Financial Markets is the market, an arrangement or institution where the traders are involved in the buying and selling of the financial assets like shares, bonds, derivatives, commodities, currencies, etc. It facilitates the exchange of financial instruments and financial securities. There are different types of the financial market which can exist in any country that includes, Money Markets, Over the Counter Markets, Derivatives Market, Bonds Market, forex Market, and commodities market. In this article, we discuss the most important functions of Financial Markets –
There are various functions that are performed by the financial market. Some of the functions of the financial market are as follows:
#1 – Price Determination
The financial market performs the function of price discovery of the different financial instruments which are traded between the buyers and the sellers on the financial market. The prices at which the financial instruments trade in the financial market are determined by the market forces i.e., demand and supply in the market.
So the financial market provides the vehicle by which the prices are set for both financial assets which are issued newly and for the existing stock of the financial assets.
#2 – Funds Mobilization
Along with the determination of the prices at which the financial instruments trade in the financial market, the required return out of the funds invested by the investor is also determined by participants in the financial market. The motivation for persons seeking the funds is dependent on the required rate of return which is demanded by the investors.
Because of this function of the financial market only, it is signaled that how funds which available from the lenders or the investors of the funds will get allocated among the persons who are in need of the funds or raise the funds through the means of issuing financial instruments in the financial market. So, the financial market helps in the mobilization of the savings of the investors.
#3 – Liquidity
Liquidity function of the financial market provides an opportunity for the investors to sell their financial instrument at its fair value prevailing in the market at any time during the working hours of the market.
In case there is no liquidity function of the financial market, then the investor forcefully have to hold the financial securities or the financial instrument until the conditions arise in the market to sell those assets or the issuer of the security is obligated contractually to pay for the same i.e., at the time of maturity in case of the debt instrument or at the time of the liquidation of the company in case of the equity instrument is until the company is either voluntarily or involuntarily liquidated.
Thus, in the financial market investors can sell their securities readily and convert them into cash thereby providing the liquidity.
#4 – Risk sharing
Financial market performs the function of the risk-sharing as the person who is undertaking the investments are different from the persons who are investing their fund in those investments.
With the help of the financial market, the risk is transferred from the person who undertakes the investments to those persons who provide the funds for making those investments.
#5 – Easy Access
The industries require the investors for raising the funds and the investors require the industries for investing its money and earning the returns from them. So the financial market platform provides the potential buyer and seller easily, which helps them in saving their time and money in finding the potential buyer and seller.
#6 – Reduction in transaction costs and provision of the Information
The trader requires various types of information while doing the transaction of buying and selling the securities. For obtaining the same time and money is required.
But the financial market helps in providing every type of information to the traders without the requirement of spending any money by them. In this way, the financial market reduces the cost of the transactions.
#7 – Capital Formation
Financial markets provide the channel through which the new savings of the investors flow in the country which aid in the capital formation of the country.