IMPORTANCE OF FINANCIAL MARKETS 

There are many things that financial markets make possible, including the following: ∙

o Financial markets provide a place where participants like investors and debtors,
regardless of their size, will receive fair and proper treatment. 
o They provide individuals, companies, and government organizations with
access to capital. 
o Financial markets help lower the unemployment rate because of the many job
opportunities it offers 

Capital Allocation Process in the Market 

This is the process of distributing a company's financial resources with a

purpose of enhancing the firm's long-term financial stability and value creation—and
providing fair returns to providers of risk capital.

Capital allocation- decisions are made by the company's board and

management. 

1. Direct transfers

occur when a business sells its stocks or bonds directly to savers. The business

delivers the securities to savers in exchange for the capital. This process is mainly

seen used by small firms and relatively little capital is acquired through these

processes.  

2. Indirect transfers through an Investment Bank (IB)

An underwriter facilitates the issuance of securities. The business sells its

stocks or bonds to the investment bank, which further sells these to savers or

investors. This entails risk on the part of investment bank since they may not be

able to resell the securities to savers for as much as it paid, and they hold the
 securities for a period of time. This transaction is called a primary market

transaction since new securities are involved and the corporation receives the sale

proceeds.  

3. Indirect transfers through a Financial Intermediary

Transfers made through a bank, an insurance company, or a mutual fund are

examples of these. The existence of intermediaries greatly increases the efficiency

of money and capital markets. The intermediary obtains funds from savers or

investors in exchange for its own securities. The intermediary uses this money to

buy and hold businesses’ securities, and the savers hold the intermediary’s

securities. Therefore, intermediaries literally create new forms of capital such as

certificates of deposit, which are safer and more liquid than mortgages and thus

better for most savers to hold.