Introduction to Intermediaries
Intermediaries are the middlemen between any two parties that are partaking in a transaction. These middlemen act as the bridge between them and help in exchanging necessary information towards fulfilling the objective of a common goal.
In a stock market, or business, or any traditional marketplace, these intermediaries act as the connecting links between the producers and consumers. They facilitate intermediate action or transactions between those parties.
To understand their functions in the marketplace and the role they play in providing a common platform to the players, one has to understand the types of Intermediaries. Depending on the type of intermediary, their functions are also predefined. You should also note that there can be intermediaries at various levels of a supply or distribution chain. Hence, these levels could be a parameter to decide the roles of an intermediary.
Who are Intermediaries in a Stock Market?
An intermediary in a stock market is a person or an organization which helps people to invest their money in various company stocks. A person involved in such intermediary activities is usually called a fund manager.
Generally, among the types of Intermediaries in stock market, it can be one of the following -
Underwriter: As the name implies, underwriters are entities directly associated with a company or an organization. Their primary function is to manage people and talk to them regarding investment in multiple schemes or so.
In India, for instance, an insurance company can be an underwriter. It charges a certain fee for providing you with insurance services under certain terms and conditions.
Merchant bankers: These are institutions that extend funds to a company in place of loans and share the ownership of that particular company. So, they gain a right to have a say in the corporate affairs of that organization where they have invested.
Hence, merchant bankers become a link between large organizations and external markets. For instance, in India, State Bank of India, ICICI Bank, Punjab National Bank are some of the merchant bankers.
Portfolio Managers: It can be a person or a group of people or even an institution that manages money to be traded in the stock market. These intermediaries discuss the entire plan of investment with their team or with the organization and then they trade in stocks or securities in the market.
Also, these types of Intermediaries invest in bonds, derivatives, mutual funds, etc to make more money out of their investments.
Debenture Trustees: These personnel are registered with the Securities and Exchange Board of India (or SEBI) and function based on the rules cited in SEBI Guidelines, 1993. These personnel are monitored by SEBI on their functions of creating security, complaints redressal, interest payments and debenture redemption.
They act as the connecting links between debenture holders and the organization or company whose debentures have been purchased by those holders.
Sub Broker: A sub-broker is not directly linked to the stock exchanges but is a proxy member who has the necessary knowledge to act on behalf of the trading member. He can assist trading members and also investors in matters of securities dealing.
Stockbroker: Such brokers are part of the stock market as they assist in trading of securities. Although they charge a specific fee for facilitating such trading, their work is more effective than others. One of the most viable reasons behind such efficiency is their knowledge of the stock market.
A trader lacks such knowledge and is likely to end up buying or selling securities at a higher price than it should be. In such conditions, an intermediator can help in linking the stock exchanges and traders rightfully.
What are the Types of Intermediaries?
Based on the functions and areas the intermediaries perform their tasks, they are divided into specific categories, that are listed below -
Agents and Brokers: These are personnel who are directly associated with the organization or stock exchanges. They function to link the buyer and sellers. Agents and brokers also handle the necessary paperwork.
Distributors: They are appointed by the manufacturing company directly and act as a link between the wholesalers and the company itself. For instance, businessmen purchase from the company and distribute it to the wholesalers for further selling.
Retailers: These are the connecting links between the consumers and wholesalers. Their job is to purchase goods from wholesalers and sell it to the end-customers.
Resellers and Wholesalers: Wholesalers purchase from distributors and sell it to multiple retailers. They buy goods in bulk and sell them after that to other businesses or retailers.
Among the types of intermediaries, agents and brokers are the first of their kind and people generally consider them as the only kind of intermediaries.
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The Financial Intermediaries' Role
The distinctiveness of financial intermediaries such as banks and insurance companies is the cause for their all-pervasive nature. As previously stated, banks frequently act as "intermediaries" between individuals who have resources and those who seek them. Financial intermediaries, such as banks, are asset-based or fee-based, depending on the type of service they provide and the type of clientele they serve. Institutions such as banks and insurance companies are asset-based financial intermediaries, whereas fee-based financial intermediaries charge a fee Portfolio management and syndication services are provided through intermediaries.
Recent Developments
Recent trends in the evolution of financial intermediaries, particularly in the developing world, have demonstrated that these institutions can play a critical role in poverty reduction and other debt reduction programmes. Some measures, such as reaching out to the people with microcredit, have improved the economic well-being of formerly marginalized groups of the population.
Furthermore, financial intermediaries such as banks are maturing into "financial hyper marts," or umbrella institutions that cater to the complete demands of both investors and borrowers.
Financial intermediaries play an important role in today's global economy. They are the "lubricants" that enable the economy to function. Due to the increased complexity of financial transactions, financial intermediaries must constantly reinvent themselves and respond to new needs.
the investors' different portfolios and needs Financial intermediaries bear a large amount of responsibility for both borrowers and lenders. The name "intermediary" implies that these institutions are critical to the economy's operation, and they, along with the monetary authorities, must ensure that credit reaches the poor without harming investors' interests. This is one of the most significant issues they face.
FAQs on Types of Intermediaries in Business: Roles and Functions
1. What are intermediaries in the context of business?
In business, an intermediary is an individual or organisation that acts as a link in the distribution channel between the producer and the final consumer. Their primary purpose is to facilitate the smooth flow of goods, services, and information, effectively bridging the gap between the parties involved in a transaction.
2. What are the main types of intermediaries in a distribution channel?
The main types of intermediaries, often referred to as middlemen, in a distribution channel are:
- Wholesalers: They purchase goods in large quantities from producers and sell them to retailers.
- Retailers: They buy goods from wholesalers or producers and sell them directly to the end consumers in smaller quantities.
- Agents or Brokers: They facilitate transactions between buyers and sellers on behalf of the producer but do not take ownership or title of the goods.
- Distributors: Similar to wholesalers, but they often have a closer relationship with the producer and may hold exclusive rights to sell a product in a specific territory.
3. What are the key functions performed by business intermediaries?
Intermediaries perform several crucial functions that add value to the distribution process. These can be categorised as:
- Transactional Functions: Buying products from producers, selling them to customers, and assuming the risks associated with holding inventory.
- Logistical Functions: Assembling and sorting products from various sources (assorting), storing them (warehousing), and physically transporting them to customers.
- Facilitating Functions: Providing financial support (e.g., offering credit to customers) and gathering and sharing valuable market information with producers.
4. How do wholesalers and retailers differ in their roles as intermediaries?
While both are key intermediaries, wholesalers and retailers have distinct roles. A wholesaler primarily deals in bulk transactions, buying large volumes from producers and selling to other businesses like retailers. They are focused on distribution efficiency. In contrast, a retailer sells goods directly to the final consumer in small quantities. Their focus is on customer experience, location convenience, and point-of-sale service.
5. Why are intermediaries considered essential for achieving market efficiency?
Intermediaries are essential for market efficiency because they significantly reduce the total number of transactions required. Without an intermediary, a producer would have to engage in separate transactions with every single consumer. An intermediary centralises this process, allowing the producer to deal with one entity (the intermediary) and the intermediary to deal with many consumers. This specialisation saves time, reduces costs, and streamlines the entire distribution process for both producers and consumers.
6. What factors should a business consider when selecting its intermediaries?
The choice of intermediaries is a critical strategic decision. Key factors to consider include:
- Product-Related Factors: The nature of the product, such as its perishability, technical complexity, and unit value.
- Company-Related Factors: The financial strength of the company and the degree of control it wishes to maintain over the distribution channel.
- Market-Related Factors: The size of the market, geographical concentration of buyers, and their buying habits.
- Competitive Factors: The channels and intermediaries used by competitors.
7. Is it possible for a business to succeed without using any intermediaries?
Yes, it is possible for a business to operate without intermediaries through a strategy called Direct-to-Consumer (D2C) or a 'zero-level channel'. In this model, the producer sells directly to the end customer. Examples include a manufacturer selling via its own website (e.g., Dell Computers), a farmer selling produce at a local market, or a brand using its own exclusive retail stores. While this gives the company full control and higher profit margins, it also means the company must bear all costs related to marketing, logistics, and customer service.
