Question

What is the value of financial intermediation process as an investor? Explain.

Answer 1

Financial intermediaries such as banks, brokers play a crucial role in mobilization of funds as well in the financial imarkets as a whole. The first advantage of financial intermediation is that it helps the investor in risk reduction. The intermediation process helps diversify risks since the investments are spread across a variety of instruments such as shares and stocks to achieve portfolio diversification. Also intermediaries help in maturity transformation i.e. by providing investors with financial instruments which are liquid for the investors financial needs and providing funds for borrowers on a long term basis. Financial intermediaries help in reduction of costs such as lower search costs and achieving economies of scale.