6.1 Investing - Financial Institutions and Markets - YouTube

The financial system is referred to quite a bit in the news. It is the group of institutions

in an economy that help to match people and firms that have excess financial capital with

people and firms looking to borrow or raise financial capital. We all participate in this

financial system one way or another. If we have savings in a bank our money is active

in the financial system. If we borrow money to buy a house, car, or through credit cards,

we're making use of this system. There are two basic types of institutions

in the financial system: we've got financial intermediaries and financial markets. Financial

intermediaries are institutions where funds are transferred INDIRECTLY between parties.

So, for example, a bank is a financial intermediary. You make deposits at your bank. Other individuals

come ask for loans at the bank. And the bank does the ground in the middle. So they match

you with your excess funds with someone who wishes to borrow funds, and the bank does the transaction.

We talked a lot about banking institutions

in the Savings Unit so we’ll move on to the other common type of financial intermediary

- a mutual fund. This is an institution that buys an assortment of stocks and bonds (called

a portfolio) and then sells shares of the portfolio to the public. Because you are not

directly choosing the stocks and bonds and not directly buying them, a mutual fund is

a financial intermediary – going between you and the stocks and bonds.

Here’s why many people invest in mutual funds. Let's suppose you have $500 you'd like

to invest, and you purchase one company's stock. Now, if that company does well, the

stock goes up in value - you’ve made a good investment. But if that company does poorly,

you lose money. It's kind of like putting all of your eggs in one basket when you buy

only one company’s stock. So here's where mutual fund comes in. They allow you to diversify

your investment because you are buying a share of a portfolio that's invested in many stocks.

So, some of the stocks will be going up and some of the stocks might be going down, but

on balance you should be able to come out okay.

Another reason people like mutual funds is because they don’t have to follow individual

stocks to track their investment. Bruce Potter: If you don't want to take the time to learn

about individual stocks, you can buy a mutual fund that will buy those stocks for you. I

think very convenient. You add safety to it because you're diversified in many different

stocks. You've got a manager that's hired to buy those stocks for you, to pick and

choose, so you don't have to know much about it. Narrator: Professional investors manage

mutual funds and are the ones tracking stocks and bonds and deciding when to buy or sell.

All you have to do is select the mutual fund you want to buy and how much you want to invest.

Unlike your savings account, a mutual fund is not FDIC insured. That means you are not

guaranteed to get your money back. But because there is a higher risk, you'll actually earn

a higher return - or at least you could. Now this is something important to keep in

mind. If you're earning a higher return it's because you're being compensated for taking

on more risk. If you ever hear of an investment that has a great rate of return and has no

risk - it is NOT a “sure thing." Financial markets are institutions where funds

are transferred directly between parties. The two most common types of financial markets

are the stock market and bond market. If you want to buy a stock, you can just go online

and buy one. Same thing with bonds. You are making your transaction directly with the

stockholder or bondholder. Sure, a 3rd party might actually facilitate the transaction

or transfer of funds - when we say the funds are transferred directly, we mean you are

choosing the stock and when to buy it. Someone isn’t doing that part for you.