Financial Markets and Institutions
Updated: September 20, 2011
The Capital Allocation Process Financial markets Financial institutions Stock Markets and Returns Stock Market Efficiency
The Capital Allocation Process
In a well-functioning economy, capital (credit) flows efficiently from those who supply capital (credit) to those who demand it. Suppliers of capital (credit) – individuals and institutions with “excess funds.” These groups are saving money and looking for a rate of return on their investment. Demanders or users of capital (credit) – individuals and institutions who need to raise funds to finance their investment opportunities. These groups are willing to pay a rate of return on the capital they borrow.
How is capital transferred between savers (Sc) and borrowers (Dc)?
Direct transfers – stocks and bonds, securities Investment banking house - Underwriting Financial intermediaries – b..