The financial markets serve a number of important functions. They enable producers to access the funds they need to keep their businesses afloat, and they also improve the efficiency with which the overall economy is able to produce goods and services. This article outlines these seven functions of the financial market, and discusses how they benefit the wider economy.
Primary market
A primary market is a place where new securities are issued and sold to investors. Companies and governments can issue bonds, stocks, notes, and government securities on a primary market. The proceeds are used to fund new projects or other business goals.
When a company enters the primary market, it is given the opportunity to create interest in its brand. It can also use the funds to purchase land, buildings, and equipment.
In order to access the primary market, companies need to go through an underwriting firm or a bank. These firms are paid a fee to facilitate the sale of the securities.
Investors can participate in IPOs, rights issues, and preferential issue markets. This is a form of underwriting and offers a specific group of individuals the chance to buy securities for a discounted price.
The secondary market is the trading of existing securities. These are traded between different investors. Investment banks, stock exchanges, and debt market are all part of the secondary market.
Capital market
Capital market functions help the economy by channelling savings and investments from one place to another. It enhances productivity and promotes economic growth. The main constituents of capital market are savers, investors and financial and investment institutions.
In the primary market, banks and insurance companies offer equity shares to the public. Investing in these shares, as opposed to physical assets, is more profitable. This type of finance is used for a variety of purposes, including funding mergers and acquisitions, technological upgradation of the industrial sector, and a number of other purposes.
Capital markets also help the corporate sector by allowing it to raise funds. Companies can issue public sector shares, which are traded on stock exchanges. A company’s net worth, gross profits, operating profit, and return on capital employed are factors that evaluate a firm’s performance.
Financial instruments issued by a company to raise finance include preferred shares, debentures, and equity shares. Long-term securities have a lock-in period of a year or more. Short-term instruments have a maturity period of less than a year.
Intermediary
Financial markets are marketplaces where you can buy and sell various financial instruments, including stocks, bonds, precious metals and other commodities. These markets serve many purposes and contribute to economic development in general, and to the standard of living of people in particular.
The primary function of financial markets is to channel funds from investors to corporations and to fund new projects. They also help with the transfer of risk. In addition, the market provides for the price discovery of different kinds of financial instruments.
Among other functions, it can be used to make short term loans. During the process, banks receive a pool of deposited money, and then lend it out to individuals or businesses.
As a result, they earn a profit. This is due to the fact that they are able to create a new form of debt money, and they also provide a means for other parties to invest in their own financial commitments.
Enhance production and allocation efficiencies in the overall economy
Allocative efficiency refers to the ability of a company or economy to produce goods and services that satisfy consumer demands. To achieve allocative efficiency, it is important to make the right distribution decisions.
For example, a government-provided health service, such as the National Health Service (NHS), must ensure that its allocative efficiency is maximized. This is done by allocating resources properly.
There are two types of production and allocation efficiencies: static and dynamic. Both are based on the concept of maximising the output of finite resources, such as capital, labor, material, technology, and more.
Dynamic efficiency consists of adjusting the allocative efficiency of a production process or society, introducing new products, and learning from previous decisions. Static efficiency, on the other hand, focuses on producing an output at a certain time, for a particular group of consumers, and satisfying their preferences.
The optimal allocation of resources occurs when the marginal utility of a good equals the marginal cost of production. This is achieved when all economic actors have access to high-quality information about the market. It allows them to make efficient investment and production decisions.
