B. Financial Intermediaries
1. Definition of Financial Intermediaries: financial institutions through which savers can indirectly provide funds to borrowers.
2. Banks
a. The primary role of banks is to take in deposits from people who want to save and then lend them out to others who want to borrow.
b. Banks pay savers interest on their deposits and charge borrowers a higher rate of interest to cover the costs of running the bank and provide the bank owners with some amount of
profit.
c. Banks also play another important role in the economy by allowing individuals to use checking deposits as a medium of exchange.
3. Mutual Funds
a. Definition of Mutual Fund: an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds.
b. The primary advantage of a mutual fund is that it allows individuals with small amounts of money to diversify.
c. Mutual funds called “index funds” buy all of the stocks of a given stock index and have generally performed better than funds with active fund managers. This may be true because they trade stocks less frequently and they do not have to pay the salary of a fund manager.