Characteristics of Well-functioning Financial System

A well-functioning financial system has three main characteristics:

These characteristics are described below:

  • Complete markets: The existence of well-developed markets that trade instruments that help people solve their financial problems.

  • Operationally efficient markets: Liquid markets in which the costs of trading, such as commissions, bid--ask spreads, and order price impacts, are low

  • Informationally efficient markets: Timely financial disclosures by corporations and governments that allow market participants to estimate the fundamental values of securities. Prices that reflect fundamental values so that prices vary primarily in response to changes in fundamental values and not to demands for liquidity made by uninformed traders.

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