The paper "Primary Elements and Functions of a Modern Financial System" is a good example of a finance and accounting assignment. The financial system is a way in which money is transferred between the investors and the borrowers. It works in a global market or domestic market so that the investors can obtain finance to fund their investment projects (Viney, 2007). This system is effective in allocating resources in the modern economy by channelling family savings to the corporate sector and distributes finances to different firms and also improves sharing of household and organizations risks (Elton & Gruber, 2003).
The financial system has two elements namely financial intermediaries and financial markets. They are responsible for transferring funds from savers to investors. Question 1 Primary elements and functions of a modern financial system The relationship between liquidity and production capacity of the economy occur because most investment projects with high returns require long term sources of finance but lenders who are risk averse are not able to share their control function to investors for long payback periods (Shapiro, 2006). It is, therefore, the function of the financial system to activate savings through agglomeration and gathering financial resources from different sources and forming a small point in which these resources are allocated.
These points are called financial instruments and they are responsible for providing opportunities for investors to own diversified portfolios. Financial intermediaries also increase risk sharing between different investors which enhance liquidity (Ross, 2007). Without intermediaries such as financial institutions, investors are held in permanent illiquid investments that are able to produce high investment returns to investors who remain in the business the end of the investment (Elton & Gruber, 2003).
Investors who are entitled to early payoffs receive low returns because in the early hour's consumption needs premature liquidation of permanent investments. The financial market also has the ability to change illiquid assets into liquid assets (Marc & Groz, 2009). The availability of financial markets, investors are able to own assets in the form of equity or bonds which can be changed easily into purchasing power if there is a need to access savings. Financial systems are also able to provide different sources of finance to various borrowers in the modern economy (Viney, 2007).
They provide it in the form of debt or equity at lower costs to encourage investments. Function and purpose of both the primary and secondary markets Raise Capital for Businesses There are several functions and purpose of primary and secondary markets in the modern economy. These markets are formed to help investors raise money for the different business (Ross, 2007). These markets provide different companies with the facility to raise capital for expansion through selling shares to investing public. Mobilize Savings for Investment When different investors draw their savings and buy shares it leads to a more a location of resources in more useful activities hence help to provide commerce and industries in the modern economy (Elton & Gruber, 2003). Redistribution of Wealth By giving a wide spectrum of people chance to buy shares, therefore, becoming part of owners of profitable enterprises (Viney, 2007).
It helps in reducing the lack of income inequalities since many people get a chance to share profits of the firm which was set up by other people.
Elton, M. & Gruber, G. 2003. Modern Portfolio Theory and Investment Analysis, John Wiley & Sons, New York
Keith, P. 2010. Finance and Financial Markets, Palgrave ISBN 978-0230233218
Marc M & Groz, V. 2009. Forbes Guide to the Markets, John Wiley & Sons, Inc., New York ISBN 978-0470463383.
Ross, S. 2007. Fundamentals of Corporate Finance (4 ed.). Sydney, NSW, Australia: Mcgraw-Hill Irwin
Shapiro, Y. 2006. Multinational financial management (8th edn ed.). Hoboken, New Jersey, United States: John Wiley & Sons.
Viney, C. 2007. Financial institutions, instruments and markets (5th ed.). North Ryde, NSW, Australia: McGraw-Hill Irwin Australia Pty Ltd.