Debt Review- What are the 6 Functions of Financial Markets?

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Debt Review

The market, as we know, is a place where we can buy or sell goods and services. Similarly, a market where buying and selling of financial assets take place is known as Financial Market.

Financial Markets Defined

Financial markets are the markets where investors- individual or businesses, can buy and sell securities (shares, bonds, and precious metal), derivatives, and foreign exchange. Investors go to the financial market to make more money, whereas businesses enter the market intending to raise money for their businesses.

Various names know financial markets. Capital Market, stock exchange, and Wall Street are most commonly used synonyms for financial markets. Just like any other market, financial markets are available physically (BSE, NYSE, etc.) as well as electronically (NASDAQ).

Types of Financial Market

Several financial markets are available all over the world. Almost every country has its financial market. However, some work on a local level, whereas others have an international presence. Trading worth trillions of dollars takes place at International stock exchanges like the New York Stock Exchange daily.

Let us gain some knowledge about different kinds of financial markets

Stock Market

Stock markets are markets where trading of ownership of the shares take place. Investors buy shares, and the return on their investment depends on the performance of the share in the market. Buying shares is very easy. However, the challenge lies in the selection of the share, which can give higher returns on the invested amount. The aim is to buy shares, hold them, and sell them when their price increases.

Bond Market

The bond market is a financial market where all the bond-related transaction related to the bonds takes place. Though the return on the investments is quite low in comparison to the stock markets, there is no risk factor in such kind of investments.

Commodities Market

As the name itself suggests, these are financial markets where trading of commodities/natural resources takes place. Trading of gold, oil, metals, corn, etc. takes place in these markets. The trading in these markets can be quite risky as the prices are highly unpredictable.

Derivatives markets

Derivative markets are financial markets which deal with contracts or derivatives. The value of the derivative depends on the worth of the asset in the market.

Some other types of financial markets are Foreign Exchange Markets, Futures Markets, Money Markets, Cryptocurrency, Interbank Lending markets, and Spot Markets.

Functions of Financial Markets:

Financial markets play a significant role in strengthening the economy of a nation. Some essential functions of financial markets are discussed below.

#1. Lowers the cost of transactions

Decision making of buying or selling depends on lots of factors. For this investor needs various kinds of information. Investors may even end up spending a hefty amount on getting the required information. Financial markets act as a hub of information. They have all the information related to all kinds of bonds, securities, and commodities. Investors can access the information without paying any charges. Hence, financial markets reduce the cost of transactions. There are many financial websites where this information can be easily accessed. However, it is important to refer to reliable and authenticated information. Snap finance reviews provide authenticated information.

#2. Price Determination

Investors enter the financial market to earn high returns on their investment. In the financial market, the price of any security is based on its demand and supply in the market. Financial markets act as a platform where the buyer (investor) and supplier (businesses) interact. This demand and supply, along with other market forces, help in determining the price of the asset or security.

#3. Mobilizing Funds

Financial markets enable mobilization of idle lying funds towards places where it is needed.

#4. Puts savings into more productive use

Through financial markets, money lying in the savings account of the customer are used by banks to give various loans like home loan, car loan, house loan, etc.

#5. Easy access

Financial markets give investors easy access to all kinds of bonds, securities, etc.

#6. Makes financial assets liquid

The best part of financial markets is that buyers and sellers are available all the time. Hence, investors can invest in securities whenever they want, and they can also convert the securities back into money immediately, as per their financial needs,

Importance of Financial Markets 

Financial Markets create a platform where all kinds of investors (big and small) are treated equally.

They grant government organizations, individuals, and businesses easy access to raise capital.

Financial markets provide employments to numerous people, hence help in reducing unemployment.