Question

What are the functions of a financial market?

Options

• Transfer of Savings and Alternatives for Investment

• Establishes the Price

• Facilitates Liquidity

• All of the above

Answer 1

All of the above

Explanation -

A financial market is a marketplace for the development and exchange of financial assets such as stocks and bonds. The functions of a financial market are listed below.

1. Transfer of Savings and Alternatives for Investment : A financial market serves as a conduit between savings and investors. It provides a platform for saving to be transferred from households to investors. It also gives savers a variety of investment options, allowing them to allocate their money to the most profitable investment.
2. Establishes the Price : The price of a financial asset is determined by the forces of demand and supply for funds, just like the price of a commodity. The financial market serves as a platform for the interaction of fund demand (represented by business firms) and fund supply (represented by households). As a result, it aids in determining the price of the traded asset.
3. Facilitates Liquidity : A financial market makes it simple to buy and sell an asset or security. This provides the assets with liquidity. That is, assets can be quickly converted through financial market trading. into money or money equivalents.