Financial markets encourage investment by:
providing capital at lower rates than provided by banks
providing electronic execution of transactions which are faster and cheaper than other methods
providing the means for savers to easily and quickly convert financial assets into cash when needed
none of the above
The correct answer and explanation is :
The correct answer is:
“providing the means for savers to easily and quickly convert financial assets into cash when needed.”
Explanation:
Financial markets play a crucial role in the economy by facilitating investment, capital allocation, and liquidity. One of their primary functions is to ensure that savers (investors) can buy and sell financial assets (such as stocks, bonds, and other securities) efficiently. This process is known as liquidity, which refers to the ease with which an asset can be converted into cash without significantly affecting its price.
- Liquidity and Investment Encouragement:
Investors are more willing to invest their money in financial instruments if they know they can quickly sell these assets when needed. Financial markets provide a structured platform where assets are traded with minimal transaction costs and within a short time. This ensures that capital is available to businesses and governments for growth and development. - Market Efficiency:
Financial markets, particularly stock exchanges and bond markets, operate efficiently, allowing prices to reflect real-time information. This efficiency helps investors make informed decisions and encourages them to invest rather than hold onto cash. - Access to Capital:
While banks provide loans at fixed interest rates, financial markets offer alternative ways for companies to raise funds by issuing stocks and bonds. However, this statement does not fully capture how markets encourage investment by savers. Instead, it is more relevant to businesses. - Speed and Cost of Transactions:
Electronic execution of trades does make transactions faster and cheaper, but this is more of a technological benefit rather than the core reason why financial markets encourage investment.
Thus, the most accurate reason is that financial markets provide liquidity, enabling investors to convert assets into cash when needed, reducing risk and encouraging investment.