Introduction to Functions of Financial Market
A financial market is a term that is used for describing any marketplace in an economy where the trading of securities takes place such as trading of equities, trading of bonds, trading of currencies, and trading of derivatives. Financial markets helps in creating an open and regulated system for the companies for acquiring large amounts of capital from the market for its working. It also allows businesses in offsetting their risk. Since markets are public, so they provide a transparent way of setting up the prices for everything which is being traded in the market. A financial market is a broad term where there are different types of financial markets like bonds, money, derivatives and stock markets. In this article, the most important functions of financial markets are discussed
Functions of Financial Market
There are different types of functions that the financial market in any economy performs. Some of the functions are as follows:
- Liquidity on tradable assets is given by the financial market as it facilitates the exchange of securities by making it accessible to the investor who can easily sell the securities he holds and thus helping the conversion of the assets to cash.
- In the financial market, prices at which the financial instruments will be traded are determined by the demand and supply forces i.e., frequent interaction between the investors helps in deciding the price of the securities. Thus Determination of the securities prices is one of the important functions of the financial market.
- The financial market provides the platform to the probable seller and the buyer easily where they trade with each other, which helps them in saving their time, efforts and money in finding other required parties.
- Some of the persons require the money whereas some other has the spare money which is lying 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 inserting them into most productive uses.
- Various types of information are required by the different traders while trading in the market which requires time and effort. This financial market provides many types of different information to the traders who can get easy access to that information without the requirement of investing their time and money.
Example of Financial Market Functions
For example, Mr. X is holding 500 shares of company XYZ Ltd. The current market price of the share is $ 50 per share. Now due to some urgency, Mr. X requires the funds. He can get the required funds from selling his holding in the shares of company XYZ Ltd. If there is no proper functioning of the financial market, then the investor could find it difficult to buy and sell their securities.
In the present case with the liquidity function of the financial market, it will become easier for Mr. X to sell its holding at its fair value prevailing in the market during trading hours. In case if there is no liquidity function, then the investor forcefully has to hold the financial securities or the financial instrument until the conditions arise in the market to sell those assets arise in the market.
There are several different advantages of the Functions of the financial Market providing the investors and the companies that are involved in the financial market. Some of the advantages are as follows:
- It helps in creating an open and regulated system for the companies for acquiring large amounts of capital from the market for its working.
- It provides the medium using which the savings of the potential investors flow in the economy. This will lead to capital formation in the country.
- It helps in saving the time, efforts and money of the parties because the traders don’t have to spend their resources for finding the potential sellers or the buyers of the security.
The Limitations and drawbacks of the Functions of the financial market include the following:
- There is no function of the financial market which may indicate a stock’s true intrinsic value. There is no stock’s true intrinsic value because of the different macroeconomic factors such as taxes etc.
- Various types of information are required by the trader which is provided by the financial market. It is very much required that this information is correct as the prices of the securities are reliant heavily on informational transparency in order to ensure that the appropriate prices are being set by the market for the securities.
Important points of the Financial Market Functions
- Financial markets provide the platform where the different participants such as investors and debtors receive fair and the proper treatment, regardless of the size of their working and other aspects.
- The financial market offers various different employment opportunities as well, thereby helping in lowering the unemployment rate in the country.
- Along with the other financial market, the market of real estate is also a financial market as their financing is provided when there are buying and the selling of the physical properties.
Thus it can be concluded that the Functions of the financial market play an important role in the economy of any country. There are the different basis on which the financial market can be classified which include by Nature of the Claim, by the maturity of the claim, by the timing of the delivery, or by the organizational structure. But whatever be the classification, the role of the financial market remains the same and important one. It provides the medium using which the savings of the potential investors flow in the economy. This will lead to capital formation in the country. From the last few years, role and the functions of the financial market have seen a drastic change because of the different number of the factors such as the measures taken to protect the investors, dispute settling procedures, low cost of the transactions, provision of high liquidity, price information transparency, etc.
This is a guide to the Functions of the Financial Market. Here we discuss the Function, examples, Advantages, and Disadvantages of the Financial Market. You can also go through our other suggested articles to learn more –