A financial market refers to the market where creation and exchange of financial assets such as shares and debentures etc. take place. The functions of a financial market are given below:
(i) Transfers savings and alternatives for investment: A financial market acts as a link between the savers and the investors. It provides a platform for the transfer of savings from the households to the investors. It also provides the savers with various alternatives for investment and thereby, directs the funds to the most productive investment.
(ii) Determines price: Similar to a commodity, price of a financial asset is determined through the forces of demand and supply for funds. Financial market provides a platform for the interaction of the demand (represented by the business firms) and supply of the funds (represented by the households). Thereby, it helps in determining the price of the asset being traded.
(iii) Facilitates liquidity: An asset or a security can be easily purchased and sold in a financial market. This renders liquidity to the assets. Thus, through trading in the financial market, assets can be easily converted into cash or cash equivalents.