Easy Understanding of Financial Market

According to (Darskuviene, 2010) the financial system plays the key role in the economy by stimulating economic growth, influencing economic performance of the actors, affecting economic welfare. This is achieved by financial infrastructure, in which entities with funds allocate those funds to those who have potentially more productive ways to invest those funds.

A financial system makes it possible a more efficient transfer of funds. As one part of the transaction may possess superior information than the other part, it can lead to the information asymmetry problem and inefficient allocation of financial resources.

By overcoming the information asymmetry problem the financial system facilitates balance between those with funds to invest and those needing funds. Financial markets facilitate the flow of funds in order to finance investments by corporations, governments and individuals (Darskuviene, 2010).

According to the functional approach, financial markets facilitate the flow of funds in order to finance investments by corporations, governments and individuals as shown in the figure 2 below. Financial institutions are the key players in the financial markets as they perform the function of intermediation and thus determine the flow of funds. The financial regulators perform the role of monitoring and regulating the participants in the financial system (Darskuviene, 2010).