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.