4.4.1: Role Of Financial Markets

Question 1

What are financial markets?

Answer 1

Markets where buyers & sellers can buy & trade a range of monetary services/assets.

Question 2

Why do financial markets exist?

Answer 2

-To meet the demand for services (such as saving and borrowing from economic agents).
-To allow speculation (the act of conducting a transaction that has risk of losing value while also holding the expectation of significant gain).

Question 3

What are the roles of the financial markets?

Answer 3

-Facilitate savings.
-Lending.
-Facilitate exchange of goods & services.
-Provide forward markets.
-Provide market for equities.

Question 4

Why do financial markets facilitate savings?

Answer 4

-Allows people to transfer their spending power from the present to the future.
-It can be done through storing money in savings accounts and holding stocks & shares.

Question 5

Why do financial markets lend?

Answer 5

-Allows consumption & investment.
-Provides credit - without which, individuals & firms may have cash flow problems.

Question 6

Why do financial markets facilitate exchange of goods & services?

Answer 6

-Financial markets can make it easier to exchange goods & services from the physical market, by providing a way to transfer funds.
-Central banks print paper money, institutions process cheque transactions, companies offer credit card services.

Question 7

Why do financial markets provide forward markets?

Answer 7

-This is where firms are able to buy & sell in the future at a set price (e.g. if a farmer wants to sell crop they are growing at a guaranteed price in a month’s time).
-The forward market exists for commodities and in foreign exchange, helping provide stability.

Question 8

Why do financial markets provide market for equities?

Answer 8

-Issuing shares allows companies to finance expansion.
-Financial markets provide the ability for shares to be sold on in the future.