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Financial Intermediary

Reviewed by Athena | Updated on Oct 05, 2020

Catalogue

Introduction

A financial intermediary is an institution or a person that acts as a link between two parties of a financial transaction. The parties could be a bank, a mutual fund, etc., where typically one party is the lender and the other, the borrower.

Financial Intermediaries and How They Work

There are various types of financial intermediaries, such as banks, credit unions, insurance companies, mutual fund companies, stock exchanges, building societies, etc. Banks provide well-known financial services to invest and borrow funds seamlessly.

Depositors invest funds at an interest rate lower than the borrowing rate. The bank earns its income on the difference between these rates. A non-banking finance company (NBFC) also provides loans, but at a much higher rate as compared to banks.

Mutual fund companies collate various funds and provide investment options to investors on the basis of their budget and risk appetite. These funds consist of shares, bonds, and other investment options. Stock exchanges facilitate the trading of stocks and other trading activities. A commission or brokerage is charged on each transaction done through mutual fund companies and stock exchanges.

In the case of credit unions and building societies, these entities are formed to provide financial assistance to its members. Insurance companies provide insurance options to individuals and companies against risk and uncertainty, such as death, health, fire, business loss, etc. Investment banks assist mergers and acquisitions, IPOs, and provide other such services.

Advantages of Financial Intermediaries

  1. They provide a convenient means to investors and borrowers, who are not financial experts but require to partake in a financial transaction.

  2. They do the work of analysing and interpreting risk and reward for the investor.

  3. They help lower the cost of financing due to the economies of scale.

  4. They help spread the risk between investors, providing a safer and more secure form of investment.

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