Financial intermediaries serve as a middleman between investors and borrower. They form an integral part of the financial system of a country. There is a wide range of financial intermediaries in terms of size and scales. Commercial banks are the examples of typical financial intermediary but apart from them there are other intermediaries ranging from a small broker to giant self-regulatory associations.
Role of Financial Intermediaries
- They act as a mediator between savers and borrowers of funds in financial market.
- They save efforts of searching of prospective lenders and borrowers.
- They provide Investment Avenue for savers and source of funds for borrowers.
- They insure liquidity and safety in capital and money market.
- They provide economies of scale by pooling simultaneous investments by large number of people.
- They help the growth and development of economy through smooth and easy working of financial markets.
Types of Financial Intermediaries
Investment bankers: They increase monetary funds of companies through stocks and bonds. An individual who works in a financial institution i.e. in the business primarily of raising capital for companies, governments and other entities, or who works in a large bank’s division that is involved with these activities is called an investment banker. Investment bankers may also provide other services to their clients such as mergers and acquisition advice, or advice on specific transactions, such as a spin-off or reorganization.
Investment brokers: Brokers are usually licensed professionals in fields where specialized knowledge is required, such as finance. They transact the buying and sale of securities usually charging a commission. Discount brokers only carry out the transaction whereas there is another type called full time brokers who provide investment advices as well.
Mutual funds: These are organisations that facilitate investments through pooling resources from large number of similar investments and invest them in capital and money market securities. Investing in a mutual fund can be a lot easier than buying and selling individual stocks and bonds. Mutual funds include diversification by diversifying the portfolio across large number of securities so as to minimize risk and also provide professional money management. Mutual funds offer choice, liquidity, and convenience. They also charge a fee.
Pension Funds: Pension funds generally acquire funds from employer and employee contributions while the employee is working and provide the employee with payments during retirement. Pension funds usually invest funds in corporate bonds and equities. Pension funds are beneficial to individuals because they help employees plan and save for retirement. Because of the long-term investment nature, pension funds generally invest in long-term, higher yield securities for maximum returns.
Underwriter: A company or other entity that administers the public issuance and distribution of securities from a corporation or other issuing body. An underwriter works closely with the issuing body to determine the offering price of the securities buys them from the issuer and sells them to investors at the Initial Public Offering (IPO). Underwriters generally receive underwriting fees from their issuing clients, but they also usually earn profits when selling the underwritten shares to investors. However, underwriters assume the responsibility of distributing a securities issue to the public. If they can’t sell all of the securities at the specified offering price, they may be forced to sell the securities for less than they paid for them, or retain the securities themselves. The underwriter buys the newly issued securities from the company and sells them to investors on the secondary market through a stock exchange.
Stock exchanges: Stock Exchange is a financial intermediary for the purchase and sale of securities in the secondary capital market. Stock exchange is an organization which facilitates this process of buying and selling existing securities by providing a medium for buyers and sellers to interact with each other. As there could be a large number of buyers and sellers who want to trade in a particular security, stock exchanges facilitates arriving at trading price based on supply and demand by providing a medium. They help both buyers and sellers arrive at a mutually satisfactory price. Some popular stock exchanges are NASDAQ (US), NSE, BSE (INDIA) etc.
Registrar, Depositors, Custodians: They issue securities to the investors on behalf of the company and handle share transfer activity.
Registrar: Registrar is an institution or organization that is responsible for keeping records of bondholders and shareholders and keeps an up-to-date record of all stocks bought. The registrar makes sure that the numbers of securities held are equal to the authorized limit and issue share certificates to investors.
Depositor: A person or company who is making a deposit with the bank is known as a depositor.
Custodian: A custodian holds securities and other assets in electronic or physical form. Since they are responsible for the safety of assets and securities that may be worth hundreds of millions or even billions of dollars, custodians generally tend to be large and reputable firms. In addition to holding securities for safekeeping, most custodians also offer a variety of other services including account administration, transaction settlements, collection of dividends and interest payments and foreign exchange. The fees charged by custodians vary, depending on the services desired by the client.
Portfolio Managers: They are the experts managing an individual’s investments in the form of bonds, shares, cash, mutual funds etc so that he earns the maximum profits with minimum risk within the stipulated time frame and invests on behalf of the client. Portfolio managers advices, counsels and present the best investment plan to the individuals as per their income, budget, age and ability to undertake risks. Portfolio managers provide customized investment solutions to clients as per their needs and requirements.
Primary Dealers: primary dealer is an institution that directly buys and sells government securities introduced in 1995 to strengthen the market infrastructure of Government Securities. Primary Dealers can also be referred to as Merchant Bankers to Government of India as only they are allowed to underwrite primary issues of government securities other than RBI. PDs are permitted to borrow, lend and trade in the money market including call money market and repos.
Authorized Dealer: it is a person or institution that is allowed to buy and sell foreign currency. In other words Authorized Dealer means a Bank, authorized by Central Bank to Deal in foreign Exchange under the FERA 1947 and FEMA 1999. Authorized Dealer can handle all kinds of Foreign Exchange transaction under the instruction of Central Bank.
Self -Regulatory Organizations (SRO): A Self-Regulatory Organizations (SRO) is an entity that is organized for the purpose of regulating the operations and the standards of practice and business conduct of its members and their representatives with a view to promoting the protection of investors and the public interest. They regulate themselves. SROs in India:
- Association of Merchant Bankers in India (AMBI)
- Association of Mutual Funds in India (AFMI)
- Association of Custodial Agencies in India (ACAI)
- Registrars Association of India (RAIN)
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