It is impossible to imagine a modern market economy without a financial market. This is the sphere of realization of financial assets or the totality of all monetary resources that are in constant motion under the influence of changes in supply and demand.
Financial market: essence, models
The specificity of the financial market lies in the fact that the main commodity here is money. They circulate in key sectors of the financial sector - credit, investment (securities market), foreign exchange (Forex), stock, insurance, etc. The more efficiently the financial market functions, the higher liquidity is provided to them.
The global financial market is formed by the aggregate supply and demand of lenders and borrowers. It has a wide range of participants. These are government agencies, individual countries, private and institutional investors.
There are two key models of financial markets - a system focused on bank financing (continental) and on the securities market and institutional investors (Anglo-American model). The latest model is focused on public offering and a developed secondary market. In the continental model, there is a fairly high level of concentration of equity capital in a narrow circle of investors.
Function to reallocate cash and facilitate access to assets
One of the key tasks of the financial market is the redistribution of funds from those who have a surplus to those who need investments. As a result, funds are redistributed between different economic sectors. In most cases, the money goes to the group of people who can use it more efficiently.
As a result of redistribution, free money is transformed into borrowed capital. As a result, the financial market makes money available to all its participants who have the goal of capital gains.
The financial market also facilitates the very process of bringing money to consumers. This is achieved through the creation of intermediary institutions - banks, investment funds, stock exchanges, etc.
Pricing function
In financial markets, prices for resources are set under the influence of the ratio of supply and demand. In this case, the price of financial resources means the income that the buyer pays to the seller. This can be a bank interest rate, stock price, bond rate, dividend amount, etc.
In the most general case, the equilibrium price formation scheme is as follows. Investors (those who create demand) have their own ideas about the acceptable level of return for a certain level of risk. And the issuers (those who form the proposal) have the goal of providing the required amount of profitability on investments. Based on this ratio, the equilibrium price is formed.
Cost saving function
Financial markets reduce transaction costs. Due to the fact that a significant volume of transactions is performed on the market every day, it becomes possible to reduce risks and transaction costs. They are decreasing thanks to economies of scale, improved procedures for evaluating the value of securities, as well as their issuers.
