FINANCIAL MARKET: Functions, Roles, and Types

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Understanding the major financial markets

Capital Market 

A market where securities are issued, including shares and bonds, to raise medium- to long-term financing for governments and corporations.

Money Market

It is a market for short-term loan finances, especially for households and businesses.

Foreign Exchange Market

A market where the trading of currencies happens. 

The financial market in simpler terms: 

Financial markets encompass any location or system that allows buyers and sellers to trade financial instruments, such as bonds, shares, and different international currencies. Financial markets interact between those with capital to invest and those who need money. Financial markets enable participants to transfer risk (often through derivatives) and advance trade, making it feasible to raise funds.

The financial market has different roles, Some of which are stated below:

  • Price Determination  

A kind of financial market that determines the cost of goods sold and services provided in the free market. Meanwhile, in a free market, forces of demand and supply determine the prices. 

  • Liquidity

Investors can sell their financial instruments ( during the working hours of the market anytime) at their fair value, thanks to the financial market’s liquidity function.

If there is no liquidity in the financial market, investors will be forced to hold their securities or financial instruments, waiting for the conditions to arise in the market. 

  • Funds Mobilization

It is indicated that funds accessible from lenders or investors of the funds will be distributed among those who require the funds or raise funds by issuing financial instruments in the financial market solely because of this function of the financial market. Therefore, the financial market assists in releasing investors’ funds.

  • Risk sharing

The financial market serves the purpose of risk-sharing since the people making the investments and the people investing their money in those investments serve different purposes.

Risk is moved from the person making the investments to those providing the funding venture aid of the financial market.

  • Easy access

Investors need to raise capital for the industries, and the industries need to deploy that capital and provide returns for the investors. 

As a result, the financial market platform makes it simple for buyers and sellers to locate one another, saving them both time and money.

  • Reduction in Transaction Costs and Provision of the Information

When buying and selling stocks, the trader needs a variety of different kinds of information. It takes time and money to accomplish the same.

However, the financial market enables traders to receive information without investing any money. Therefore, the financial market lowers the cost of the transactions in this way.

  • Capital Formation 

The financial markets aid the country’s capital formation, which acts as a channel for new investors’ money.

 

Ultimately, the Financial market serves various valuable purposes. For example, it brings good stability for investors between current and future consumption; efficiently utilizing assets; allocating resources; separating management and ownership; bringing borrowers and lenders together, etc. 

An excellent financial market provides a connection between savings and investments that leads to meeting the corporate and household sectors’ short-term and long-term goals through the allocation of surplus and efficient mobilization; these allow the creation of wealth. 

 

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