The Importance of the Financial Market to Government, Business and Householders
The Importance of the Financial Market to Government, Business and Householders
Financial markets are where the investors who have an excess amount of funds meet with the parties who need capital. Those who have surplus funds and wish to invest lend funds to those who have a shortage of funds and wish to borrow. Thus in the financial markets, these excess funds constantly are transferred from the investors to the borrowers.
Usually, government and businesses are placed in the borrower side of the market, and the households are principally the lender-savers. However, business and government can have excess funds and lend them out, or households also can borrow to finance their purchases such as cars or houses too.
As Tooze says, financial markets are the financial fuel of the world economy (2020). It is essential for all these parties as it allows the spenders to finance their activities, and the savers to invest their surplus capital. Financial markets create a channel of funds from lenders to borrowers so that the capital will flow from who have, to who need.
A World Without a Financial Market
As Mishkin states, financial markets result in economic efficiency (2004). In the absence of a financial market, the world would be boring for savers, and challenging for spenders. Lender-savers would not be able to invest their savings to earn interest and would have to hold on to their excess funds. Borrowers would not be able to find an investment to finance their business and activities. There would be no transfer of fund between the parties who have investment opportunities and who do not.
References
Mishkin, F. S. (2004). The economics of money, banking and financial markets. Harlow, Essex: Pearson Education Limited.
Tooze, A. (2020). How coronavirus almost brought down the global financial system. Retrieved May 27, 2020, from https://www.theguardian.com/business/2020/apr/14/how-coronavirus-almost-brought-down-the-global-financial-system
