Financial Markets and its Functions
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Financial Markets & its Functions
Financial market is a type of marketplace where the sale and purchase of tradeable financial assets, a.k.a securities such as , stocks, foreign exchange, commodities, crypto currency, and derivatives takes place.
The stock market trades shares of ownership of public companies. Each share comes with a price, and investors make money with the stocks when they perform well in the market. It is easy to buy stocks. The real challenge is in choosing the right stocks under the right market conditions that will earn money for the investor.
The bond market offers opportunities for companies and the government to secure money to finance a project or investment. In a bond market, investors buy bonds from a company, and the company returns the amount of the bonds within an agreed period, plus interest.
The commodities market is where traders and investors buy and sell natural resources or commodities such as corn, oil, meat, and gold. A specific market is created for such resources because their price is unpredictable. There is a wherein the price of items that are to be delivered at a given future time is already identified and sealed today.
is the market in which participants can buy and sell currencies. Market participants can earn money by identifying the pairs under the right market conditions and placing the respective buy or sell orders.
The role of financial markets in the success and strength of an economy cannot be underestimated. Some of the important functions of financial markets are:
Puts savings into more productive use
A savings account that has money in it should not just let that money sit in the vault. Money can be invested into the financial markets for 5-15% returns per month at a risk as low as 2% of the invested capital
2. Determines the price of securities
Investors aim to make profits from their securities. However, unlike goods and services whose price is determined by the law of supply and demand, prices of securities are determined by financial markets.
Makes financial assets liquid
Buyers and sellers can decide to trade their securities anytime. They can use financial markets to sell their securities or make investments as they desire. Financial markets offer investors the ease with which they can convert their tradeable asset into ready cash without affecting their market price.
Providing the borrower with funds so as to enable them to carry out their investment plans.
Providing the lenders with earning assets so as to enable them to earn wealth by deploying the assets in production debentures.
Providing liquidity in the market so as to facilitate trading of funds.
Providing liquidity to commercial bank
Facilitating credit creation
Promoting savings
Financial markets provide a place where participants like buyers and sellers, regardless of their size, will be able to transact and make a profit fairly.
Promoting investment
Facilitating balanced economic growth
They provide individuals, companies, and government organizations with access to capital.
Improving trading floors
Financial markets help lower the unemployment rate because of the many job opportunities it offers as market analysts, fund managers, brokers, financial advisors, traders at a trading desk in a bank, independent professional traders
Intermediary functions: The intermediary functions of financial markets include the following:
Transfer of resources: Financial markets facilitate the transfer of real economic resources from lenders to ultimate borrowers.
Enhancing income: Financial markets allow lenders to earn interest or dividends on their surplus funds, thus contributing to the enhancement of the individual and the national income.
Productive usage: Financial markets allow for the productive use of the funds borrowed. The enhances the income and the gross national production.
Capital formation: Financial markets provide a channel through which new savings flow to aid the capital formation of a country.
Price determination: Financial markets allow for the determination of the price of the traded financial assets through the interaction of buyers and sellers. They provide a sign for the allocation of funds in the economy based on the demand and to the supply through the mechanism called the price discovery process.
Sale mechanism: Financial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets.
Information: The activities of the participants in the financial market result in the generation and the consequent dissemination of information to the various segments of the market. So as to reduce the cost of the transaction of financial assets.