Question

Explain how the information related problems affect the operation of the financial intermediaries? ( 20 marks)

How financial intermediaries managed with the information related problems. ( 20 marks)

Answer 1

Financial intermediaries are the one who link investors with one who is in need of money. They help the investors by allocating their money at a secure place that could earn them huge profits.

Intermediaries have knowledge and experience as they are working on this for a long time and they can properly guess which security is safe to invest on and which not with information they gather by their experience and knowledge.

At times, there are problems related to these informations. Some times the trends they follow, are affected by market conditions and hence as a result the information they gather does not match with the ongoing trend, hence may cause loss on investments being done.

Sometimes it may happen that with passage of time, some new securities are launched and come in demand and intermediaries do not have knowledge about the new securities, thus this leads to opportunity loss as they might have provided more profits.

So, it's clear that any problems related to information could mislead the intermediaries from their basic duty that is providing the best guidance to individuals regarding investments. This then also leads to causing loss or less potential profits to the respective individuals or investors.

This way we can see how it affects the financial intermediaries.

Now, the intermediaries must deal with these problems so that they do not have a adverse effect on the working of intermediaries..

For this, they follow the following things :

• Intermediaries follow the current trends going in the market and try to gather all the correct information to make sure they do not miss any new update regarding market trends. This would help decide which security is best to invest and is in demand in market for proving high profits to investors.
• Intermediaries need to follow the market at very short intervals so that a certain up and down in prices can be of their profit and would give the best advice to their clients.
• They should have a proper knowledge of each and every security and should know fir a specified term, which security is best to invest on.

These all steps when followed by intermediaries they can manage and even reduce the information related problems.