Final answer:
The growth of investment companies over traditional banks and insurance companies can be largely attributed to the benefits of diversification and decreased transaction costs. Investment companies offer more flexible and potentially higher-return investment options, whereas traditional banks provide essential but sometimes less lucrative financial services.
Step-by-step explanation:
The growth of investment companies relative to traditional banks and insurance companies can be attributed to reasons such as diversification benefits and decreased transaction costs. Investment companies are increasingly popular because they often offer better diversification options, allowing investors to spread risk across different assets and markets. Additionally, advancements in technology and competition among investment platforms have led to more efficient trading and lower associated costs, making them more attractive than traditional institutions that tend to have higher fees and less flexibility.
While banks and insurance companies are necessary financial intermediaries that offer services like deposits and insurance under the FDIC, they aren't always the most efficient for every investor’s needs. Investment companies such as mutual funds, venture capitalists, and angel investors provide alternative avenues. These options permit investors to participate in a pooled investment structure or to directly invest in potential high-growth companies, which might not be possible through a traditional bank setup.
On the other hand, traditional banks provide essential services like loans and the facilitation of payments and savings accounts. They play a crucial role in the financial system by turning deposits into loans and thus supporting economic activities. However, for those seeking higher returns and willing to accept more risk or lower liquidity, investment companies present more suitable options.