FINANCIAL
MARKETS
Function of Financial Markets
1. Raising Capital
2. Commercial Transactions
3. Price Setting
4. Asset Valuation
5. Arbitrage
6. Investing
7. Risk Management
Function of Financial Markets
1. Raising Capital Provides a source of capitalization to businesses and
individuals in the form of bonds, shares, and other
2. Commercial Transactions types of financial instruments
3. Price Setting
4. Asset Valuation
5. Arbitrage
6. Investing
7. Risk Management
Function of Financial Markets
1. Raising Capital
Financial markets became a channel to make
2. Commercial Transactions commercial transactions possible. This includes, but is
not limited to, arranging payment for the sale of a
3. Price Setting product abroad and providing working capital to
businesses to meet their obligations
4. Asset Valuation
5. Arbitrage
6. Investing
7. Risk Management
Function of Financial Markets
1. Raising Capital
2. Commercial Transactions Financial markets provide price discovery and a way to
3. Price Setting determine the relative values of different items, based
on the demand and supply of the individuals and
4. Asset Valuation provider of financial instruments, respectively. Through
financial markets, prices of financial instruments can
5. Arbitrage be standardized.
6. Investing
7. Risk Management
Function of Financial Markets
1. Raising Capital
2. Commercial Transactions
Financial markets is the source of the market value,
3. Price Setting which is one of the valuation basis used for some of
the assets, liabilities and equity. This is important to
4. Asset Valuation individual who will buy and sell instrument as well as
5. Arbitrage the regulators. With financial markets, the players in
the financial markets will have the uniform basis of
6. Investing pricing their assets or property
7. Risk Management
Function of Financial Markets
1. Raising Capital
2. Commercial Transactions
3. Price Setting
4. Asset Valuation Financial markets allow traders to profit through
arbitrage. Arbitrage is the simultaneous purchase and
5. Arbitrage sale of an asset in different markets to capitalize on
price differences. Prices in financial markets fluctuate
6. Investing over time and vary across locations, creating
opportunities for traders to maximize their gains from
7. Risk Management these discrepancies.
Function of Financial Markets
1. Raising Capital
2. Commercial Transactions
3. Price Setting
4. Asset Valuation
5. Arbitrage
6. Investing Individuals and business can obtain investment
through financial markets
7. Risk Management
Function of Financial Markets
1. Raising Capital
2. Commercial Transactions
3. Price Setting
4. Asset Valuation
5. Arbitrage Financial markets minimizes the risk exposure of
investors since financial instruments, like futures,
6. Investing options, and other derivative contracts can be traded
7. Risk Management in this market. This kind of instruments provide
protection against various type of risk, such as
possibility of losing the value of foreign currency
against the local currency before the payment is
received.
Debt and Equity Markets - NATURE
DEBT MARKETS EQUITY MARKETS
• Type of financial markets that offer • Type of financial markets that
debt instruments (bonds, issues equity instruments
mortgage) (common shares, preferred
• Debt instrument is a contractual shares)
agreement by the borrower to pay
the holder of the instrument fixed • Equity instrument are claims to
peso amount at regular interval share in the net income and asset
until a specified date of the business
• Maturity of debt instrument • Investors received periodic
• Short Term – less than a year payments through dividends, and
• Intermediate Term – 1 to 10 years owns a portion of the firm if they
• Long Term – more than 10 years invest in an equity instruments
Debt and Equity Markets – ADV. & DISADV
DEBT MARKETS EQUITY MARKETS
• When a business is insolvent, • Holders of equity instruments are
debt instrument holders are considered as residual claimant,
among the top priority claimants especially for common
compared to others. shareholders, as they are the least
prioritize in paying the business
outstanding obligations to them.
• They benefit directly from any
• Debt holders received the increases in the profitability or
principal and interest, thus a fixed asset value since equity
payment only instruments confers ownership
right
Primary and Secondary Markets – NATURE
PRIMARY MARKETS SECONDARY MARKETS
• Original sale of securities • Popularly known as the Stock
• Two types: Market or Exchange
• Public Offerings (IPO) • Security brokers and dealers are
• Involves selling securities to the crucial to a well-functioning
general public secondary market
• Must be approved and registered • Broker
with SEC • Agents of investors who match buyer
• Private Placements will seller of securities
• A negotiated sale between specific • Middleman in financial instrument
buyer transactions
• Must be approved and registered • Dealer
with SEC • Buys and sells securities at stated
prices
• Assisted by investment banks • Provides and purchases the securities
Secondary Markets
• Two Broad Segment
- Stock exchanges will have a physical location where stocks buying and
ORGANIZED
selling transactions takes place in the stock exchange form
STOCK
- PSE, New York Stock Exchange, Japan Nikkei, Shanghai Components,
EXCHANGE
NASDAQ
OVER THE - Financial instruments are traded using a system of computer screens and
COUNTER telephones.
(OTC) - NASDAQ (For additional information, you may watch:
EXCHANGE https://www.youtube.com/watch?v=6LPzOJbdu-0; until 6:00 mins)
• Important Functions
1. Make financial instruments more liquid
• Make it easier to sell financial instrument to raise cash
2. Determines the price of the security that the issuing firm sells in the primary
market
Secondary Markets – Stock Exchange
• An organized secondary market where securities are purchased and
sold
• Purpose:
• Facilitate the exchange of securities between buyers and sellers
• Listing of Securities
• Admission of securities to dealings on recognized stock exchange
• Objective of listing:
• Provide liquidity ad marketability to listed securities and ensure effective
monitoring of trading for the benefits of all participants in the market
Secondary Markets – Over-The-Counter
• Requires brokerage firm to match a prospective buyer and seller at a
price acceptable at both
Secondary Markets – Day Trading
• Buying and selling of shares, currency or other financial instruments in a
single day
• Key points in Day Trading
1. Market Data
• Pertains to the current trading information for each day-trading market
2. Scalping
• A strategy in which traders hold their share or financial assets (“position”) for just a few minutes
or even seconds
• A trading strategy in which traders profit from small price changes.
3. Margin Trading
• A margin account is a brokerage account in which the broker lends the investor money to buy more
securities than what they could otherwise buy with the balance in their account.
• Margin trading pertains to buying shares in which the trader will borrow a part of the sum needed
(margin) from the broker who is executing the transaction
4. Bid-Offer Spread
• The difference between the highest price a buyer is willing to pay (the "bid") and the lowest price
a seller is willing to accept (the "ask")
Attributes of Formal Markets
1. Liquidity Pertains to ease in doing a trading transactions
2. Transparency Availability of prompt and complete information about trade volume and prices
3. Reliability Trades can be completed quickly according to the terms agreed
4. Legal Procedures Can settle disputes and enforce contracts
5. Suitable investor protection and regulation
6. Low Transaction Cost Various location of the markets give traders opportunity to lower the cost
