Question

• Stock Brokerage Firms. In its traditional role, why is a stock brokerage firm not considered a financial intermediary? What are the roles of a brokerage firm and an intermediary?

Answer 1

In layman terms, a financial intermediary is a financial institution that indirectly connects lenders having surplus funds and borrowers with shortage of funds, for example – commercial banks, investment banks, insurance companies etc. On the other hand, stock brokerage firms indirectly connect buyers and sellers and in turn receive compensation after the transaction is completed.

In its traditional role, stock brokerage firms are not considered as a financial intermediary because they were mostly involved in bridging the information gap by providing necessary information to their clients about the changes in the stock market and suggested them stocks for better returns. Unlike the financial intermediaries, stock broker firms didn’t facilitate the allocation of funds. Hence, as per their traditional roles they were quite different from financial intermediaries like commercial banks.

Role of the Financial Intermediaries

To serve as an intermediary or middleman between lenders and borrowers and help maintain stability in the economy.

Role of Brokerage firms

The key role of a brokerage firm is to facilitate the selling and buying of financial securities. They provide necessary information to their clients regarding the stock market changes and its volatility thus reducing the information gap.

They also play a key advisory role wherein they suggest stocks to their clients for investment purpose.