CHAPTER 7

FINANCIAL MARKERTS: AN OVERVIEW

 Financial Markets are the meeting place for people, corporations

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

 Without global 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.

1. Public financial markets – includes national, state and local

governments that are primarily borrowers of funds for
highways, education, welfare, and other public activities.
2. Corporate financial markets – it is where large corporations
raise funds.

 Thanks to global financial markets, money flows around the world

between investors, businesses, customers, and stock markets.

 Corporations also rely on the financial markets to provide funds

for short-term operations and for new plant and equipment.

FUNCTIONS OF FINANCIAL MARKETS

 Financial markets (bonds, 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 surplus of funds to those who have shortage
of funds.
 WHAT FINANCIAL MARKETS DO

 Raising Capital – Enable firms to expand their business in other

ways through financial instruments such as bonds, shares and etc.
 Commercial Transactions –This includes arranging payments for
sale of a product abroad.
 Price Setting – Financial markets provide price discovery.
 Asset Valuation – Market prices offer the best way to determine
the value of a firm or of the firms assets or property.
 Arbitrage – In countries with poorly developed financial markets,
commodities and currencies may trade at very different price in
different locations.
 Investing – Provides 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 – Financial instruments can provide protection
against many types of risk as the possibility that a foreign
currency will lose value against the domestic currency before an
export payment is received.
 STRUCTURES OF FINANCIAL MARKETS
Funds in financial market can be obtained by a firm or individual
in two ways:

 Debt Instruments - it 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. Ex:
bonds, mortgage
 Equity Instruments – it is claims to share in the net income
(income after expenses and taxes) and the assets of a business.

Disadvantage of owning a corporation’s equities rather than

debt instrument
– an equity holder is a residual claimant.
Advantage of owning a corporation’s equities rather than
debt instrument
– equity holders benefit directly from any increases in the
corporation’s profitability or asset value.

 Financial Markets functions as both primary and secondary

markets for debt and equity securities.

 Primary markets – refers to original sale of securities by

governments and corporations.

Primary Market Transactions

o Public Offerings – involves selling securities to general
public
o Private placements – negotiated sale involving a
specific buyer.

 Secondary Markets – it is popularly known as Stock Market

or Exchange. After the securities are sold to the public, they
can be traded in the secondary market between investors.

Two broad segments of stock market

 o 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.
o The Over-the-Counter (OTC) Exchange – It is where
shares, bonds, and money market instruments are
traded using a system of computer screens and
telephones.

 Secondary markets serve two important functions:

1. They make it easier to sell these financial instruments
to raise cash and they make the financial Instruments
more liquid.

2. They determine the price of the security that the

issuing firm sells in the primary market.

STOCK EXCHANGE
Stock Exchange – is an organized secondary market where securities
like
a. Shares
b. Debentures of public companies
c. Government securities and bonds issued by municipalities
d. Public corporations
e. Utility undertakings
f. Post trusts

And such other local authorities are purchased and sold. In order to
bring liquidity, the stock markets are traded systematically in a stock
exchange.
The stock exchange is an entity (a corporation or a 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 market that does not have a physical presence, it is a virtual
market. Share brokers may be assembled in a place called the “trading
ring” and bought and sold shares.
Buyers and seller’s orders are matched by the central computer and if
quantities and prices correspond, then a trade is set to be executed.
Stock exchange provides a platform that regulates the company’s
behavior which is called listing agreement. Which it ensures that the
company provides all the information pertaining to its work from time
to time, including events
Large Volumes are possible in these markets because of two things.
1. Ease of settlements- that shares are traded in are received and
delivered through an electronic entry in the books of buyers and
sellers.
2. Guarantee of trades – sellers get their money, buyers get their
shares.

The stock market is known as barometer of the company’s economy.

The companies 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 an organized stock
exchange of any incorporated company, central and stage
governments, quasi-governmental and other financial
institutions/corporations and municipalities, electricity boards, housing
boards and so forth.
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.
Recognized stock exchange means a stock exchange is 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 in recognized stock exchange is known as the
official quotation
THE PHILIPPINE STOCK EXCHANGE
The Philippine Stock Exchange,Inc. ( Pamilihang Sapi ng Pilipinas:
PSE;PSE) is the national stock exchange in the Philippines. This
exchanged was created in 1992 from the merger of the Manila Stock
Exchange and Makati Stock Exchange.
The main index for PSE is the PSE Composite Index (PSEi) composed of
30 listed companies. The Selection of the companies PSEi is based on a
specific set of Criteria. There are also six additional sector-based
indices. The PSE is overseen by a 15- member Board of Directors,
Chaired by Jose T. Pardo.
SNAPSHOT OF PSE HISTORY
The Philippine newspaper publish daily activities in the Philippine Stock
Exchange by reporting
a. The PSE index, gain and loss
b. Individual trading outcome of publicly-listed-securities.

A list of companies (323) registered with Philippine Stock Exchange

where stock are actively traded as of Sept. 2019

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.
HOW IT WORKS
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 regular dividends that companies issue.
Day traders favor shares that are liquid.
Those are easy to buy and sell in the secondary market. They make
profits by trading large volume of shares, in one transaction, or by
making multiple trades during the course of the day.
POTENTIAL DAY TRADERS SHOULD BE KNWOWLEDGEABLE OF THE
FOLLOWING
1. Market data – the current trading information for each day-
trading market.
 2. Scalping – a strategy in which traders hold their share or financial
asset for just a few minutes or even seconds.

3. Margin trading – a method of buying shares the day trader

borrowing a part of the sum needed from the broker who is
executing the transaction.

4. 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 month to trading, and many never
graduate to profit-making status.

2. Day trading is stressful –day traders must watch the market

nonstop during the day, concentrating on dozens of fluctuating
indicators in the hope of spotting market trends.

3. Day trading is expensive – Day traders pay large sums in

commissions for training and for computers

THE RISE OF FORMAL MARKETS

The formal financial market have expanded rapidly in recent years, as
governments in countries marked by shadowy, semi-legal markets have
sought to organize institutions. The motivation was in part self-interest:
informal markets generate no tax revenue, but officially recognized
markets do.
 1. Liquidity – trading is easier and spreads are narrower in more
liquid markets. Because liquidity benefits almost everyone,
trading usually concentrates in markets that are to trade there.

2. Transparency- the availability of prompt and complete

information about trades and prices. Generally, the less
transparent the market, the less willing people are to trade there.

3. Reliability- particularly when it comes to ensuring that trades are

competed quickly according to the terms agreed.

4. Legal procedures – adequate to settle disputes and enforce

contracts.

5. Suitable investor protection and regulation – regulation and

availability of information about the securities will help trading
partners have a safer transaction

6. Low transaction cost- many financial-market transactions are not

tied to specific geographic location, and the participants will strive
to complete them in places where trading costs, regulatory cost
and taxes are reasonable.

THE FORCES OF CHANGE

1. TECHONOLOGY – abundant computing power and cheap
telecommunications changed the cost structure of every part of
the financial industry

2. DEREGULATION – most national regulators agree on the

principles that individual investors need substantial protection but
the dealings involving institutional investors require little
regulation.

3. LIBERALIZATION - Many conditions that once separated banks,

investment banks, insurers, investment companies and other
 financial institutions have been lowered, allowing such firms to
enter each other’s businesses.

4. CONSOLIDATION – Liberalization has led to consolidation, as firms

merge to take advantage of economies of scale or to enter other
areas of finance.

5. GLOBALIZATION – Investors increasingly take a global approach

as well, putting their money wherever they expect the greatest
return for the risk involved without worrying the geography.

CODE OF ETHICS GOVERNING MARKET ACTIVITIES IN THE PHILIPPINES

Circular Letter No. CL 2010-013 addressed to all banks their subdivision
and other affiliates to non-bank which contains financial institutes
supervised by the BSP.