A financial market refers to the market where the creation and exchange of financial assets such as shares and debentures takes place. The following are the functions of a financial market.
i) Transfer of Savings and Alternatives for Investment
A financial market acts a link between the savers and the investors. It provides a platform for the transfer of savings from the households to the investors. It also provides savers with various alternatives for investment and thereby, directs the funds to the most productive investment.
ii) Establishes the Price
Similar to a commodity, the price of a financial asset is established through the forces of demand and supply for funds. Financial market provides a platform for the interaction of the demand of the funds (represented by the business firms) and the supply of funds (represented by the households). Thereby, it helps in determining the price of the asset being traded.
iii) Facilitates Liquidity
An asset or a security can be easily purchased and sold in a financial market. This renders liquidity to the assets. That is, through trading in the financial market assets can be easily converted into cash or cash equivalents.
iv) Reduced Cost of Transaction
By rendering information regarding the securities being traded, their price, availability, etc., a financial market helps in reducing the cost of transaction in terms of effort, money and time.
