What are Financial Intermediaries in Stock Market?

Author: George Davis

What are financial intermediaries

When purchasing an item, you must have thought about the middleman taking responsibility for the delivery. While there isn't a middleman when you buy a small item online, huge stock market transactions require financial intermediaries.

What are Financial Intermediaries?

According to Investopedia,

"A financial intermediary is an entity that acts as the middleman between two parties in a financial transaction, such as a commercial bank, investment bank, mutual fund, or pension fund."

However, in simpler terms, any entity or person who steps between a transaction to protect both parties is called a financial intermediary. Financial intermediaries offer several benefits to the consumer other than securing their money, such as liquidity, safety, and economies of scale.

Financial Intermediaries in Stock Market

Rules and regulations of the stock market govern all the buying and selling of stocks, and every stock purchased or sold has a financial intermediary. All financial intermediaries in the stock market have assigned tasks. Here are 4 main financial intermediaries in the stock market.

1. Stock Broker

There is no secret that stockbrokers are financial intermediaries of the stock market. This is because they purchase and sell on behalf of their customers with a set commission percentage. However, it's not necessary to hire a stockbroker. Many successful stock market experts have done it on their own without the need of a stockbroker.

2. Depository

Theoretically speaking, a share is percentage ownership in a company. However, there is no proof that you own a part of an organization unless you have proper documentation. Previously, these documents were provided in written format, but since they were hard to print and keep, digital documentation took over. Currently, all stock purchases are recorded digitally, and this service is known as Demat.

The financial body that provides Demat services is known as a deposit account or a depository. These depositories are the financial intermediaries of the stock market because they are directly linked with you and the company whose shares you have purchased.

3. Banks

Banks are financial intermediaries of the stock exchange because they allow the transfer of money to trading accounts. This responsibility involves banks becoming a part of trading. In the same way, you can transfer money from your trading account to your bank as well. However, nor banks neither do any financial intermediaries in the stock market share your loss.

4. Clearing Corporations

The final financial intermediary of the stock market is Clearing corporations. These corporations handle confirmation, settlement, and delivery of transactions. Their main obligation as a financial intermediary is making sure transactions are made promptly and efficiently.

The Bottom Line

Financial intermediaries are third-party organizations or people involved in a trade to facilitate both the buyer and seller. In the stock market, financial intermediaries’ support is slightly inclined towards the buyer because the seller is a robust corporate organization. Moreover, financial intermediaries offer tremendous benefits to consumers and try their best to ensure maximum safety and efficiency. The financial intermediaries mentioned above are responsible for maintaining the monetary functions of the stock market and ensuring nothing goes wrong.

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