Commerce Exam > Commerce Videos > Business Studies (BST) Class 12 > Functions of Financial Market
Functions of Financial Market Video Lecture | Business Studies (BST) Class 12 - Commerce
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FAQs on Functions of Financial Market Video Lecture - Business Studies (BST) Class 12 - Commerce
| 1. What are the functions of financial market commerce? |  |
Ans. Financial market commerce serves several important functions, including:
- Facilitating capital formation: Financial markets provide a platform for individuals, businesses, and governments to raise funds by issuing and trading financial instruments such as stocks and bonds. This capital formation process helps to channel savings into productive investments, which can stimulate economic growth.
- Price determination: Financial markets enable the interaction of buyers and sellers, resulting in the determination of prices for various financial assets. These prices reflect market participants' expectations, supply and demand dynamics, and other factors that influence the value of these assets.
- Risk management: Financial markets provide individuals and businesses with tools to manage financial risks. For example, derivatives such as futures and options allow market participants to hedge against price fluctuations, reducing their exposure to potential losses.
- Liquidity provision: Financial markets offer a platform for buying and selling financial assets, providing liquidity to investors. This liquidity allows market participants to easily convert their investments into cash, enhancing market efficiency.
- Information dissemination: Financial markets play a crucial role in disseminating information to market participants. Through various channels such as financial news, company reports, and regulatory filings, investors can access relevant information to make informed investment decisions.
| 2. How do financial markets facilitate capital formation? | |
Ans. Financial markets facilitate capital formation by providing a platform for individuals, businesses, and governments to raise funds. Here's how the process typically works:
1. Issuance of financial instruments: Entities in need of capital, such as companies or governments, issue financial instruments like stocks or bonds. These instruments represent claims on future cash flows or ownership stakes in the issuing entity.
2. Primary market transactions: The initial sale of these financial instruments takes place in the primary market. Investors, including individuals and institutional investors, purchase these instruments directly from the issuer. The proceeds from these sales provide the issuer with the necessary capital.
3. Secondary market trading: Once issued, these financial instruments can be traded on secondary markets, such as stock exchanges or bond markets. Investors can buy or sell these instruments among themselves, providing liquidity and allowing the issuer to access additional capital or for investors to exit their positions.
4. Capital allocation: The funds raised through primary and secondary market transactions are then allocated to various investment opportunities, such as funding business expansions, infrastructure projects, or government expenditures. This allocation of capital helps stimulate economic growth and development.
Overall, financial markets play a crucial role in connecting those in need of capital with those willing to invest, facilitating the flow of funds towards productive investments.
| 3. What is the role of price determination in financial markets? | |
Ans. Price determination is a fundamental function of financial markets. Here's why it is important:
- Efficient allocation of resources: Price determination allows market participants to assess the value of financial assets based on various factors, such as market sentiment, supply and demand dynamics, and fundamental analysis. This information helps in the efficient allocation of resources by directing funds towards investments that are expected to generate the highest returns.
- Risk assessment: Prices in financial markets reflect market participants' expectations about the future performance of assets. By observing price movements, investors can evaluate the risk associated with different investments. Higher prices may indicate increased demand and positive expectations, while lower prices may suggest negative sentiment and potential risks.
- Market transparency: Financial markets provide a transparent platform where prices are publicly available. This transparency promotes fair competition and reduces information asymmetry among market participants. It allows investors to make informed decisions based on market prices, ensuring a level playing field.
- Market efficiency: Price determination is crucial for market efficiency. As buyers and sellers interact and adjust their bids and offers, prices reach equilibrium, reflecting the true value of assets. Efficient markets help ensure that financial assets are fairly priced, reducing the potential for arbitrage opportunities and enhancing overall market integrity.
In summary, price determination in financial markets plays a vital role in allocating resources efficiently, assessing risk, promoting transparency, and enhancing market efficiency.
| 4. How do financial markets provide liquidity? | |
Ans. Financial markets provide liquidity by offering a platform for buying and selling financial assets. Here's how they achieve this:
- Centralized trading venues: Financial markets, such as stock exchanges or bond markets, provide centralized trading venues where buyers and sellers can come together to execute transactions. These venues facilitate the exchange of financial assets, ensuring liquidity by connecting those seeking to sell with potential buyers.
- Market participants: Financial markets attract a diverse range of participants, including individual investors, institutional investors, market makers, and brokers. The presence of multiple participants increases the likelihood of finding willing buyers or sellers, enhancing liquidity.
- Market depth: The depth of a financial market refers to the volume of buy and sell orders available for a particular asset. Deep markets with a high number of orders at various price levels provide greater liquidity. Market depth is typically influenced by the number of participants, the size of their orders, and the overall trading activity in the market.
- Market hours: Financial markets often have designated trading hours during which investors can buy or sell assets. These predefined hours allow market participants to transact at a time that suits them, ensuring continuous liquidity throughout the trading day.
- Market makers and liquidity providers: Market makers are entities that provide liquidity by continuously quoting bid and ask prices for specific assets. They stand ready to buy or sell the asset, ensuring that there is always a counterparty available for a trade. Market makers play a crucial role in enhancing liquidity, especially for less actively traded assets.
Overall, financial markets provide liquidity by creating a platform for trading, attracting a diverse range of participants, maintaining deep markets, and facilitating continuous trading throughout designated market hours.
| 5. How do financial markets contribute to risk management? | |
Ans. Financial markets contribute to risk management by providing tools and instruments that allow market participants to mitigate and manage financial risks. Here's how they do it:
- Derivatives: Financial markets offer a wide range of derivative instruments, such as futures, options, and swaps. These derivatives allow investors to hedge against price fluctuations, interest rate changes, currency movements, and other types of risks. By entering into derivative contracts, market participants can offset potential losses in their existing positions, reducing their overall risk exposure.
- Diversification: Financial markets provide opportunities for investors to diversify their portfolios. By investing in a variety of assets, such as stocks, bonds, commodities, or real estate, investors can spread their risks across different sectors and asset classes. Diversification helps reduce the impact of any single investment's poor performance on the overall portfolio.
- Risk assessment tools: Financial markets provide access to various risk assessment tools, such as credit ratings, market indices, and volatility indicators. These tools help investors evaluate the creditworthiness of borrowers, assess the overall market sentiment, and gauge the level of risk associated with different investments. By using these tools, market participants can make more informed decisions and manage their risks effectively.
- Insurance products: Financial markets facilitate the trading of insurance products, such as insurance policies and reinsurance contracts. These products allow individuals and businesses to transfer the risk of potential losses to insurance companies. Insurance markets help protect against unforeseen events, such as accidents, natural disasters, or business disruptions, providing a mechanism for risk management.
In summary, financial markets contribute to risk management by offering derivative instruments, facilitating diversification, providing risk assessment tools, and enabling the trading of insurance products. These mechanisms allow market participants to hedge against risks, reduce exposure, and protect against potential losses.
Text Transcript from Video
now we'll discuss the various functions
of financial market
the first one is mobilization of savings
and generalizing them into most
productive uses right so what is the
first function of financial market
financial market mobilizes savings and
generalizes them into most productive
uses first the mobilize right savings
and then generalize these savings into
most productive users means that amount
right the money should be put to the
best uses fine or you can say the
optimum you know use the optimum
utilization of money all the savings
fine so that is the most function of
financial market financial market as we
discussed earlier also that it brings
together the savers and the borrowers
fine so there are savers which have now
the surplus fund and there are the
borrowers which have deficit funds or
you can say they are called the deficit
units fine so they bring together the
surplus unit and the deficit unit
together fine and then financial market
also provides the choice of different
investment option to save us right
savers they have surplus fund or money
in their hand so a financial market
provides them alternative uses of that
surplus fund or the money find these
different investment options they depend
on the risk and the profit involved for
example you might have seen that money
generally we invest money in mutual
funds so mutual funds they have below by
the equity funds are their debt funds
are there or the mixed one are their
fine so in equity fund there is high
profit but at the same time there is you
know more risk right there is more
whereas in debt fund your investment is
considered to be safe right there is
less risk whereas the return is also
very less fine
so in equity risk is high and the profit
is high whereas in debt risk is low and
the profit is also low right so slash
your market it provides different
investment option to the saver so that
they should not park there you know
amount or the savings into one type of
investment or one type of one right
second is informational role for price
discovery right so financial market also
plays an informational role for price
discovery price generally you might have
studied in economics that price of any
good this is determined by the demand
and supply right in the market so in
general in our market the price of a
good is determined by the demand and
supply right there are two players in
that market one is producer and then
other one is consumer likewise in
financial market again there are two
players one is this household and the
second one is the business firms fine
and the price of the debentures shares
or any security is determined by the
demand and supply of funds fine
so you will see that households they are
having surplus fund so they supply funds
they supply funds where as business
forms they are the deficit units so they
demand funds right so it works as a
general market third one is ah it
provides liquidity to financial assets
financial market provides liquidity to
financial assets as we discussed that
financial assets are the share
the ventures or any kind of technologies
right so they are the financial assets
so it provides liquidity to such assets
what do you mean the liquidity liquidity
means the assets which can be easily
convertible into cash when required as
and when required they should be easily
convertible into cash so that the pits
that shows the liquidity of the
financial essence fine so financial
market provides easy sale and purchase
of financial asset
since there are households there are
business forms they are dealing together
with the help of in a financial market
financial market that's why it provides
easy sale and purchase of financial
assets it also provides financial market
also provides liquidity as I discussed
that it can be easily convertible into
cash fourth one is reducing the cost of
transactions fine when the seller and
buyer they have a direct communication
and less
you
of financial market
the first one is mobilization of savings
and generalizing them into most
productive uses right so what is the
first function of financial market
financial market mobilizes savings and
generalizes them into most productive
uses first the mobilize right savings
and then generalize these savings into
most productive users means that amount
right the money should be put to the
best uses fine or you can say the
optimum you know use the optimum
utilization of money all the savings
fine so that is the most function of
financial market financial market as we
discussed earlier also that it brings
together the savers and the borrowers
fine so there are savers which have now
the surplus fund and there are the
borrowers which have deficit funds or
you can say they are called the deficit
units fine so they bring together the
surplus unit and the deficit unit
together fine and then financial market
also provides the choice of different
investment option to save us right
savers they have surplus fund or money
in their hand so a financial market
provides them alternative uses of that
surplus fund or the money find these
different investment options they depend
on the risk and the profit involved for
example you might have seen that money
generally we invest money in mutual
funds so mutual funds they have below by
the equity funds are their debt funds
are there or the mixed one are their
fine so in equity fund there is high
profit but at the same time there is you
know more risk right there is more
whereas in debt fund your investment is
considered to be safe right there is
less risk whereas the return is also
very less fine
so in equity risk is high and the profit
is high whereas in debt risk is low and
the profit is also low right so slash
your market it provides different
investment option to the saver so that
they should not park there you know
amount or the savings into one type of
investment or one type of one right
second is informational role for price
discovery right so financial market also
plays an informational role for price
discovery price generally you might have
studied in economics that price of any
good this is determined by the demand
and supply right in the market so in
general in our market the price of a
good is determined by the demand and
supply right there are two players in
that market one is producer and then
other one is consumer likewise in
financial market again there are two
players one is this household and the
second one is the business firms fine
and the price of the debentures shares
or any security is determined by the
demand and supply of funds fine
so you will see that households they are
having surplus fund so they supply funds
they supply funds where as business
forms they are the deficit units so they
demand funds right so it works as a
general market third one is ah it
provides liquidity to financial assets
financial market provides liquidity to
financial assets as we discussed that
financial assets are the share
the ventures or any kind of technologies
right so they are the financial assets
so it provides liquidity to such assets
what do you mean the liquidity liquidity
means the assets which can be easily
convertible into cash when required as
and when required they should be easily
convertible into cash so that the pits
that shows the liquidity of the
financial essence fine so financial
market provides easy sale and purchase
of financial asset
since there are households there are
business forms they are dealing together
with the help of in a financial market
financial market that's why it provides
easy sale and purchase of financial
assets it also provides financial market
also provides liquidity as I discussed
that it can be easily convertible into
cash fourth one is reducing the cost of
transactions fine when the seller and
buyer they have a direct communication
and less
you
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Oct 25, 2024 Last updated |
Video Description: Functions of Financial Market for Commerce 2024 is part of Business Studies (BST) Class 12 preparation.
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