Introduction
Consider the following scenarios:
- A couple needs to borrow money to buy a home.
- An entrepreneur needs to raise funds to develop a new product.
- A mother wants to set up a regular program to save for her children’s education.
Both the couple and the entrepreneur, as borrowers, are users of capital, whereas the mother, as an investor, is a supplier of capital. What they all have in common is the need for a financial intermediary to help them meet their goals.
A financial intermediary is an institution such as a bank that borrows money from suppliers of capital and lends it to users of capital. In essence, investors lend funds to the intermediary, and the intermediary loans those funds in the form of loans, mortgages, and other products. An intermediary can also have a direct role by raising capital through new issues of securities in the financial markets.
Example with Company Expansion
For example, consider a company that wishes to expand its business operations. To finance the expansion, the company might issue securities to the public in the form of stocks. Investment dealers act as intermediaries by helping the company issue and sell these stocks to investors. The mechanics of this process can be summarized as follows:
- Company issues stocks ->
- Investment dealers facilitate the sale of stocks ->
- Investors buy the stocks and transfer money ->
- Intermediary completes the transaction ->
- Company reinvests proceeds into expansion.
As a result, the company uses the proceeds from the stock transaction to advance its development, and the intermediary profits from the transaction. If the expansion is successful, the firm’s stock price may rise, allowing investors to sell at a profit.
By facilitating these transactions, financial intermediaries help establish effective channels for funding between lenders and borrowers. They play a critical role in economic growth by making capital accessible where needed, thereby fostering development and financial stability.
Dive Deeper
To fully grasp the concepts presented in this course, it is essential to stay informed about the financial markets and the broader industry. Relating lessons to real-world financial activities will ease understanding and make the material more approachable. Numerous sources, including online platforms, newspapers, books, and magazines, offer valuable information about the financial markets.
Staying well-informed will ultimately help you achieve your goal of becoming a competent and trusted participant in the securities industry.
Key Takeaways
- Financial intermediaries serve a crucial function in the economy by acting as bridges between suppliers and users of capital.
- They facilitate transactions like mortgage loans, business expansions through stock issuance, and more.
- Staying informed about the financial markets will enhance your understanding and competence in the securities industry.
Frequently Asked Questions (FAQs)
Q1: What role do investment dealers play in the issuance of stocks?
Investment dealers act as intermediaries that help companies issue and sell stocks to investors, facilitating capital movement in the market.
Q2: How do financial intermediaries benefit from their services?
Financial intermediaries earn profits from the transactions they facilitate, such as loan origination fees or commissions from stock sales.
Q3: Why is it important for someone preparing for the Canadian Securities Course to stay informed about the financial industry?
Staying informed helps you relate the course material to real-world activities, improving comprehension and practical application.
graph TD;
Company -->|Issues Stocks|InvestmentDealers;
InvestmentDealers -->|Facilitate Sale|Investors;
Investors -->|Transfer Money|InvestmentDealers;
Company -->|Reinvests Proceeds|Expansion;
📚✨ Quiz Time! ✨📚
## What is a financial intermediary?
- [ ] An individual who invests in stocks and bonds
- [ ] A government institution that collects taxes
- [x] An institution that borrows money from suppliers of capital and lends it to users of capital
- [ ] An organization that directly funds entrepreneurs using its own capital
> **Explanation:** A financial intermediary is an institution (such as a bank) that facilitates the transfer of funds between suppliers of capital (investors) and users of capital (borrowers), via products like loans or securities.
## Who are the users of capital in the examples given?
- [ ] The couple needing borrowed money and the mother saving for education
- [x] The couple needing borrowed money and the entrepreneur raising funds
- [ ] The entrepreneur raising funds and the mother saving for education
- [ ] Only the entrepreneur
> **Explanation:** In the examples, the couple needing to borrow money for a home and the entrepreneur looking to raise funds for a new product are the users of capital.
## What do the mother, couple, and entrepreneur have in common according to the text?
- [ ] They all are borrowing money
- [ ] They all need legal advice
- [x] They all need a financial intermediary to meet their financial goals
- [ ] They all are investing in stocks
> **Explanation:** They all need a financial intermediary to help them meet their financial goals, whether it's borrowing money or investing for education.
## How does an intermediary directly raise capital?
- [ ] By selling government bonds
- [x] By bringing a new issue of securities to the financial markets
- [ ] By lending its own funds directly to borrowers
- [ ] By collecting fees from financial consultations
> **Explanation:** An intermediary can directly raise capital by introducing new issues of securities, like stocks, into the financial market and selling them to investors.
## What role does an investment dealer play?
- [ ] Guarantee returns on investments
- [ ] Lend directly to entrepreneurs
- [x] Help companies issue securities and sell them to investors
- [ ] Manage savings accounts
> **Explanation:** An investment dealer assists companies in issuing securities and subsequently selling them to investors, facilitating the transfer of funds from investors to companies.
## What is a result of a successful expansion using raised capital?
- [ ] Decrease in stock value
- [ ] Increase in debts
- [x] Increase in stock value
- [ ] Decrease in intermediary's profit
> **Explanation:** If a company does well following its expansion enabled by raised capital, the stock value typically increases, allowing investors to potentially sell at a profit.
## What can investors do if the stock value of the company rises after expansion?
- [ ] Borrow more money from intermediaries
- [ ] reinvest in the intermediary
- [x] Sell their stocks to earn a profit in the marketplace
- [ ] Close their accounts
> **Explanation:** If the stock value rises, investors can sell their stocks in the marketplace to earn a profit.
## How do intermediaries make a profit?
- [ ] By issuing stocks themselves
- [ ] By taxing financial transactions
- [x] By facilitating transactions and charging fees
- [ ] By saving funds in accounts
> **Explanation:** Intermediaries earn profits through facilitating financial transactions (like issuing securities) and charging fees for their services.
## Why should students stay informed about the financial markets?
- [ ] To predict which stocks will rise
- [ ] To focus only on theoretical knowledge
- [x] To better understand the concepts presented in the textbook
- [ ] To avoid investing
> **Explanation:** Staying informed about the financial markets helps students better understand the practical application of the concepts presented in the textbook and enhances their knowledge about the industry.
## What should students use to stay informed about financial markets?
- [ ] Only newspapers
- [ ] Only financial blogs
- [ ] Only TV news
- [x] A variety of sources like online resources, newspapers, books, and magazines
> **Explanation:** Students should use various sources such as online resources, newspapers, books, and magazines to stay well-informed about financial markets.