What is the purpose of financial markets? How can this purpose be accomplished efficiently
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Financial markets allows companies to finance themselves by raising capital, either by issuing bonds (debt securities) or shares (titles of property). This allows them to finance business growth and their projects, by having access to long-term finance, rather than short term finance such as bank loans.
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The connection between people with capital to invest and those who need capital is facilitated by financial markets.
Purpose of financial markets:
- Financial markets enable participants to transfer risk (often through derivatives) and advance trade in addition to making it feasible to raise funds.
- The degree to which market prices accurately reflect all available, pertinent information is referred to as market efficiency.
- There is no way to "beat" the market if markets are efficient since there are no assets that are undervalued or overvalued because all information is already factored into prices.
Purpose of financial markets accomplished efficiently:
- Financial markets allocate resources and provide liquidity for firms and entrepreneurs, which is essential for the proper operation of capitalist economies.
- Trading financial holdings is made simple for buyers and sellers by the markets.
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