Key Roles for Financial Markets

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

1. To facilitate saving by businesses and households: Offering a secure place to store money and earn interest
2. To lend to businesses and individuals: Financial markets provide an intermediary between savers and borrowers
3. To allocate funds to productive uses: Financial markets allocate capital to where the risk-adjusted rate of return is highest
4. To facilitate the final exchange of goods and services such as contactless payments systems, foreign exchange etc.
5. To provide forward markets in currencies and commodities: Forward markets allow agents to insure against price volatility
6. To provide a market for equities: Allowing businesses to raise fresh equity to fund their capital investment and expansion

Main financial markets to understand

Money Market

Market for short term loan finance for businesses and households

Includes inter-bank lending i.e. commercial banks providing liquidity for each other

Capital Market

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