Functions of the Financial Markets
A Financial markets can be defined as a market where buyers and sellers engage in trading of financial assets comprising of equities, bonds, currencies, derivatives and commodities at a low transaction cost and prices settled by demand supply equilibrium. Financial markets operates by gathering interested buyers and sellers, including households, firms and government agencies in a single platform for enabling them to find each other easily.
There are two types of functions of the financial markets. These are the Intermediary functions and the Financial functions.
Intermediary Functions: The intermediary functions of a financial markets include the following:
ü Transfer of Resources: Financial markets acts as an intermediary for facilitating transfer of real economic resources from lenders to ultimate borrowers.
ü Escalating income: Financial markets enable the lenders to earn interest or dividend on their surplus invisible funds hence, contributing towards escalation of the individual and national income.
ü Productive usage: The financial markets facilitates in productive usage of the borrowed funds. This helps in enhancing the income and the gross national production.
ü Capital Formation: It acts a channel through which new savings are directed to aid the capital formation of a country.
ü Price determination: Financial markets facilitates in determination of the price of the traded financial assets through the interaction of buyers and sellers. They offer a sign for the allocation of funds in the economy on the basis of the demand and supply through the method known as price discovery process.
ü Sale Mechanism: Financial markets allow a mechanism to sell a financial asset by an investor so that the benefit of marketability and liquidity of such assets are offered.
ü Information: The activities of the participants in the financial market lead to generation and consequent dissemination of information to the different segments of the market. This further reduces the cost of transactions of the financial assets.
Financial Functions: The financial functions of the financial markets can be summarized in the following points:
ü The financial market offers the borrower with funds in order to enable them to carry on their investment plans.
ü The financial markets facilitate the lenders by offering them with earning assets so that they get to earn wealth by using the assets in production debentures.
ü The financial markets provides liquidity in the market in order to facilitate trading of funds among the buyers and sellers.