Financial Markets
What are financial markets?
• A financial market is a market in which
people and entities can trade financial securities,
commodities, and other fungible items of value
at low transaction costs and at prices that reflect
supply and demand. Securities include stocks
and bonds, and commodities include precious
metals or agricultural goods.
en.wikipedia.org/wiki/Financial_market
What are financial markets?
• Broad term describing any marketplace where
buyers and sellers participate in the trade of
assets such as equities, bonds, currencies and
derivatives.
www.investopedia.com
Channels for Funds and
Financial Instruments in the
Financial Market
Benefits of Financial Markets
• Funds are directed to deficit spending units
(DSUs) which can use them most efficiently
• Liquidity is provided to savers
Why Firms Invest and Borrow
• There are times when companies are confronted
by capital deficiency. And there are times when
opportunities for investment come by but the
company cannot provide the needed amount of
money to take advantage of these opportunities.
Thus, when firms borrow, they enjoy the
following:
▫ Quantity discounts for bulk purchases granted by
suppliers
▫ Additional revenues from sales
Methods by which financial markets
transfer funds
• Direct Finance
▫ Refers to lending by ultimate borrowers with no
intermediary. Under this method, the SSU gives
money to the DSU in exchange for financial claims
on the DSU. The claims issued by the DSU are
called direct claims.
▫ SSUs have a venue for savings with expected
returns while DSUs are provided with a source of
funds for consumption or investment.
Disadvantages of Direct Financing
• There are few DSUs which can transact in the
direct market because the denominations of
securities sold are very large.
• It is difficult to match the requirements of SSUs
and DSUs in terms of denomination, maturity,
and other factors.
Methods of Direct Financing
• Private Placement
▫ Selling of securities by private negotiation directly
to insurance companies, commercial banks,
pension funds, large-scale corporate investors,
and wealthy individual investors.
Methods of Direct Financing – cont’n
• Broker and Dealers
▫ A broker is one who acts as an intermediary
between buyers and sellers but does not take title
o the securities traded.
▫ A dealer is one who is in the security business
acting as a principal rather than an agent. The
dealer buys for his account and sells to customers
from inventory. He makes profits by selling this
inventory of securities at a price higher than the
acquisition cost.
Examples of Brokers in Baguio City
• R. Coyiuto Securities, Inc.
• Regina Capital Development Corp.
Methods of Direct Financing – cont’n
• Investment Brokers / Investment Banker
▫ A person who provides financial advice and who
underwrites and distributes new investment
securities.
• Indirect Finance
▫ Also called financial intermediation
▫ Refers to lending by an ultimate lender to a
financial intermediary that then relends to
ultimate borrowers.
▫ Financial intermediaries include commercial
banks, mutual savings banks, credit unions, life
insurance companies, and pension funds.
Classification of Financial Markets
•
•
•
•
•
•
•
•
Primary market
Secondary market
Money market
Capital market
Bond market
Stock market
Mortgage market
Consumer credit market
•
•
•
•
•
•
•
•
Auction market
Negotiation market
Organized market
Over-the-counter market
Spot market
Futures market
Options market
Foreign exchange market
Primary Market
• This is where newly issued primary and secondary
securities are traded for the first time.
• Large corporations needing large amount of funds
usually tap the primary market through issuance of
bonds.
• The primary markets are where investors can get
first crack at a new security issuance. The issuing
company or group receives cash proceeds from the
sale, which is then used to fund operations or
expand the business. Exchanges have varying levels
of requirements which must be met before a security
can be sold. (investopedia)
• For instance, if Ayala Corporation decides to sell
a new stock to raise equity funds, it will be a
primary market transaction. Since it is the first
time the company has sold stock to the public, it
is called an initial public offering (IPO). The
proceeds of the sale go to Ayala Corporation, the
issuing company. Investors who have subscribed
to the IPO have provided the company with the
necessary funds to continue its operation and
expansion, and become part owners of the
company.
• An underwriter or investment banker assists the
issuer of a new security in setting the offering
price and in marketing the securities to the
public. The investment bankers serves as a
middleman in the transfer of funds between the
company in need of capital and the public, and
facilitates the issuance of shares.
Secondary Market
• Financial market through which existing
financial securities are traded.
• A market where investors purchase securities or
assets from other investors, rather than from
issuing companies themselves. (investopedia)
• If you decide to buy existing shares of Ayala
Corporation, you cannot buy them directly from
the issuing company anymore since they have all
been sold to the investing public during the
initial public offering.
• So, how can you avail of AC shares when the IPO
has been completed?
Investors can only buy these shares from
existing shareholders who are willing to sell
their shares. When they do so, it is a secondary
market transaction. The proceeds from this
transaction don not go to the issuing
corporation; instead they go to the investor who
sold his shares.
• Once the initial sale is complete, further trading
is said to conduct on the secondary market,
which is where the bulk of exchange trading
occurs each day. Primary markets can see
increased volatility over secondary markets
because it is difficult to accurately gauge investor
demand for a new security until several days of
trading have occurred.
• In the primary market prices are often
set beforehand, whereas in the
secondary market only basic forces like
supply and demand determine the price
of the security.
Money Market
• Financial market on which debt securities with
an original maturity of one year or less are
traded.
• The money market is where short-term funds
are raised through the buying and selling of
short term debt securities such as commercial
papers. (PSE)
Capital Market
• Portion of the financial market where trading is
undertaken for securities with maturity of more
than one year. In the Philippines, it is
subdivided into 3 parts: bond market, stock
market, and the mortgage market
• The capital market is where long-term funds are
raised through the bond market, which deals
with long-term debt securities such as bonds, the
stock market which deals with equity securities
or stocks. (PSE)
• Capital markets channel savings and investment
between suppliers of capital such as retail
investors and institutional investors, and users
of capital like businesses, government and
individuals. Capital markets are vital to the
functioning of an economy, since capital is a
critical component for generating economic
output. Capital markets include primary
markets, where new stock and bond issues are
sold to investors, and secondary markets, which
trade existing securities. (investopedia)
Bond Market
• Market for debt instruments of any kind.
• The bond market primarily includes
government-issued securities and corporate debt
securities, and facilitates the transfer of capital
from savers to the issuers or organizations
requiring capital for government projects,
business expansions and ongoing operations.
(investopedia)
• The Philippine domestic bond market consists of
short- and long-term bonds, mainly issued by
the national government.
• The Philippine bond market is dominated
mainly by Treasury notes and bonds.
Although the size of the Philippine corporate
bond market is still small relative to government
bonds, it has been growing rapidly over the
years.
• In the Philippines, corporate bond issuance
came from various sectors, mostly banks, real
estate and telecommunication
companies, toll way operators and a beerbased conglomerate.
• The growth in the region’s bond market was
driven partly by huge demand from foreign
investors looking for more attractive returns
than those available in the United States, Europe
and other developed markets.
Stock Market
• Financial market where the common and
preferred stocks issued by corporations are
traded.
• A place, whether physical or electronic, where
stocks, bonds, and/or derivatives in listed
companies are bought and sold. (financial dictionary)
Mortgage Market
• Deals with loans on residential, commercial, and
industrial real estate, and on farmland.
• A market for loans to people and organizations
buying property a market for mortgages that
have been bought by financial institutions and
are then traded as asset-backed securities.
(financial times)
Consumer Credit Market
• Involved in loans on autos, appliances,
education, travel, etc.
Auction Market
• One where trading is conducted by an independent third
party according to a matching of prices on orders
received to buy and sell a particular security. If there is a
match, trade is consummated.
• A market in which buyers enter competitive bids and
sellers enter competitive offers at the same time. The
price a stock is traded represents the highest price that a
buyer is willing to pay and the lowest price that a seller is
willing to sell at. Matching bids and offers are then
paired together and the orders are executed.
(investopedia)
• 4 buyers want to buy a share of XYZ and make
the following bids: $10.00, 10.02, 10.03 and
$10.06. Conversely, there are 4 sellers that
desire to sell XYZ and they submitted offers to
sell their shares at the following prices: $10.06,
10.09, 10.12 and $10.13. In this scenario, the
individuals that made bids/offers for XYZ at
$10.06 will have their orders executed. All
remaining orders will not immediately be
executed and the current price of XYZ will then
be $10.06.
Negotiation Market
• When buyers and sellers of securities negotiate
with each other regarding price and volume,
either directly or through brokers to dealers,
they are engaged in the negotiation market.
• Through the negotiation market, the situation
wherein securities are not frequently traded and
which are in large volumes may not be readily
accommodated in the auction market for lack of
time is remedied.
Organized Market
• Financial market with fixed trading rules.
• PSE is an example of an organized market
Over-the-Counter Market
• Stocks of corporations not listed and therefore not
traded in the stock exchange but registered and licensed
by the Securities and Exchange Commission for sale to
the public are only available in the so-called over-thecounter (OTC) market. This market is not a specific
organization but another way of trading securities. OTC
transactions are carried out by direct inquiries and
negotiations among the buyers and sellers through the
use of mail, telephone, telegraph, Teletype, or other
forms of communications.(PSE)
Spot Market
• This is where securities are traded for immediate
delivery and payment.
• The spot price is the main feature of the market.
• The Wholesale Electricity Spot Market
(also known as WESM) is the Philippine spot
market for the trading of electricity as a
commodity.
• The trading process maybe summarized in five steps as
follows:
1. Trading participants submit online hourly energy offers
(price and quantity).
2. The Market Operator matches offers of generators with
demand bids of customers, prioritizing the lowest offers
(generators) and highest bids (customers).
3. The Market Operator submits the dispatch schedule to the
System Operator for central dispatch and informs the trade
participants of the price and schedule.
4. Electricity is dispatched to the buyer, for distribution to the
end-users.
5. Electricity used is measured and settled using the locational
marginal prices and schedule.
Futures Market
• Market where contracts are originated and
traded that give the holder the right to buy
something in the future at a price specified by
the contract.
Options Market
• Market where stock options are traded. A stock
option is a contract giving the owner the right to
either buy or sell a fixed number of shares of
stock at any time before the expiration date at a
price specified in the option.
Foreign Exchange Market
• Market where people buy and sell foreign
currencies.