FUNCTIONS OF FINANCIAL MARKETS
- 1. FUNCTIONS OF FINANCIAL MARKETS SUBMITTED TO : SUBMITTED BY: PROF. JYOTI SHARMA KHYATI TONGIA BBA.LL.B, VI SEM
- 2. FINANCIAL MARKET A FINANCIAL MARKET IS A MARKET, OR AN ARRANGEMENT OR AN INSTITUTION THAT FACILITATES THE EXCHANGE OF FINANCIAL INSTRUMENTS AND SECURITIES. THESE INSTRUMENTS INCLUDE SHARES, STOCKS, BONDS, DEBENTURES, COMMERCIAL PAPERS, BILLS, CHEQUES ETC. DEFINITION :
- 3. The economy must provide a link between savings and investments. Savings can be turned into investments through banks or through financial markets. Through financial markets, the households use their savings to buy financial instruments and commodities such as shares, stocks, debentures etc. When the allocation of funds is done well, there are some added benefits, such as : 1. The rate of return on their savings will be higher for householders, than what a bank offers. 2. The resources will be invested in firms that have high productivity and show great promise in the economy. CONCEPT OF FINANCIAL MARKET :
- 4. WORKING OF FINANCIAL MARKETS - For example, the company XYZ ltd, which requires the funds to start a new project but at present, it doesn’t have such funds. On the other side, there are investors who have spare money and want to invest in some areas where they can get the required rate of expected returns. So, in that case, the financial market will function where the company can raise funds from the investors and the investors can invest their money through the help of the financial market.
- 5. FUNCTIONS OF FINANCIAL MARKETS (1) MOBILIZATION OF SAVINGS AND THEIR CHANNELIZATION INTO MORE PRODUCTIVE USES. (2) FACILITATES PRICE DISCOVERY. (3) PROVIDES LIQUIDITY TO FINANCIAL ASSETS. (4) REDUCES THE COST OF TRANSACTIONS. (5) EASY ACCESS. (6) RISK SHARING. (7) CAPITAL FORMULATION.
- 6. i. For an economy to be successful it is crucial that the money does not sit idle. Thus, a financial market helps in connecting those with money with those who require money. ii. Investors that have savings must be linked with industries that require investment. So financial markets will enable this transaction, where investors can invest their savings according to their choices and risk assessment. This will utilize idle funds and the economy will boom. iii. Many financial instruments are made available for transferring finance from one side to the other side. The investors can invest in any of these instruments according to their wish. (1) MOBILIZATION OF SAVINGS AND THEIR CHANNELIZATION INTO MORE PRODUCTIVE USES.
- 7. i. The price of any goods or services is determined by the forces of demand and supply. Like goods and services, the investors also try to discover the price of their securities. The financial market is helpful to the investors in giving them proper price. ii. The financial commodities traded in a financial market get their prices from the rules of demand and supply. The investors or the household are the suppliers of the funds, and the industries are the ones demanding them. The interaction between the two and other market factors will help determine the prices. (2) FACILITATES PRICE DISCOVERY.
- 8. i. Buyers and sellers can decide to trade their securities anytime. They can use financial markets to sell their securities or make investments as they desire. ii. The instruments sold in the financial market tend to have high liquidity. This means at any given time the investors can sell their financial commodities and convert them to cash in a very short period. This is an important factor for investors who do not want to invest long term. iii. This is a market where the buyers and the sellers of all the securities are available all the times. This is the reason that it provides liquidity to securities. It means that the investors can invest their money, whenever they desire, in securities through the medium of financial market. They can also convert their investment into money whenever they so desire. (3) PROVIDES LIQUIDITY TO FINANCIAL ASSETS.
- 9. i. The trader requires various types of information while doing the transaction of buying and selling the securities in financial markets. ii. The financial market makes available every type of information regarding securities without spending any money. In this way, the financial market reduces the cost of transactions. (4) REDUCES THE COST OF TRANSACTIONS.
- 10. i. Both investors and industries need each other. The industries require the investors for raising the funds and the investors require the industries for investing its money and earning the returns from them. ii. The financial market provides a platform where both the buyers and sellers can find each other easily without spending too much time, money or effort. (5) EASY ACCESS.
- 11. i. Financial market performs the function of the risk- sharing as the person who is undertaking the investments are different from the persons who are investing their fund in those investments. ii. With the help of the financial market, the risk is transferred from the person who undertakes the investments to those persons who provide the funds for making those investments. (6) RISK SHARING.
- 12. i. Producing more goods and services can lead to an increase in national income levels. To accumulate additional capital, a country needs to generate savings and investments from household savings or based on government policy. Countries with a high rate of household savings can accumulate funds to produce capital goods faster, and a government that runs a surplus can invest the surplus in capital goods. ii. Financial markets provide the channel through which the new savings of the investors flow in the country which aid in the capital formation of the country. (7) CAPITAL FORMULATION.
- 13. EXAMPLE : Caterpillar (CAT) is one of the largest producers of construction equipment in the world. CAT produces equipment that other companies use to create goods and services. The firm is a publicly traded company and raises funds by issuing stock and debt. If household savers choose to purchase a new issue of Caterpillar common stock, the firm can use the proceeds to increase production and to develop new products for the firm’s customers. When investors purchase stocks and bonds issued by corporations, the firms can put the capital at risk to increase production and create new innovations for consumers. These activities add to the country's overall capital formation.
- 14. CONCLUSION Financial markets are the backbone of a country’s economy and are essential for the growth and development of the nation. It plays a crucial role in the allocation of the limited resources available in the economy of any country by acting as an intermediary between savers and the investors. These markets involve a massive amount of risk. But when done wisely and strategically, they are highly beneficial for the individuals, business firms, financial institutions, brokers and various other parties involved in it.