Elements of Corporate Finance
What are the most important functions of financial markets?
In an economy, money flows in circles. And very important feature of this is
turning financial savings into investment. Financial markets function as both primary
and secondary markets for debt and equity securities. The primary advantage of
financial markets is that they facilitate the flow of money from those that have surplus
cash to those that need financing.
The most important functions of the financial market are price determination,
where financial markets help in price discovery of many financial instruments,
mobilization of funds, where it helps in connecting investors with industries that require
investment, ensuring liquidity, that is an important reason for investors to participate in
trade, and saving time and money, and for this financial markets provide a platform
where both the buyers and sellers can find each other easily without spending too
much time, money or effort.
In addition, a bit more about each function:
• Price Determination – Demand and supply of an asset that is in a financial market
help to determine the price. The investors or the household are the suppliers of the
funds, but the industries are the ones demanding them. Furthermore, the interaction
between the two and other market factors helps determine the prices.
• Mobilization of Funds – In an economy that is successful, money should never sit
idle. There must be a connection between investors that have savings with
industries that need investment.
• Ensuring Liquidity – The financial market facilitates the easy to purchase and sale
of financial assets. By doing that, it provides liquidity, which means that financial
assets are easily converted into cash whenever required.
• Saving Time and Money – In the process of trade while doing the transaction of
buying and selling the securities, various types of information are required. Financial