Explaining Financial Intermediaries

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Economic Definitions

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Explaining Financial Intermediaries

  1. 1. Financial Intermediaries What are they and What do they do?
  2. 2. Financial Intermediaries Defined <ul><li>Financial Intermediaries are: any institution that moves money between savers and borrowers. </li></ul><ul><li>Examples Include: </li></ul><ul><ul><li>Credit Unions, Banks, and Savings & Loans – These Intermediaries take in money from savers and then issue through loans to borrowers. </li></ul></ul><ul><ul><li>Mutual Funds – Intermediaries that spread risk by investing the contributions of multiple individuals together in a range of financial assets. </li></ul></ul><ul><ul><li>Finance Companies – These Intermediaries issue loans to individuals and small businesses. They often make riskier loans and charge higher interest rates. </li></ul></ul>
  3. 3. Financial Intermediaries Cont’d <ul><li>Pension Funds – These intermediaries collect funds from workers and their employers to redistribute the assets after the worker retires. </li></ul><ul><ul><li>The Pension Fund can invest its assets through other financial intermediaries in order to increase the benefits received by the retirees. </li></ul></ul><ul><li>Pension Funds can take two forms: </li></ul><ul><ul><li>Defined Benefit plans where retirees are guaranteed a certain level of benefits. </li></ul></ul><ul><ul><li>Defined Contribution plans where the worker receives the proceeds from the funds that directly contributed and their employer contributed on their behalf. These benefits can increase or decrease based on the performance of their investments. </li></ul></ul>
  4. 4. Financial Intermediaries Cont’d <ul><li>Life Insurance Companies – These intermediaries provide future financial protection to the families of the insured. </li></ul><ul><li>The holder of the policy pays a premium to obtain the benefits upon their death. </li></ul><ul><ul><li>The family can then use the benefits to offset costs and debts such as the funeral. </li></ul></ul>
  5. 5. Why do they exist? <ul><li>Financial Intermediaries exist to spread the risk of financial investments over a broad group of individuals and investments. </li></ul><ul><ul><li>This process is know as Diversification. </li></ul></ul><ul><li>Financial Intermediaries also act to provide liquidity to contributors for their investments and to provide information and guidance to the investors. </li></ul><ul><ul><li>Information is often given in the form of a Prospectus , a document detailing potential investments, risks, and returns. </li></ul></ul>

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