Consider the following statements about the functions of Financial Markets.

i. Mobilisation of savings and channeling them into the most productive uses.

ii. Facilitating price discovery.

iii. Providing liquidity to financial assets.

iv. Reducing the cost of transactions.

Which of the above statements is/are correct?

The correct answer is i, ii, iii and iv.

Key Points

• Financial markets play a crucial role in mobilising savings and channeling them into the most productive uses. This ensures that savings are used efficiently for investment in various economic activities, leading to economic growth.
• They facilitate price discovery, which is the process through which the prices of financial assets are determined by the interactions of buyers and sellers in the market. This helps in reflecting the true value of assets based on supply and demand.
• Financial markets provide liquidity to financial assets, meaning that they allow for the easy buying and selling of securities, ensuring that investors can readily convert their assets into cash without significant loss of value.
• They also help in reducing the cost of transactions by providing a platform for the efficient exchange of securities, which minimizes the time, effort, and cost involved in trading.

 Additional Information

• Mobilisation of savings
  • It refers to the process of collecting savings from individuals, businesses, and institutions and directing them towards productive investments.
  • This is crucial for economic growth as it ensures the availability of capital for various sectors of the economy.
• Price Discovery
  • Price discovery is the determination of the price of an asset in the marketplace through the interactions of buyers and sellers.
  • It helps in ensuring that the prices reflect all available information and the true value of the asset.
• Liquidity
  • Liquidity refers to the ease with which an asset can be converted into cash without affecting its market price.
  • High liquidity in financial markets ensures that investors can enter and exit positions with minimal price impact.
• Transaction Costs
  • Transaction costs include all costs associated with the trading of securities, such as brokerage fees, bid-ask spreads, and other trading expenses.
  • Efficient financial markets help in minimizing these costs, making trading more cost-effective for investors.