Financial markets are the backbone of any given economy. Without a proper, systematic, and dynamic financial market, a country will be nowhere when it comes to finances. The financial system of an economy works in a simple circular flow – the funds from the public are invested, which double up as capital for the economy. Every aspect of the economy then works to use this capital and generate returns – part of which is given back to the public in the form of interest, dividends, and even as wages and salaries. The circular flow of money is what runs the economy in any given country.
When talking about financial markets, you just cannot miss out on financial institutions. What are these financial institutions which hold an essential part in the whole system of financial markets? Let’s have a look.
The institutions which act as intermediaries between lenders and borrowers are known as Financial Institutions. These are basically a link between the lenders and borrowers and strive to ensure that the money which the lenders are ready to pump into the economy reaches the borrowers. Under the umbrella of financial institutions, all the relevant middlemen – the brokers, dealers, investment banks, and financial intermediaries are covered. All of these work to ensure the transfer of funds from the hands of the lender to borrower happens seamlessly.
The main task of the intermediary persons and institutions is to trade in securities and financial asset transformation. Each of the categories mentioned above have different functions and characteristics, but the ultimate aim is to ensure that a smooth transition of fund happens in the economy.
Many people don’t wish to or have enough knowledge about investing in the financial market – this is precisely when the financial institutions come into the picture. Bridging the gap between the public who either don’t have enough time or knowledge to invest in the financial markets are helped by the intermediaries. These financial institutions help to pool these funds and transfer them to the relevant borrowers – all this at a nominal cost, which usually is part of the rate of return earned by the lenders upon investment.
The functions of these intermediaries don’t stop here – they take the lenders’ funds and invest them in diverse investment options. Investing in a variety of stocks at once requires a lot of monitoring too – everything of which is done by these financial institutions on behalf of the lenders.