FUNCTIONS OF FINANCIAL MARKETS

Financial market is a market for the exchange of money. It brings together two kinds of people:
People who need money:
Borrowers in the financial market can be individuals who need money for personal consumption like buying a house, car, etc., private & public companies which need funds for expansion, setting up manufacturing facilities, launching a new product, R&D, etc., governments and other local authorities like municipalities to spend on public service and infrastructure like roads, healthcare, sanitation.
People who have surplus money:
Lenders in the financial market are actually the investors who have extra funds and want to use the additional money to earn more money. Their invested money is used to finance the requirements of borrowers. In return the investors expect to earn in the form of interests, dividends, company ownership, etc.

Financial Markets Functions:
Financial markets serve five basic functions. These functions are:
1.
Borrowing and Lending: Financial markets permit the transfer of funds (purchasing power) from one agent to another for either investment by the lender or consumption purposes by the borrower.

2.Information Aggregation and Coordination: Financial markets act as collectors and aggregators of information about financial product values and the flow of funds from lenders to borrowers.
This is an important function when it comes to transparency and results in better price discovery.
3.Price Determination:
Financial markets provide the platform by which prices are set both for new issues as well as existing financial products.
This function is similar to the way price mechanisms work in other markets through demand and supply.
A higher demand for a particular financial product results in a higher price and vice versa.
4.Risk Management:
Financial markets allow a transfer of risk from one person to another.
Examples of risk sharing are present in foreign currency transactions, derivatives etc.
If an exporter is worried about the Dollar appreciating, he can lock in the exchange rate by entering into a forward contract to buy in the future at a predetermined price.

5.Liquidity:
Financial markets provide the holders of financial assets with a chance to resell or liquidate these assets.