Financial markets can function without physical contact, via phone, fax, and computer. There are also financial markets if they have physical contact, like the rings of the bag.
The purpose of the financial market is to bring supply and demand of funds, and determining fair prices of different financial assets.
The advantages of investors thanks to the existence of financial markets are quick search of financial asset that fits our willingness to invest, and in addition, that investment is a fair price which prevents us to cheat.
The price determines the price of supply and demand.
Another purpose of the financial markets is that transaction costs as low as possible. But we must insist that the main purpose is to determine the fair price of financial assets, this will depend on the characteristics of the financial market.
The closer a financial market to the ideal of perfect financial market, the asset price will be closer to his fair price.
Characteristics of Financial Market
- Size: number of financial instruments traded on financial markets. The more securities are dealt in the wider financial market.
- Depth: existence of supply and demand curves above and below the equilibrium price that exists at any given time.
- Depth: If there are people who would be able to buy at a price above the equilibrium price P0. And if there is someone who is willing to sell at a lower price.
- Freedom: If there are barriers to entry or exit from the financial market.
- Flexibility: ability of financial asset prices, which are traded on a market to change before a change occurs in the economy.
- Transparency: can obtain information easily. A financial market is more transparent when it is easier to obtain information.
A market the more closely to these characteristics, the closer to the ideal of perfect financial market.
There is no financial market is perfect.
We’ll never be sure that the market price reflects fair value. The perfect financial market concept appears as a unit of measurement for comparing the various financial markets.
Perfect Financial Market Characteristics:
- Large number of agents involved both the supply side as the demand side. So that no one can influence the formation of financial asset prices.
- There are no transaction costs or taxes, or interest rate fluctuations or inflation.
- There are no restrictions or entry or exit of the financial market.
- Perfect information there, everyone knows the same thing.
- The assets are divisible and indistinguishable.