Financial Market Functions Transfer of funds Providing of liquidity Securities pricing Resource allocation

Transfer of Funds Financial markets facilitate the transfer of funds from savers and investors to spenders. In the terminology used by some a textbook authors, the funds are transferred from a surplus spending units ( SSUs ) to deficit spending units ( DFUs ). These funds transfers occur in the primary financial markets. SSU = net saver DSU = net spender 3 Major Sectors o Households o Business o Government typically net SSUs typically net DSUs almost always net DSUs

Providing of liquidity The financial markets provide liquidity for sellers of securities in the secondary market. Liquidity is usually defined as the ease with which you can sell an asset on short notice without a loss in its value. Assets with good liquidity: o Stock issues included in the Dow Jones Averages or the NASDAQ 100 index o Options on popular stocks o Gold coins o Treasury Bills, Notes, and Bonds Assets with poor liquidity: o Enron Common Stock o Russian bonds issued by the Czar in 1905

Securities pricing Financial markets facilitate pricing of various financial securities. Securities pricing is accomplished through the supply-demand forces in a potential market. Behind the supply and demand forces, however, individual investors make decisions about what they feel are the intrinsic values of different financial assets. Where the supply and demand curves meet the market arrives at an equilibrium price.

Resource allocation In the primary financial markets, securities are sold by businesses and government entities that are raising money. Firms raising money for investment purposes must compete with other security issuers ( public and private ) for available money. Since the investors who provide these funds are interested in earning the highest return for a given level of risk, they have an incentive to evaluate these different investment opportunities and choose the best investments. Through this process, they channel available investment funds in the economy to their highest and best possible uses.

Saving function credit function protection function policy function liquidity function payment function

Six key functions of Financial Market are 1.

Borrowing & Lending: Financial market transfers fund from one economic agent (saver/lender) to another (borrower) for the purpose of either consumption or investment. Determination of Prices: Prices of the new assets as well as the existing stocks of financial assets are set in financial markets. Assimilation and Co-ordination of Information: It gathers and co-ordinates information regarding the value of financial assets and flow of funds in the economy. Liquidity: The asset holders can sell or liquidate their assets in financial market.

2.

3.

4.

5.

Risk Sharing: It distributes the risk associated in any transaction among several participants in an enterprise. Efficiency: It reduces the cost of transaction and acquiring information.

6.