Financial institutions are the soul of the financial system – major credit of smooth functioning of any given financial system and economy goes to these institutions, which act as intermediaries. The main objective of every financial institution is to bridge the disparity between the borrowers and lenders – who, in most case scenarios, don’t even know who the other party is. A huge percentage of people willing to pump funds in the economy don’t really have the required knowledge, expertise, and sometimes even time to invest funds and closely monitor their fluctuations. Here, the financial institutions come in as a huge help and patch the gap to ensure the funds of these eager lenders are put to best use.
There are four types of financial institutions.
Large corporations which handle funds put in by individuals, business, and even the government to make optimal utilization of their spare funds are known as Investment banks. The investment bank culture is thriving these days, with many known, reputed investment banks coming into the picture. The investment banks ensure that the funds of these lenders reach a broader market by investing them in the relevant stocks.
The brokers in these brokerage firms work to ensure that people’s money is invested and converted into a diversified, return-minting portfolio. Brokerage firms handle all kinds of investment options. They provide this service by charging a nominal charge – which usually is part of the returns earned by a particular person with regards to the amount he has invested. This amount is credited to the respective broker’s account in the form of commission.
Unlike Brokers, the dealers take possession of the assets – which is the main thing in which they trade. Purchasing assets at a lesser cost and then striking a deal and selling these assets at a much higher rate is what dealers do. The resultant profit is the return earned by the lender in this dealing. The dealer makes quite some money with his wits here – the amount he is entitled to is the difference between the asked price and the bid price!
The financial intermediaries have a different way of functioning – they buy an asset from the people ready to sell and then sell them a different asset – it’s a very short term claim run. Although the financial intermediaries are extremely popular and advertised on various means of communication, they are still very primitive and aren’t opted for a lot by the general public.