Functions of Financial Market - Finance | Management Notes

Functions of Financial Market
Finance

BBA BBA-BI
Management Notes

Financial market is a market in which people trade financial securities commodities and their tangible item of value at low transaction cost and at price that reflect supply and demand. Simply we can say financial market is the market in which short term as well as long-term financial instrument are traded.
Some of the major functions of financial market are as follows:

Borrowing and lending:
Financial market channels funds from households, firms, governments and foreigners that have saved surplus funds to those who encounter a shortage of funds. Simply we can say it transfer funds from savers(surplus units) to borrowers(deficit units) in the time of need.

Price Determination:
Financial markets help to determine the price of the financial assets .The secondary market plays an important role in determining the prices for newly issued assets. The financial markets ensure the accurate and justifiable price of a stock that is about to be sold in the market for the first time.

Coordination and Provision of Information:
The exchange of funds is characterized by a high amount of incomplete and asymmetric information. Financial market collect and provide much information to facilitate this exchange.

Risk Sharing:
Trade in financial markets is partly motivated by the transfer of risk from leaders to borrowers who use the obtained funds to invest. The financial intermediaries use their experiences to reduce the level of risk. So,the ultimate suppliers of the funds feel themselves to be secured while mobilizing their savings through financial intermediaries to ultimate users.

Liquidity:
The existence of financial markets enables the owners of assets to buy and resell these assets .Generally this leads to an increase in the liquidity of these financial instruments. Financial markets ensure the adequate liquidity in the market through proper channeling of funds from the savers to borrowers.

Efficiency :
The facilitation of financial transactions through financial markets leads to decrease in informational cost and transaction costs which from an economic point of view leads to increase in efficiency.