Financial Market – Meaning:
- A financial market is an institution, that facilitates the exchange of financial instruments including deposits, loans, corporate stocks, bonds, etc.
- The financial market provides a place through which the transfer of funds by investors to the business is adequately facilitated.
- Financial Markets attract funds from investors and channelizes them to corporations.
- The financial market consists of money and capital markets. They help to raise short and long-term capital.
Functions of Financial Market:
(i) Capital formation:
- Capital is the main part of the functioning of the business.
- The capital market provides a channel through which savings flow to organizations in the form of capital.
- This leads to capital formation.
(ii) Transfer of Resources:
- The financial market is one of the key sources of transfer of resources.
- The financial market facilitates the transfer of real economic resources from lenders to ultimate users.
(iii) Mobilization of funds:
- Investors that have savings must be linked with corporates that require investment.
- The financial market enables investors to invest their savings according to their choices and risk assessment.
- This will utilize funds and the economy will boom.
(iv) Price determination:
- The financial instruments traded in a financial market get their prices from the mechanism of demand and supply.
- The interaction between demand and supply will help to determine the prices.
(v) Productive usage:
- Financial Market allow productive use of the fund.
- An excess fund of investors is used by the borrowers for productive purposes.
(vi) Enhancing Income:
- The financial market allows lenders to earn interest or dividends on their surplus funds.
- Thus, it helps in the enhancement of the individual and the national income.
(vii) Liquidity:
- The financial market provides a mechanism through which liquidating of financial instruments take place.
- Here, the investor can sell their financial instruments and convert them into cash.
(viii) Sale Mechanism:
- Financial Market provides a mechanism for selling a financial instrument by investors.
- It helps to offer the benefit of marketability and liquidity of such assets.
(ix) Easy access:
- Both industries and investors need each other.
- The financial market provides a platform where buyers and sellers can find each other easily.
(x) Industrial Development:
The financial market transforms saving into capital. Corporate use of funds of investors to undertakes productive or commercial activities leads to economic development.