Role of Financial Markets in a Modern Economy

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Discuss the role of financial markets in a modern market economy. Explain the role and function of the share market and its effect on the economy.

The financial market is the most influential sector in a modern market economy. The financial markets provide products to consumers and financial intermediaries allow for the mobilization of money between savers and borrowers. The share market is the financial market in which investors buy and sells shares. The share market’s main function in the economy is to allow consumers to attain part-ownership of a company and further their wealth and in effect provide funds for businesses for expansion. The main effects the share market has on the economy is its ability to reallocate resources and mirror overall economic growth.

The financial services industry is one of the largest industries in Australia and its actions influence all other sectors due to its vital role in the economy. Financial markets are so significant as they create products for consumers also serve to provide a return for the producers. In essence, this allows for those who have excess funds to make these funds available to those who need additional money. Furthermore, the most influential institution in the financial sector are financial intermediaries who are those organizations that allow for the mobilization of money. These firms create a bridge between borrowers and savers in that they receive accumulated funds from individuals or firms and then allow for other firms and individuals to borrow and make use of that money.

Financial markets are also the factor markets for capital in the market economy because capital must be acquired by businesses to produce goods and services. The economy’s productive capacity heavily impacts the ability of the economy to grow in the long term and thus capital investment is vital for the modern market economy. Financial markets provide an efficient process by which income that is not used for consumption...
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