What Is A Financial Market?

As the name implies, a financial market refers to a platform where people and businesses can trade (i.e., buy and sell) stocks, bonds, commodities, and other goods.

The financial market serves as an intermediary between organizations, facilitating the exchange of funds and assets and thus mobilizing capital. They ensure transactions are smooth. A financial market helps connect the investors and borrowers and earns some commission for providing the bridge.

Importance Of Financial Markets

Financial markets hold prime significance in a nation’s economy and the world. It is a market that provides a platform where buyers and sellers can trade in financial assets. These markets serve as a link between savers and investors, or they assist savers in becoming investors. On the other hand, they can help companies in fundraising expand their business.

The following are a few of the many things that financial markets enable:

  • Financial markets allow participants like investors and debtors to receive fair and proper treatment regardless of their size.
  • Because of the numerous job opportunities it offers, financial markets help lower the rate of unemployment.
  • They provide capital to individuals, businesses, and government organizations.

Having discussed the importance, let’s now look at some of the most important functions of financial markets.

Basics Of Finances:

Functions of Financial Markets

There are many financial markets, and every country is home to at least one, although they vary in size. A financial market in any economy performs different types of functions. Some of them are as follows:

Liquidity

Liquidity (the efficiency with which an asset can be converted into readily-available cash) is an important reason why investors participate in trade. The financial market provides liquidity for tradable assets by allowing for the purchase and sale of securities. It implies that investors can sell those assets and convert them to cash whenever they wish.

Determine The Price Of The Securities

The demand and supply rule applied to an asset in a financial market help in determining its worth. For instance, investors are the supplier of the funds, while the industries need the funds. As a result, the price is affected by the interaction between these two participants and other economic factors.

Platform

Financial markets also allow potential buyers and sellers to interact, agree, and deal. This feature of the financial market saves interested parties a lot of time and money, but it also makes trading easier.

The Use Of Resources

For an economy to be successful, the money mustn’t sit idle. With the help of the financial market, investors having the savings are linked with the industries which require the funds, thereby mobilizing the savings and putting them to the most productive uses.

Saves Time And Effort

In a typical market where individuals trade, it takes a lot of effort and time to perform effectively. On the other hand, a financial market makes all of the information necessary for trading financial assets available.

Moreover, because these marketplaces process many transactions, they benefit from economies of scale (an increase in production that results in equal cost savings). Investors can save money on transaction costs as a result of this.

To Conclude

The economic impact of financial markets explains why they are so crucial to the global economy. Financial markets perform various functions in any country. These include acting as an intermediary between savers and investors by mobilizing the funds between them and helping determine the prices of securities. It also plays a vital role in allocating a country’s resources of any country.

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You can also read: Student’s Guide To Budgeting And Money Management
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