Introduction to Financial

Market
Financial Markets are structures through which funds flow.

Financial markets can be distinguished along two major

dimensions:

1. Primary versus secondary markets

Money versus capital markets
Types of financial markets:
Primary markets- markets in which corporations raise funds through new issues of
securities.
Secondary markets- markets that trade financial instruments once they are issued.
Money markets- markets that trade debt securities or instruments with maturities
of less than one year.
Types of financial markets… cont’n
Capital markets- markets that trade debt and equity instruments with maturities of
more than one year.
Foreign exchange markets- markets in which cash flows from the sale of products
or assets denominated in a foreign currency are transacted.
Derivative markets- markets in which derivative securities trade.
Primary Markets
Primary markets are markets in which users of funds (e.g. corporations) raise funds
through new issues of financial instruments, such as stocks and bonds.
Fund users have new projects or expanded production needs, but do not have
sufficient internally generated funds (such as retained earnings) to support these
needs.
The fund users issue securities in the external primary markets to raise additional
funds. New issues of financial instruments are sold to the initial suppliers of funds
(e.g., households) in exchange for funds (money) that the issuer or user of funds
needs.
Most primary market transactions are arranged through financial institutions called
investment banks that serve as intermediaries between the issuing corporations
(fund users) and investors (fund suppliers).
 Primary Markets
(Where new issues of financial instruments are offered for sale)

FI’s flow FI’s flow

Users of
Funds flow Funds flow
funds Underwriti Initial
(Corporation ng with suppliers of
s issuing investment funds
debt/equity banks (Investors)
Instruments
First time issues are usually referred to as
Initial public offerings (IPO’s)
Secondary Markets
Once financial instruments such as stocks are issued, they are then tradedrebought
and resold- in secondary markets.
Buyers of secondary market securities are economic agents (consumers,
businesses, and governments) with excess funds.
Sellers of secondary market securities are economic agents in need of funds.
Secondary markets provide a centralized marketplace where economic agents
know they can transact quickly and efficiently. These markets therefore save
economic agents the search and other costs of seeking buyers or sellers on their
own.
When an economic agent buys a financial instrument in a secondary market, funds
are exchanged usually with the help of security broker acting as intermediary
between the buyer and the seller of the instrument.
The original issuer of the instrument is not involved in this transfer.
In addition to stocks and bonds, secondary markets also exist for financial
instruments backed by mortgages and other assets, foreign exchange, and futures
and options (i.e., derivative securities- financial securities whose payoffs are linked
to other, previously issued [or underlying] primary securities or indexes of primary
securities).
Secondary Markets
(Where financial instruments once issued, are traded)

Economic Economic
agents agents
(Investors) Financial (Investors)
Wanting to Markets Wanting to
sell buy
securities securities

Financial instruments flow

Funds flow
Benefits of trading in secondary markets:
For investors- provide opportunity to trade securities at their market values quickly
as well as to purchase securities with varying risk-return characteristics.
For issuers- they are not directly involved in the transfer of funds or instruments in
the secondary markets, however, the issuer does obtain information about the
current market value of its financial instruments.
Trading volume can be large.
Secondary markets offer buyers and sellers liquidity. Liquidity is the ability to turn
an asset into cash as quickly at its fair market value- as well as information about
the prices or the value of their investments.
Existence of centralized markets for buying and selling financial instruments allows
investors to trade these instruments at low transaction costs.
Top Investment Banks in the Philippines

ABCapitalOnline.com, Inc. Asian

Alliance Investment Corporation
Asian Focus Group Inc.
BPI Capital Corporation
Eastgate Capital Partners, Inc.
First Abacus Financial Holdings
Corporation First Metro Investment
Corporation FSG Capital Inc.
Insular Investment & Trust Corporation Investment & Capital Corporation of the
Philippines Mabuhay Capital Corporation, Inc.
Medco Holdings, Incorporated
Navarro Amper & Co
PNB Capital and Investment Corporation
Punongbayan & Araullo
SB Capital Investment Corporation
Unioil Resources & Holdings Company, Inc
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.Wikipedia
Market cap: ₱ 14.69 Trillion (1st Half 2019); $ 253.59 Billion (2018);
No. of listings: 323 (2018)
Owner: The Philippine Stock Exchange, Inc
Indices: PSEi
Key people: José T. Pardo (Chairman); Ramon S. Monzon (President & CEO)
Currency: Philippine peso (₱)
Money Markets

Money markets are markets that trade debt securities or instruments with
maturities of one year or less. In the money markets, economic agents with
shortterm excess supplies of funds can lend funds to economic agents who have
shortterm needs or shortages of funds.
Money Market Instruments
1. Treasury bills- short-term obligations issued by the government.

2 Federal funds- short-term funds transferred between financial institutions usually for no
more than one day.

3 Repurchase agreements- agreements involving the sale of securities by one party to

another with a promise by the seller to repurchase the same securities from the buyer at a
specified date and price.

4. Commercial paper- short-term unsecured promissory notes issued by a company to raise

short-term cash.

5. Negotiable certificates of deposit- bank-issued time deposits that specify an interest rate
and maturity date and are negotiable (i.e., can be sold by the holder to another party.
 6. Banker’s acceptance- time drafts payable to a seller of goods, with payment guaranteed by
bank.

Money Market Funds in the Market

ATR KimEng Money Market Fund. ...

BDO Peso Money Market Fund.
BPI Short Term Fund.
Infinity Peso Money Market Fund.
Metrofund Starter.
PBCom Signature Trust Fund.
RCBC Dragon Fund.
RCBC Savings Molave Fund.
Capital Markets

Capital markets are markets that trade equity (stocks) and debt (bonds)
instruments with maturities of more than one year.
The major suppliers of capital market securities (or users of funds) are
corporations and governments.
Given their longer maturity, these instruments experience wider price
fluctuations in the secondary markets in which they trade than do money market
instruments.
Capital Markets Instruments

1. Corporate stock- the fundamental ownership claim in a public corporation.

2. Mortgages- loans to individuals or businesses to purchase a home, land, or
other real property.
3. Corporate bonds- long-term bonds issued by corporations.
4. Treasury bonds- long-term bonds issued by the government.
5. State and local government bonds- long- term bonds issued by state and local
governments.
6. US government agency bonds- long-term bonds collateralized by a pool of
assets and issued agencies of the US. Government.

7. Bank and consumer loans- loans to commercial banks and individuals.

Foreign Exchange Markets

It is essential that financial managers understand how events and movements in

financial markets in other countries affect the profitability and performance of
their companies.
The actual amount of US dollars received on a foreign investment depends
on the exchange rate between the US dollar and the foreign currency when the
nondollar cash flow is converted into US dollars.
Derivative Security Markets

A derivative security is a financial security (such as futures contract, option

contract, swap contract, or mortgage-backed security) whose pay-off is linked to
another, previously issued security such as security traded in the capital or foreign
exchange markets.
Derivative securities generally involve an agreement between two parties
to exchange a standard quantity of an asset or cash flow at a predetermined price
and at a specified date in the future.
Financial Market Regulation

Financial instruments are subject to regulations imposed by regulatory agencies

such as the Securities and Exchange Commission (SEC), as well as the exchanges (if
any) on which the instruments are traded.
The main emphasis of SEC regulations is on full and fair disclosure of
information on securities issues to actual and potential investors.
Those firms planning to issue new stocks or bonds to be sold at the public at large
(public issues) are required by SEC to register their securities with the SEC and to
fully describe the issue, and any risks associated with the issue, in a legal document
called a prospectus.
SEC regulations are not intended to protect investors against poor
investment choices, but rather ensure that investors have full and accurate
information available about corporate issuers when making their investment
decisions
Financial Institutions

Financial Institutions perform the essential function of channeling funds from those
with surplus funds (suppliers of funds) to those with shortages of fund (users of
funds).
Types of Financial Institutions

Commercial Banks- depository institutions whose major assets are loans and
whose major liabilities are deposits.
Thrifts- depository institutions in the form of savings associations, savings banks,
and credit unions. Thrifts generally perform services similar to commercial banks,
but they tend to concentrate their loans in one segment, such as real estate loans
or consumer loans
Insurance Companies- financial institutions that protect individuals and
corporations (policy holders) from adverse events. Life insurance companies
provide protection in the event of untimely death., illness and retirement.
Property casualty insurance protects against personal injury and liability due to
accidents, theft, fire and so on.
Securities firms and investment banks- financial institutions that help
firms issue securities and engage in related activities such as securities brokerage
and securities trading.
Finance companies- financial intermediaries that make loans to both
individuals and businesses. Unlike depository institutions, finance companies do
not accept deposits but instead rely on short- and long-term debt for funding.

Investment funds- financial institutions that pool financial resources of individuals

and companies and invest those resources to diversified portfolios of assets.

Pension funds- financial institutions that offer savings plans through which fund
participants accumulate savings during their working years before withdrawing
them during their retirement years.
Flow of funds in a world without FI’s
Direct Transfer of Funds
Financial claims
(Equity and Debt Instruments)

CASH CASH

CASH
USERS OFCASH SUPPLIERS
FUNDS OF FUNDS

Direct transfer- A corporation sells its stock or debt certificate directly to

investors without going through a financial institution.
 In this economy without financial institutions, the level of funds flowing
between supplier of funds (who want to maximize the return of their funds subject
to risk) and users of funds (who want to minimize their cost of borrowing subject to
risk) is likely to be low.
Reasons for the low exchange in direct transfer:

1. Monitoring costs
Monitoring of the money lent in exchange for the financial claims is
often extremely costly for any given supplier because it requires considerable time,
expense, and effort to collect necessary information.
2. Liquidity costs
Fund suppliers may choose cash instead of long-term securities,
because cash is more liquid.
3. Price risk Fund suppliers face a price risk upon the sale of securities.
Price risk is the risk that an asset’s sale will be lower
than its purchase price.
Indirect Transfer

Indirect transfer is the transfer of funds between suppliers and users of funds
through a financial intermediaries.
 Flow of funds in a world with FI’s
Users of FI Suppliers of
funds (Brokers)
fund
------------------
FI
(Asset
Transformers)

Financial Claims Financial Claims

(Equity and Debt (Deposits and Insurance
Securities) Policies)
Services performed by FI’s

Services Benefiting Suppliers of Funds

1. Monitoring costs- Aggregation of funds in an FI provides greater incentive to
collect a firm’s information and monitor actions. The relatively large size of the
FI allows this collection of information to be accomplished in a lower average
cost (economic of scale).
2. Liquidity and price risk- FI’s provide financial claims to household savers with
superior liquidity attributes and with lower price risk.
3. Transaction cost services- similar to economies of scale in information
production cost, and FI’s size can result in economies of scale in transaction
costs.
4. Maturity intermediation- FI’s can better bear the risk of mismatching the
maturities of their assets and liabilities.
5. Denomination intermediation- FI’s such as mutual funds allow investors to
overcome constraints to buying assets imposed by large minimum
denomination size.
A mutual fund is a professionally managed investment fund that pools money
from many investors to purchase securities. These investors may be retail or
institutional in nature.
Services Benefiting the Overall Economy

1. Money supply transmissions- depository institutions are the conduit through

which monetary policy actions impact the rest of the financial system and the
economy in general.
2. Credit allocation- FIs are often viewed as the major, and sometimes only,
source of financing for a particular sector of the economy, such as farming and
residential real estate.
3. Intergenerational wealth transfers- FI’s, especially life insurance companies
and pension funds, provide savers with the ability to transfer wealth from one
generation to the next.
4. Payment services- the efficiency with which depository institutions provide
payment services directly benefits the economy.