Major Functions of Financial Markets
Financial markets are platforms where buyers and sellers can exchange financial instruments such as stocks, bonds, and currencies. These markets play a critical role in the economy by facilitating the flow of capital and enabling businesses to raise funds for investment. In this blog, we will explain the major functions of financial markets using the following points: price determination, mobilization of savings, ensuring liquidity, and saving time and money.
Price Determination
One of the primary functions of financial markets is to determine the prices of financial instruments. Financial markets provide a platform where buyers and sellers can meet and agree on the price of a security. Prices are influenced by a range of factors, including the performance of the issuer, market demand, and economic and political conditions. The price determination function of financial markets helps to ensure that assets are priced fairly and that investors receive a fair return on their investments.
Mobilization of Savings
Financial markets play a crucial role in mobilizing savings from individuals and businesses. By investing in financial instruments such as stocks and bonds, savers can earn a return on their savings while providing capital for businesses to invest in growth and expansion. Financial markets help to match savers with borrowers and ensure that funds are channeled to their most productive uses.
Ensuring Liquidity
Another important function of financial markets is to ensure liquidity. Liquidity refers to the ease with which an asset can be converted into cash. Financial markets provide liquidity by creating a secondary market where investors can buy and sell securities. This means that investors can easily sell their securities if they need cash, providing a source of liquidity and reducing the risk of holding illiquid assets.
Saving Time and Money
Financial markets also help to save time and money. By providing a platform for investors to buy and sell securities, financial markets eliminate the need for investors to search for buyers or sellers on their own. This saves time and reduces transaction costs, making it easier and more affordable for investors to trade securities.
In conclusion, financial markets play a critical role in the economy by facilitating the flow of capital and enabling businesses to raise funds for investment. The major functions of financial markets include price determination, mobilization of savings, ensuring liquidity, and saving time and money. Understanding these functions is essential for anyone looking to invest or participate in financial markets.
