Funds In Various Ways. For Essay Example

goods (Lewis).

The diversification of funds flow has increased due to the availability of specialized markets for transferring funds from surplus entities like savers and investors to deficit entities who need funds. This has led people to explore alternative ways to save and source excess funds, apart from using credit cards or smart cards. Eligibility to participate in these flows has also contributed to this diversity. For instance, small businesses can now procure long-term debt for constructing a new building.

Due to this small business being established for fewer than 2 years, there is insufficient audited accounting records or comparable evidence to support the repayment of this debt. Therefore, a controversial bank loan product, the 'low-doc loan', has been introduced specifically for deficit entities without supporting evidence to obtain funds. Equity markets, such as Shares, Commodities, Property, International Equity and Collectibles, offer a means for surplus entities to channel funds to deficit entities via financial intermediaries or debt markets. These equity markets are particularly appealing to entities with surplus funds.

Investing in equity markets presents the potential for greater returns, but also carries risks due to the possibility of a company collapsing or becoming insolvent. In such cases, any shares or equity purchased would essentially become worthless. Equity markets offer opportunities for trading in both primary and secondary markets, while issuing shares can be a viable option for entities seeking to raise funds despite deficits.

Internal funding allows businesses to avoid seeking debt market financing by tapping into surplus funds from lenders such as households, companies, the government, and the rest of the world. Both borrowers and lenders can benefit from following the matching principle of pairing short-term assets

with short-term liabilities. However, if internal funding is not feasible, businesses can explore options in the Debt market, including Treasury bonds, notes, corporate debentures, Commercial bills, Promissory notes, Bank products, Securitised assets or International debt.

The debt market offers security to a surplus entity, with banks being the most secure investment. However, the downside is a lower return compared to equity markets. On the other hand, deficit entities find the debt market a suitable source of funds, as per the RBA Bulletin's observation that commercial banks hold over 49.1% of total financial institution assets. Nonetheless, downsides do exist.

When obtaining funds through the debt market, there are several drawbacks. These include the need to service the debt by paying interest for the duration of the loan. Additionally, there are expenses related to bank fees and other financial costs associated with establishing the debt finance.

Commercial banks are one type of depository financial institution that accepts deposits from customers and provides loans. The risk associated with the new 'low-doc' debt finance option is high as borrowers are required to secure the loan with their property/assets. Financial intermediaries such as banks act as middlemen between buyers and sellers in markets for general goods and services. Other financial intermediaries also exist for surplus entities to invest and for deficit entities to borrow from.

Other financial intermediaries, aside from banks, are building societies, credit unions, unit trusts, finance companies, mortgage companies, super funds, securitisers, money market corporations, life offices, and approved deposit funds and funds managers. Although the recent collapse of some major players had shaken confidence in them, these intermediaries are becoming increasingly popular. There are constantly new ways for funds to

be transferred; however, the existence of this diversity is for ease of use and smooth fund transfers. These markets have been around since the currency was first introduced in the Roman Empire and have since modified themselves to suit many contributing factors.

Government policy is a significant factor that affects the financial system. The existence of diversity within the financial system is continuously created to sustain the flow of funds from surplus entities to deficit entities. This diversity is achieved through various types and uses of funds, providing surplus entities with options for higher returns with higher risk or lower returns with lower risk. On the other hand, deficit entities seek out the best deals for acquiring funds. Over time, diverse needs have been catered to, resulting in the expansion of the global economy and financial markets. The financial system encourages accumulated savings, making them available for investment in an economy through these diversities. (Reference: Lewis, P, Garnett, A, Hawtrey, K, Treadgold, M, Issues, Indicators and Ideas: A Guide to the Australian Economy, 4th edition, Pearson, Australia.)

Viney's Financial Institutions, Instruments and Markets, 5th edition, was published in Australia by McGraw Hill in 2007.