Legal Definitions - financial intermediary

A financial intermediary is an organization that acts as a go-between in financial transactions, connecting parties who have money to invest or lend with those who need to borrow or raise capital. These entities make it more efficient for funds to move through the economy by pooling resources, managing risk, and facilitating transactions between different groups.

• Commercial Bank

  Imagine a commercial bank where thousands of individuals and businesses deposit their savings. Instead of keeping all that money in a vault, the bank then lends a significant portion of it out to other individuals for home mortgages or car loans, or to businesses for expansion projects.

  How it illustrates: The bank acts as the intermediary by taking funds from many small savers and consolidating them into larger loans for borrowers. This makes it easier for both groups to achieve their financial goals without having to find each other directly, facilitating the transfer of capital from those with surplus funds to those who need them.

• Mutual Fund

  An investment company creates a mutual fund, which collects money from thousands of individual investors, each contributing a relatively small amount. The fund manager then uses this pooled money to buy a diversified portfolio of stocks, bonds, and other securities from various companies and governments.

  How it illustrates: The mutual fund serves as an intermediary by allowing many small investors to collectively invest in a broad range of assets that they might not be able to access individually. It channels their savings into the capital markets, providing funding to corporations and governments that issue these securities.

• Pension Fund

  A large pension fund collects regular contributions from employees and their employers over many years. The fund then invests these vast sums of money in various assets like real estate, stocks, and bonds, with the goal of growing the money so it can pay out retirement benefits to those employees in the future.

  How it illustrates: The pension fund acts as an intermediary by pooling long-term savings from a large workforce and investing it strategically. It connects the current contributions of workers and employers (the savers/lenders) with future retirees (who will receive the benefits) and also with the companies and projects that receive the fund's investment capital (the borrowers/recipients of capital).