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L02: How Financial Institutions Are Able To Reduce The Transaction Cost Problem

Financial intermediaries are able to reduce transaction costs in three main ways: 1) Economies of scale - By gathering funds from many investors and lending to borrowers in different amounts, intermediaries reduce per-unit transaction costs. 2) Diversification - Intermediaries like mutual funds invest in hundreds of stocks and bonds, allowing individual investors to diversify their portfolios with minimal transaction costs. 3) Expertise and networks - Financial institutions have expertise to offer low-cost loans and convenient services. Their extensive networks also allow customers fast, easy access to funds and low transaction costs.

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204 views4 pages

L02: How Financial Institutions Are Able To Reduce The Transaction Cost Problem

Financial intermediaries are able to reduce transaction costs in three main ways: 1) Economies of scale - By gathering funds from many investors and lending to borrowers in different amounts, intermediaries reduce per-unit transaction costs. 2) Diversification - Intermediaries like mutual funds invest in hundreds of stocks and bonds, allowing individual investors to diversify their portfolios with minimal transaction costs. 3) Expertise and networks - Financial institutions have expertise to offer low-cost loans and convenient services. Their extensive networks also allow customers fast, easy access to funds and low transaction costs.

Uploaded by

Nguyễn Tâm
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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L02: How financial institutions are able to reduce the transaction cost

problem
1. How transaction costs influence financial structure
What transaction cost is?
- A fee charged by a financial intermediary such as a bank, broker, or insurence
company.
-Economics: The cost associated with exchange of goods or services and
incurred in overcoming market imperfections. Transaction costs cover a wide
range: communication charges, legal fees, informational cost of finding the
price, quality, and durability, etc., and may also include transportation costs.
Transaction costs are a critical factor in deciding whether to make a product or
buy it. Also called frictional cost. See also transfer cost.
Example: Brokers in football such as Raiola- representatitive of famous
footballer Paul Pogba when he moved to Manchester United fc from Juventus
fc=> The headers of MU fc had to pay Raiola a big amount of money to
enhance the negotiation so this money is called transaction cost.
What the fianancial structure is?
- The fianancial structure is framework of various types of financing employed
by a firm to acquire and support resources necessary for its operations.
Commonly, it comprises of stockholders' (shareholders') investments (equity
capital), long-term loans (loan capital), short-term loans (such as overdraft), and
short-term liabilities (such as trade credit) as reflected on the right-hand side of
the firm's balance sheet. Capital structure, in comparison, does not include
short-term liabilities.

Example of the activity of sponsering the capital of companies . They can get
the capital by selling securities on markets or borrow capital from intermediary
such as commerial bank.
*
Supose that you have amount of 100 How transaction cost influence financial
structure milions dong and you want to invest in securities market.
Having 100 milions so you only buy a litte share and have to pay quite high
broke fee. It is because your investment size is so small and broke fee acount
high percent in purchase price . Therefore with high transaction cost, you
cannot use and invest effectively with your savings and so do investors.
In sum, transactions costs can hinder flow of funds to people with productive
investment opportunities.
2.How financial intermediaries reduce transaction costs
- Financial intermediaries reduce transaction cost.
- Allow small savers and borrowers from the existence of financial markets.
*Economies of scale:
According to this method, investment fund size and transactions increasing
reduces transaction cost for per invested currency unit.After gathering funds of
many investors and ensure them a reasonable profit we can lend the other
investors with different amounts of money
Diversify investment list: an idea that mean investors divide funds into many
kinds of investments.Then when a investment field fails and another one
grows the diversification for the investors reduces their risks.The basic level
in diversifying investment list is to buy many kinds of stocks instead of only
one .A mutual fund founded is a financial intermediary that sells share to
individuals and then invest in bonds or stocks. Stock quantity is up to hundreds
or thousands of ones so investors can diversify their investment list.When
contributing fund in mutual funds investor only takes few hours instead of
many weeks to divesify investment as mutual funds automatically diversify to
an available investment list.
*Expertise:
-Banks and nonbank financial institutions have qualified professional in major
and with their experience they are willing to bring out borrow contract with
low interest and supply cheap and convenient financial servies.
-Besides skills in information technology helps intermediaries provide free
information about investment results and let them write checks on their
accounts .
-An important aspect of intermediaries is the ability to provide customers with
liquidity services .The liquidity service is the ability to quickly convert an
investment portfolio to cash with little or no loss in value which make them
easier to pay transaction costs.For example mutual funds not only pay
shareholders high interest rates but also allow them to write checks for paying
many different kinds of services.
*Network: With extensive network including branches, transaction offices
intermediary help customers approach funds fast and easily so transaction costs
are minimized.

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