Financial Institutions

Transfers of capital between savers and those who need capital take place in three different ways such as Direct Transfers, Indirect Transfers through Investment Bankers, and Indirect Transfers through a Financial Intermediary.

Transfers of capital between savers and those who need capital take place in three different ways such as Direct Transfers, Indirect Transfers through Investment Bankers, and Indirect Transfers through a Financial Intermediary.

Direct transfers of money and securities occur when a business sells its stocks or bonds directly to savers, without going through any type of financial institution. The business delivers its securities to savers, who in turn give the firm the money it needs.

Transfers may also go through an investment banking house such as Morgan Stanley, Merrill Lynch, Salomon Brothers, Dean Witter, and Goldman Sachs, which serves as a middleman and facilitates the issuance of securities. The company sells its stocks or bonds to the investment bank, which in turn sells these same securities to savers. The businesses' securities and the savers' money merely "pass through" the investment banking house. Because new securities are involved and the corporation receives money from the sale, this is a primary market transaction.

Investment Banking House is a financial institution that underwrites and distributes new investment securities and helps businesses obtain financing.

Direct transfers of funds from savers to businesses are possible and do occur on occasion, but it is generally more efficient for a business to enlist the services of an investment banking house. These organizations (1) help corporations design securities with the features that are currently most attractive to investors, (2) buy these securities from the corporation, and (3) then resell them to savers. Although the securities are sold twice, this process is really one primary market transaction, with the investment banker acting as a middleman as capital is transferred from savers to businesses.