The existence of many financial intermediaries is to cater for the different needs of people within a given market. Many investors would like to get information about prospective projects, and they lack the expertise to gather that data. However, with financial intermediaries, people can access the information at lower costs (Merton &Thakor, 2017). In case of the commercial banks, they will not offer the investors about potential investment opportunities as all the need is for people to seek a source of financing.
Investors tend to have three types of risk attitudes, risk aversion, risk tolerance, and risk-neutral. A risk tolerance attitude indicates an investor is willing to attempt a high-risk selection of a given financial institution or intermediary regardless of what others think about it. On the other hand, risk aversive investors are those who have a high degree of risk perception in financial investments and intermediaries. Likewise, risk-neutral investors care more about expected return as they have an indifferent attitude towards financial institutions or intermediaries before making their selection. On the other hand, one’s amount of wealth determines the financial institution or intermediary to use as an investor would want to feel his/her money is safe.
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The first important factor when selecting a financial intermediary or institution is determining their terms and conditions. Every institution has different policies, and some may not realign with your needs. It is thus essential for one to select an institution or intermediary that will let you use your money correctly. Likewise, when choosing a financial institution, it is better to determine savings account interest rates and if one can access mortgages.
The main difference is that for hedge funds, they tend to focus more on high risks investments, and one can invest in anything, including lottery tickets, stocks, bit coin, real estate, and life insurance. However, for mutual funds, they focus on low-risk investments, and this limits their return abilities. Examples of hedge fund investments include publicly traded securities such as bonds and stocks.
The SEC does not regulate hedge funds, and this means that they are not subject to the various rules and regulations that aim at protecting investors from fraudsters.
References
Merton, R. C., & Thakor, R. T. (2019). Customers and investors: a framework for understanding the evolution of financial institutions. Journal of Financial Intermediation , 39 , 4-18.
