Financial market plays an important role in the allocation of scarce resources in an economy by performing many important functions. Some of the functions are as follows:
(i) Mobilise the savings and channelise them into most productive uses: A financial market helps to transfer savings from savers to investors. It gives savers the choice of different investment options and thus helps to channelise surplus funds into most productive use.
(ii) Facilitate price discovery: Price of anything is determined through market forces of demand and supply. In the financial market household supply funds and business firms make demand. Price of financial assets is determined through their demand and supply.
(iii) Provide liquidity to financial assets: Financial market facilitate easy purchase and sale of financial assets. So, it provides liquidity to financial assets.