A financial intermediary is a financial institution that pools the savings of households and lends them to others, either individuals or firms. Commercial banks, credit unions, and savings and loan associations are examples of financial intermediaries. Financial intermediaries render valuable services to both lenders and borrowers, for which they are paid by means of the difference between the relatively high rate of interest they charge borrowers and the relatively low rate of interest they pay lenders. These services are of several types:
1. Lower transactions costs. The borrower avoids having to deal with thousands of households, and lenders enjoy banking services that enable them to deposit and withdraw funds without negotiation.
2. Lower information costs. The financial intermediary specializes in collecting and analyzing information about borrowers to determine whether a loan is a wise undertaking.
3. More liquidity. Loans are unattractive to households because they are illiquid they cannot quickly and cheaply be turned into cash. Financial intermediaries can offer savers the liquidity of a checking account because they are collecting payments on so many illiquid loans.
4. Greater diversification. Savers participate in all the loans extended by a financial intermediary and so enjoy the lower risk that comes from diversification.
Not all financial intermediaries offer banking services. Insurance companies and pension funds, for example, have funds from thousands of households available for investment. Because these funds are committed for a long period of time, these types of financial intermediaries can more safely make long-term loans. This situation contrasts with banking-type financial intermediaries, whose funding sources from savers can be withdrawn with little or no notice. Yet another type of financial intermediary is a mutual fund, which invests households savings in stocks and bonds. The stock market and the bond market are also financial institutions that channel funds from savers to borrowers.
A corporation can raise funds by selling additional shares in its company, the collective term for which is stock. This type of financing is called equity financing. The value of a corporation's shares is determined by the forces of supply and demand on a stock market, the most prominent of which is the New York Stock Exchange (NYSE). Buying and selling of stock is handled by brokerage firms that act as agents for buyers or sellers. Shares of smaller corporations are traded ''over the counter" in a market among brokers called NASDAQ (National Association of Securities Dealers Automated Quotations). Today these markets all operate electronically. Information on stock prices appears daily in financial sections of newspapers, as shown in the following example:
