Investment intermediaries are not a new term. It refers to an entity that acts as a mediator to execute financial transactions between two groups (generally), usually known as borrowers and lenders. Such intermediaries are found in investment banks, commercial banks, stockbroking houses, pooled investment funds, and stock exchanges. The investment intermediaries are always in full support to transfer funds and cash to people and groups suffering a liquidity crunch from the groups with surplus capital. Hence, they act like fund givers from groups with excess money to the groups with deficient money.
What do these investment intermediaries do?
An investment intermediary is a financial institution or entity acting as a middleman for financial transactions between banks or funds in most cases. They help in creating efficient markets to lower the cost of doing business. These intermediaries are able to provide things like factoring services, leasing, and more through wealthy groups to the groups or businesses in need of the funds. However, they do not accept any deposits from the public.
Types of investment intermediaries
Banks
The first, most popular, and important type of investment intermediary are commercial and investment banks. They connect the lenders to the borrowers by serving as a middleman. For example, when someone raises a loan from the bank, they are provided with the money that someone else deposited in the bank for saving purposes. The one who deposits receives interest from the bank, and the one who borrowed gives interest to the bank. The difference between these two interest rates is the bank’s income. Banks also help large companies find investors.
Pension funds
A pension fund is what millions of workers worldwide use to save money for their post-retirement life by investing. It works on the factor of risk involved, marching contribution, and investing in the long term. When you sign up for a pension fund, you choose the amount of salary to be put away, and that amount gets locked in for a particular period of time. The employer, in most cases, matches the contribution and deposits the same amount in your pension fund, so you receive double of it. The money is then used to purchase assets that grow and give a good yield in the future until you retire and withdraw all the money with interest gained.
Stock exchange houses
Stock exchange houses help you simplify the process of buying corporate stocks after you buy and pay for large orders. The exchange uses the money to buy stocks from corporations. The customer then gets their desired assets, and the company gets the funding. Stock exchanges help in facilitating the entire process and transaction and hence are the main financial intermediary in the investment category. They earn revenue by adding interest rates and transaction fees.
Insurance companies
There are several types of insurance organisations globally, and almost each of them operates similarly to one another. They find several customers who need coverage and target them. Coverage could be for several things like car, health, home, and much more. Once they convince the customers to purchase the coverage and pay for the premium, all the funds get added as a large pool of money. It is understood that every person does not make a claim because such instances do not occur very often. The insurance company accesses and provides money from the pool collected whenever someone needs to claim an injury, theft, accident, and more. So, they take money in small amounts from many customers and then provide them in huge sums to people who end up needing it.
Credit unions
Credit unions work somewhat like banks. They bring people together in need of money along with people who have that kind of money. They offer credit terms to individuals and groups by using money that other individuals or a group of individuals have deposited into their savings account. This means, whenever someone needs a loan from such credit unions, they receive it due to the abundance of funds contributed by someone else. The only difference between credit unions and regular banks is how they react to consumer credit. They do not just lend money but also oversee several credit-related inquiries and guide their customers accordingly.
Closure
We have understood the role and importance of investment intermediaries in the financial and investment world. It is clear that an absence of an investment intermediary could cause the entire borrowing and lending system to crash down. The entire financial sector world suffers from investments not existing and people not benefiting from the same. Lenders benefit from the interest they gain, and borrowers benefit from the funds they receive. Having such investment intermediaries make daily transactions easy, and large companies get the funds they desire timely. Hence, an investment intermediary’s role in an economy is of utmost significance.
