Question

Answer in brief.

State any four functions of the financial market.

Answer 1

A financial market is a place where financial instruments or assets are exchanged or bought and sold. Financial markets help to mobilize savings and convert them into investments. They also attract funds from investors and channel them to corporations.

The functions of the financial market are as follows:

• Mobilisation of Savings and Channeling them into the most Productive Uses: A financial market facilitates the transfer of savings from savers to investors. It gives savers the choice of different investments and thus helps to channel surplus funds into the most productive use.
• Transfer of Resources: Financial market facilitates the transfer of real economic resources from lenders to ultimate users.
• Capital Formation: Capital formation is the net addition to the existing stock of an economy's capital. The financial market provides a channel through which savings flow to industrial and commercial organizations in the form of capital. This leads to capital formation.
• Facilitating Price Discovery: Forces of demand and supply help to establish a price for a commodity or service in the market. In the financial market, households are suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.
• Sale Mechanism: Financial market provides a mechanism for selling a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets.
• Liquidity: Financial market provides a mechanism for liquidating the financial instruments, i.e., at any given time, the investor can sell these instruments and convert them into cash. It is an important factor for investors who do not want to invest for a long period.
• Reducing the Cost of Transactions: Financial markets provide valuable information about securities being traded in the market. It helps to save time, effort, and money that both buyers and sellers of a financial asset would have to otherwise spend to try and find each other. The financial market is thus, a common platform where buyers and sellers can meet to fulfilling their individual needs.