HANDOUTS

GROUP 1

CHAPTER7
FINANCIAL MARKETS: AN OVERVIEW

Expected Learning Outcomes

After studying the chapter you should be able to…

1. Described what financial market is

2. Distinguish between “primary” market and “secondary market”
3. Enumerate and explain the factors that bought about major changes
in the financial markets
4. Distinguish between “debt market” and “equity market”
5. Describe what “stock exchange” is
6. Distinguish between the “Organized Stock Exchange” and “Over-
the-Counter Exchange

7. Explain the main function of financial markets

8. Enumerate and describe the activities of financial markets
9. Enumerate and explain the attributes of financial markets that
investors look for
10. Explain how securities are listed on a stock exchange
FINANCIAL MARKET
 Are the meeting place for people, corporations and institutions that
either need money or have money to lend or invest. In a broad
context, the financial markets exist as a vast global network of
individuals and financial institutions that may be lenders,
borrowers or owners of public companies worldwide.

TYPES OF FINANCIAL MARKET

STOCK MARKET
 The stock market is a component of a free-market economy. It
allows companies to raise money by offering stock shares and
corporate bonds and allows investors to participate in the financial
achievements of the companies, make profits through capital gains,
and earn income through dividends.
 For example, if investors believe the economy is strong or that it’s
growing, they’ll invest in stocks. In a strong economy, companies
will typically see higher earnings, meaning stock prices will most
likely go up, increasing earnings or number of stockholders. If the
opposite happens, or if there are potential threats to the economy in
general, investors typically will put their money in safer
investments such as bonds or other types of assets. Falling stock
prices can also happen during a stock market crash, which can
even cause a recession.
BONDS MARKET
 The bond market offers opportunities for companies and the
government to secure money to finance a project or investment. In
a bond market, investors buy bonds from a company, and the
company returns the amount of the bonds within an agreed period,
plus interest.
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COMMODITIES MARKET
 The commodities market is where traders and investors buy and
sell natural resources or commodities such as corn, oil, meat, and
gold. A specific market is created for such resources because their
price is unpredictable. There is a commodities futures market
wherein the price of items that are to be delivered at a given future
time is already identified and sealed today.
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DERIVATIVES MARKET
 Such a market involves derivatives or contracts whose value is
based on the market value of the asset being traded. The futures
mentioned above in the commodities market is an example of a
derivative.
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PRIMARY MARKET
 A financial market were securities are initially issued.
 A primary market is a financial market in which new
issues of security are sold to initial buyeRs.
 NEW FUNDS ARE RAISED
SECONDARY MARKETS
 Is a financial market in which securities that have PREVIUSLY
been issued can be resold.
 NO NEW FUNDS ARE RAISED

FUNCTION OF FINANCIAL MARKETS

 Financial markets help capitalist economies run smoothly by

allocating resources and generating liquidity for companies and
entrepreneurs.

 The financial market makes it possible for people with and without
capital to trade capital.
DIRECT FINANCE
In the financial markets, borrowers obtain credit directly from lenders by
offering financial instruments, which are claims on the future income or
assets of the borrowers.

INDIRECT FINANCE
By providing financial instruments that are claims on the borrower's
future earnings or assets, financial intermediaries (created to source both
loanable money and loan opportunities) enable borrowers to obtain
indirect borrowing from lenders.

WHAT FINANCIAL MARKETS DO

Raising Capital
A business can obtain funding from a lender or an investor to help it
launch, expand, and run day-to-day operations.

Commercial Transaction
Commercial transactions refer to agreements made between businesses
or between businesses and government agencies that result in the
delivery of goods or the rendering of services in exchange for payment.

Price Setting
The value that justifies producing and selling your product is determined
by the price you charge. People can decide whether it is worthwhile to
buy and sell anything by looking at the actual pricing.

Assets valuation
The process of figuring out the current value of a company's assets is
known as asset valuation. Before you buy, sell, or insure an asset, this
process frequently takes place as part of a larger corporate valuation.

Arbitrage
the simultaneous purchase and sale of the same asset in various
marketplaces with the goal of making money off of small price
fluctuations.

Investing
The act of investing involves allocating resources to a project with the
goal of generating income or making a profit.

Risk Management
It offers protection from risk in the derivatives market by enabling
markets to attach a price risk and allowing businesses and individuals to
exchange risks to lessen their exposure to some while maintaining their
commitment to others.

STRUCTURE OF FINANCIAL MARKETS

Debt and Equity markets

Debt Instruments- are assets that require a fixed payment to the holder,
usually with interest.

 Examples of debt instruments include bonds (government or

corporate) and mortgages.

Equity Instruments- an equity instrument represents an ownership

interest in an entity and is determined either by the absence of a
settlement requirement or the type of return the instrument conveys to
the counterparty.
Two types of equity Instruments:
1. Perpetual instrument issued by the entity.
2. Direct ownership instrument issued by the entity.

Financial markets functions as both primary and secondary markets for

debt and equity securities.

Primary market- it refers to original sale of securities by governments

and corporations. Primary markets are facilitated by underwriting groups
consisting of investment banks that set a beginning price range for a
given security and oversee its sale to investors.

Secondary market- is where investors buy and sell securities they

already own. It is what most people typically think of as the “stock
market,” though stocks are also sold on the primary market when they
are first issued.
-The national exchanges, such as the New York Stock Exchange
(NYSE) and the NASDAQ, are secondary markets.
Two broad segments of the stocks markets:
1. The organized stock exchange
- A securities marketplace where purchasers and sellers regularly
gather to trade securities according to the formal rules adopted
by the exchange.
Example: Philippine stock Exchange, Exchange New York Stock
Exchange, etc.

2. The Over-the Counter (OTC) Exchange

- It is where shares, bonds and money market instruments are
traded using a system of computer screens and telephones.
Example: NASDAQ
Secondary markets serve two important functions:

1. They make it easier to sell these financial instruments to raise

cash.
2. They determine the price of the security that the issuing firm
sells in the primary market.

STOCK EXCHANGE

 A market wherein the process of buying of goods and selling it.

 An entity where a business brings the buyer and seller of stocks
together.

WHAT IS THE PURPOSE OF STOCK EXCHANGE?

 To facilitate the exchange of securities between buyers and sellers,
providing a market place virtually or physically.
TRADING RING- the ‘place’ where share brokers assemble and
buy and sell shares.

LISTING AGREEMENT
 This ensures that a company, which is included in the exchanging
of stocks, behaves and follows regulations that are agreed by all
the other companies involved.
The companies must provide information regarding its work from
time to time, and events that can affect the valuation like ; Mergers
(union) & Amalgamation and the like.
ARE LARGE VOLUMES POSSIBLE IN THESE MARKETS?
 YES! Because of ;
1. Ease of settlement
2. Guarantee of trades - sellers get their money, buyers get their
share.

Listing of Securities on Stock Exchange

Listing - admission of securities to dealing on a recognized stock

exchange of any incorporated company.
 Its goal is to provide marketability to recognized
securities and ensure monitoring of trading for the
benefit of the participants.

Requirements to be followed:
1. Pay the specified Listing Fee
2. Comply clauses of listing agreements
3. Show details of book closure, record dates, copies of annual
report etc.
RECOGNIZED STOCK EXCHANGE
 Stock exchanges that are recognized by the Securities and
Exchange Commission
Brokers - recognized members
Official Quotation - the price at which the securities bought and
sold a known product.
 The securities of an entity may be listed at any of the following ;
1. At the time of public issues of debentures
2. At the time of rights issue of debentures
3. At the time of bonus issues of shares
4. Shares issues on amalgamation (merger)
THE PHILIPPINE STOCK EXCHANGE

 The national stock in the Philippines

 The main index (PSEi) composed of thirty (30) listed companies
Snapshot of PSE History
 Third of February in 1936, the SEC announced that it had
“relinquished control of the Manila Stock Exchange”
 Formed on December 23, 1992 from merger Manila Stock
Exchange (Aug. 12, 1927, Muelle de la Industria, Binondo,
Manila) and Makati Stock Exchange (May 15,1963, Makati
Central District, Ayala Tower One)
 June 1998 the SEC granted PSE a “Self-Regulatory Organization”
status, meaning they can implement their own rules and penalties
on errant Trading Participants.
 In 2001, the PSE became a shareholder-based, revenue-earning
corporation.
 December 15, 2003, listed its own shares on the exchange
 July 26, 2010, launching of the new trading system PSEtrade.
 Total Return Index (PSE TRI) was introduced in 2019, which is
part of the effort to create a wider investor base.
In order to bring liquidity stocks are traded systematically.
 THE OVER-THE-COUNTER MARKET

The vast majority of publicly available equities are seldom bought or

sold and are of no interest to institutional investors. Such shares are
usually traded over the counter (OTC).
In the United States, which has far more publicly traded companies than
any other country, an estimated 25,000 firms trade over the counter,
about three times as many as trade on organized exchanges. Most of
these are very small firms, and some do not file the periodic financial
reports and audited financial statements required by exchanges.
(In the United States; trading on the NASDAQ stock market is
sometimes referred to as over-the counter trading, but this convention is
outdated.
OTC trading requires a brokerage firm to match a prospective buyer and
a prospective seller at a price acceptable to both. Alternatively, the
brokerage firm may purchase shares for its own account or sell shares
that it has been holding. Several electronic services post bid and offer
prices for OTC shares as well as information about trading volume.
However, as such shares trade infrequently, a trade may be difficult to
arrange owing a lack of sellers and investors, and the price at which the
transaction is completed may be very different from the last price at
which those shares were traded days or even hours before. Firms, whose
shares trade over the counter normally have few shareholders and little
equity outstanding. If a firm wishes to raiser larger amounts of capital in
the equity market and to appeal to a broader shareholder base, it will
seek a list its shares on a stock exchange.
Day Trading
What is Day Trading?
-Day trading is the buying and selling of shares, currency, or other
financial instruments in a single day. The intention is to profit from
small price fluctuations-sometimes traders hold shares for only a few
minutes.

How it works
Investors typically buy or sell based on their analysis of economic or
market trends, research into specific companies, or as part of a strategy
to benefit from the regular dividends that companies issue. Unlike such
investors, day traders look for small movements in prices that they can
exploit to make a quick profit.

Day traders favor shares that are liquid – those are easy to buy and sell
in the secondary market. They may hold shares only momentarily,
buying at one price and selling when the price rises by a few cents,
perhaps only minutes later. Day traders make profits by large volumes of
shares in one transaction, or by making multiple trades during the course
of the day. They buy (or sell) shares and then sell (or buy) them again
before payment becomes due, and usually “close out” all trades (selling
the shares they have bought, and vice versa) at the end of the day to
protect themselves from off-hours movements in the market.

The vast majority of publicly available equities are seldom bought or

sold and are of no interest to institutional investors. Such shares are
usually traded over the counter (OTC).
In the United States, which has far more publicly traded companies than
any other country, an estimated 25,000 firms trade over the counter,
about three times as many as trade on organized exchanges. Most of
these are very small firms, and some do not file the periodic financial
reports and audited financial statements required by exchanges.

(In the United States; trading on the NASDAQ stock market is

sometimes referred to as over-the counter trading, but this convention is
outdated.

OTC trading requires a brokerage firm to match a prospective buyer and

a prospective seller at a price acceptable to both. Alternatively, the
brokerage firm may purchase shares for its own account or sell shares
that it has been holding. Several electronic services post bid and offer
prices for OTC shares as well as information about trading volume.
However, as such shares trade infrequently, a trade may be difficult to
arrange owing a lack of sellers and investors, and the price at which the
transaction is completed may be very different from the last price at
which those shares were traded days or even hours before. Firms, whose
shares trade over the counter normally have few shareholders and little
equity outstanding. If a firm wishes to raiser larger amounts of capital in
the equity market and to appeal to a broader shareholder base, it will
seek a list its shares on a stock exchange.
This is different from long-term investing, in which assets are held for
longer periods in order to generate growth or income.
Potential Day Traders should be knowledgeable of the following:

Market Data
The current trading information for each day-trading market. Rather than
using market data that is available free of charge but can be up to an
hour old, day traders pay a premium for access to real-time data. Day
traders must be able to trade on news or announcements quickly, so they
need to watch the market and stay close to their trading screens at all
times.

Scalping
A strategy in which traders hold their share of financial asset (known as
their “position” ) for just a few minutes or even seconds.
Margin Trading
A method of buying shares that involves the day trader borrowing a part
of the sum needed from the broker who is executing the transaction.
Bid-offer spread
The difference between a price at which a share is sold, and that at
which is brought.

Potential Day Traders should be aware of that:

a) Day trading is a high risk occupation

- day trading typically suffer severe losses in their first months to
trading, and many never graduate to profit-making status.
b) Day trading is stressful
-day traders must watch the market nonstop during the day,
concentrating on dozens of fluctuating indicators in the hope of spotting
market trends.

c) Day trading is expensive

-day traders pay large sums in commissions, for training, and for
computers.

THE RISE OF THE FORMAL MARKETS

Formal markets
- Formal markets, each seller has a fixed location, example store.
Informal markets
Informal buyers are the ones who have fixed locations (home or
workplace)
-The factors that investors considered before investing in the
company are the following:
1. Liquidity- the ease with which trading can be conducted.
2. Transparency- the availability of prompt and complete
information about trades and prices.
3. Reliability- particularly when it comes to ensuring that trades
are completed quickly according to the terms agreed.
4. Legal procedures- adequate to settle disputes and enforce
contracts.
5. Suitable investor and regulation.
 6. Low transaction cost.

THE FORCES OF CHANGE

The factors that influence how the financial markets change through
time are as follows:
1. Technology- almost everything about the markets has been
reshaped by the forces of technology.
2. Deregulation- the trend towards deregulation has been
worldwide.
3. Liberalization- the reduction of regulations has been
accompanied by a general liberalization of rules governing
participation in the markets.
4. Consolidation- liberalization has led to consolidation, as firms
merge to take advantage of economies of scale or to enter other
areas of finance.
5. Globalization – most of the important financial firms are now.

Code of Ethics Governing Market Activities in the Philippines

 On February 24, 2010 former Deputy Governor Nestor A.

Espenilla Jr. issued letter No. CL 2010-013 addressed to all banks.
 That their subdivision and other affiliates to non-bank which
contains financial institutes supervised by the BSP.