Question

a) Discuss the role of the financial markets in providing the platform for investors to interact

and help in providing the financing and investment requirements of market participants.

Answer 1

Ans: A Financial Market is defined as the market in which financial assets are created and exchanged for a consideration. Financial assets represent a claim to the payment of a single sum of money at some point of time in the future or multiple payments in the form of interest or dividend spread over many time periods.

Role of Financial Market:

1. Facilitates Savings: Financial market helps in the mobilization of savings from households, public sector and private sector units and makes them available to the producers. This is done through issuing various financial instruments in the money and capital markets. Mobilization of savings and their utilization has direct impact on the investment activity in the economy. If industries need fresh investments, they need adequate funds, as inadequate availability of funds may hamper the industrial growth.

2. Provides Liquidity: Money is the most liquid financial asset. Money has time value and inflation erodes its value. That's why one always prefers to invest the funds in financial instruments like stocks, bonds and debentures. However, these instruments are relatively more risky and less liquid. Financial system provides an opportunity to the investor to liquidate the investments whenever the investor desires.

3. Facilitates Exchange: The financial market facilitates exchange of money and financial claims by offering a very convenient mode of payment for goods and services.

4. Risk Management: A well developed financial market helps in managing risk by providing various instruments, tools and techniques of risk management.

5 Provides various sources of financing: The primary capital market is the doorway for corporate enterprises to enter in the financial market. The issue of fresh or subsequent securities are offered to the public through primary market. By issuing securities like shares, bond etc. company raise funds from the market which they use for their long term budgeting plans.