An efficient financial system promotes intermediaries that successfully link “savers” from “borrowers” (Mankiw). There are two widely-known financial intermediaries namely the banks and mutual funds. Banks are highly accessible to the general public are generally more cost advantageous that direct lending. Generally, the banks main purpose in the economy is to take in deposits from savers and “use these deposits to make loans to people who want to borrow” (Mankiw, N. Gregory, 2001, Principles of Economics, p. 557).
Banks incur costs by paying interest on these deposits and earn from these by charging higher interest rates on loan borrowers. Second to this, banks play an important role in the economy as they “facilitate the purchases of goods and services by allowing people to write checks against their deposits” (Mankiw, N. Gregory, 2001, Principles of Economics, p. 557). In this manner, the economy benefits from banks by this accessible medium of exchange. Unlike stocks or bonds which are not as immediate, checks make it easier for the public to exercise their monetary transactions.
Mutual funds, on the other hand, are institutions that use the proceeds of selling shares in buying portfolios of stocks and bonds where they derive their profits. The financial markets become more accessible and efficient because mutual funds allow people with small savings to become owners and creditors of numerous companies. Also, mutual funds allow its shareholders the benefit of risk diversification wherein a single fund can carry a roster of diverse portfolios in stocks and bonds.
A broker can either be an individual or a corporate entity that earns a fee-based profit by performing buy and sell orders from investors and/ or clients. A good example of this is a brokerage firm that specializes in trading company stocks and securities. A broker’s main functions in the financial market would include basic execution of buying and selling shares, and financial advisory to clients regarding the management of their shares/ stocks. With the emergence of automation and popular online brokerage firms, traditional brokers have redefined their place in the industry.
Most popular online brokerage firms such as Ameritrade and E*Trade offer lower fees to investors as opposed to traditional brokers. Financial and Investment Advisory are also automated online via innovative investment software tools. With information becoming more accessible because of the internet, traditional brokers are now transitioning into online brokers wherein online orders are still routed to and monitored by them; and with reduced client-interface for advisories.