Financial markets and financial institutions play a great role in the economy of a country. Financial markets form part of the markets where individual performs trades on financial commodities and securities among other financial products (Mishkin & Eakins, 2016). The commodities on financial markets include agricultural products and precious metals like Gold. Securities are traded in the financial markets include bonds and stocks. Financial markets play a significant role in the economy in that they help in coming up with long-term solutions to financial issues, linking issues with investors, reducing business risks particularly when trades are in foreign currencies and supporting various investors especially in assisting them on their investments. Since financial marks are imperfect, financial institutions come in to play the role of providing more information on securities and other financial products for investors. Therefore, the imperfection of financial markets results in the need for financial institutions.
Financial institutions, on the other hand, consist of the establishments that carry out the trade of financial goods and services that include deposits, loans, and investments. Many people in an economy encounter financial institutions in their business and daily activities. Financial institutions include commercial banks, investment companies, unit investment Trusts, credit unions shadow banks among many others which play the important role of providing financial services that include loans, purchasing stocks and various deposits carried out by companies and individuals (Fabozzi et al., 2014).
Financial institutions thus play the important role of maintaining liquidity to ensure that their economic activities are carried out on a larger scale to the benefit of the economy. As such, the financial institutions to ensure that economic activities are carried out at successful in general provide the money needed by traders, the government, individuals, and corporations. Financial institutions mostly help investors and companies obtain funds, which help them in further contributing positively to the growth of the economy.