Role of Financial Markets in a Modern Economy

1179 WordsNov 28, 20115 Pages
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…show more content…
However, issuing new shares reduces the control existing shareholders have over the company as they own a smaller proportion. The sale of new share is a primary financial market transaction whilst an existing shareholder selling their shares is a secondary financial market transaction. By allowing both types of share trades the ASX is in effect both a primary and secondary financial market. Changes in the share market have large impact on the operations of a company. A company’s share price is determined by the price mechanism and thus if demand is low the company’s value will decrease however if demand is high, the company’s value will increase and thus provide benefits to the company itself and its shareholders. When individual businesses prosper it provides greater ability for the Australian economy to grow as it is heavily reliant on the growth of individual businesses to facilitate overall economic growth. The share market has extensive effects on the economy and it is an indicator of a country’s economic conditions. Rising share prices suggest that the economy is experiencing favourable economic conditions as market prices rise in accordance to better economic prospects for companies. The relationship between general economic conditions and share values can be seen in the following graph which shows that fluctuations in the share market mirror changes in economic growth A downturn or upturn in the share market can
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