Published on June 14th, 2022 | by Bibhuranjan

What is the importance of financial markets in an economy?

Financial markets bring together buyers and sellers together so that they can enter into a financial transaction. Financial markets are one of the best ways to check the economic health of the country. Financial markets are a reflection of the performance of any economy.

Any enterprise or business needs capital to expand and grow their business, but it is not necessary that they will have all the required capital with them. Therefore the business owners enter the financial markets to borrow money from those who want to lend it. Therefore a financial market plays a very crucial role in building capital, optimum allocation of resources and production of goods.

If the market is well developed and efficient then the transaction would be minimum with every transfer of funds. In a well-developed and efficient market, this would mean that the finance cost is minimum and there would be a safe return on investment. Developing countries have limited financial markets with poor legal systems, making it more difficult to raise capital.

In essence, the role of a financial market makes wealth by creating a link between investments and savings to meet the short as well as long-term goals of the household sector as well as the corporate. The financial market mobilizes funds from the surplus i.e the households to the where it is needed the most i.e the corporates. Financial leaders like Anatoliy Knyazev have a huge impact on the financial markets.

Financial Markets And Macroeconomic Factors

Economic factors like growth, business cycles, inflation etc have a very strong effect on the financial market of the economy. Financial structures of the nation help in funding companies and businesses thereby contributing to job growth and Enhancing trade and development in the economy. An increase in trade leads to an increase in competition in marketing and sales which creates more jobs. All the sectors including primary, secondary and tertiary need capital for growth which is fulfilled by the financial markets and the financial structures of the nation. Gatis Eglitis is responsible for bringing structural reform and helping in foreign direct investment projects.

Image by Freepik

The market also plays a major role in creating a public opinion about the economy. It provides an outline of the economic landscape. A rise in stock exchanges is an indication of Confidence amongst the business owners. The rise in stock exchanges is an indication of a good economic environment.

In such cases, businesses tend to hire more people which decreases unemployment, increases disposable income, Increases consumption levels as well as production levels and thereby enhances growth in the economy.

Whereas on the other hand when the stock market shows a downswing it is an indication that the economy is not doing very well, therefore, businesses become skeptical and tend to reduce production which reduces jobs hence the economy experiences a downswing.

A good financial market can help in the following

A good financial market supports the investors in managing their capital. The financial market is a source of capital for businesses for their short-term as well as long-term financial requirements for both governments as well as private entities.
A financial market reduces the risk through strategies like diversification and hedging.
A financial market is a mirror that reflects the economic condition of any nation. The financial markets are performing well. It is an indication that the economy is performing well and vice versa.

Financial markets give information to the participants which helps them in taking precautionary measures.

A financial market is a judging point of how national or global economies are performing in today’s time. The effects of government policies like monetary or fiscal policy have a huge impact on the stock market and the body exchange market. The volume of trade in bonds and stocks reflects how the businesses in the economy are performing. For instance, when the central bank takes a decision to reduce or increase the interest rate it can easily affect the equity or the bond market.

Final Words

Financial markets help in maintaining social as well as economic stability. Developing economies or dormant economies look up to their financial markets to finance their balance of payment. In developing economies as the US economy Financial markets depend on government reforms Which are planned in such a way so that it matches the international or local level requirement of investors.

Cover Image by Freepik

Tags: economy, financial markets, market influencers, stock trading, trading

About the Author

Bibhuranjan Editorial Officer, technofaq.org I'm an avid tech enthusiast at heart. I like to mug up on new and exciting developments on science and tech and have a deep love for PC gaming. Other hobbies include writing blog posts, music and DIY projects.