Four Benefits of Financial Markets (and intermediaries)

In the first lecture of my corporate finance course, the professor make a case in favor of having financial markets, including their intermediaries, like banks. He summarized his case into the four following points.

1. Transport consumption over time (save money, invest)
2. Reduction of risk (through diversification)
3. Liquidity (allows trade to happen faster)
4. Information (trends, evaluation of health)

Information

From a business manager’s perspective, the fourth bullet is critical. The information that comes from financial markets informs nearly every decision he makes, including production schedules, marketing functions, labor decisions, benefits structure and timing, etc.

Since business decisions should be informed by data (unfortunately we find that is not always the case, but I’ll comment on that more in another post), the financial markets provide that data.

Opportunity Cost of Capital

One common question is whether or not some opportunity represents enough value to justify investment. If so, at what level and over what time period. Certainly risk can factor in, but with such a broad range of opportunities today, including stock markets, bonds, start ups, etc., there’s a lot more to take in to account.

Ultimately the information that comes from the financial markets drives the valuation of investment opportunities, including their amount, timing and risk.