“It gives households the choice of different investments for their surplus funds.”
Which function of a financial market is described in the above statement?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Mobilisation of savings
Option (1) Providing liquidity to financial assets — Incorrect. Providing liquidity means financial assets can be easily converted into cash whenever required, through easy purchase and sale.
Option (2) Reducing the cost of transactions — Incorrect. Reducing the cost of transactions means the market saves the time, effort and money that buyers and sellers would spend to find each other.
Option (3) Facilitating price discovery — Incorrect. Price discovery means the interaction of households and business firms sets the price of a financial asset, as demand and supply do for goods.
Option (4) Mobilisation of savings — Correct. A financial market transfers savings from savers to investors. It gives savers a choice of different investments. So surplus funds go to the most productive use.
NCERT (Pre-rationalised Edition): “1. Mobilisation of Savings and Channeling them into the most Productive Uses: A financial market facilitates the transfer of savings from savers to investors. It gives savers the choice of different investments and thus helps to channelise surplus funds into the most productive use.” “2. Facilitating Price Discovery: You all know that the forces of demand and supply help to establish a price for a commodity or service in the market. In the financial market, the households are suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.” |