Question

What are the functions of Financial Markets?

Answer 1

• Intermediary Functions:

1. Transfer of Resources: Financial markets facilitate the transfer of real economic resources from lenders to ultimate borrowers.
2. Enhancing Income: Financial markets allow lenders to earn interest/dividends on their surplus investible funds and thus contributing to the enhancement of the individual and the national income.
3. Productive Usage: Financial markets allow for the productive use of the funds borrowed and thus enhancing the income and the gross national production.
4. Capital Formation: Financial markets provide a channel through which new savings flow to aid the capital formation of a country.
5. Price Determination: Financial markets allow for the determination of the price of, the traded financial asset through the interaction of buyers and sellers.
6. Sale Mechanism: Financial market provides a mechanism for selling a financial asset by an investor so as to offer the benefits of marketability and liquidity of such assets.
7. Information: The activities of the participants in the financial market result in the generation and the consequent dissemination of information to the various segments of the markets, so as to reduce the cost of the transaction of financial assets.

• Financial Functions:

1. Providing the borrowers with funds so as to enable them to carry out their investment plans.
2. Providing the lenders with earning assets so as to enable them to earn wealth by deploying the assets in productive ventures.
3. Providing liquidity in the market so as to facilitate the trading of funds.