5 Major Functions of Financial Markets

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In this article, we will explain the major functions of financial markets. We must know that the financial markets are the backbone of financial systems of any country especially the developing countries like India. It also helps in the process of balanced economic growth.

The economy of a country can be classified into two categories which are Banks driven economy and Market-driven economy.

Therefore, the countries whose economy is market-driven, the role of the financial market becomes more essential. The 5 vital functions of the financial market are explained below.

function of financial market
This is one of the primary function of the financial market. It creates funds from the investors, depositors and distributes in the deficit sectors such as business entities, Government, borrowers etc. Thus it facilitates allocation of Credits from surplus sector to deficit sector.
The financial market caters the various financial needs of public sector companies as well as private sector companies.

2) It determines the price of tradable financial instruments:

The trading prices of the financial instruments are decided by the market itself on supply and demand basis. The live interactions among investors make the prices transparent and update it on a regular basis. It also determines the price of new issues of shares, or debt instruments.

Thus price determination is a significant function of the financial market.

3) It facilities savings and liquidity:

The financial market serves as intermediaries for mobilisation of saving and provides hassle-free transactions of securities. As there is no lower and upper limit of the transaction value hence it encourages saving or investments and facilitates liquidity or reselling of the securities because any investor can sell the stock which they hold whenever they want to do so.

Thus it facilitates reselling and saving.

4) Financial market collects and transmits the information of assets:

While trading in stock market numerous types of information about shares or stocks, bonds, debentures or pieces of information about the company’s management, liabilities, assets balance sheet or company’s upcoming projects etc are needed for profitable investments.

Such pieces of information are collected from the corporates and spread among the investors or savers by the financial market. Thus it can be recognized as a key function of the financial market.

5) It reduces the advertisement and transaction cost:

Today in the digital world financial market reduces time, efforts, cost of transactions and information. As financial markets are governed and monitored under the statutory body SEBI (Stock Exchange Board of India), it offers a transparent and hassle-free transactions process among traders. It also provides information about new issues like IPOs (initial public offer) and FPO (follow on public offer) and other new issued securities.

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