The financial markets enable efficient transfer and allocation of resources for productive activities in the economy. Users of funds include governments, businesses and households who seek funds to run their activities. Governments, businesses and households also act as providers of surplus funds. Intermediaries such as banks, financial institutions, mutual funds and insurance companies, among others, channelize the available surplus funds from lender to the users.
The function of the financial markets is to ensure that economic activity is enables by providing access of funds to those that need it for consumption or productive activity. They provide a way for aggregation of funds from a large number of investors and make it available for productive economic activity, For Example, Banks collect deposits from a large number of depositors who have surplus funds and lend it to individuals and businesses who seek loans to meet their need for funds. In the absence of financial markets such aggregation may not be possible.
An efficient financial market ensures that the transfer of funds happen at a cost that makes it attractive for savers to save and lend and for users to borrow funds. The markets must enable the dissemination of relevant information to all its participation so that decision is made after integrating all available information that determine the risk and return for the lenders and cost of funds to the borrowers. It must also allow the participants to review their funding decisions given new information and to reallocate the resources accordingly.
Therefore, providing liquidity and exit options are an important function of financial markets. Financial market regulation and regulators focus of setting up system and processes in place to streamline the activities associated with the transfer of funds.
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