4.4.1 Role of financial markets

Question 1

Financial markets and their objectives

Answer 1

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:
1) To meet the ​demand for services​ (such as saving and borrowing, from individuals, businesses and the government)
2) To allow speculation and financial gains

Question 2

Roles of financial markets

Answer 2

• 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

Question 3

Facilitate savings

Answer 3

Allows people to transfer their spending power from the present to the future. It can be done through a range of assets, such as storing money in savings account and holding stocks and shares.

Question 4

Lending to businesses and individuals

Answer 4

Allows consumption and investment.
- They are sometimes referred to as a financial intermediary, the step between taking money from one person to give to another since money from savings is used for investment.

Question 5

Facilitate the exchange of goods and services

Answer 5

They do this by creating a payment system.
Central banks print paper money, institutions process cheque transactions, companies offer credit card services and banks and bureau de changes buy and sell foreign currencies.

Question 6

Providing forward markets

Answer 6

Where firms are able to buy and sell in the future at a set price, for example if a farmer wants to sell the crop they are growing at a guaranteed price in a month’s time.
- The forward market exists for commodities and in foreign exchange and helps to provide stability.

Question 7

Market for equities

Answer 7

They provide a ​market for equities​, company’s shares.
- Issuing shares is an important way for companies to finance expansion but people would be unlikely to buy shares if they were unable to sell them on in the future. Financial markets provide the ability for shares to be sold on in the future, making the asset more appealing.

Question 8

Role of financial markets synoptic point *

Answer 8

The financial market is an individual market and so in this sense it is a microeconomic concept.
However, it has huge implications on the macroeconomy.