Intermediaries

Introduction

After submitting my report to the group of new stock brokers on the American Stock Exchange and the NASDAQ, one of the new brokers asked me 3 questions. 1) What are the economic functions financial intermediaries perform? 2) What is the role of a broker in the financial market? 3) How has the role changed since the inception of on-line investing? I have written my responses to these questions.

Q & A

Question 1: What are the economic functions financial intermediaries perform?

Answer 1:

One economic function intermediaries perform is lowering costs of transactions. In this case they help at lower costs channel funds from lenders to borrowers. For example, if a person has a need for some funds the intermediary will find the lender to borrow the funds. Another function they perform is lowering the lending risk. Here they screen the borrowers. They also guarantee deposit safety to an amount limited. Resources do not have to be spent in order to determine the profitability of each borrower’s reputation to be a potential lender (Brazosport College, 2003, November 14). One more function they perform is diversifying the risks that are involved. They can do this by pooling deposits together so that not just a single depositor is lending to a single borrower. Last but not least another function they perform is liquidity which means that money is more accessible at all times.

Question 2: What is the role of a broker in the financial market?

Answer 2:

The responsibilities of a broker are to deal fairly and be loyal to their customers. The security industry regulates the high standards of honesty and integrity through rules. When an

investor recommends an investment it is the broker’s obligation to disclose all information needed. Along with this it includes levels of risk. A broker may not execute any trades what so ever unless the customer gives them the authorization to. In other words, what ever the customer wants is what the broker provides or does. There are always certain situations to where the broker will have additional duties. For example, when money is borrowed from the brokerage firm it is a regulated activity (Miller, 2006).

Question