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A) What are the two major problems associated with channeling funds from savers to investors? B)...

Question:

A) What are the two major problems associated with channeling funds from savers to investors?

B) How do financial institutions resolve them?

Investment:

Investment is defined as the purchase of securities issued by the companies in the market. These securities are issued to avail capital from the market. The people/investors purchase these securities to earn higher returns from the investments.

Answer and Explanation:

A) What are the two major problems associated with channeling funds from savers to investors?

From the above question, the cash from the savers is used in the investment market. The problems associated with such are described below:

Asymmetric Information: There is a lack of complete information between the buyers of the securities and the traders. The buyers lack complete knowledge about the market. This causes failure to the buyers and they are not able to make a rational decision on the same. The sellers may take advantage of the buyers. On the other hand, the buyers may also promise a transaction and later not execute it. In this case, the loss will be borne by the sellers.

Adverse Selection: The are too many products in the investment market. Investors often have no idea which product completes their goals and plans. They have to choose between high risk and high return and low risk and low returns. They often end up making a wrong selection of choice.

B) How do financial institutions resolve them?

The problems associated with the investment market are resolved by the financial institutions by hiring financial advisors and consultants. These consultants ask the investors of their goals and motive for the investment. These people educate investors about the plans and securities that suits the objectives of the investors in the best way. Also, advisors give advice to the investors on what investment plans carry high risks and returns. They reduce the incomplete information from the market also help the investors in making an ideal selection of choice.


Learn more about this topic:

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Investment Spending: Definition & Formula

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 16
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