WHEN IT COMES TO the third stage of investing in financial assets, this is facilitated by financial intermediaries. They provide services that assist clients in saving, borrowing or investing funds.
Examples of financial intermediaries are commercial banks, credit unions, trust companies, finance companies, mortgage companies, mutual funds, insurance companies, investment companies, brokers-dealers and pension plans.
Whereas some financial intermediaries deal only in clients’ deposits and borrowing, there are others which will facilitate securities trading. The most readily accessible financial intermediaries for the securities trader are commercial banks which provide brokerage services in government or corporate debt or company stock.
The existence of financial intermediaries provides a safe and ready market for the purchase and sale of securities. For example, any person looking to invest in government treasury bills, or a range of the different government bonds, including savings bonds, can approach his or her chosen bank for assistance.Â
Alternately, an interested investor can approach other financial intermediaries which offer brokerage services like a trust company, investment bank, mutual fund or a broker-dealership. Some investment companies may also issue their own debt securities as well as serve as broker for other businesses or government.
Trades involve relatively small brokerage fees and investing client benefit from the intermediary or middleman providing for greater liquidity in the securities market.
The broker, in turn, can serve clients as a manager of the funds invested by making the decisions about how and where to take investment risks. Alternately, clients may opt to make the investment decisions, guiding the broker as to how and where they wish to have their funds invested.
Mutual funds provide the option of clients subscribing to a pool of funds which is then managed by an investment manager in a portfolio of debt and/or stock securities according to a stated investment strategy/policy.
In addition to the possible capital gains or losses that may arise from trading in the shares of mutual funds, there may also be annual dividend income for investors depending on the dividend policy of the mutual fund. There are just over a dozen mutual funds available for investing in Barbados.
An open mutual fund allows for the relatively timely redemption of a client’s investment should the investor wish to redeem his investment. The Net Asset Value, NAV, is a critical parameter of a mutual fund. For an open mutual fund, shares are redeemed at a price which represents the NAV of the fund divided by the number of shares outstanding.
For a closed mutual fund, shares are not redeemed by the mutual fund, but rather have to be on-sold to another investor. Although assessing the value of the shares in a closed mutual fund may be compared to the pricing method for the shares in an open fund, the value of the share will be what the investor can get when he attempts to sell.
Typically the bid price (what interested buyers are willing to pay per share) and the ask price (what sellers are asking) are published weekly in the newspaper. The bid size and the ask size presented represent the number of shares for each bid, respectively.
It is useful to note that with the advances in technology, financial intermediaries around the world are under threat from the development of live securities trading platforms where investing clients can trade online directly and instantaneously.
However, such investing calls for worthy investing knowledge. The likelihood of making a devastating loss in securities trading is heightened by the lack of understanding of the economics, finance and risk management of securities trading.
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. Email: louisefairsave@nationnews.com
