4.4.1 - Role of financial markets

• Functions of Financial Institutions

  • To facilitate saving
  • To lend to businesses and individuals
  • To facilitate the exchange of goods and services
  • To provide forward markets in currencies and commodities
  • To provide a market for equities
• Financial markets are where buyers and sellers can buy and trade a range of services or assets that are fundamentally monetary in nature.
• They exist for two main reasons: to meet the demand for services , such as saving and borrowing, from individuals, businesses and the government and to allow speculation and financial gains
• To Facilitate Saving

  Financial institutions, such as banks and credit unions, provide a safe and convenient platform for individuals and businesses to save their money. They offer various types of savings accounts, including regular savings accounts, fixed deposits, and retirement accounts like IRAs (Individual Retirement Accounts)
• To Lend to Businesses and Individuals

  One of the primary functions of financial institutions is to act as intermediaries between savers and borrowers. They collect deposits from individuals and then lend this money to businesses and individuals in need of capital. 
• To Facilitate the Exchange of Goods and Services

  Financial institutions provide a wide range of payment and transaction services that facilitate the exchange of goods and services in the economy. This includes offering checking accounts, electronic fund transfers, debit and credit card services, and online payment systems.
•  To Provide Forward Markets in Currencies and Commodities

  Financial institutions also participate in financial markets by offering forward contracts for currencies and commodities. These contracts allow businesses and investors to hedge against currency exchange rate fluctuations and commodity price volatility. Forward markets provide a mechanism for parties to lock in future prices, reducing uncertainty and risks associated with international trade and commodity markets.
• To Provide a Market for Equities

  Financial institutions often serve as intermediaries in the equity market, allowing individuals and institutions to buy and sell shares of publicly traded companies. Stock exchanges and brokerage firms facilitate these transactions, enabling investors to participate in the ownership of corporations and potentially benefit from capital gains and dividends. This function supports capital formation and efficient allocation of resources.
• In summary, financial institutions are integral to the functioning of modern economies, offering services that promote saving, lending, facilitating transactions, managing risks, and providing investment opportunities