Financial markets are present in every nation of the world. They are very important as no one Government, company, body or person has the funds to finance major projects which are needed for the development of a country. Without the presence of investors, it’s practically impossible to build infrastructure that’s necessary for a country’s development.
Investors always have access to all financial markets and exchanges present in the world. These markets deal with a huge array of financial products such as – foreign exchange, bonds, equities, treasuries, etc. Some of these are accessible for private and foreign investors, while the others remain within the reach of major banks and financial organizations.
Structure of a Financial Economy
To understand the importance of financial markets, one should first understand their individual role in our economy. When it boils down to tapping funds for investments , every economy has two sectors – savings and investment. Savings is what an individual household saves, usually in their savings/ postal bank account. Investment is the capital that every corporation needs to start and run their businesses.
Here, the financial economy acts as a major link between savings and investments. The standard way to convert savings into investments is with the help of banks. Almost all banks depend on the deposits they receive from account holders for lending them out as loans. Loans are the main source of revenue for banks.
Alternatively, savings can be also turned into investments with the help of financial markets. The households can use their savings to buy financial commodities such as shares and bonds, which also help corporates raise funds. In this way a financial market can serve as an allocative function and help mobilize idle funds which can help a business grow, thus giving better returns to shareholders and create critical infrastructure and services for the nation.
Only when the allocation and use of funds is done well, is there all round progress in an economy.
Some retail investors prefer to invest in financial markets because:
l The rate of returns on their savings will be higher than what a bank offers
l Your resources will be invested in firms which have high productivity and which shows great promise in the economy.
Functions of Financial Markets :
1] Mobilization of Funds
In a successful economy, money never sits idle. Investors with savings must be linked with corporations and industries that require investment. So financial markets enable this transaction, where investors invest their savings according to their choices and risk. This utilizes idle funds and the economy experiences growth.
2] Determination of Price
The financial commodities that are traded in a financial market get their prices from the rule of demand and supply. The investors or households are the suppliers of capital and the industries are the ones that demand them. The interaction between the two and other market factors provide help in determining the prices.
The instruments or securities sold in the financial market have high liquidity. This means that at any given time, an investor is able to sell his/her financial commodities and convert them to cash in a very short period of time. This is crucial for investors who do not wish to invest for long term.
4] Easy Access
Investors and industries have a symbiotic relationship – they need each other. The financial market provides a platform where both the buyers and the sellers find each other without any third party involvement, without spending too much time, money or effort.
5] The markets are unpredictable
The markets cannot be predicted at any time. For example: Investors predicted a fall in the Indian rupee after a massive increase in international oil prices. They believed that with oil touching $100 per barrel, the Indian Rupee will drop to Rs 80 to the US dollar and more. However, the oil prices dropped in no time to below $60 a barrel and the rupee was trading at Rs 70 to the US dollar resulting in heavy fluctuation in the financial markets.
Investors have to have a deep knowledge about the markets before they make their decisions. It is vital to know about the historic climatic and economic conditions of a certain geography before investing in it. Living in an age where the markets fluctuate on a daily basis, having the right knowledge and information is imperative.
BSE Institute has been successfully training students and working professionals in the field of financial markets for the past few decades. The course on GFMP Edge Financial Markets can help anyone become an expert in the field of financial markets in under 4 months!!