Financial markets are essential to the operation of our economic system. 

a. Financial markets: 

i. Offer savers and borrowers liquidity so that they can buy and sell financial instruments easily. 

ii. Pool and communicate information through prices. 

iii. Allow for the sharing of risk. 

b. There are several ways to categorize financial markets. 

i. Primary markets that issue new securities versus secondary markets, where existing securities are bought and sold. 

ii. Physically centralized exchanges, dealer-based electronic systems (over-the counter markets), or electronic networks. 

iii. Debt and equity markets (where instruments that are used primarily for financing are traded) versus derivative markets (where instruments that are used to transfer risk are traded). 

c. A well-functioning financial market is characterized by: 

i. Low transaction costs and sufficient liquidity. 

ii. Accurate and widely available information. 

iii. Legal protection of investors against the arbitrary seizure of their property. 

iv. Ability to enforce contracts quickly at low cost.

Answer rating: 100% (QA)

Answer a i Offer savers and borrowers liquidity so that they can buy and sell financial instruments ... View the full answer