FINANCIAL MARKET

MEANING:

The market deals with the trading of financial assets such as stocks, bonds, and debentures etc called Financial Market. In simple words, it is a marketplace where the creation and exchange of financial assets take place.

So, in nutshell it is a credit markets catering to the various credit needs of the individuals, firms and institutions.

FUNCTIONS OF FINANCIAL MARKET:

These are the four most important functions which are performed by it.

functions of financial market
Fig 1 : Financial Market functions
  1. MOBILIZATION OF SAVINGS AND CHANNELIZING THEM: This function performed by acting as inter-mediator between savers and borrowers.
Mobilization of funds and channelizing them
Fig 2: Mobilization of funds and channelizing them.

Financial Market helps the Household sector to use their surplus funds or savings in a most productive way. This is possible by lending the savings to the business sector in the form of credit for securities and returns.

On the other hand, it helps businesses to fulfill their fund requirements by issuing securities to household sector. Directing those funds to projects yielding highest or to projects needed to promote balanced economic development.

2. PROVIDE LIQUIDITY TO FINANCIAL ASSETS:

Provide liquidity to financial assets
Fig 3 : Provide Liquidity to financial assets

Second function is to allow the investors to convert their financial securities into cash in a short period of time. Liquidity means ability to turn the asset into cash. So, whenever the investors feel it is high time to sell their securities in a market, they can sell it . It is always a better option to invest your savings in a stock market instead of non liquid assets which cannot be converted into cash promptly.

3. PRICE DISCOVERY: It also helps to determine the price of the financial instruments which are traded between the buyer and seller through market forces i.e. Demand and Supply. In simple words, if the demand of securities is high and the supply is low, then price will be high and vice versa.

Price determination
Fig 4 : Price determination

4. REDUCING THE COST OF TRANSACTION: It helps to reduce the cost by providing useful information to the investors without spending any extra money.


In other words, trader needs various type of data to make a rational decision, so financial market helps to save time and money spend for gathering it.

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