Financial Intermediary: Meaning & How It Works, Examples

Financial Intermediary: Meaning & How It Works, Examples

Financial Intermediary: The central part of economics

Meaning of Financial Intermediaries: In simple terms, Financial Intermediary is a bond between different parties. For example, investors and borrowers are financial intermediaries.

A Financial Intermediary can be a person, place, agency, or organization.

It is a middle ground between two parties for any financial transaction.

It plays the role of a mediator or peacemaker. Financial intermediaries do many types of work. Store assets, supply loans, and Offer investment advice to clients. They play an important role in the economic development of the country.

How Financial Intermediaries Works (Functions of Financial Intermediaries):

There are many functions of a financial intermediary. Here are some examples

Maturity transformation: It converts short-term liabilities to long-term assets.

Convenience domination: It Matches small deposits with large loans and matches large deposits with small loans.

Price determination: Financial Intermediaries decide the price at which the financial instruments trades. Asset storage: It provides safe storage for all valuable assets. It stores important assets safely.

Loan providing: It provides short-term and long-term loans. They advance the loans at interest. They take funds from investors, and borrowers take that loan to make purchases. They provide loans carefully.

Easy Access: Financial Intermediaries is a platform that is easy to access. And it saves time and money for investors and borrowers. People easily access it.

Investments: Financial Intermediaries bring potential Investors who help clients grow their assets.

Capital Formation: It provides a medium or platform to investors. Their funds flow into the country, turning into its Capital Formation.

Financial Intermediaries provide an opportunity to different investors. It gives a chance to buy or sell their financial instrument at the fair value that is ongoing in the market. There are three roles of financial intermediaries taking deposits, lending the money to borrowers, pooling the savings by investing in a variety of stocks, bonds, and other financial assets, and making loans to small businesses and consumers. The role of financial intermediaries is very important for Investors and buyers.

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Examples of Financial Intermediaries:

There are many types of Financial intermediaries. Banks are the most important type of financial intermediaries. There are more like, Insurance Companies, Mutual Funds, Credit Unions, Financial Advisors. and Stock Exchangers, Pension Funds, Brokers, etc.,

Banks: Banks are the most famous type of Financial Intermediaries. People use banks for safety. Banks keep valuable assets such as Money, gold, silver, diamonds, important papers, etc., and give loans at a particular interest rate.

Insurance Companies: An insurance company insures a person’s risky investments. It makes it easy for people to secure their investments.

Mutual Funds: Mutual funds invest in mutual revenue streams from different investors. Credit Unions: Like banks, credit unions accept deposits. They provide many financial services. They are small non-profit depositories.

Financial Advisors: They offer advice to their customers towards borrowers and lenders.

Stock Exchanges: It is a trading platform where stocks and bonds trade and are bought.

Pension Funds: It is also known as a retirement fund. It secures life after retirement so they can have a steady flow of income.

Brokers: A broker arranges the transaction between buyer and seller for a commission.

Conclusion

As we have seen, financial intermediaries play an important role in the economy. Nowadays, financial transactions have become very hard to understand for people. It becomes important for financial intermediaries to keep themselves updated, make very good portfolios, and meet the needs of the investors. The financial intermediaries have a responsibility towards the borrowers and lenders. The role of financial intermediaries is central to the world's economy.

FAQs:

1. Why do we need Financial Intermediaries?

Financial Intermediaries reduces transaction and informative cost. Without reducing costs, it would be very costly for investors and buyers to do transactions; that's why we need financial intermediaries to make financial transactions easy and cheaper.

2. How do Financial Intermediaries reduce risk?

They focus on risk assessments. They make a plan for risk analysis and work accordingly.

3. What is the most known type of Financial Intermediaries?

 Banks are the most known type of Financial Intermediaries.

4. How can we define Financial Intermediaries in different ways?

  We can define Financial Intermediaries as an entity that makes financial transactions very easy.

5. What factors do we need to consider before selecting Financial Intermediaries?

We need to consider the professionality of those financial intermediaries, and we should also consider how profitable they are and how they work and also look at their portfolio.

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