Demonstrate an understanding of the role of financial markets
Understanding of the role of financial markets
Objectives
Demonstrate an understanding of the role of financial markets
Demonstrate an understanding of regulating financial markets to protect investors
Demonstrate an understanding of options for investing in financial securities
Why are financial markets and institutions important?
Financial markets play a critical role in the accumulation of capital and the production of goods and services. The price of credit and returns on investment provide signals to producers and consumers—financial market participants. Those signals help direct funds (from savers, mainly households and businesses) to the consumers, businesses, governments, and investors that would like to borrow money by connecting those who value the funds most highly (i.e., are willing to pay a higher price, or interest rate), to willing lenders.
In a similar way, the existence of robust financial markets and institutions also facilitates the international flow of funds between countries.
In addition, efficient financial markets and institutions tend to lower search and transactions costs in the economy. By providing a large array of financial products, with varying risk and pricing structures as well as maturity, a well-developed financial system offers products to participants that provide borrowers and lenders with a close match for their needs. Individuals, businesses, and governments in need of funds can easily discover which financial institutions or which financial markets may provide funding and what the cost will be for the borrower.
This allows investors to compare the cost of financing to their expected return on investment, thus making the investment choice that best suits their needs. In this way, financial markets direct the allocation of credit throughout the economy—and facilitate the production of goods and services.
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