Structure of the Financial Industry
Finance courses in universities offer a wealth of knowledge on accounting, financial products, modeling, and other technical
skills. However, there are undoubtedly students who go into interviews without a clear picture of how
the job they are seeking fits within the industry. For non-students, knowing the industry structure also helps explain
important events that occur and the motivations of the people involved.
The next page will display a diagram illustrating some of the important relationships between key players in the industry. Don't worry if it doesn't make a lot of sense at first - we will break down each participant's role and how they interact with each other. Feel free to use this diagram as a reference in the future.
The side of finance often known as the "buyside" refers to participants that use their funds to buy assets - stocks, bonds, etc - as investments. This could be either individuals or institutions. Individual investors are often refered to as retail investors - we will not go into the details of classification - but know that "retail" and "individual" will sometimes be used interchangeably. Below are two well known institutional investors, The Vanguard Group and California State Teachers' Retirement System.
The side of finance often known as the "sellside" refers to participants, mostly banks, that sell their services to the buyside during the investment process. For example, investment banks sell their trading services for a commission or fee to help institutional investors execute trades on their investments. Investment banks also offer mergers and acquisitions advice, or M&A services to companies seeking to buy other companies in a merger deal. Retail banks serve the consumer clients and commercial banks serve corporations. Below are two well known American bank holding companies. These are combinations of commercial, investment, and retail banks.
Corporations are the heart of capitalism in America. Innovation and the drive for profit have propelled this country throughout the decades to be an engine of economic growth in the global arena. They employ workers, manufacture products to make our lives better, push technology to its boundaries, and generate enormous wealth for those with dedication and the right ideas. Below are two of the most iconic components of the Dow Jones Industrial Average. Although not as flashy as some of the new technology companies, they have helped shape America to be what it is today.
The public sector consists of local, state, and the federal government. It is outside of the private sphere, and is not based on driving profits for shareholders, but enhancing the lives of all its constituents. It gets its funding from raising taxes on its citizens and borrowing money from individuals, corporations, banks, other nations, and whoever wants to lend to it through buying its bonds. In return, it provides services to its citizens, and maintains a safe, fair, predictable environment for its corporations. The role of government can also extend to encouraging investments in certain industries that are not naturally profitable at first, such as electric vehicles and sustainable energy, which require heavy subsidies. This is a departure from pure capitalism, but important to guide our society in the right direction. The federal reserve, while not directly part of government, is an independent agency set up by Congress that makes its decisions with the interest of the nation's economy in mind.
The structure of the financial industry is a useful concept to grasp. There are many resources out there on the web
that hone your analytical skills, provide great reference material for specific terms, and host a wealth of
information in general. But all this information can be a little overwhelming to absorb without some context to glue it
Here we have briefly summarized the components of the industry and will continue to elaborate on their roles. Hopefully the rest of the lessons in Finance Fundamentals will help you tackle more technical studies with a confident understanding of how things fit together. We encourage you, at anytime, to refer to the diagram presented at the beginning of this lesson!