Intermediation: The finance system bridges the gap between surplus units (those with excess funds) and deficit units (those in need of funds), efficiently allocating capital to where it’s most productive.
Risk Management: Through diversification, insurance, and financial derivatives, the finance system helps individuals and businesses mitigate various risks, including market volatility, credit default, and unforeseen events.
Price Discovery: Capital markets serve as platforms for determining the prices of financial assets based on supply and demand dynamics, reflecting expectations about future cash flows and risks.
Liquidity Provision: Liquidity, the ease with which assets can be bought or sold without significantly affecting their prices, is crucial for the functioning of financial markets. The finance system provides liquidity through various mechanisms, including central banks, market makers, and trading platforms.