Question

Briefly discuss why it is necessary to have financial markets and financial intermediaries.

(Hint: base your answer on what we have discussed in class)

Answer 1

In order to know, why it is necessary to have a financial market and financial intermediaries, first we have to understand the meaning of both terms

Financial Market- Financial market can be defined as a marketplace(virtual or physical) where trading of securities takes place, which includes bond, stock, forex, derivatives, etc

Necessary to have financial market

1. The financial market acts as an intermediary between savers and investors.

2. Increase liquidity means a person or entity who holds the securities can easily convert them into cash by selling the securities in the financial market.

3. Promote economic activity by providing an efficient allocation of capital. Thus by this production is increased which leads to creating employments.

4. Helps in price discovery i.e. price of goods and service is determined by demand and supply likewise same, investors also discover the price of securities.

Financial intermediaries- Finance intermediaries is an entity that facilitates a financial transaction between two parties. Intermediaries can be firm or institution like an investment bank, pension fund, commercial bank, insurance company.

Necessary to have financial intermediaries

1. Financial intermediaries quickly and easily transfer funds from one party to another, it leads to helps businesses access the resources they need. It is also known as channelization of saving into investments.

2. Financial intermediaries provide safety in mitigating risk and access to funding. Example It pools money from all individuals who have taken insurance policy and provides funds to those who suffered the loss in a particular year.

3.  Financial intermediaries pay interest on saving amounts and fixed deposits. Thus, enables savers of money to earn money.