Role of the US Financial System
A financial market is a market in which financial assets are traded. It enables the exchange of previously issued financial assets, borrowing and lending by facilitating the sale by newly issued financial assets. Examples of financial markets include the New York Stock Exchange (resale of previously issued stock shares), the U.S. government bond market, and the U.S. Treasury bills auction (The Economics of Money, Banking, and Financial Markets).
A financial market keeps in mind six basic functions which they need to facilitate:
? Price Determination: One of the key features of a financial market is to determine the price of financial assets which already exist in the stock as well as ones which are issued recently.
? Borrowing and Lending: This includes the relocation of funds for investment or for utilization from one particular agent to another. Usually the borrowers are organizations or individuals in need of funding or for investments and the lenders are usually those who have cash in excess which can be utilized for investing.
? Information Aggregation and Coordination: For a financial market to function smoothly, it is important for there to be a channel through which there is a communication and coordination of information regarding the values of financial assets and the movement of funds from the lenders to the borrowers.
? Risk Sharing: They allow a hand over of risk from the investors to the entities which provide the fund for the investment to take place.
? Liquidity: It is important for the financial market to accommodate the will of the investors. For this, they need to provide the holders of financial assets with a ...