Basics of Financial Services

Financial Service Industry - A Top-Down View          

1) Any person or a company before starting any kind of business needs Capital i.e. money. It is required to invest in assets that will be used in production to generate revenue. Searching for the persons who are interested to invest in the company is difficult and time-consuming. Also, from the investor's point of view, it again becomes difficult to select the right company to invest. To overcome this problem, there is a system called as Financial Services Industry.

2) Financial Services Industry Exist to provide a link between savers/lenders/providers of capital who have money to invest and spenders/borrowers/users of capital who need money.

3) To smoothen the system between lenders and borrowers, Financial Intermediaries come into the picture and act as middlemen.

4) Financial Intermediaries include Financial Institutions. The two main Financial Institutions are Banks and Insurance Companies. Other Financial intermediaries include Mutual savings banks, Credit unions, Brokers, Pension Funds, Cooperative societies, and Stock Exchanges.

5) The Investment industry, a subset of the financial services industry, includes all participants that help savers invest their money and spenders raise capital in financial markets.

6) As we know the goal of economic systems is the efficient allocation of scarce resources thus, Financial markets and the investment industry help allocate capital and scarce resource, to the most productive uses, which fosters economic growth and also benefits society.

7) Apart from the efficient allocation of scarce resources, the Investment Industry also provides better information about investment opportunities, products, and services that are appropriate for providers and users of capital.

8) Now the question arises that what benefit does the Investor derives from Investment Industry?

A well-functioning investment industry that provides a broad range of products and services that meet investors' needs is their benefit. Providing liquidity, low transaction cost, timely and accurate disclosure of information, and ability to modify the risk exposure before time is their benefit.

9) Further, trust is essential to the functioning of the investment industry as well as to the broader financial services industry. Laws and regulations are necessary to protect investors and ensure the integrity, transparency, and fairness of financial markets.