Investment promotes economic growth. Investment is the act of redirecting resources from being used today so that they can create future benefits. The financial system makes investment possible by allowing the transfer of money between savers and borrowers. Savers are households and businesses that lend out their savings. Borrowers are governments and businesses who use the money they borrow to build roads, factories, and homes. Borrowers may also use these funds to develop new products or provide new services.

     Financial intermediaries are institutions which help channel funds from savers to borrowers. Examples include banks and mutual funds, funds which pool savings from many people and invest this money in different ways. Financial intermediaries provide three major advantages to investors. They reduce risk by helping people invest in a variety of opportunities. The idea of spreading out investments to reduce risk is called diversification. Financial intermediaries also provide information and liquidity to investors.

     Saving and investing involves tradeoffs. For example, savings accounts have very low risk, and are liquid, but they also have a low return. Return is the money, such as interest, an investor receives above and beyond the sum of money initially invested. An investment with higher risk or less liquidity usually offers a higher potential return. Investors will be more tempted to take on more risk, or to give up liquidity, if they have a chance of earning more money on their investment.