Functions of Financial Markets

 I kicked off a series on financial literacy by setting a backgrounder and something on financial systems . Now we discuss the functions of financial markets.

The term `financial market’ refers to the means through which buyers and sellers are brought together to transact the financial products. The Major Functions Performed by the Financial Markets
o Price Discovery
o Liquidity
o Lower Transaction Costs

Price Discovery
Financial markets provide a centralized place for trading in financial products. This `place’ need not be physical. It may be virtual such as the online trading system of the National Stock Exchange. This feature enables the prospective buyers and sellers to discover the going price and take appropriate decisions.

Liquidity
Financial markets also provide a mechanism for the investors to sell their financial assets. For example, if an investor wishes to sell his shares, the equity markets offer an easy exit.

Lower Transaction Costs
Financial markets save a market player the cost of locating counterparty to his transactions. The counterparty can be readily found by going to the appropriate market.

We will discuss Financial Market Segments in the next post. Crossposted on the website’s Blog and Ranjan’s Blog


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