Question

These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed most. To give strength to the economy, SEBI is undertaking measures to develop the capital market. In addition to this there is another market in which unsecured and short term debt instruments are actively traded everyday. These markets together help the savers and investors in directing the available funds into their most productive investment opportunity.

(a) Name the function being performed by the market in the above case.

(b) Also, explain briefly three other functions performed by this market.

Answer 1

(a) Allocative function

(b) The other functions of market are as follows:

(i) Mobilises savings and channelise them into most productive uses: Financial market provides the choice of different investment options to the savers. It helps the savers to invest or channelise their surplus funds into the most productive use.

(ii) Facilitates price discovery: In the financial market, households supply funds and business firms make demand. Price of various financial assets and securities is determined through their demand and supply.

(iii) Provides liquidity to financial assets: Financial market facilitates easy purchase and sale of financial assets. So, it provides liquidity to financial assets as it can be easily converted into cash when required.

(iv) Reducing the cost of transactions: Financial market provides a common platform where buyers and sellers can fulfill their individual needs. It provides valuable information about price, cost and availabilities. It reduces the cost of transactions as investors are not required to spend much on getting such information.