Role of Financial Markets (Edexcel A Level Economics A)

Role of Financial Markets

• Financial markets are any place or system that provides buyers and sellers the means to exchange goods/services and trade financial instruments

  • These include bonds, equities, international currencies, and derivatives

1. They facilitate saving: storing money for future use is essential for households and firms. It also provides a pool of money that financial institutions can lend i.e. one person's savings is another person's borrowing

2. They lend to businesses and individuals: access to credit is a key requirement for economic growth and development. Being able to borrow money speeds up consumption by households and investment by firms. It also allows households or firms to purchase assets and pay them off over an extended period of time e.g. mortgages on home purchases

3. They facilitate the exchange of goods and services: each purchase of goods/services requires the movement of money between at least two parties. Financial markets provide multiple ways for this exchange to happen including phone apps (Google Pay), debit cards, credit cards and bank transfers

4. They provide forward markets in currencies and commodities: forward markets are also called futures markets. They provide some price stability in commodity markets and enable investors to make a profit by speculating on future prices

5. They provide a market for equities: equities are shares in public companies that are listed on stock exchanges around the world. Financial markets facilitate both long term investment and speculation by providing platforms which connect buyers and sellers e.g. E-Trade