Financial market plays an important role in the allocation of scarce resources in an economy by performing the following four important functions.

1. Mobilisation of savings and channelizing them into the most productive uses: A financial market facilitates the transfer of savings from savers to investors. It gives savers the choice of different investments and thus helps to channelize surplus funds into the most productive use. 

2. Facilitating price discovery: In the financial market, the households are suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded-in that particular market. 

3. Providing liquidity to financial assets: Financial markets facilitate easy purchase and sale of financial assets. In doing so they provide liquidity to financial assets, so that they can be easily be converted into cash whenever required. 

4. Reducing the cost of transactions: financial markets provide valuable information about securities being traded in the market. It helps to save time, effort and money to both buyers and sellers of a financial asset.