Functions of Financial Market in Finance

Before reading functions of the Financial Market, you must go through this link to read What is Financial Market?

 

Functions of Financial Market

There are various functions that the financial markets carry out, which includes the following:

  1. Easy Access
  2. Capital Formation
  3. Reduction in transaction costs and provision of the Information
  4. Liquidity
  5. sharing of the risk
  6. determination of the prices
  7. mobilization of the fund

 

Let us discuss each of the financial market functions in detail 

1 . Price Determination

The financial market carries out the function of price assurance of the variety of financial instruments traded between the purchasers and the seller on the financial market. The prices at which the financial instruments are traded in the financial market are dictated by the market forces such as demand and supply.  Demand and supply of a resource in a financial market help to decide their price.

Funds are being supplied by the investors, whereas the corporations need the funds. Consequently, the collaboration between these two members and other market powers assists with deciding the price.

 

2 . Funds Mobilization

In simple terms, it means the movement of funds. Financial markets link those with money and those who require money. This function of the financial market, funds lent to the borrower at the required rate of return from a lender or investor through the means of issuing financial instruments in the financial market. Therefore, the financial market assists in the mobilization of the savings of the investors.

 

3.  Liquidity

This function provides an opportunity for investors to trade their financial instruments at fair value in the financial market during working hours. If liquidity does not function in the financial market, then the investors are compelled to hold the financial instruments/securities till the liquidate condition. If the liquidity condition arises, the issuer of financial securities or the seller of the assets is obligated to pay for the same at any time of maturity in the case of debt instrument. 

 

4.  Risk sharing

The financial market performs the function of the risk-sharing function performed as the person who is undertaking the investments is different from the people who are investing their money in those investments. With the help of the financial market, the risk is transferred from the people who agree to invest to those who provide the funds for making those investments.

 

5.  Easy Access

The companies need the investors for raising funds, and the investors require the companies to invest their money and earn the returns from those investments. So the financial market is a platform that 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 different types of data while doing the business transaction of buying and selling the financial securities and for which time and money are required, and the financial market helps in providing every type of information to the traders without any cost; therefore, it reduces the cost of transactions.

 

7 . Capital Formation

Financial markets give the connection through which the new funds from the investors stream in the country, which helps in the capital formation of the country.

 

Example for Functions of Financial Market

Let us suppose, In New York, Ms. Sophia wants to start a new project for which she requires funds, and she does to have it at present. Whereas, In California, Mr. Joe Root wants to invest his saved money (funds) in some profitable project, where he can get the expected rate of return. Consequently, the Financial Market is a solution for both of them and functions to meet both at one market.

 

Note: If you have got any confusion regarding understanding the above topic on functions of the financial market, do comment and contact us to help you.

 

1 Response

  1. November 26, 2022

    […] trade a wide range of assets. Derivative prices are based on changes in the underlying asset. These financial instruments can be traded to reduce risk and are frequently used to get access to specific markets. Derivatives […]

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