Question

A financial system consists of both financial institutions and financial markets. Financial markets bring the “key players” together and their funds. For this discussion, choose one of the functions of the financial markets and discuss how financial institutions play a role in this process.

Answer 1

Answer:

The market where various kinds of financial instruments are traded and exchanged are known as financial market.

The accompanying three major functions are performed by the financial markets:-

• Price disclosure
• Liquidity
• Reduction of transactions costs

i) Price disclosure:

Price discovery function of financial markets encourages the assurance of cost of the exchanged financial assets through an exchange which is performed between the purchasers and sellers of financial instruments in a financial market.

ii) Liquidity:

With the assistance of liquidity function of financial markets, a chance whenever gave to the speculators to sell a financial instrument as it implies the estimation of the capacity to sell any financial assets at its fair market value at whenever.

iii) Reduction of exchange costs:

When a charges are collected to the members of a financial market and additionally bear they bear the expense of exchanging a financial instrument, it is named as Reduction of exchange costs or Reduction of transaction costs.

Role of Financial Institutions:

Financial institutions can be characterized as special financial entities which have the function of effective allotment of funds in those circumstances when the prevailing circumstance in the market is hard for the speculators or lenders to manage the individuals who are willing to borrow the funds in financial markets. Financial organizations incorporate depository institutions, insurance agencies, regulated investment organizations, investment banks, pension reserves.

Making more positive transaction openings or opportunities than it very well may be acknowledged by moneylenders/speculators and borrowers managing each other in the financial market is the primary function of these institutions.

The accompanying significant functions are performed by the financial institutions:-

• Accepting funds from the lenders
• Giving these funds to the individuals who need these funds for their uses.