Question

B2. A bank named ‘Bank sohar’ allows Khalid family to deposit their money for the period of 5 years’ as a fixed deposit. These types of fixed deposit will give good return to his family in the form of fixed deposit interest rate. To deposit their money Khalid and his family visited the bank sohar branch this is located nearest to their home. One of his family friends his name is Radwan working as a stock broker he suggested them investing the same money in the stock market will give very huge returns after 5 years but risk also there. This is the scenario.

Answer below questions:

a) In the above case, Identify, what was the process performed by the bank and by the stock exchange?

b) Examine the role of stock exchange and the role of bank in the above case?

c) If you are the financial advisor to this family which type of investment you will recommend to Khalid and his family? Justify your answers with proper reasons?

Answer 1

a. The process performed by the bank and the stock exchange were of financial intermediary. They connected the savers of capital with those who need capital.

b. The stock exchange basically makes the buyers and sellers of stocks meet and transact according to their needs. With the help of the stock market, in this case, the companies who have big business project plans in place would be able to raise capital to execute those plans and in return would give those who provide them this capital a share in their company and profits. The bank makes the savers of capital meet with those who need to raise debt. The debt can be for personal reasons, for infrastructure projects by firms or for other projects, etc. The bank and stock exchange differ in that through the bank you invest in debt whereas through a stock exchange you invest in equity.

c. If I am the financial advisor to this family, I would first like to know the needs of this family financially. I would like to know what are their expectations from the returns and how much time horizon are they comfortable with while investing. I would also tell them about the risks involved in stock markets and what are the advantages and disadvantages of both types of investments. If they are fine with slightly higher investment risks, I would suggest them to invest in the stock market as it can give them higher returns as compared to the bank. But if they are more risk averse, I would suggest them to put their money in the bank.