Question

Answer the following question
Explain the functions of financial market.

Answer 1

A financial market is a place where financial instruments or assets are exchanged or bought and sold. Financial markets help to mobilise savings and convert them into investments. They also attract funds from investors and channelize them to corporations.

1. The functions of the financial market are as follows:
   Transfer of Resources: Financial market facilitates the transfer of real economic resources from lenders to ultimate users.
2. Productive Usage: The Financial market allows productive use of the funds. Excess funds of the investors are used by the borrowers for productive purposes.
3. Enhancing Income: The financial market allows lenders to earn interest or dividends on their surplus funds, thus leading to the enhancement of individual and national income.
4. Capital Formation: Capital formation is the net addition to the existing stock of an economy's capital. The financial market provides a channel through which savings flow to industrial and commercial organisations in the form of capital. This leads to capital formation.
5. Price Determination: The financial instruments traded in the financial market get their prices from the mechanism of demand and supply. The interaction between the suppliers of the funds, i.e. investors and the users, i.e. corporates, as well as the other market factors, helps to determine the prices.
6. Sale Mechanism: The financial market provides a mechanism for selling a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets.
7. Mobilizing Funds: Investors having idle funds or savings must be linked with corporates that require investment. Thus, the financial market enables investors to invest their savings according to their choices and risk assessment. This will utilize idle funds and the economy will boom.
8. Liquidity: Financial market provides a mechanism for liquidating the financial instruments, i.e., at any given time, the investor can sell these instruments and convert them into cash. It is an important factor for investors who do not want to invest for a long period.