4.4 - Role of Financial Markets Flashcards
What are the roles of financial markets?
Facilitate savings
Lending
Allocate funds
Facilitate final exchange
Provide forward markets
Provide equity market
How do financial markets facilitate savings?
Offers secure money storage
Potential for returns/interest
Business + households build up deposits
How is lending a function of a financial market?
Provide intermediary between savers + borrowers
E.g., Banks, connect borrowers + savers
Why is the allocation of funds a role of financial markets?
Trusted to allocate capital productively
Where risk adjusted rate of return is highest
How do financial markets facilitate final exchange?
Provide payment mechanisms
Connect G+S with money
What are forward markets?
Price for certain good agreed upon for future delivery
How do financial markets provide markets for equities?
Allowing businesses to raise fresh equity
Issuing shares, borrowing, bonds etc
What is equity?
Value of shares issued by a business
Assets - Liabilities
What is a bond?
Loan from an investor to a borrower
Investor receives interest payments
Repaid at maturity date
What are the advantages of forward markets?
Control price, supply + risk
Hedge costs
Contracts can be flexible + specific
What are the disadvantages of forward markets?
Vulnerable to price shifts
Long term risk of non-payment + defaults
What are stocks?
Share of a business
Traded by investors
Dividends paid
Raises business capital
What are financial markets?
Any exchange that facilitates the trade of financial instruments
Stocks, bonds, forex, commodities
