profit x 100

Net sales value

= RM 422976000 x 100

RM 2455143000

= 17.23 %

= RM 354659000 x 100

RM 4666602000

= 7.60%

Operating profit margin on sales (%)

Operating profit before

= interest & before taxation x100

Net sales value

= RM 259852000 x 100

RM 2455143000

= 10.58%

= RM 244145000 x 100

RM 4666602000

= 5.23 %

Profit margin on sales (%)

= Net income available

to common stockholders x 100

Net sales value

= RM 280693000 x 100

RM 2455143000

= 11.43 %

= RM 147098000 x 100

RM 4666602000

= 3.15 %

Basic earning power (BEP)

= Operating profit before

Interest and

before taxation x100

Total assets

= RM 259852000 x 100

RM 6550910000

=3.97%

= RM 244145000 x 100

RM4478484000

= 5.45 %

Return on total assets (ROA)

= Net income available to

common stockholders x100

Total assets

= RM 280693000 x 100

RM 6550910000

= 4.28%

= RM 147098000 x 100

RM 4478484000

= 3.28 %

Return on total equity (ROE)

= Net income available to

common stockholders x 100

Common equity

= RM 280693000 x 100

RM 325752500

= 8.62 %

= RM 147098000 x 100

RM 1250246000

= 11.77 %

Liquidity

Current ratio

= Current assets

Current liabilities

= RM 4203173000

RM 1930241000

= 2.18 : 1

= RM 2553187000

RM 1807550000

= 1.41 : 1

Acid-test ratio

= Liquid assets

Current liabilities

= RM4123435000

RM1930241000

= 2.14 : 1

= RM 2439478000

RM 1807550000

= 1.35 : 1

Asset Management

Inventory turnover

= Cost of sales

Average stock value

= RM 2032167000

RM 79738000

= 25.49 times

= RM 4311943000

RM 113709000

= 37.92 times

Total assets turnover

= Net sales

Total assets

= RM 2455143000

RM 6550910000

= 0.37 times

= RM 4666602000

RM 4478484000

= 1.04 times

Debtor ratio

= Debtor

Credit sales

= RM 1607772000

RM 2455143000

= 0.65 : 1

= RM 1472655000

RM 4666602000

= 0.32 : 1

Day sales outstanding (DSO)

= Debtor x 365 days

Credit sales

= 0.65 x 365 days

= 237.52 days

= 0.32 x 365 days

= 116.8 days

Debts management and capital gearing of company

Debts ratio

= Total debts

Total assets

= RM 3243187000

RM 6550910000

= 0.50 : 1

= RM 2991508000

RM 4478484000

= 0.67 : 1

Debts equity ratio

= Total debts

Common equity

= RM 3243187000

RM 3257525000

= 1 : 1

= RM 2991508000

RM 1250246000

= 2.39 : 1

Times interest earned

= Profit before interest

and before taxation

Interest charges

= RM 259852000

RM 43813000

= 5.93 times

= RM 24414500

RM 50308000

= 4.85 times

Market value of investment to ordinary shareholders / common stockholders

Earnings per share

= Net income available to

common stockholders

Number of ordinary

shares in issues

= RM 280693000

2025888000 shares

= RM 0.14

= RM 147098000

777712000 shares

= RM 0.19

Price earnings ratio

= Market price per ordinary share

Earnings per share

= RM 3.20 per share

RM 0.14 per share

= 22.86 times

= RM 2.60 per share

RM 0.19 per share

= 13.68 times

Earnings yield

= Gross earnings per share x 100

Market price per ordinary

share

= (100/75 x RM 0.14) x 100

RM 3.20

= 5.83 %

= (100/75 x RM 0.19) x 100

RM 2.60

= 9.74 %

Market price per book value

= Market price per ordinary share

Net book value per ordinary

share

= RM 3.20 per share

(RM 325752500 /

2025888000 shares)

= RM 3.20

RM 1.61

= 1.99 : 1

= RM 2.60 per share

(RM 1250246000 /

777712000 shares)

= RM 2.60

RM 1.61

= 1.61 : 1

1.8 Ratios comparison between Gamuda and WCT

1.81 Profitability

Gross profit markup and gross profit margin

Based on the profitability ratios calculation's result generated above, Gamuda Company is generating higher profit compared to WCT Company. The both gross profit markup and gross profit margin of Gamuda is higher than WCT. High gross profit earned by Gamuda shows that it has effective and efficient control in lowering its purchasing cost and production cost. Lower gross profit earned by WCT indicates it does not effective and efficient control in lowering its purchasing cost and production cost. Besides, both operating profit margin and profit margin on sales of Gamuda is higher than WCT. Higher profit margin earned by Gamuda shows it has an effective control in lowering its expenditures and interest cost. Whereas it indicates WCT is ineffective in controlling its expenditures and interest cost.

Basic earning power, return on total assets, and return on common equity

However, in basic earning power and return on common equity, Gamuda is lower than WCT. Return of asset of Gamuda is slightly higher 1 % than WCT only, which is 4.28 % and 3.28 % respectively. It shows that WCT is generating higher profit regarding to its effective and efficient in using its assets and capital in the business. In contrast, Gamuda is ineffective and inefficient in employing its assets and capital.

1.82 Liquidity

Current ratio

In liquidity aspect, the current ratio of Gamuda and WCT is 2.18: 1 and 1.41: 1 respectively. If the current ratio is higher than average of industry, it means a company has a larger amount of current assets to pay its current liabilities. Besides, it proves that a company has a stable financial condition. In contrast, when current ratio is lower than average of industry, it shows the company's financial condition is unstable. The company has lower amount of current assets to pay its current liabilities.

Acid test ratio

On the other hand, acid test ratio of Gamuda is 2.14: 1, whereas WCT is 1.35: 1. When a company's acid test ratio is higher than average of industry, it shows that it has larger amount of liquid assets to pay its current liabilities. In contrast, lower acid test ratio shows a company has lower amount of liquid assets to pay its current liabilities.

1.83 Asset management

Inventory turnover

In asset management aspect, the inventory turnover of Gamuda is 25.49 times and WCT is 37.92 times. Higher inventory turnover shows that a company experiences fast stock turnover, so stocks are not accumulated, and no money to be tied up. WCT has a higher inventory turnover than Gamuda. It means that WCT has fast turnover, less stocks to be accumulated, and less money to be tied up compared to Gamuda.

Total assets turnover

Besides, total assets turnover of Gamuda is 0.37 times, and WCT is 1.04 times. Total assets turnover of WCT is higher than Gamuda. WCT has higher sales generated from its business due to its effective asset usage which increases the production volume.

Debtor ratio & days sales outstanding

Debtor ratio of Gamuda is 0.65: 1, and WCT is 0.32: 1. Besides, the day sales outstanding of Gamuda are 237.5 days, and WCT is 116.8 days. Higher debtor ratio and day sales outstanding shows that Gamuda gives a longer credit time to its debtors which cause a longer time to collect back the money. Gamuda may accumulate the debts balance and experiences shortage of money which unable to finance its current liabilities. In contrast, WCT has a lower debtor ratio and day sales outstanding. It has shorter debtor payment period, experience less debts balance, and less money to be tied up from its debtors.

1.84 Debts management and capital gearing

Debtor ratio

In debts management and capital gearing aspect, WCT has a higher debts ratio compared to Gamuda. The higher debts ratio shows that a company experiences heavy debts and high interest cost. It may cause a company unable to pay back the debts, and forced to sell its assets to pay.

Debts equity ratio

Debts equity ratio is used to measure the proportion of company debts with its common equity. Both Gamuda and WCT debts equity ratio is higher than 0.5:1, but WCT is higher than Gamuda which are 2.39:1 and 1;1 respectively. It means these 2 companies operate at a high gear with larger proportion of prior charge debts capital. It views as unstable capital structure and bearing the high interest cost financed by larger proportion of profit.

Time interest earned / Interest cover

Both companies experience high capital gearing ratio, but WCT is higher than Gamuda. It means WCT experiences low times interest earned and indicates it is bearing the high interest charges in relation to its profit.

1.85 Market value of investment to ordinary shareholders / common stockholders

Earnings per share

Lastly, in market value of investment to ordinary shareholders / common stockholders, WCT has a higher earnings per share compared to Gamuda. It shows that WCT has a higher business growth and higher profit earnings. In converse, lower earnings per share shows that a company experiences a low business growth and low profit earnings.

Price earnings per share

Besides, WCT has a lower price earnings ratio compared to Gamuda. Lower price earnings ratio shows that Gamuda's earnings per share is very high which influenced the common stockholders have to take shorter period use their profit earning to recover back their share investment amount. If the earnings ratio is high, it shows that a company's earnings per share are very low and the common stockholders spend longer period use their profit earning to recover their share investment amount.

Earning yield

The earning yield of WCT is higher than Gamuda. If the earning yield higher than the average of industry, it shows that a company has high net income and very attractive to the common stockholders. However, when the earning yield is lower than average of industry, it shows that a company has low net income and not attractive to the common stockholders.

Market price per book value

Besides, the market price per book value of WCT is lower than Gamuda. If market price per book values is lower than the average of industry, it means the share market price decreases below its real asset value and becomes attractive to common stockholders. In converse, if the market price per book value is higher than the average of industry, it means its share market price increases over its real asset value and become not attractive to the common stockholders.

1.9 Conclusion

Based on the result of 5 aspects of accounting ratio above, WCT Company has a better overall business performance than Gamuda Company. Firstly, WCT has higher BEP and ROE which shows WCT is generating higher profit regarding to its effective and efficient in using its assets and capital in the business activities. Secondly, WCT has a higher inventory turnover than Gamuda. It indicates that WCT has fast turnover, more liquid, less stocks to be accumulated, and less money to be tied up compared to Gamuda. Thirdly, total assets turnover of WCT is higher than Gamuda. WCT has higher sales generated from its business due to its effective asset usage which increases the production volume. Fourthly, WCT experiences a lower debtor ratio and day sales outstanding than Gamuda Company. WCT has shorter debtor payment period, experience less debts balance, more liquid and less money to be tied up from its debtors. Fifthly, WCT has higher earnings per share compared to Gamuda. WCT has a higher business growth and higher profit earnings. Sixthly, WCT experiences lower price earning ratio compared to Gamuda. Lower price earnings ratio shows that WCT's earnings per share are very high. It enables the common stockholders have to take shorter period use their profit earning to recover back their share investment amount. Seventhly, the earning yield of WCT is higher than Gamuda. When the earning yield higher than the average of industry, it shows that a company has high net income and very attractive to the common stockholders. Lastly, the market price per book value of WCT is lower than Gamuda. When market price per book values is lower than the average of industry, it means the share market price decreases below its real asset value and becomes attractive to common stockholders. Thus, WCT is more attractive than Gamuda.

On the other hand, while doing inter-firm comparison, there are several limitations in applying the ratio and trend analysis. The first limitation must select the same industry norms and compare based on the industry average. The second limitation is each firm experiences a different financial and business risk profile. It also affected by the analysis differently. The third limitation is accounting policies. Each firm applies different accounting policies. For example, in small firm, it groups its stationery in current assets. However, in large firm, it groups it into expenses. The fourth limitation is the size of the firm would experience different level of risk from its competitors, structure, and returns. The fourth limitation is the area and environment of a firm. Home-based firm and multinational firm operate differently in different countries.

2.0 Introduction

What is financial market? Financial market is a mechanism where surplus funds are gathered from the people who intended to lend out their money. Furthermore, it acts like a platform where provides the opportunities for the organizations and individuals who are short of money to borrow funds. Financial markets have different categories. Each financial market deals with a different type of financial instrument of its maturity and the asset backing it. Different financial markets serve different types of customers, and operate in different parts of the country. Financial markets are different from physical asset markets. Physical asset markets also called as tangible asset markets or commodities market which deal with the physical products like gold, crude oil, real estate, and machinery. Whereas the financial markets deal with the financial instruments like shares, bonds, notes, mortgages, and so on. Besides, these 2 markets can operate as the spot market or future market. Spot markers can be defined as goods are being traded on the spot and delivery within several days. Conversely, the goods that are being traded in future market are for future and delivery on future date. It could be six months or a year in future.

2.1 Types of financial markets

2.11 Primary markets

There are various financial markets in each country. The first type is primary markets. It is the market for corporations to raise capital by issuing new securities or shares. The corporations collect the funds by selling off the new issued stocks in the primary market transaction.

2.12 Secondary markets

The second type is secondary markets. Secondary markets are the markets in which existing and already outstanding securities or other financial assets that are traded among the investors after they have been issued by the corporations.

2.13 Initial public offering market

The third type is initial public offering (IPO) market. It is a market that provides the company or corporations go public by offering new securities or shares to the public for the first time. Once the corporation or company went public, it will be listed on the stock exchange. These companies or corporations are usually newly established and go public to collect capital.

2.14 Private markets

The fourth type is private markets. It is a financial market where the transactions are worked out directly between 2 parties. Private markets are different from the public markets where standardized contracts are traded on organized exchanges, but private market could perform privately without going to public where the transaction may be structured in any manner that appeals to the 2 parties. Bank loans and placement of debts with insurance are the examples of the private market transaction.

2.15 Consumer credit markets

The fifth type is consumer credit markets. Generally, it deals with the loans on autos and appliances, loans for education, vacations, and so on.

2.16 Mortgage markets

The sixth type is mortgage markets. Mortgage markets deal with the loans for the purposes of residential, commercial, industrial real estate, and also farmland.

2.17 capital markets

The seventh type is capital market. Capital markets deal with the stocks or shares, intermediate or long-term debts in which funds to be loaned and borrowed for long periods. It usually more offered in one year or more than one year.

2.18 Money market

The eighth type is money market. Money market deals with short-term, highly debt securities in which funds to be loaned and borrowed for a short period which usually less than one year.

2.2 Three ways for transferring capital or fund between savers and borrowers

2.21 Direct transfer from savers to borrowers

The first way is direct transfer from savers to borrowers. It usually happens when a corporation (borrower) wants to collect funds by issuing and selling new securities or bonds to the savers (money lender). In this selling process, it does not pass through any financial institution which the corporations directly deliver the securities to the savers who in return pay money to the corporation. Therefore, it is a direct flow where the funds are directly transferred from the savers to the corporations. The following diagram can fully explain the process between corporations and savers.

Issue corporation's securities or bonds to

Corporations (Borrowers)

Savers (Money lenders)

Receive capital or fund from

Diagram 2.21.1- Direct transfer from savers to borrowers

2.22 Indirect transfer from the savers to the borrowers through investment banking house

The second way is indirect transfer from the savers to the borrowers through investment banking house. It normally happens when an investment bank underwrites the issuance of a corporation's securities where the investment bank acts as a middleman to facilitate the issuance of corporation's securities. Indeed, investment bank purchases the corporation's securities and then resell it to the savers. It means the money paid by the savers in purchasing corporation's securities is passed to the investment bank and to be received by the corporation (borrower). Thus, money of savers and securities of company is only passing through the investment banking house. As a result, the fund is indirectly transferred through the investment banking house from the saver (money lender) to the corporation (borrower). The below diagram can fully explain the process among the investment banking house, corporation, and saver.

Investment Banking House

(Middle man)

(

Corporations

(Borrower)

Savers

(Money lender) Issue corporation's Resell corporation's

securities to securities to

Receive fund from Receive fund from

Diagram 2.22.1- Indirect transfer from the savers to the borrowers through investment banking house

2.23 Indirect transfer from the savers to borrowers through a financial intermediary

The third way is indirect transfer from the savers to borrowers through a financial intermediary. It usually happens when a financial intermediary like bank or a mutual fund collects the funds from the savers by issuing its own securities or certificate of deposit to the savers. After that, the financial intermediary uses the collected funds from the savers to buy and keeps the other corporation's securities as its investments. It means that the money paid by the savers to purchase the securities or certificate of deposit issued by the financial intermediary. Then, the money passed to the financial intermediary, and then the financial intermediary paid the money for purchasing the other corporation's securities. In fact, there are many people prefer holding the certificate of deposit and the securities issued by the financial intermediary. The reason is they are safer and more liquid than the mortgages and loans. Thus, financial intermediaries are greatly increasing the efficiency of money and capital markets. The below diagram can fully explain the process among the financial intermediary, saver, and corporation.

Savers

(Money lender)

Corporations

(Borrower)

Financial Intermediary (Money lender to corporation) / (Borrower from saver) Issue corporation's Issue intermediary's

securities to owns securities to

Receive fund from Receive fund from

Diagram 2.23.1- Indirect transfer from the savers to borrowers through a financial intermediary

2.3 Types of financial intermediaries and its role

Investment banking house is an organization that underwrites and distributes the new securities issued by the corporations which helps the corporation in obtaining the funds for financing. In Malaysia, examples of investment banking house are CIMB bank, Affin bank, and Maybank. Financial intermediary are the specialized financial organization that facilitate the transfer of funds from the savers to the borrowers. There are several types of financial intermediaries.

2.31 Commercial bank

The first type is commercial bank. It is a traditional departmental store of finance which serves a huge population of savers and borrowers. Besides, commercial banks are the major institutions that handled checking accounts and through which Federal Reserve System increased or decreased the money supply. Furthermore, it provides stock brokerage services and insurance.

2.32 Mutual savings fund

The second type is mutual savings fund. It is similar to savings and loan associations which accepts the funds from savers and lend the money for a long term basis to house buyers and consumers.

2.33 Savings and loan association

The third type is savings and loan association. This organization serves individual savers, residential and commercial mortgage borrowers by collecting the funds from small savers. Then, it lends the money to house buyers and other types of borrowers.

2.34 Credit unions

The fourth type is credit unions. They are cooperative associations whose members are supposed having a common bond to enable the unions collect funds from the members. Then, the unions lend the funds to other members who need funds in vehicle purchases, house improvement, and house mortgage. It is the cheapest source of funds for the individual borrowers.

2.35 Pension funds

The fifth type is pension funds. It is a retirement plan funded by the corporation or government agencies for their staffs. Pension funds are administered primarily by the trust departments of commercial banks or by life insurance companies. It normally used in investing in bonds, stocks, mortgages, and real estate.

2.36 Life insurance companies

The sixth type is life insurance companies. These companies collect the savings in the form of annual premiums and invest the funds in purchasing stocks, bonds, real estate, and so on. They make payments for the beneficiaries who are injured. Life insurance companies also offered a variety of tax-deferred savings plans to provide benefits to the applicants when they retire.

2.37 Mutual funds

The seventh type is mutual funds. They collect the fund from savers and use it in purchasing stocks, long-term bonds, and short-term debt instruments issued by businesses or government units. They pool the funds in diversifying the investment to reduce the risk.

2.4 Conclusion

After finished this question, it provides a clear picture and more understanding in financial markets and its categories. Financial market is a mechanism where surplus funds are gathered from the people who intended to lend out their money. Furthermore, it acts like a platform where provides the opportunities for the organizations and individuals who are short of money to borrow funds. Financial markets have different categories. There are primary market, secondary market, initial public offering (IPO) market, private market, consumer credit markets, mortgage market, capital market, and also money market. Besides, it also indicates 3 different ways in transferring capital or fund between savers and borrowers. The first way is direct transfer from savers to borrowers. The second way is indirect transfer from the savers to the borrowers through investment banking house. The third way is indirect transfer from the savers to borrowers through a financial intermediary. On the other hand, it also indicated the roles of investment banking house and financial intermediaries. Financial intermediaries consist of 7 types. They are commercial banks, mutual saving funds, savings and loan association, credit unions, pension funds, life insurance companies, and also mutual funds.

2.5 Appendix


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