Class 12 Business Stud
, A Financial Market is a market for the creation and e
Financial of financial assets.
Markets A business is part of an economic system that con
two main sectors - households which save funds
business firms which invest these funds.
A financial market helps to link the savers and t
investors by mobilizing funds between them. In
it performs the ‘Allocative Function’. It allocates
funds available for investment into their most p
investment opportunity.
The process by which the allocation of funds is do
called financial intermediation.
Financial markets exist wherever a financial tra
occurs.
Financial transactions could be in the form of cre
financial assets such as the initial issue of shares
debentures by a firm or the exchange of existing
assets like equity shares, debentures and bonds.
, Consequences of Allocative Function
When the Allocative function is performed well, two consequences follow
The rate of return offered to the households would be higher.
Scarce resources are allocated to those firms which have the
highest productivity for the economy.
Alternative Mechanisms of Allocation of Funds
There are two major alternative mechanisms through which allocation of funds can be d
1) Banks : Households can deposit their surplus funds with
banks, who in turn could lend these funds to business firms.
2) Financial Markets : Households can buy the shares and
debentures offered by a business using financial markets.
, Functions of the Financial Markets
Financial Market play an important role in the allocation of scarce resources in an economy b
performing the following four important functions :
Allocative function - mobilization of savings and channelling them into the most productive us
A financial market facilitates the transfer of savings from savers to investors.
It gives savers the choice of different investments and thus helps to channelize surplus funds into the most produc
Facilitating Price Discovery :
In the financial market, households are suppliers of funds and business firms represent the demand.
The interaction between the forces of demand and supply helps to establish a price for a financial
asset being traded in the financial market.
Providing Liquidity to Financial Assets :
Financial markets facilitate easy purchase and sale of financial assets.
Financial markets provide liquidity to financial assets so that they can be easily converted into cash whenever req
Holders of assets can readily sell their financial assets through the mechanism of the financial market.
Reducing the Cost of Transactions :
Financial markets provide valuable information about securities being traded in the market.
It helps to save time, effort and money that both buyers and sellers of a financial asset would
have to otherwise spend to try and find each other.
The financial market is thus a common platform where buyers and sellers can meet for the
fulfilment of their individual needs.
, A Financial Market is a market for the creation and e
Financial of financial assets.
Markets A business is part of an economic system that con
two main sectors - households which save funds
business firms which invest these funds.
A financial market helps to link the savers and t
investors by mobilizing funds between them. In
it performs the ‘Allocative Function’. It allocates
funds available for investment into their most p
investment opportunity.
The process by which the allocation of funds is do
called financial intermediation.
Financial markets exist wherever a financial tra
occurs.
Financial transactions could be in the form of cre
financial assets such as the initial issue of shares
debentures by a firm or the exchange of existing
assets like equity shares, debentures and bonds.
, Consequences of Allocative Function
When the Allocative function is performed well, two consequences follow
The rate of return offered to the households would be higher.
Scarce resources are allocated to those firms which have the
highest productivity for the economy.
Alternative Mechanisms of Allocation of Funds
There are two major alternative mechanisms through which allocation of funds can be d
1) Banks : Households can deposit their surplus funds with
banks, who in turn could lend these funds to business firms.
2) Financial Markets : Households can buy the shares and
debentures offered by a business using financial markets.
, Functions of the Financial Markets
Financial Market play an important role in the allocation of scarce resources in an economy b
performing the following four important functions :
Allocative function - mobilization of savings and channelling them into the most productive us
A financial market facilitates the transfer of savings from savers to investors.
It gives savers the choice of different investments and thus helps to channelize surplus funds into the most produc
Facilitating Price Discovery :
In the financial market, households are suppliers of funds and business firms represent the demand.
The interaction between the forces of demand and supply helps to establish a price for a financial
asset being traded in the financial market.
Providing Liquidity to Financial Assets :
Financial markets facilitate easy purchase and sale of financial assets.
Financial markets provide liquidity to financial assets so that they can be easily converted into cash whenever req
Holders of assets can readily sell their financial assets through the mechanism of the financial market.
Reducing the Cost of Transactions :
Financial markets provide valuable information about securities being traded in the market.
It helps to save time, effort and money that both buyers and sellers of a financial asset would
have to otherwise spend to try and find each other.
The financial market is thus a common platform where buyers and sellers can meet for the
fulfilment of their individual needs.
