FINANCIAL MARKETS
Financial markets are the meeting place
for people, corporations and institutions
that either need money or have money
to lend or invest.
Without the global financial markets,
governments would not be able to
borrow money, companies would not
have access to the capital they need to
expand, and investors and individuals
would be unable to buy and sell foreign
currencies.
Corporations rely on the financial
markets to provide funds for
short-term operations and for new
plant and equipment.
Financial capital may be raised
• 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 stock.
Financial markets (bond and stock
markets) and financial intermediaries
(banks, insurance companies among
others) 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.
The principal lender-savers are households, but
business enterprises and the government as
well as foreigners and their government,
sometimes also ting
themselves with excess funds and so lend them
out.
The most important borrower-spenders are
businesses and the government but households
and foreigners also borrow
Funds flow from lenders to borrowers indirectly
through financial intermediaries such as banks
or directly through financial markets, such as
the Philippine Stock Exchange.
WHAT FINANCIAL MARKETS DO
Raising capital. Firms often require funds to
build new facilities, replace machinery or
expand their business in other ways. Shares,
bonds and other types of financial instruments
make this possible.
The financial markets are also an important
source of capital for individuals who wish to buy
homes or cars, or even to make credit-card
purchases.
Commercial transactions.
the financial
markets provide the grease that makes many
commercial transactions possible. This includes
such things as arranging payment for the sale of
a product abroad, and providing working capital
so that a firm can pay employees if payments
from customers run late.
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 and sell them.
Asset valuation Market prices offer the best
way to determine the value of a firm or of the
firm's assets, or property.
Arbitrage. In countries with poorly developed
financial markets, commodities and currencies
may trade at very different prices in different
locations
Investing. The stock, 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.
Risk management. Futures, options and other
derivatives contracts can provide protection
against many types of risk, such as the
possibility that a foreign currency will lose value
against the domestic currency before ah export
payment is received.
STRUCTURE OF FINANCIAL MARKETS
There are many different financial markets in a
developed economy each dealing with a
different type of security serving a different set
of customers, or operating in a different part of
the country.
Debt and Equity 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, such as a bond or mortgage,
which is a contractual agreement by the
borrower to pay the holder of the instrument
fixed peso amounts at regular intervals (interest
and principal payments) until a specified date
(the maturity date), when a final payment is
made..
A debt instrument is short term if its maturity is
less than a year and long-term if its maturity is
ten years or longer.
Debt instruments with a maturity between one
and ten years are said to be intermediate-term.
The second method of raising funds is by
issuing equity instruments, such as common or
ordinary stock, which are claims to share in the
net income and the assets of a business.
Equities often make periodic payments
(dividends) to their holders and are considered
long-term securities because they have no
maturity date.
In addition, owning stock means that you own
a portion of the firm and thus have the right to
vote on issues important to the firm and to
elect its directors.
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 place
behind closed door.
Corporations engage in two types of primary
market transactions:
• Public offerings - as the name suggests,
involves selling securities to the general
public as the name suggests, involves selling
securities to the general public
Public offerings of debt and equity must be
approved by and registered with the Secunties
and Exchange Commission. Registration
requires the firm to disclose a great deal of
information before selling any securities.
• Private placements -is a negotiated sale
involving a specific buyer. The accounting
legal and selling costs of public offerings can
be considerable.
Secondary Market
After the securities are sold to the public, they
can be traded in the secondary market between
investors.
Secondary market is popularly known as Stock
Market or Exchange.
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.
l. The Organized Stock Exchange. The stock
exchanges will have a physical location where
stocks buying and selling transactions take
place in the stock exchange floor
2. The Over-the-Counter (OTC) Exchange.
shares, bonds and money market instruments
are traded using a system of computer screens
and telephones.
Dealers in an over-the-counter market attempt
to match
the orders they receive from
investors to buy and sell its stock.
Secondary
functions:
markets
serve
two
important
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.
The stock exchange is an entity (a corporation
or mutual organization) 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.
The stock exchange supplies a platform from
which to buy and sell shares in certain listed
companies.
It regulates the company's behaviour through
requirements agreed upon by the company in
order to be listed.
listing agreement ensures that the company
provides all the information pertaining to its
working from time to time, including events
that affect its valuation .
Large volumes are possible in these markets
because of two things.
• ease of settlements. The shares that are
traded in are received and delivered
through an electronic entry in the books of
buyers and sellers.
•
guarantee of trades. Sellers get their money,
buyers get their shares.
Stocks that trade on an organized
exchange are said to be listed on
that exchange.
To be listed, firms must meet
certain
minimum
criteria
concerning, for example number of
share holder and asset size.
OTC trading requires a brokerage firm to match
a prospective buyer and a prospective seller at
a price acceptable to both.
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.
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.
Investors typically buy or sell a share 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.
Day traders favor shares that are liquid -those
are easy to buy and sell in the secondary
market.
This is different from long-term investing, in
which assets are held for longer periods in
order to generate growth or income.
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 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 -strategy in which traders hold their
share or 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 it is bought.
Potential Day Traders should be aware that:
1. Day trading is a high risk occupation — Day
traders typically suffer severe losses in their first
months to trading, and many never graduate
from profit-making status.
2. Day trading is a stressful — Day traders must
watch the market nonst during the day,
concentrating on dozens of fluctuating
indicators in t hope of spotting market trends.
3. Day trading is expensive — Day traders pay
large sums in commission for training, and for
computers.
Money markets and Capital markets
Commercial banks were the center of
financial markets.
Savers and investors kept most of their
assets on deposit with banks, either as
short-term demand deposits, such as
cheque-writing accounts, paying little or
no interest, or in the form of certificates
of deposits that tied up the money for
years.
WHAT MONEY MARKETS DO
The phrase is usually applied to
the buying and selling of debt
instruments maturing in one year
or less.
The money markets are thus
related to the bond markets, in
which
corporations
and
governments borrow and lend
based on longer-term contracts.
Money markets and the bond markets
serve different purposes.
Bond issuers typically raise money to
finance investments that will generate
profits
Government issuers for the purpose of
public benefits
Issuers of money-market instruments are
usually more concerned with cash
management or with financing their
portfolios of financial assets.
Money markets attach a price to
liquidity, the availability of money
for immediate investment. The
interest rates for extremely
short-term use of money serve as
benchmarks
for
longer-term
financial instruments
Commercial paper
Commercial paper is a short-term
debt obligation of a private-sector
firm or a government-sponsored
corporation.
Only companies with good credit
ratings issue commercial paper
because investors are reluctant to
bring the debt of financially
compromised companies.
They tend to be issued by highly
rated banks and are traded in a
similar way to securities.
Bankers’. An acceptance is a promissory note issued by a
non-financial firm to a bank in return for a loan.
The bank resells the note in the money market at a
discount and guarantees payment.
Acceptances usually have a maturity of less than six
months.
Bankers’ acceptances differ from commercial paper in
significant ways.
•
They are usually tied to the sale or storage of specific
of specific goods, such as an export order for which
the proceeds will be received in two or three months.
• They are not issued at all by financial-industry firms.
• They do not bear interest; instead, an investor
purchases the acceptance at a discount from face
value and then redeems it for face value at maturity.
• Investors rely on the strength of the guarantor bank,
rather than of the issuing company, for their security.