Question

An investment is an asset acquired with the goal of generating income. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit. A financial intermediary is an entity that acts as the middleman between two parties in a financial transaction. As a student of financial management, can you write a brief note on financial intermediary. can you write eight points how financial intermediary improve and attract the prospective investor 

Answer 1

A financial intermediary a middleman in a financial transaction among diverse parties. He act as a facilitator of the financial transactions. A financial intermediary could be an individual or an institution. Common types of financial intermediary includes commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges. Financial intermediaries reallocate otherwise uninvested capital to productive enterprises through a variety of debt, equity, or hybrid stakeholding structures.

Following is the role which a financial intermediary plays to facilitate transactions-

a. Bring thier own reputation into the play

b. Shares risk and guarantees the counterparty performance

c. Act as network of connections and provide their assessment on performance of assets

d. Helps in saving time and cost for various parties. Since these intermediaries deal with a large number of customers, they enjoy economies of scale

e. They accumulate and process information, thus lowering the problem of asymmetric information

f. Being expert in the field, they impart knowledge to various parties in the transaction

g. Provides a platform for the parties to discuss, engage and conclude the deal e.g. Stock exchanges

h.  Exchange becomes suitable for the investor as well as the borrower. Since both, the parties do not need to invest time and money in searching for each other. Instead, they have to approach the intermediary for the purpose

i. The financial intermediaries like banks allow investors or depositors to withdraw their amount at any point of time, as per their requirement