Q.What are the functions of Financial Market?

A financial market links savers and investors and allocates scarce funds to their most productive uses. It performs four important functions.

These are: mobilising savings and channelling them into productive uses; facilitating price discovery through the interaction of demand and supply; providing liquidity to financial assets so they can be readily converted into cash; and reducing the cost of transactions by providing information and a common platform for buyers and sellers.

Financial markets play an important role in allocating scarce resources by performing the following four functions:

1. Mobilisation of savings and channelling them into productive uses. The market transfers savings from savers to investors and offers savers a choice of investments, channelling surplus funds into their most productive use.
2. Facilitating price discovery. In the financial market, households are the suppliers of funds and firms represent the demand; their interaction establishes the price of the financial asset being traded.
3. Providing liquidity to financial assets. The market makes it easy to buy and sell financial assets, so holders can convert them into cash whenever required.
4. Reducing the cost of transactions. By providing valuable information about securities and a common platform for buyers and sellers, the market saves the time, effort and money they would otherwise spend finding each other.