What are the economic functions that financial intermediaries perform that benef

Question

What are the economic functions that financial intermediaries perform that benefit society? In your answer, discuss the relationship of financial intermediaries and financial markets to the savings-investment process within an economy and to each other. As part of your discussion provide an analysis of the differences in preferences among economic agents as an explanation for the wide variety of primary and secondary securities found in financial markets. Be sure to explain how depository intermediaries, like banks, differ from other financial institutions such as investment banking firms or securities brokerage companies, and how financial intermediaries profit from the transformation of primary securities into secondary claims.

Explanation / Answer

Financial intermediaries are one who acts as middlemen between two parties. Some of them are Banks, investment banks, Insurance companies, Micro finance institutions, brokerage firms, pension funds,mutual funds etc.The functions performed by them are providing liquidity to the funds, enables an individual/company to borrow or lend money, security to your funds.

The financial market place is the one where all the buyers and sellers trade different financial products like bonds,equities, fixed assets, commodities , derivaties etc.

The relationship between financial intermediates and financial market is very critical for growth of an economy. Because of having financial intermediary like bank you can borrow money at lower rate than what you get outside eg: Relatives, Neighbours. If you want to save your money you can save it in banks which will pay you interest and also 100% guarentee for your funds. This money will be used for lending to companies, education loans, consumer good loans, home loans, gold loans etc.

Primary Security: This is part of capital market where new securities are issued by public institutions,companies, or government entities Examples are common and prefered stock, corporate/governemnt debt securities like bonds,bills,treasuy etc

Secondary Security: These are issued by financial intermediary in different forms like derivates, options,mutual funds etc

Banks: These people having excess money save in banks and the same money is used by banks to lend to corporates or the person who in need. Example are Bank of America, JP morgan Chase etc

Investment Banking firms: These are the ones who helps the companies to raise money in the primary market i.e IPO(Initial public offering). The individuals will buy the bonds/stocks seeing the bankers name and its credibility alon with the company. They will be receiving commission on succesfully helping the comapny to raise money . Example are Investment banking division of Goldman Sachs,Morgan Stanley etc

Brokerage companies: These will play role in the secondary market securities trading. These will provide platform for the stocks/bonds to be traded once they are out in the market. They perform multiple functions like making orders to happen in real time, provide liquidity to the trading stock/bonds,Providing advisory services,Brokering other securities like Exchange traded funds,mutual funds,options. They will earn money mainly in three ways:

1)Brokerage commissions: This is the fee they collect for buying or selling securities i.e executing the orders

2)Margin interest charges: Sometimes you can borrow money using the securities you own as guarentee and buy stocks/bonds. On this you have to pay interest.

3)Service Charges: These are mainly classified as adminstrative charges for performing the functions

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