Key Roles for Financial Markets
- A-Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 3 Mar 2020
Some of the key roles of financial markets are explained in this short revision video.
We also look at evidence of the significance of financial services for the UK economy.
Six key roles of financial markets
- To facilitate saving by businesses and households: Offering a secure place to store money and earn interest
- To lend to businesses and individuals: Financial markets provide an intermediary between savers and borrowers
- To allocate funds to productive uses: Financial markets allocate capital to where the risk-adjusted rate of return is highest
- To facilitate the final exchange of goods and services such as contactless payments systems, foreign exchange etc.
- To provide forward markets in currencies and commodities: Forward markets allow agents to insure against price volatility
- To provide a market for equities: Allowing businesses to raise fresh equity to fund their capital investment and expansion
Main financial markets to understand
Market for short term loan finance for businesses and households
Includes inter-bank lending i.e. commercial banks providing liquidity for each other
Market where securities such as shares, and bonds are issued to raise medium to long-term finance for businesses & government
Foreign Exchange Market
Market where currencies (foreign exchange) are traded