Login with Facebook

Financial Markets and Functions

Many traditional economies failed because they did not allow financial markets to work. But talk about financial markets, it is vital to talk about the financial system. The financial systems operate as economic boosters as it stimulates the economy. It influences the economic performance of different actors while affecting economic welfare. It works through financial infrastructure where the player with fund allocates the funds to individuals who can invest the funds. A financial system ensures a more efficient and easy way for funds transfer. It can also give rise to asymmetry problems and poor assigning of resources since one entity in a financial transaction may have much superior information but the other.

The structural approach suggests that there are three main components of the financial system: Financial markets, financial intermediaries, and; financial regulations. Each has a certain part to play in an economy. The financial markets, which are our focus in the article, act as facilitators of the flow of financial resources in financing investments in different entities. They serve corporations, governments, and individuals with financial institutions as the key players. Financial regulations are simple rules that govern participants in the financial system.

Financial market studies have become an important part of the modern economy. They are based on the capital market theory with a focus on financial systems in which interest rates and pricing of financial services is the main center of discussion. And before students are introduced to the subject, they must learn the most basic terms commonly used by economists in the financial industry. They include the following:

- Asset.

And asset is anything that carries durable value. In other words, it is any item that stands as a means to store value over a long time. There are different types of assets:

- Real assets.

These are tangible assets, like land, equipment, houses, and animals. It also includes human capital like natural abilities, learned skills, and knowledge.

- Financial assets.

As the name suggests, these are valuables stored in terms of money. They are claims against real assets, directly as in-stock share equity, or indirectly as in money holdings.

- Securities.

These are financial assets one can exchange in an auction or over-the-counter markets. They are distributed based on legal requirements and expectations as per the laws of a nation.

- Lenders.

These are individuals who have available resources in terms of money, above their possible expenditures, which they can loan out. The opposite is borrowers; individuals who have a shortage of funds required to meet their expenditures; hence, they need the loan. Borrowers try to borrow funds through the sale of claims against their real assets to the lender.

- Financial markets.

This is simply the market that controls the trading of financial assets. There are places where lenders meet borrowers, just like real markets where a producer of goods meet consumers. Hence financial market facilitates and controls borrowing and lending by initiating the sale by newly issued financial assets. They include markets like the New York Stock Exchange, the U. S government bond market, and the U.S. Treasury bill auction. And we have already talked about financial institutions, which are physical institutions that profit primary through financial transactions.

The Role of Financial Market and Institutions

As stated above, these are players in the financial industry that control monetary transactions. They control borrowing and lending as they allow the transfer of funds from one party to another. In other words, they give purchasing power to different agents involved in the transaction. This happens to facilitate either investment or consumption.

Financial institutions and markets are responsible for setting prices. They are the instruments through which players set prices for both newly issued financial assets and for the current stock of monetary valuables.

They form the link for information aggregation and coordination. If there is, for instance, changes in the price of a certain asset, the involved party must send or receive the information through these markets. They play as collectors and initiators of information about financial asset values and cash flow from lenders and borrowers. In other words, they can either prove or disapprove information about a specific asset.

Financial institutions also control risk sharing. They take charge of risk transfer from those who invest in those who offer the funds to facilitate those investments. This means they are responsible for shielding lenders against potential loss of their money by ensuring borrowers are held accountable for their actions.

Also, financial markets are responsible for the liquidity of assets. When borrowers, for instance, fail to honor their loans, financial assets holders can resell or liquidate the assets to recover their investments. They also protect borrowers from unlawful use of their assets by lenders.

Financial markets are also in charge of controlling transaction costs. By reducing transaction costs and information costs, they ensure efficiency in the industry.

Though the roles discussed are tied to the operations of financial markets, they are not all handled by one sector. There are different categories of financial institutions that work together to create a harmonious system of operation. And one must learn these players when trying to characterize the operation of financial markets. All these participants have various ways of fitting into the structure of the markets.

Major Players

Many economists look at financial institutions as bodies that take part in financial markets. This means they are responsible for the creation and exchange of financial assets. Without the, we would not even be talking about financial institutions.

There are different categories of financial institutions in different parts of the world. The following form the most common players:

- Brokers

When a buyer wants to acquire an asset from the seller, they may not be able to do directly. They need a middleman, someone who will help in the smooth completion of the transaction process, and a broker is that mediator. A broker is described as a commissioned agent or a buyer or a seller, who ensures trade by identifying the seller or a buyer, for the completion of the process.

A broker cannot have any position in the assets they trade. They don’t have any inventories in the assets. All they do is facilitate a meeting between the right buyer and the right seller, and vise versa. Brokers get their profits based on the commission they charge users of their services. An excellent example of a broker is the real estate of a stockbroker.

- Dealers

Dealers are more or less, just like brokers. They take charge of facilitating trade, whereby they find buyers and match then with asset sellers. They don’t take any part in the transformation of the assets. They only difference is that a dealer can and does ‘take position’ in the assets they trade. This means they maintain inventories in these assets because they are allowed to sell out inventory rather than only locating and matching buyers with sellers. In simple terms, a dealer holds the actual asset, and they can sell directly on behalf of the seller.

Also, dealers do not profit by charging commissions for the service they offer. Instead, they buy the asset at a relatively lower price, increase the cost and then resell and the new price. The profit comes as the current price less than the original price. This difference is called ‘bid-ask spread,’ and it represents the profit margin for the asset in question. Examples of dealers include car dealers, dealers in the U.S. government bonds, among others.

Investment banks

Investment banks play a vital role in ensuring proper control of assets. They help in the initial sale of securities that have been newly issued (Initial Public Offerings, IPOs), by handling several services:

- They advise corporations on bonds offering. They answer the questions of whether or not the bonds or stock should be issued. They also advise on bond issues on specific types of payments for the securities they provide.

- They stand in as guarantors for corporations’ prices on the products they provide. This means they handle underwriting, of either individual or by incorporating various investment banks. They create a syndical to underwrite the problem together,

- Investment banks work as sales assistances, where they help in the sale of securities to the public.

The top investment banks in the U.S. include Morgan Stanley, Salomon Brothers, among many others.


Financial intermediaries take part in the transformation of financial assets. And this is the major difference that makes them unique from brokers, dealers, and investment banks. In a nutshell, they can purchase a specific type of financial asset from a borrower, for instance, a long-term loan contract, where its terms are in line with certain situations of the borrower and sell a different item to the saver, mostly a relatively tangle claim against an intermediary. For instance, an financial intermediary can but a mortgage from a borrower and sell something like a deposit account.

Besides, a financial intermediary can temporarily own a financial asset to stand in as part of their investment portfolio. They don’t just create an inventory for resale. These institutions profit from offering relatively higher interest rates to the borrower and paying lower interests to saves.

Financial intermediaries are the most common type of financial market in the world. They include Depository Institutions like commercial banks, savings and loan associations, mutual savings banks, and credit unions. There are also Contractual Savings Institutions like life insurance companies, fire and casualty insurance companies, and pension funds, among others. Last but not least, are investment intermediaries like finance companies, stock and bond mutual funds, and money market mutual funds, who mostly connect buyers to sellers of financial assets.

Types of financial market structures

There are four primary forms of financial market structures, which are determined by the cost of collecting and disseminating information. These structures include securities markets, some of which combine the characteristics of more than one of the categories. Consider the following

Auction markets

Auction markets are simply centralized facilities that facilitate trades between buyers and sellers in an open and highly competitive selling process. It works like a cleaning house, not necessarily a physical place, but any institution than enables a clear bidding process between buyers and sellers. There is centralized information about offers to buy, called bid prices, and offers to sell, called asked prices. This means they all come and are controlled from one place, readily available to willing sellers and will buyers. In this error where technology controls everything, computer networks have become very essential in auctions. Note that these markets don’t allow private transactions between parties.

An auction market can be simply described as a public market, where everything is open and available to participants. They can be call markets, like art auctions – the bids and asked prices are all called at once, or continuous markets, like stocks where the prices appear randomly and continually.

Over-the-counter markets

These are very common markets involving public markets with several dealers spread across a region. They can be spread across the world, and they involve the entire market as part of the asset. There is no centralized mechanism in these markets. The dealers themselves take control of posting the prices for assets and then prepare to sell or buy to or from another party who responds. Customers are exposed to more flexibility and choices than in the case with traders.

Intermediation financial markets

Think of these markets simply in terms of banks, like commercial banks and savings banks. They involve financial intermediaries who assist in the fund transfers from savers to borrowers. They do this by giving out specific types of financial assets to savers and taking different forms from borrowers. The financial assets given to lenders are simply claims against financial intermediaries. They, therefore, serve as liabilities on the side of financial intermediaries. On the other hand, the origination of the assets from borrowers, represent claims against the borrower; therefore, they are assets of the intermediaries.

Financial markets are vital in putting savings into more productive use. For instance, in a savings account, money does not just sit in the account; rather, it grows with interest. Also, they are responsible for determining the prices of securities and liquifying financial assets. They are, thereforeFinancial Markets and Functions, a vital part of the economy.  

Author: James Hamilton

Need a custom

We will write it for you.
Order now

Free Essay Examples

Free essays:

All you need to know about Neuroendocrinology
All you need to know about Big data management
All you need to know about digital special effects
All you need to know Technical Writing?
Basics the Game Theory in Cryptoeconomics
Business innovation ideas for making money
Biosensors for cancer diagnosis
Business Analysis: Pricing strategies and Demand Curve
Cognitive Computing- How does Cognitive Computing work?
Consciousness: characteristics and peculiarities
Conservation Economics
Cybersecurity in business: challenges, risks, and practices
Demographic trends and how they affect Economic Growth
Dance as an art form and entertainment
Discrimination Economics
Determinants of Wages
Everything you need to know about short-term memory
Economic and Policy Impacts of Demographics
Ethics: an essay on the understanding of evil
Emotions: what are they? Theories explained
Factors of Demographic Data Collection
Factors Affecting Purchasing Behavior
Financial Statement Analysis
Factors Influencing Interest and Exchange Rates
Government's Intervention in The Labor Market
Guide on the Pathways of the nervous system
Game theory in microeconomics
Globalization: definition, causes, social impact and risks
How Relativism Promotes Pluralism and Tolerance
How to use the audience’s feedback to write a news report
History of silent cinema
How news report can be strengthened through multimedia
Introduction to Population Problems
Imperfect Information and Asymmetric Information
Imperfect Information in Insurance
Introduction to Labor Markets
Journalism: What is News?
Journalism: Broadcast media and Television Presenters
Journalism: Sources of News
Journalism and Law
Key Determinants of National Income
Key Factors That Affect Pricing Decisions
Kinetic models in biology and Related fields
Know about the different forms of traditional African dances
Latest technology trends
Latest dance trends
Magnetoencephalography (MEG)
Microeconomic Analysis to the Demand for Labor
Neuromuscular disorders
National Economies, Fluctuation, and Responses to Fluctuations
Neurotransmitters: what they are and different types
Nanomedicines to target tumors
Objections to utilitarianism
Organizational motivation and its effects
Overcoming Hiring Challenges for Nonprofit Organization
Population Demographics
Recurrent neural networks (RNN) for speech detection
Russian School of Mathematics
Research and Development
Risk Sharing in Insurance and Asset Markets
Stochastic optimization methods in deep learning?
Structure of the nervous system
Structure of a Corporation
Schizoaffective disorder: how to live better with it
The climate change denial
The techniques of basic cinematography
The Endosymbiotic Theory
The Role of Internal Audit in Corporate Risk Management
Utilitarianism Vs. Kantianism
Understanding Auctions and Auction Theory: Part 2
Various theoretical perspectives of sociology
Virtual reality, what it is and how it works
What are the linear models in machine learning?
What is Convolutional Neural Network
4 Facts about Origin of Mathematics!
5 techniques to create an animation
10 emerging technologies according to World Economic Forum
10 strategies to maximize corporate profits
3d Model Of Building
6 Medical Technologies that revolutionized the healthcare in 2020
All you need to know about the ACA Code of ethics
Architecture and Democracy: An Introduction
Architecture and Democracy: Democratic Values
Architecture and Democracy: Democratic Procedures
All You Need to Know About a Synthesis Essay
An essential guide to understanding Film Theory
Application of Artificial Intelligence in Cyber Security
Applications of electrical engineering
Augmented reality: what it is, how it works, examples
Advantages And Disadvantages Of Social Networking
All you need to know about Cryptography
Applications of astrophysical science
All you need to know about architecture engineering
Applications of geological engineering
Artificial intelligence and medicine: an increasingly close relationship
An insight into Computational Biology
ACA code of conduct
A Rose for Emily
Applications of Mathematics in daily life
Architecture mistakes to avoid
All you need to know about Toxicology
All you need to know about Holistic Medicine
All you need to know about linguistics
An introduction to Linguistics and its subfields
All you need to know about Anxiety disorder
All you need to know about Drones
A Brief Insight into Political Science
Assumptions related to feminism
All you need to know about Byzantine emperors
All you need to know about labour economics
An insight into xenobots -the first-ever robots
An ultimate guide about Biomaterials
A Comprehensive Introduction to the Mona Lisa
Analysis methods of Transport through biological membranes
An ultimate guide about biochemical reactions
Analysis of brain signals
Artificial Gene Synthesis
Application to synthetic biology of CAD methods
All you need to know about metabolic pathways
Applications of BIOMEMS
All you need to know about the epidemiology
Asian vs. western leadership styles
All you need to know about Smart prosthesis
Analysis of Economy: Output of Goods and Services (GNP), and GDP on Economic success
A Guide to Pricing Strategies
An Overview Of Economic Studies
Analysis of Fiscal and Monetary Policies
Analysis of Business Cycles
Analysis of Consumption and Investment
A Look into Regression Analysis
Analysis of Household's Consumption and Savings Behavior
All you need to know about Capital Budgeting
All you need to know about risk management
Art looted in wartime.
Appropriate use of Data in Economics
All you need to know about reaction kinetics?
A historical overview of Financial Crises
All you need to know about management discipline?
An insight into the error-correction models
All you need to know about Data visualization
All you need to know about Work-family balance
All you need to know Technical Writing?
All you need to know about digital special effects
All you need to know about Big data management
All you need to know about Neuroendocrinology
How to Write a Personal Essay
Housing Needs in America
How to Write a Description Essay
How to Create an Excellent Scholarship Essay?
How to write a cause and effect essay
How to Hire the Best Essay Writing Service Provider?
How to Write a College Application Essay?
How to get the most out of your English lectures
How to write Expository Essay
How to succeed in your psychology class?
How to Write an Academic Essay in the Shortest Time?
History of Journalism
How Different Sectors are Using Artificial intelligence (AI)
How to write an informative essay
How to deliver persuasive essays?
How to Give a Convincing Presentation
How to write an essay on leadership?
Historical Art Still Around Today
Humanoid robot: what it is, how it works and price
History of Chemistry
Healthcare Advanced Computer Power: Robotics, Medical Imaging, and More
Healthcare AI: Game Changers for Medical Decision-Making and Remote Patient Monitoring
How to understand different types of English
How to Cope with Chronic Pain
How African American choreographers and dancers have influenced American dance
How mobile robot can do in logistics or in production
How To Become a Successful Entrepreneur
History of the Philosophy of Feminism
How is the climate changing?
How to Track Your Content Marketing ROI
How to Gun control In the USA?
Historical and contemporary role of labour in the modern world
How breast cancers are classified?
How the cells of our body communicate?
How the Lymphatic System Works?
How Digestive System Works
How to complete your capstone projects effectively?
How to write a research project
Healthcare technologies that help patients with better self-management
How to choose the topic of the senior capstone project
How to make your business survive at economic crisis
How can immigrants blend in the American society?
How does the economics of war affect society?
Hate speech on social media.
How to Build an Economic Model
How to start a healthcare startup?
How can financial illiteracy harm you?
How cancer is developed - Cancer biology
How to define the Enterprise Value
How to conduct economic research?
How women can manage sexual harassment
How to use quotes in your news reports?
How news report can be strengthened through multimedia
History of silent cinema
How to use the audience’s feedback to write a news report
How Relativism Promotes Pluralism and Tolerance
Introduction to Urban Studies
Importance of dance in education
InMoov: how to build an open source humanoid robot
Importance of KYC verification to making the Blockchain secure
Importance of Rhythm
Importance of dance student evaluation
I/O control methods -types and explanations
Identity theft: what to do?
Introduction to Utilitarianism
Importance of 3d Modelling in Architecture
Importance of online journalism
Image processing in medical diagnosis
Introduction to USA Politics
Introduction to Comparative Politics
International Relations as a Major in Political Science
Importance of modern trade policy
Introduction to Journalism
Introduction to Writing a TV Script
Introduction of Microfabrication techniques
Introduction to Microeconomics
Interaction of Consumer and Firm Choices in Markets
Importance of corporate sustainability
Issues in International Monetary Macroeconomics
Introduction to Statistics and Data for Economics
Introduction to Data and Probability for Economics
Introduction to the Game Theory
Introduction to Econometrics
Introduction to Economic Information
Introduction to Market Equilibrium
Introduction to Economic Models and Application
Introduction to Empirical Research
Introduction to Econometric Data
Importance of Critical Thinking, Principles, and Goals
Introduction to Identification and Causal inferences
Introduction to Econometric Application
Intermediaries and Government in Financial Crisis
Importance and seven principles of quality management
Illiteracy in the USA
Introduction to Economics of Law
Introduction to Coase Theorem
Introduction to Social Choice and Incarceration
Intellectual Property and Product Liability
Investment in Human Capital
Introduction to Labor Markets
Imperfect Information in Insurance
Imperfect Information and Asymmetric Information
Introduction to Population Problems
The Looming Energy Crisis in America
Top benefits of performance-based engineering
The More Languages You Know, The More Times You Are a Man
Things to consider while writing an Argumentative Essay
Top Ways to Improve Your Academic Writing Skills
Tips to Excel in Creative Writing
The origins of films in the early 19th century
Top career options in Architecture
The Elevator Pitch
Top finance trends 2020
The basic Structure and functionality of robots
The Way to Success
The election system of the President in the United States of America
Two-party System in United States of America
Top trends in urban design
The history and theory of African American filmmaking
Top benefits of creative writing
Tinnitus Guide: Common Symptoms and Treatment Options
The language of dance
The digital image processing management
Top famous politicians of the World
Top methods of political science!
The history of the feminist movement
The blood flow in cardiovascular system - Biofluid Mechanics
The best of Leonardo Da Vinci
The Structure and Function of Macromolecules
The structure of cell: a research on the bricks of the human body!
Tissue and organ construction: Adhesion and recognition between cells
The kinetics of the transformation processes
The Modeling of Biological Systems
Tips for writing a great thesis statement
The Defense mechanisms against infections
The impact of the technological innovations in medicine
Top journalism trends to know about
The relation between mass media & politics
Theranostics: Diagnosis and Care through Nanoparticles
The practical Applications of X-rays
The applications of Ultrasound in medicine
Transfer mechanisms of genetic information in Bacteria
The regulation of cellular metabolism in the diagnosis
The Principles of MRI Contrast agents
The technical basis of optical coherence imaging
The New Media: Emerging Trends
The Structure of Interest Rates and the Yield Curve
Technological perspectives and reflections of neural engineering
Types of bioreactors and their applications
The Role of Government Policy in Improving Economic Outcomes
Types of corporate responsibility
The Role of IMF in International Monetary Macroeconomics
Tools for investment decision making
The concept of Organizational Culture and its applications
The Conduct of Monetary and Fiscal Policy
The Basics of Financial Accelerator Models
Tips for labeling medical devices- Medical Entrepreneurship
The different medical imaging techniques
The Economics of Uncertainty – Introduction
Theories of Public Policy
The Game Theory in Social Media
The political theory of Thomas Hobbes
The Use of Law on Economics and Vice Versa
The Role of Internal Audit in Corporate Risk Management
The Endosymbiotic Theory
The techniques of basic cinematography
The climate change denial
What is a Definition Essay?
What are diagnostic essays?
What is the relation between art structural engineering?
What is a Narrative Essay
What are robotics and intelligence systems?
What are the benefits of studying health sciences?
What is artificial intelligence and why it matters?
What is comparative Literature?
Why study neuroscience
What is Wi-Fi and how does it works
What is French history famous for?
What are Humanistic Studies?
What is covered in Biophysics?
What is modern journalism?
What is Virtualization? Benefits & Applications
What are modern public relations?
What is plasma physics?
What is teacher preparation?
What is rapid prototyping for 3D printing?
What is contemporary European Politics?
Why should you learn American Ballet?
What is engineering physics?
What is the purpose of African American Literature?
Ways to learn the Rhythm
What is digital art used for?
What are Enzymes and how do they work
Who is the father of political science?
Why Study Political Science - Job?
What is the Philosophy of Feminism?
What is a quantum computer?
Ways B2B Startups Streamline Their Conversion Strategies
Why do biomedical signals need processing?
What are the long term effects of climate change?
Why study labour relations
What is Holoprosencephaly?
What is antisocial disorder?
What are the important principles of evolution?
What is the cytoplasm and its function?
What is biopolymers?
What Makes a Good Leader
Women empowerment in modern generation
What is the history of political thought?
What is Gene recombination
What is synthetic biology
What is business cost analysis?
What is Inflation
What are the consequences of unemployment?
What is lithotripsy and its types?
What is transition elastography?
What is the purpose of deep brain stimulation?
What is a Brain-Computer Interface (BCI)
What is neuroethics?
What is Market and Supply and Demand
What is optogenetics?
What are the techniques to record brain activity?
What happens if the interest rate increases?
What is immunotherapy?
What is the economic role of the financial market?
What are the factors behind illegal immigration?
What is the lymphocyte activation?
What is financial market and its types?
What is the structure of financial markets?
What are the methods of measuring business performance?
What is the Credit market?
What is business ethics and code of ethics
What are the Causes of financial instability?
What is MBA with Concentrations
What is regenerative medicine?
What is Population ecology?
What is Microfinance: evolution, and practices?
What is biotechnology and its applications?
What are Workplace diversity and its benefits?
What is the difference between a leader and a manager?
What Is Branding and best branding Business strategies?
Why are microelectronics important?
What are biologic drugs.
What is the Foreign Exchange market?
What is the role of scientific research in times of crisis?
What are the risks of international trade?
What is financial management?
What is gene therapy?
What is education economics?
What is regression analysis, and why should you use it?
What Is Technology Marketing And How Should It Work?
What is Management Accounting
What are the methods of valuation of companies?
What is Immune System and Immunotherapy?
What is big data analytics?
What is the 7 layers of OSI model?
What is Neuroplasticity?
What are Sculpture art and its types?
What are the different genres of films?
What is Transcranial magnetic stimulation (TMS)?
What is TES-Transcranial electrical stimulation?
What is Relativism?
What is Vaccine skepticism, and what to do about it?
What happens in the brain when learning?
What is the deep neural network?
What is Convolutional Neural Network
What are the linear models in machine learning?