FINANCIAL MARKET

Topic 5
FINANCIAL MARKETS

Financial markets are the meeting place for people,

corporations and institutions that either need
money or have money to lend or invest.

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.
FINANCIAL MARKETS

The flow of money around the world is

essential for businesses to operate and
grow. Stock markets are places where
individual investors and corporations can
trade currencies, invest in companies, and
arranged loans.
FINANCIAL MARKETS

Participants in the financial markets also

include national, state and local governments
that are primarily borrowers of funds for
highways, education, welfare and other public
activities: their markets are referred to as
public financial markets. Large corporations
raise funds in the corporate financial markets.
FINANCIAL MARKETS

Corporations rely on the financial markets to

provide funds for short-term operations and
for new plant and equipment. A firm may go to
the markets and raise financial capital by
either borrowing money through a debt
offering of corporate bonds or short-term
notes, or by selling ownership in the company
through an issue of common share.
FINANCIAL MARKETS

When a corporation uses the financial markets to raise

new funds, the sale of securities is said to be made in
the primary market by way of a new issue.
After the securities are sold to the public, they are
traded in the secondary market between investors. It is
in the secondary market that prices are continually
changing as inventors buy and sell securities based on
their expectations of a corporation’s prospects.
Functions of Financial Markets

Financial markets and financial

intermediaries have the basic function of
getting people together by moving funds
from those who have a surplus of funds to
those who have a shortage of funds.
Functions of Financial Markets

Financial markets and financial

intermediaries have the basic function of
getting people together by moving funds
from those who have a surplus of funds to
those who have a shortage of funds.
Some basic functions of financial markets:

1. Raising capital
Firms often require funds to build new
facilities, replace machinery or expand their
business in other ways. The financial markets
are also important source of capital for
individuals who wish to buy homes or cars, or
even to make credit-card purchases.
Some basic functions of financial markets:

2. Commercial transactions
The financial markets provide the grease
that makes many commercial transactions
possible. This includes arranging payment
for the sale of a product abroad, and
providing working capital to firms.
Some basic functions of financial markets:

3. Price setting
Markets provide price discovery, a way to
determine the relative values of different
items, based upon the prices at which
individuals are willing to buy or sell them.
Some basic functions of financial markets:

4. Asset valuation
Market prices offer the best way to
determine the value of a firm or the firm’s
assets, or property. This is important not
only to those buying and selling businesses,
but also to regulators.
Some basic functions of financial markets:

5. Arbitrage
A poorly developed financial market trades
commodities and currencies at very different
prices in different location. As traders in
financial markets attempt to profit from these
divergences, prices move towards a uniform
level, making the entire economy more
efficient.
Some basic functions of financial markets:

6. Investing
The shares, bond and money markets
provide an opportunity to earn a return on
funds that are not needed immediately, and
to accumulate assets that will provide an
income in future.
Some basic functions of financial markets:

7. Risk management
The financial market enables to attach a
price to risk, allowing firms and individuals
to trade risks to reduce exposure.
Structure of Financial Markets

Funds in a financial market can be obtained by a

firm or an individual in two ways.

The most common method is to issue a debt

instrument, which is a contractual agreement by
the borrower to pay the holder of the instrument
fixed peso amounts at regular intervals until a
specified date when a final payment is made.
Structure of Financial Markets

The second method of raising funds is by

issuing equity instrument which are claims to
share in the net income and the assets of a
business.
Financial market functions as both primary
and secondary markets for debt and equity
securities.
Primary Market

Primary market refers to original sale of

securities by governments and
corporations. The primary markets for
securities are not well known to the public
because the selling of securities to initial
buyers often takes behind closed door.
Primary Market

Corporations engage in two types of

primary market transactions, public
offerings and private placements. A public
offering involves selling securities to the
general public. A private placement is a
negotiated sale involving a specific buyer.
Primary Market

An important financial institution that

assist in the initial sale of securities in the
primary market is the investment bank. It
does this by underwriting securities. It
guarantees a price for a corporation’s
securities and then sells them to the public.
Secondary Market

The secondary market is popularly known as Stock

Market or Exchange.

Securities brokers and dealers are crucial to a well-

functioning secondary market. Brokers are agents
of investors who match buyers with sellers of
securities; dealers link buyers and sellers by
buying and selling securities at stated prices.
Secondary Market

Secondary markets serve two important

functions:
1. They make it easier to sell financial
instruments to raise cash, they make
financial instruments more liquid.
2. They determine the prices of the security
that the issuing firm sells in the primary
market.
Stock Exchange

Stock exchange is an organized secondary

market where securities are purchased and
sold. In order to bring liquidity, the stocks
are traded systematically in a stock
exchange.
Stock Exchange

The stock exchange is an entity which is in

the business of bringing buyers and sellers
of stocks and securities together. The
purpose of stock exchange is to facilitate
the exchange of securities between buyers
and sellers thus providing a market place –
virtual or real.
Stock Exchange

Stock exchange supplies a platform from which

to buy and sell shares in certain listed
companies. It regulates the company’s
behavior through requirements agreed upon
by the company in order to be listed. This is
called a listing agreement which ensures that
the company provides all the information
pertaining to its working from time to time.
Stock Exchange

Large volumes are possible in these markets

because of two things: (1) the ease of
settlement, and (2) guarantee of trades. The
stock market is known as barometer of the
company’s economy. The companies listed on
stock exchange collectively contribute to the
country’s gross domestic product (GDP).
Listing of Securities on Stock Exchange

Listing means admission of securities to

dealings on a recognized stock exchange.
The principal objective of listing is to
provide liquidity and marketability to
listed securities and ensure effective
monitoring of trading for the benefits of all
participants in the market.
Listing of Securities on Stock Exchange

A recognized stock exchange means a stock

exchange being recognized by the national
government through Securities and Exchange
Commission (SEC). Securities are bought and sold
in recognized stock exchanges through members
who are known as brokers. The price at which the
securities are bought and sold on recognized stock
exchange is known as official quotation.
Listing of Securities on Stock Exchange

The securities of an entity may be listed at any

of the following stages:
1) At the time of public issue of shares or
debentures
2) At the time of rights issue of shares or
debentures
3) At the time of bonus issue of shares
4) Shares issued on amalgamation or merger
Philippine Stock Exchange

The Philippine Stock Exchange, Inc. is the

national stock exchange of the Philippines.
The exchange was created in 1992 from the
merger of the Manila Stock Exchange and
the Makati Stock Exchange. Including
previous forms, the exchange has been in
operation since 1927.
Philippine Stock Exchange

The main index for PSE is the PSE

Composite Index (PSEi) composed of thirty
listed companies. The selection of
companies in the PSEi is based on a specific
set of criteria. The PSE is overseen by a 15-
member of Board of Directors, chaired by
Jose T. Pardo.
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).
The Over-the-Counter Market

The OTC trading requires a brokerage firm

to match a prospective buyer and
prospective seller at a price acceptable to
both. Alternatively, the brokerage firm may
purchase shares for its own account or sells
shares that it has been holding.
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.
Day traders favor shares that are liquid. They may
hold shares only momentarily, buying at one price
and selling when the prices rises by a few cents,
perhaps a minute later.
Potential day traders should be
knowledgeable of the following:

1. Market data
2. Scalping
3. Margin trading
4. Bid-offer spread
Potential day traders should be aware
that:

1. Day trading is a high risk occupation

2. Day trading is stressful
3. Day trading is expensive
Rise of the Formal Markets

Investors have many reasons to prefer

financial markets over street-corner
trading. Yet not all formal markets are
successful, as investors gravitate to certain
markets and leave others underutilized.
The busier ones, generally, have important
attributes that smaller markets often lack:
Rise of the Formal Markets

1. Liquidity
2. Transparency
3. Reliability
4. Legal procedures
5. Suitable investor protection and
regulation
6. Low transaction costs
The Forces of Change

The speed of change has been accelerating as

market participants struggle to adjust to increased
competition and constant innovation.
1. Technology
2. Deregulation
3. Liberalization
4. Consolidation
5. Globalization
End