Intermediary

Definition

General

An intermediary is anyone who serves as a go-between for two parties or entities. This term often encompasses roles such as executive recruiters or brokers whose primary function is to facilitate transactions or agreements.

Finance

In the realm of finance, an intermediary refers to persons or institutions empowered to make investment decisions on behalf of others. These intermediaries help channel funds from savers to borrowers or from investors to investment opportunities. Examples include banks, savings and loan institutions, insurance companies, brokerage firms, mutual funds, and credit unions.

Examples

Banks: Financial institutions that accept deposits from the public and create credit. They act as intermediaries between depositors who supply capital and borrowers who require capital.
Mutual Funds: Investment vehicles consisting of a pool of funds collected from many investors. Managed by professionals, mutual funds invest in securities such as stocks, bonds, money market instruments, and other assets.
Brokers: Agents who arrange transactions between a buyer and a seller for a commission when the deal is executed. Brokers play a crucial role in financial markets by matching buyers with sellers.
Insurance Companies: Firms that provide risk management in the form of insurance contracts. These companies collect premiums from policyholders and pay out claims, acting as intermediaries in the risk transfer process.

Frequently Asked Questions (FAQs)

What are the typical roles performed by an intermediary?

Intermediaries can arrange transactions, facilitate negotiations, offer investment advice, manage assets, and provide financial services.

Why are financial intermediaries important in the economy?

Financial intermediaries help in the efficient allocation of resources. They reduce transaction costs, provide liquidity, improve risk-sharing, and allow for diversification.

How do intermediaries earn profit?

Intermediaries earn profit through various means such as fees, commissions, interest margins, premiums, and dividends.

Can individuals act as intermediaries?

Yes, individuals can act as intermediaries, particularly in roles such as brokers, financial advisors, or independent sales agents.

What is a broker-dealer?

A broker-dealer is a financial intermediary that buys and sells securities on behalf of clients (broker) and its own account (dealer).

Broker

An agent who arranges transactions between a buyer and a seller for a commission when the deal is executed.

Financial Institution

An organization such as a bank, credit union, or insurance company that provides financial services to its customers.

Investment Advisor

A person or firm that provides advice about investment options, managing assets, and financial planning.

Mutual Fund

An investment vehicle consisting of a pool of funds collected from many investors to invest in securities such as stocks, bonds, and other assets.

Credit Union

A member-owned financial cooperative that provides traditional banking services to its members.

Online References

Suggested Books for Further Studies

“Financial Institutions, Markets, and Money” by David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias
“Intermediaries in Finance” by Parag Y. Arjunwadkar
“Mitigating Circumstances: A Rational Theory of Competitive Strategy and Financial Intermediaries” by Nikhil Vora

Fundamentals of Intermediary: Finance Basics Quiz

### What is the primary role of an intermediary in finance? - [x] To facilitate the allocation of capital between savers and borrowers. - [ ] To create financial markets. - [ ] To print money. - [ ] To set tax policies. > **Explanation:** An intermediary facilitates the efficient allocation of capital between savers who supply capital and borrowers who require capital. ### Which of the following is NOT a type of financial intermediary? - [ ] Mutual Fund. - [ ] Bank. - [ ] Insurance Company. - [x] Manufacturer. > **Explanation:** Manufacturers produce goods, whereas financial intermediaries like mutual funds, banks, and insurance companies manage funds or provide financial services. ### What type of fee or revenue do brokers typically earn from their services? - [ ] Interest. - [ ] Salaries. - [x] Commissions. - [ ] Rent. > **Explanation:** Brokers typically earn commissions as fees for arranging transactions between buyers and sellers. ### How do mutual funds operate as financial intermediaries? - [ ] By granting loans to individuals. - [ ] By providing insurance products. - [x] By pooling funds from many investors to invest in diversified asset portfolios. - [ ] By regulating financial markets. > **Explanation:** Mutual funds pool together funds from many investors to invest in a diversified portfolio of assets. ### What function do banks primarily serve as intermediaries? - [x] They accept deposits from the public and provide loans to borrowers. - [ ] They supervise financial markets. - [ ] They create mutual funds. - [ ] They produce financial statement analyses. > **Explanation:** Banks accept deposits from the public and provide loans to borrowers, facilitating the flow of funds in the economy. ### Which of the following intermediaries specializes in risk management? - [x] Insurance Companies. - [ ] Mutual Funds. - [ ] Credit Unions. - [ ] Stock Exchanges. > **Explanation:** Insurance companies specialize in risk management by providing insurance contracts that transfer risk from policyholders to insurers. ### Can individuals be considered intermediaries? - [x] Yes, individuals can act as intermediaries in roles such as brokers or financial advisors. - [ ] No, only institutions can act as intermediaries. - [ ] Only non-profit organizations can be intermediaries. - [ ] Only government agencies can be intermediaries. > **Explanation:** Individuals such as brokers or financial advisors can also act as intermediaries to facilitate transactions and provide investment advice. ### What role does a credit union play in finance? - [ ] It sets interest rates. - [x] It operates as a member-owned financial cooperative offering banking services. - [ ] It sells insurance. - [ ] It issues government bonds. > **Explanation:** A credit union is a member-owned financial cooperative that provides traditional banking services like savings accounts and loans to its members. ### In terms of compensation, on what basis do most financial advisors earn their income? - [ ] From fixed salaries only. - [x] Through commissions or fees based on the services provided or assets managed. - [ ] Solely through dividends. - [ ] Through governmental grants. > **Explanation:** Most financial advisors earn their income from commissions or fees based on the services they provide or the assets they manage. ### Why are intermediaries said to provide liquidity? - [ ] Because they create new markets. - [ ] Because they generate financial reports. - [x] Because they are able to convert savings into loans and investments efficiently. - [ ] Because they regulate the stock market. > **Explanation:** Intermediaries provide liquidity as they efficiently convert savings into loans and investments, making funds available when needed by borrowers or investors.

Thank you for exploring the vital role of intermediaries in finance and engaging with our challenging quiz questions. Continue to enhance your comprehension of financial intermediaries and their impact on economy and markets!