Investment intermediaries play an important role in the financial system by connecting savers and borrowers indirectly. The main types of investment intermediaries include banks, mutual funds, credit unions, pension funds, insurance companies and other financial institutions. They take deposits from savers and channel the funds to provide loans to borrowers who need to invest. Their function helps overcome issues like transaction costs, lack of information, and matching different investor preferences.
banks serve as critical investment intermediaries by taking deposits and making loans
Banks are one of the most common investment intermediaries that take deposits from savers and then use those funds to provide loans to borrowers for investment purposes. They can pool funds from many small savers and then lend large sums to businesses or individuals looking to invest in projects like starting companies, purchasing real estate, etc. The interest rate spread allows banks to earn profits on this financial intermediation role.
mutual funds pool money from investors to purchase portfolios of securities
Mutual funds are investment companies that sell shares to investors and then invest the proceeds into various securities like stocks and bonds. They allow small investors to hold diversified portfolios. The fund managers research and pick securities to purchase on behalf of the investors. Mutual funds earn fees and pass along returns to their shareholders.
credit unions and pension funds also serve as key investment intermediaries
Besides banks and mutual funds, institutions like credit unions and pension funds also act as important investment intermediaries. Credit unions are member-owned cooperatives that provide banking and financial services, funded by members’ deposits and share purchases. Pension funds collect retirement contributions and invest the capital to generate returns for future pension payout needs.
The key investment intermediaries include banks, mutual funds, credit unions, pension funds and other financial institutions. They channel funds from savers to borrowers who need capital for investment, overcoming issues like transaction costs, asymmetric information, and risk management.