Role of Financial Markets
Economics: Edexcel A A Level, topic 8.3.1
Role of Financial Markets
Financial markets serve many roles in the UK economy:
Facilitate savings
- People can invest their savings and pensions into assets like company shares or government bonds.
- This can help people to keep their money safe and to generate a 'return' on their savings.
- Savings can also be recycled for investment by businesses and individuals.
Lend to businesses and individuals
- Capital markets can be used by businesses to borrow money or sell equity (shares).
- This lending can be used for things like capital investment.
Exchange of goods and services
- Financial markets facilitate the exchange of goods and services.
Provide forward markets
- Financial markets provide forward markets in currencies and commodities.
Provide a market for equities
- Financial markets can let people buy and sell shares in companies (equities).
Different Types of Financial Markets
Here are three different types of financial markets:
Money markets
- Money markets are used by firms and governments to borrow and lend short term.
- Short term is usually up to 12 months.
- It is in the money markets that commercial banks may provide short term funds for each other.
Capital markets
- Governments and firms use capital markets to borrow and lend long term.
- This is usually for longer than 12 months.
- Borrowing takes place on the capital markets by issuing bonds and shares.
- Bonds (government or corporate) can be issued for as long a duration as people are willing to lend to it.
- E.g. Disney and Coca Cola have a 100-year bond issued!
Currency markets
- A market where currencies (foreign exchange) are traded.
- Currency markets are generally very volatile, with prices moving every second.
- The spot exchange rate is the rate that you can purchase or sell currency right now.
Test yourself on Role of Financial Markets
What can lending be used for?
Which type of financial market is used by firms and governments to borrow and lend money in the short term?
Which type of market is usually the most volatile with prices moving every second?
How long is short term?