Importance of Financial Institutions and Markets : Bringing Back Investor Confidence
Colombo Stock Exchange (CSE) Reached Its Peak
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| Image from https://www.cse.lk |
As we all know, Sri Lanka is still recovering from its recent financial crisis. Earlier this week, there were some positive developments in the financial markets, especially in the stock market. On June 30th, the All Share Price Index (ASPI) of the Colombo Stock Exchange (CSE) reached a stunning figure of 18,026.72 points, as reported by Sirasa Newsfirst. The total turnover for the day was around Rs. 6.3 billion. According to the official CSE website, the ASPI reached its highest point of 18,148.34 on July 4th. This indicates that investors have regained confidence in companies, expecting high returns from them.
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For those who are new to finance, you might ask: Why are financial markets important, and how can they uplift the economy? Don't worry,in this blog, I will be covering the importance of financial markets and institutions
What Are Financial Markets?
Before we dive into the importance of financial markets, we should first understand what financial markets are.
Financial markets are similar to regular markets, where there are sellers and buyers who trade goods and services among themselves. However, instead of regular goods and services, financial assets are traded. Furthermore, financial markets can mainly be categorized into two: the debt market and the equity market. The Colombo Stock Exchange (CSE) is an ideal example of a financial market in Sri Lanka.
What Are Financial Assets?
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| Image from https://corporatefinanceinstitute.com |
There are different types of assets, which can be classified as tangible assets (real assets) and intangible assets. However, financial assets fall somewhere in between this spectrum. According to Investopedia, a financial asset is an asset that derives its value from a contractual right or ownership claim. The most common types of financial assets present in the market are shares, bonds, loans, and deposits.
What Are Financial Institutions?
Financial institutions are companies that engage in trading financial assets. They act as both buyers and sellers in the financial market. For instance, the Central Bank of Sri Lanka (CBSL) is considered the apex financial body in the country. Other financial institutions, such as commercial banks, insurance companies, and investment firms, play a major role in Sri Lanka's financial market.
Why Are Financial Markets Important?
The primary function of financial markets is to transfer funds from surplus parties to deficit parties efficiently. In other words, financial markets are responsible for the efficient allocation of resources. Financial markets play a crucial role in economic development, as they provide a platform where companies can raise capital and improve liquidity. As a result, many business operations can expand, offering a wider range of investment opportunities for both foreign and domestic investors.
In the context of Sri Lanka, financial markets have become the heartbeat of the nation's economic system.
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