Functions of Financial Markets

The financial markets play a significant role in the economy and perform some of the essential functions. Let us now discuss each of these functions one by one:

  • Facilitate Price Determination and Discovery: The demand and supply of the various securities in the financial markets regulate their price.
  • Mobilize Savings: The financial markets initiate the proper utilization of individual savings to generate profit by investing it in the right place.
  • Accelerate Economic Development: When savings are put into use for setting up new businesses and generating revenue, the economy of the country grows parallel.
  • Provide Liquidity to Financial Assets: The financial market facilitates the quick conversion of securities or commodities into cash as and when required by the investor.
  • Reduce Transaction Cost: Since the information of the financial instruments or assets is available free of cost on the financial markets, it lowers the cost of acquisition and selling of the securities.
  • Capital Formation: Raising capital from idle savings for the growth of business, infrastructure and economy is termed as a capital formation which is an essential function of financial markets.
  • Create New Assets and Liabilities: Financial markets also encourage the creation of new assets in the form of investments and liabilities through borrowings.
  • Determine Capital Formation Rate: As we know that capital formation is one of the functions of financial markets. The demand and supply of securities determine their capital formation rate to encourage people to enter the market.

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