Question

1. What do financial markets do? Why are financial markets important to a society? How do financial markets accomplish what they do? What are asymmetric information problems and why would this problem in financial markets matter to society?

Answer 1

Financial markets are involved with financing various companies and acting as intermediaries for savers and borrowers and providing a facility related to capital market as well as money market and stock markets as well.

Financial markets are generally backbone of an economy and they are used for providing funds to different sectors of the economy and they are acting as an intermediary because various savers are providing these financial player with their money and these financial players are returning them with high rate of interest at this financial players are trying to invest that money by providing them as loans to various borrowers and individuals, and investing them into better portfolios and they are also trying to earn commission.

Financial markets are important to the society because it will help the society in order to allocate their savings into better portfolios to earn a high rate of return in order to counter the inflation in the economy and they will be providing them also with the the chance to borrow the money and have an access to the credit market and trade stocks through stock market.

Financial market will be accomplishing what they are generally doing by fair mechanism of interaction of various players and providing them with the higher level of transparencies and providing a better management of funds and regulation of the funds, so these financial markets are generally helpful in providing an access to capital market and money market and maintaining a high level of standard and transparency along with public disclosure norms.

Asymmetric information are those informations in which one party has a better information than the other party and that party will be trying to exploiting the interest of the other party and trying to earn a higher rate of return so asymmetric information will be causing a mis management of finances due to low level of transparency because there are parties who are having a better access to the informations.

Asymmetric informations are generally not beneficial for financial markets because few parties will be trying to exploit the large number of retailers and they will be trying to gain on the the expense of these retailers and we can see in the case of the financial bubbles or exuberance in pricing of various securities, and various high stake investors are loading off their stakes at a higher price, and they are trying to sell the securities to retailers who are suffering, so it can be said that asymmetrical information can be leading to to mismanagement of financial system.