Module 1, Summary

Summary
Lesson 1 of 1

Summary

Without the financial services industry, it would be di cult for money to find its way from
savers to individuals, companies, and governments that have businesses and projects to
finance but insu cient capital to do so themselves.

At its best, the industry e ciently matches those who need money with those who have savings
to invest, minimising the costs to each and allowing money to support the most productive
businesses and projects. The investment industry acts on behalf of savers, helping them to
navigate the financial markets. When the investment industry is e cient and trustworthy,
economies and individuals benefit.

We began this module by defining the financial services industry and examining the actors
within it, primarily savers and spenders, and how money in the form of assets and securities is
transferred from one to the other.

The financial services industry exists to provide a link between

savers/lenders/providers of capital who have money to invest and
spenders/borrowers/users of capital who need money.

Financial intermediaries go between savers and spenders.

The investment industry exists within an economic system and these systems can di er from
country to country. But the goal of most economic systems is the e cient allocation of scarce
resources to the most productive uses.

The investment industry, a subset of the financial services industry, includes all
participants that help savers invest their money and spenders raise capital in
 financial markets.

Financial markets and the investment industry help allocate capital, a scarce
resource, to the most productive uses, which fosters economic growth and benefits
society.

The investment industry provides numerous benefits to the economy, including the
e cient allocation of scarce resources, better information about investment
opportunities, products and services that are appropriate for providers and users of
capital, and liquidity.

Investor confidence is key to fostering a well-functioning investment industry:

Trust is essential to the functioning of the investment industry as well as to the

broader financial services industry. Investor confidence arises from a feeling of
trust that all parties are adhering to a code of ethics and standards of professional
conduct, and that trust must be earned and verified consistently. In addition, laws
and regulations are necessary to protect investors and ensure the integrity,
transparency, and fairness of financial markets.

The benefits for investors of a well-functioning investment industry include a

broad range of investment products and services that meet their needs, competitive
markets that provide liquidity and keep transaction costs low, timely and e cient
disclosure of information, and the ability to modify their risk exposures.

Companies and governments use investment (merchant) banks to help them raise capital.
Ensuring the investment industry performs at optimal levels involves a wide range of
participants.

Key investment industry participants on the investing side include the following:

Categories Participants Key Characteristics

 Categories Participants Key Characteristics

Individual investors
Retail investors with the least amount of
investible assets

Individual investors
High-net-worth
with a higher amount of
Investors investors
investible assets

Organisations that
invest to advance their
Institutional investors
mission or on behalf of
their clients

Professionals who help

Investment
their clients carry out
management service Asset managers
investments to achieve
providers
their investment goals

Professionals who
collect and analyse
information about
Buy-side analysts
companies and markets
to inform the process of
buying securities
Analysts that typically
work for institutional
investors Professionals who
collect and analyse
information about
Sell-side analysts companies and their
competitors to report
and share with potential
investors
 Categories Participants Key Characteristics

Professionals and their

firms that facilitate
Trading service trading between
Brokers
providers investors, acting as
agents (they do not
trade with their clients)

Organisations that hold

Custodial service Custodians and
money and securities on
providers depositories
behalf of their clients

Module Glossary

In this module, you learned the following terms (in order of appearance):

Lesson 1: What is the Financial Services Industry?

–

Financial services industry: Industry that o ers a range of products and services to those
who have money to invest and those who need money and help channel funds between them.

Financial capital: Money provided to individuals, companies, and governments to finance

their needs.

Assets: Items that have value and include real assets and financial assets.

Real assets: Physical assets, such as land, buildings, machinery, cattle, and gold.

Physical capital: The means of production; tangible goods such as equipment, tools, and
buildings.

Financial assets: Claims on other assets; for example, a share of stock represents ownership
in a company or a claim to some of the company’s assets and earnings.
 Portfolio: The group of assets in which savings are invested.

Securities: Financial assets that can be traded, such as shares and bonds.

Financial markets: Places where buyers and sellers can trade securities; also called securities
markets or capital markets.

Direct finance: When providers and users of capital interact, the providers usually have a
direct claim on the users (e.g., right to certain assets and earnings generated by the user).
Also called direct investments.

Indirect finance: The use of financial intermediaries to find and channel funds between
providers and users of capital. Because financial intermediaries sit between providers and
users, the former do not have direct claims on the latter. Also called indirect investments.

Financial intermediaries: Organisations that go between those who have money and those
who need money.

Lesson 2: How Economies Bene t from the Existence of the Investment Industry
–

Investment industry: Subset of the financial services industry that comprises all the
participants that are instrumental in helping savers invest their money and spenders raise
capital in financial markets.

Capitalism: An economic system that promotes private ownership as the means of

production and markets as the means of allocating scarce resources.

Lesson 3: How Investors Bene t from the Existence of the Investment Industry
–

No new terms introduced in this lesson.

Lesson 4: Investment Industry Participants

–
 Investment banks: Financial intermediaries that assist companies and governments in
raising capital and can provide other services, such as strategic advisory services, brokerage
and dealing services, and research services; also known as merchant banks.

Sell-side analysts: Analysts who work for the organisations, typically an investment bank,
that sell securities. They collect and analyse information about a company and its
competitors and then prepare a report that is shared with potential investors.

Retail investors: Individual investors with the least amount of investible assets.

High-net-worth investors: Individual investors with a higher amount of investible

assets relative to retail investors.

Pension plans: Institutional investors who hold investment portfolios for the benefit of
future and current retirees.

Endowment funds: Long-term funds owned by non-profit institutions.

Foundations: Grant-making institutions funded by gifts and by the investment income that
they produce.

Sovereign wealth funds: Funds created by governments to invest surpluses for the benefit of
current and future generations of their citizens.

Buy-side analysts: Analysts who work for organisations, typically a type of institutional
investor, that buy securities. They analyse data about companies and the markets in which
they operate and review potential investments.

Up Next

Now that you have an overview of the investment industry, in the next module, you will dive
deeper into the structure of the investment industry.