Functions of Financial Markets

Borrowing and lending:

Financial markets provide funds to investors by lending money at an interest rate known as the cost of borrowing.

Price determination:

Sets or defines fixed or volatile prices for each type of instrument in the market.

Information collection and analysis:

Important information used by market participants to value or estimate prices of a certain instrument.

Risk sharing:

Financial markets eliminate a type of risk known as systematic risk through investment diversification.

Liquidity:

The ability to quickly and directly convert securities into cash without value losses during a transaction.

Efficiency:

A markets ability to reflect public information on a certain instrument.

Major Market Participants

Broker:

Responsible for mediating between a buyer and a seller of products, services, or securities.

Dealer:

Smoothes the process of matching the buyer with the seller.

Investment banks:

Involved in the selling of newly issued securities.

 Financial intermediaries:

Mediators between investors and firms when trading securities.