Given below are two statements:
Assertion (A): Financial markets provide liquidity to financial assets.
Reason (R): Financial markets provide valuable information about securities being traded in the market.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): Financial markets provide liquidity to financial assets.
Reason (R): Financial markets provide valuable information about securities being traded in the market.
(A) — True. Holders can turn their financial assets into cash whenever required. This is one of the four functions.
(R) — True. This information saves time, effort and money for buyers and sellers.
Why R does not explain A?
R is the basis of a different function, reducing the cost of transactions. Information helps buyers and sellers find each other, but it does not turn assets into cash. The real reason for A is that financial markets facilitate easy purchase and sale of financial assets, so holders can sell them whenever cash is needed.
NCERT (Pre-rationalised Edition): “3. Providing Liquidity to Financial Assets: Financial markets facilitate easy purchase and sale of financial assets. In doing so they provide liquidity to financial assets, so that they can be easily converted into cash whenever required. Holders of assets can readily sell their financial assets through the mechanism of the financial market.” “4.Reducing the Cost of Transactions: Financial markets provide valuable information about securities being traded in the market. It helps to save time, effort and money that both buyers and sellers of a financial asset would have to otherwise spend to try and find each other. The financial market is thus, a common platform where buyers and sellers can meet for fulfillment of their individual needs.” |