Financial Markets and Institutions

Module Overview

Dear students, now that you know the Basic Concepts of Finance from the previous module,
you are now ready to dig deeper into the world of Finance. In Module 1, we saw that every
organizations’ primary goal aside from gaining profit is to maximize its available resources. For a
corporation, it means increasing the price of its stock. Stock prices are determined in the financial
markets, so if financial managers are to make good decisions, they must understand how these
markets operate. Moreover, individuals make personal investment decisions, so they too need to know
something about financial markets and the institutions that operate in those markets. Thus, in this
Module, we describe the markets where capital is raised, securities are traded, and stock prices are
established and the institutions that operate in these markets.

Module Objectives/Outcomes

At the end of this modules, the students are expected to:

 Identify the different types of financial markets and financial institutions and explain how these
enhance capital allocation;
 Explain how stock market operates and list the distinction between the different types of stock
markets; and
 Learn about the importance of market efficiency and explain why some markets are more
efficient than others.

Lessons in this Module

This module contains the following topics:

 Lesson 1: The Capital Allocation Process
 Lesson 2: Types of Financial Markets
 Lesson 3: Major Categories of Financial Institutions
 Lesson 4: The Stock Market
 The Capital Allocation Process

Introduction

Welcome to Lesson 1 of Module 2. You are going to learn how the capital allocation works.
There are pre and post assessment activities that will help you understand better. Relax and enjoy this
lesson.

Activity

1. What is Capital?

Your answer:
Capital is riches that has been made yet not yet expended: Food in a washroom, devices, cash that can be
traded for thing that are helpful.

All in all, capital empowers or encourages the making of more riches: the food that can be eaten by the
woodworker for breakfast, so he has energy to manufacture a house. The mallet he uses to drive nails. The cash
he has spared so he can purchase timber and pay colleagues. Without capital the craftsman couldn't construct a
house, or even a fence.

All other capital is augmentation and reflection of a similar principal thought anything that makes work more
proficient and successful at making riches, the things of significant worth to people. The main stone blade was
capital.

In a similar sense, nuts put away for the winter are capital for squirrels.

Analysis

1. How do Corporations/Individuals raise a Capital?

Your answer:

Assets are dependably welcome on the off chance that you are importance to begin a business or have
as of late began one. Money related arranging is the key part of a gainful business. Raising capital for the
business is a significant aspect of the budgetary coordinating structure. Right when you've begun a business
you must calculate the extent of usage you will accomplish and the extent of capital you need to raise to cover
that use. All affiliations require a central hypothesis to meet their fundamentals. Imaginative plans to raise
capital have incited the improvement of enormous affiliations.

First you need to discover the sources to raise capital. These sources can be as advances, renting, financial
specialists and public duty. If you choose to start a business, you should from the outset consider approaches to
manage raise capital. First you should begin to bring capital up in detachment. Make an outline of the away from
number of hypothesis finances that you have. Figure the extent of cash you have spared in your records and
assets. On the off chance that you deal with your own backings well, you will recognize how much money to
raise.

Exactly when you have chosen your own records, you must raise resources through different techniques. The
most creative strategy to raise capital is to make an undertaking for your business. You would then have the
choice to accumulate capital by getting cash from your loved ones. It is more direct to pick up cash from family
as they will be enthused about your endeavor.

Show your loved ones an introduction of your undertaking and welcome them to assist you with raising capital for
your undertaking. If your loved ones watch your undertaking and the headway of your business, they will be glad
to raise capital for you. You can in like way raise capital by shaping joint affiliation firms. You can make
individuals join your business by letting them know of the favorable circumstances earned and the focal points
got. In joint affiliations, colleagues pool in genuine cash and assets for raise capital for affiliations.

Different governments likewise give out advances to new affiliations. These advances are called exclusive
business credits. These credits are offered out to urge new money bosses to begin another business and to help
them with raising capital. These advances are given at reasonable credit costs. A reasonable bank record will in
addition help you with getting a bank credit. You can raise capital by applying for a credit from the bank.

If you wish to raise capital, you must look at the market. Discover who your potential clients are. You must locate
the most ideal approach to manage raise capital for your business, so you can profit through your tendencies in
your business. Regardless of whether you have a dove in business, you truly need to fund-raise for anticipated
undertakings. Notwithstanding the way that a section of the theory cost will ascend out of the preferences, you
need capital for different undertakings.

A creative thought and authentic examining have incited little affiliations winding up being giant associations. You
should comprehend your clients well. Client requests continue changing and you need more inventive thoughts
in your business to give the clients best courses of action. For your business, you need to raise capital during
various stages. Credits are available to raise capital and on the off chance that you have a noteworthy affiliation
you can give stocks and bonds and reveal your affiliation.

Abstraction

Businesses, individuals, and governments often need to raise capital. Those with surplus funds
expect to earn a return on their investments, while people and organizations that need capital
understand that they must pay interest to those who provide that capital.
 There are three capital formation processes.

Direct transfers happen when a business sells its stocks or bonds directly to savers, without
going through any type of financial institution. This procedure is used mainly by small firms and
relatively little capital is raised.

Indirect transfers are through an investment bank (primary market transaction). The company
sells its stocks or bonds to the investment bank (underwriter), which then sells these same securities to
savers which the issue. An underwriter serves as a middleman and facilitates the issuance of securities.
There is a risk that it may not be able to resell the securities to savers for as much as it paid because
the investment bank buys and holds the securities for a period of time. New securities are involved and
the corporation receives the proceeds of the sale.

Indirect transfers are through a financial intermediary (bank, insurance company, or mutual
fund). The intermediary obtains funds from savers in exchange for its securities. The intermediary uses
this money to buy and hold businesses’ securities, while the savers hold the intermediary’s securities.
For example, a saver deposits dollar in a bank, receiving a certificate of deposit; then the bank lends
the money to a business in the form of a mortgage loan. Thus, intermediaries literally create new forms
of capital—in this case, certificates of deposit, which are safer and more liquid than mortgages and thus
are better for most savers to hold. The existence of intermediaries greatly increases the efficiency of
money and capital markets.

Application
 1. Describe the different ways in which capital can be transferred from suppliers of capital to
those who are demanding capital.

Your answer:

In a well-functioning economy, capital will flow efficiently from those who supply capital to those who
demand it. This transfer of capital can take place in three different ways.

Direct exchanges of cash and protections happen when a business sells its stocks or securities
straightforwardly to savers, without experiencing any sort of budgetary organization. The business conveys its
protections to savers, who thusly give the firm the cash it needs.

Moves may likewise experience a venture banking house which endorses the issue. A financier fills in as a go
between and encourages the issuance of protections. The organization offers its stocks or securities to the
venture bank, which thusly offers these equivalent protections to savers. The organizations' protections and the
savers' cash only go through the speculation banking house.

Moves can likewise be made through a budgetary delegate. Here the go-between gets assets from savers in
return for its own protections. The mediator utilizes this cash to purchase and hold organizations' protections. Go
between in a real sense make new types of capital. The presence of mediators extraordinarily builds the
productivity of cash and capital business sectors.
Assessment

1. Why are efficient capital markets necessary for economic growth?

Your answer:

You can’t have an economy without a financial system. Whether it’s barter or financial derivatives, the
financial system is the grease that lets the economy move. It provides the means of exchange of value that
elevates us from a hunter-gatherer society to one in which we explore the planets and beyond.

The development of any country depends on the economic growth the country achieves over a period. Economic
growth deals about investment and production and the extent of Gross Domestic Product in a country. Only
when this grows, the people will experience growth in the form of improved standard of living, namely economic
development.

Money is the lubricant of the economy. The financial sector is the oil pump for that lubricant. It transfers money
from place to place from lender to borrower and from time to time money lent or borrowed today to be recouped
or returned tomorrow. It allows resources to be transferred round the economy to achieve best performance
without everybody who has some resource needing to find the people, who need that exact resource.

Hurray! You are done with Lesson 1. Pause

for a while and prepare yourself for
Lesson 2.
 Types of Financial Markets

Introduction

Let us celebrate simple milestones. Congratulations, you advanced in Lesson 2 of Module 2. In

this lesson, you will get to know the different financial markets where people and organizations borrow
money.

Activity

1. What are financial markets?

Your answer:

Financial market is the transactions in the Philippine Stocks Exchange

Analysis

1. Why financial markets important?

Your answer:

Budgetary business sectors accommodate the productive assignment of assets inside the economy. Through
composed and directed trades, money related business sectors furnish members with some confirmation that
they will be dealt with decently and sincerely. The monetary business sectors give organizations and legislative
elements admittance to capital.
Abstraction

Physical asset markets versus financial asset markets.

Physical asset markets (“tangible” or “real” asset markets) are for products such as wheat,
autos, real estate, computers, and machinery.

Financial asset markets deal with stocks, bonds, notes, and mortgages. It also deals with
derivative securities whose values are derived from changes in the prices of other assets. A share of
Ford stock is a “pure financial asset,” while an option to buy Ford shares is a derivative security whose
value depends on the price of Ford stock.

Spot markets versus futures markets.

Spot markets are markets in which assets are bought or sold for “on-the-spot” delivery.

Futures markets are markets in which participants agree today to buy or sell an asset at some
future date. For example, a farmer may enter into a futures contract in which he agrees today to sell
5,000 bushels of soybeans 6 months from now at a price of $5 a bushel.

Money markets versus capital markets.

Money markets are the markets for short-term, highly liquid debt securities. The New York,
London, and Tokyo money markets are among the world’s largest.

Capital markets are the markets for intermediate- or long-term debt and corporate stocks. The
New York Stock Exchange, where the stocks of the largest U.S. corporations are traded, is a prime
example of a capital market.

There is no hard-and-fast rule, but in a description of debt markets, short-term generally means
less than 1 year, intermediate-term means 1 to 10 years, and long-term means more than 10 years.

Primary markets versus secondary markets.

Primary markets are the markets in which corporations raise new capital. The corporation
selling the newly created stock receives the proceeds from the sale in a primary market transaction.

Secondary markets are markets in which existing, already outstanding securities are traded
among investors. It also exists for mortgages, other types of loans, and other financial assets.

Private markets versus public markets.

Private markets are where transactions are negotiated directly between two parties

Public markets are where standardized contracts are traded on organized exchanges.

Application

Indicate whether the following instruments are examples of money market or capital market
securities.

MONEY MARKET a. U.S. Treasury bills

CAPITAL MARKET b. Long-term corporate bonds
CAPITAL MARKET c. Common stocks
MONEY MARKET d. Preferred stocks
CAPITAL MARKET e. Dealer commercial paper
Assessment

1. Why are financial markets essential for a healthy economy and economic growth?

Your answer:

Money related business sectors help to productively coordinate the progression of reserve funds and interest in
the economy in manners that encourage the aggregation of capital and the creation of merchandise and
enterprises.

Lesson 2 of Module 2 is
Take a deepdone.
breath and get ready for
Lesson
3.
 Major Categories of Financial Institutions

Introduction

You are now in Lesson 3 of Module 2. In here, you will know the major categories of financial
institutions. Just maintain a positive attitude in learning, you will be alright!

Activity

1. What are financial institutions?

Your answer:
A monetary establishment (FI) could be an organization drawn in inside the matter of managing cash and
budgetary exchanges like stores, advances, ventures, and money trade. cash foundations incorporate a wide
fluctuate of business tasks among the cash administrations segment along with banks, trust organizations,
protection partnerships, financier organizations, and speculation vendors. pretty much everybody living in an
incredibly evolved economy has a current or at least occasional need for the administrations of money related
foundations.

Analysis

1. Differentiate financial institutions from financial markets.

Your answer:
Financial Institution are organizations/elements that offer types of assistance to the individual members
of the money related market. Banks are presumably the most famous monetary establishments in this industry.
They come in a wide range of shapes and sizes, and they can shift from national banks, business banks, web
banks, speculation banks, and so forth. They're the ones that do the most as far as setting aside and replicating
cash, just as other monetary instruments.

Different kinds of monetary organizations incorporate investment funds reserves, protection firms, business
firms, credit associations, speculative stock investments, and home loan organizations. These, occupied with an
amicable association, make an undeniable monetary industry.

While Money related business sectors are the spots where budgetary organizations and people
interface to trade monetary instruments.

A commercial center, for example, this consolidates the entirety of the previously mentioned substances, for
example, banks, protection firms, financier organizations, and some more, just as the people who make stores,
take advances, take part in money related exchanging.
The collaboration point between the two gatherings is the money related instrument. Contingent upon which
instrument you look over, you become a member of a specific money related market.

For instance, if you choose to exchange monetary forms, you're a functioning member of the Forex market - the
biggest budgetary market on the planet with its 10 million members and the day by day exchanged volume of 5–
6 trillion US dollars. On the off chance that you choose to exchange organization shares, at that point your zone
of movement is the securities exchange; gold, silver, and different assets are exchanged the wares market;
Bitcoin and other alt coins - in the cryptographic money market, and so forth.

Along these lines, to give you a short rundown of what I've quite recently composed: Financial business sectors
are places where money related organizations connect with people to trade budgetary instruments. This tight
interconnection is clear on all degrees of the monetary business, which is the reason it has become the essential
driver of the worldwide network.

Abstraction

Investment banks/underwriters traditionally help companies raise capital and acting as a

facilitator to help transfer capital from savers to businesses. They also help corporations design
securities with features that are currently attractive to investors, buy these securities from the
corporation and resell them to savers.
Commercial banks/“department stores of finance” serve a variety of savers and borrowers.
They also provide checking services and significantly in influence the money supply.
Financial services corporations are large conglomerates that combine many different
financial institutions within a single corporation. For example, Citigroup owns Citibank (a commercial
bank), Smith Barney (an investment bank and securities brokerage organization), insurance
companies, and leasing companies.
Credit unions are cooperative associations whose members are supposed to have a common
bond, such as being employees of the same firm. Members’ savings are loaned only to other members,
generally for auto purchases, home improvement loans, and home mortgages. Often the cheapest
source of funds available to individual borrowers.
Pension funds are retirement plans funded by corporations or government agencies for their
workers and administered primarily by the trust departments of commercial banks or by life insurance
companies. Pension funds invest primarily in bonds, stocks, mortgages, and real estate.
Life insurance companies take savings in the form of annual premiums; invest these funds in
stocks, bonds, real estate, and mortgages; and make payments to the beneficiaries of the insured
parties.
Mutual funds are corporations that accept money from savers and then use these funds to buy
stocks, long-term bonds, or short-term debt instruments issued by businesses or government units.
These organizations pool funds and thus reduce risks by diversification. They also achieve economies
of scale in analyzing securities, managing portfolios, and buying and selling securities.
There are three types of Mutual Funds: (1) Bond funds for those who prefer safety; (2) Stock
funds for savers who are willing to accept significant risks in the hope of higher returns and; (3) Money
Market Funds which are used as interest-bearing checking accounts. There are literally thousands of
different mutual funds with dozens of different goals and purposes.
Exchange Traded Funds (ETFs) are similar to regular mutual funds and are often operated by
mutual fund companies. ETFs buy a portfolio of stocks of a certain type—for example, the S&P 500 or
media companies or Chinese companies—and then sell their own shares to the public. ETF shares are
generally traded in the public markets, so an investor who wants to invest in the Chinese market, for
example, can buy shares in an ETF that holds stocks in that particular market.
Hedge funds are also similar to mutual funds because they accept money from savers and
use the funds to buy various securities, but there are some important differences. Hedge funds are
largely unregulated. It traditionally was used when an individual was trying to hedge risks.
Private equity companies are organizations that operate much like hedge funds; but rather
than buying some of the stock of a firm, private equity players buy and then manage entire firms. Most
of the money used to buy the target companies is borrowed.

Application

1. Name three financial institutions in the Philippines. Describe the services they offer.

Sun Life Financial Inc.

Sun Life Financial in the Philippines offers an assorted scope of protection, riches, and resource the
board answers for help each Filipino in their excursion towards a more brilliant life.

As the country’s first and longest-standing life insurer, we provide:

Financial planning and guidance

Life insurance products for every life stage
Investment products for individuals, families, and companies
Health-focused products with an innovative wellness community
Exceptional client-servicing

Metro Bank

One of Metrobank’s offered services is its direct personal loan products. They offer car, corporate,
and housing loans, that offer competitive promo rates and affordable interest rates to provide the best for
their families. This includes a car and a home they can call their own. Car Loan
Metrobank Car loan is made available for Filipinos aged 21 to 65 years old and living in the permanent
residence for the past five years. The borrower must have been employed in the current company for
two (2) years. You can borrow from ₱250, 000.00 up to 80% of the net selling price of the vehicle. Most
banks offer at least ₱100,000.00. Business Loan
Metrobank has three types of business loans which are SME Credit Line, SME Short-term Loan, and
Long-term Loan. SME Credit Line is for people who wants to increase their working capital or those who
need funding for their daily business operations. On the other hand, the two SME term loans are for
those who are looking at acquiring a commercial property or equipment, so to speak, those who need to
add more permanent working capital. Aside from these, SME term loans are also for people who wants
to:

acquire new machinery/equipment, construction, or renovation of commercial property (i.e. warehouse,

facility, or building),
franchise financing
take-out a loan from another bank.
As for the interest rate, the amount of Metrobank business loan interest rate is not shared on its online
site. So, you have to inquire on the bank and then give your personal and busi ness details.

Agdao Multipurpose Cooperative

is a part claimed, network based money related foundation in Davao City with attaches going back to
1991. Agdao Multipurpose Cooperative (AMPC) is a Certified FOCCUS agreeable (Finance
Organizations Achieving Certified Credit Union Standards). It continues the developing number of in
excess of 70,000 individuals from 19 vital areas in Mindanao. It has firmly gone to Davao City where its
Head Office is based.

AMPC branches are situated in Davao Region, SOCKSARGEN and Caraga Region. Vital areas are
arranged in Davao City (Obrero-Head Office, Agdao, Buhangin, Cabantian, Sasa, Ulas, Mintal, San
Pedro, Calinan, Matina, Toril, Obrero, Claveria) IGACOS (Peñaplata, Babak), Digos City, Koronadal
City, General Santos City, San Francisco Agusan Del Sur and Mati City, Davao Oriental.

We will likely give the part proprietors most significant returns on investment funds and the least loan
 costs on credits that are predictable with free from any potential harm the board, exceptional enrollment
administration and money related soundness.

AMPC offers types of assistance to individuals, for example, Salary Loan, Business Loan, Vendor's
Loan, Back To Back Loan, Education Loan, Pension Loan, Home Improvement Loan and other
Productive/Consumer Loans.

Assessment

1. What would happen to the economy of the Philippines if people lost faith in the safety of the
financial institutions? Explain.

Your answer:

On the off chance that individuals in the Philippine lost confidence in the security of money related foundations, it
would be hard for firms to raise capital. In this way, capital speculation would back off, joblessness would rise,
the yield of products and ventures would fall, and, by and large, our way of life would decay.

Honestly, that was intense! You made it

up to this point. Kudos! We are now down
to the last lesson of this Module.
 The Stock Market

Introduction

At last, you are now in the final lesson of Module 2. How are you so far? Did you learn
something? In lesson 4, we will be dealing with stock markets. Don’t get intimated. Just condition your
mind to learn then you will be fine.

Activity

1. What are stocks?

Your answer:
A stock is a kind of security that speaks to legitimate responsibility for business or company. Organizations issue
stock to raise capital (cash) to support their business consumptions. This is private enterprise at its best, when
you buy a portion of a company's stock, you loan your cash to that partnership and permit it the capital it needs
to advance, develop, research, and grow new items. Many these items improve our personal satisfaction, for
example, the IPhone, Netflix, and Google. We will in general underestimate the way that a considerable lot of
these items are accessible to us, anyway development is an immediate aftereffect of our well-working capital
business sectors.

Analysis

1. Who issues stocks?

Your answer:
Any organization that needs to impart value motivating forces to representatives or colleagues in a duty proficient
way could need to do this. Privately owned businesses will need to do this more than public ones since choices
will hit the profit of the organization while protecting beneficiaries from charges. Privately owned businesses for
the most part won't have available benefit for a long time, so this doesn't generally make a difference. The most
effective method to make an investment opportunity pool and register qualified ISO programs with the legislature
is surely known by corporate legal counselors and recorded on the web.
 2. Explain how stocks are issued.

Your answer:
This is on the grounds that an essential market a market wherein partnerships raise capital by giving new
protections and introductory public contributions issue new protections. Companies issue portions of stock to
fund-raise for their business. The offers that are given speak to the measure of cash put by the investors in the
organization. Investors have a proprietorship stake in the organization and appreciate certain rights, for example,
casting a ballot rights and the receipt of profits. In this way it is imperative to consider how to give stock while
arranging your partnership. This is how to issue the stocked Decide how much capital you need.

Decide how much stock the partnership is approved to issue.

Put forward the estimation of the offers that will be given.

Decide the class of the offers to be given.

Decide the quantity of offers to issue.

Ensure you are in consistence with state and government protections law.

Draft the Stock Subscription Agreement.

_
Abstraction

Stock Market is where the prices of firms’ stocks are established. It is the most active
secondary market and the most important one to financial managers. There are a number of different
stock markets. The two leaders are the New York Stock Exchange (NYSE) and the Nasdaq stock
market.

There are wwo basic types of trading stocks:

(1) Physical Location Exchanges are tangible entities. Formal organizations having tangible
physical locations that conduct auction markets in designated (“listed”) securities. Example
of this type is the NYSE and the American Stock Exchange.
(2) Electronic Dealer-based Markets is a large collection of brokers and dealers, connected
electronically by telephones and computers, that provides for trading in unlisted securities.
To name a few example, we have Nasdaq, Over-the-Counter Market or OTC and
Electronic Communications Networks or ECNs.

Common Stock has two markets:

(1) Closely Held Corporation is corporation that is owned by a few individuals who are
typically associated with the firm’s management. This is common for companies that are so
small that their common stocks are not actively traded; they are owned by relatively few
people, usually the companies’ managers.
(2) Publicly Owned Corporation is a corporation that is owned by a relatively large number
of individuals who are not actively involved in the firm’s management. This is for large
companies whose stocks are owned by thousands of investors, most of whom are not
active in management.

There are three types of Stock Market Transactions:

(1) The secondary market where outstanding shares of established publicly owned
companies are traded. The market for outstanding shares, or used shares. The company
receives no new money when sales occur in this market.
(2) The primary market is when additional shares sold by established publicly owned
companies.
(3) The Initial Public Offering (IPO) market is the market for stocks of companies that are in
the process of going public.
Going Public is the act of selling stock to the public at large by a closely held corporation or its
principal stockholders.

To understand stock market efficiency, you should know these terms and its definitions:
Market price is the current price of a stock.
Intrinsic value is the price at which the stock would sell if all investors had all knowable
information about a stock. It is based on its expected future cash flows and its risk.
 The market price tends to fluctuate around the intrinsic value; and the intrinsic value changes
over time as the company succeeds or fails with new projects, competitors enter or exit the market, and
so forth.
Equilibrium price is the price that balances buy and sell orders at any given time.
When a stock is in equilibrium, the price remains relatively stable until new information
becomes available and causes the price to change.
Efficient market is a market in which prices are close to intrinsic values and stocks seem to be
in equilibrium.
When markets are efficient, investors can buy and sell stocks and be confident that they are
getting good prices. When markets are inefficient, investors may be afraid to invest and may put their
money “under the pillow,” which will lead to a poor allocation of capital and economic stagnation. So
from an economic standpoint market efficiency is good.
If the stock market is efficient, it is a waste of time for most people to seek bargains by
analyzing published data on stocks. That follows because if stock prices already reflect all publicly
available information, they will be fairly priced; and a person can beat the market only with luck or
inside information.
Markets are more efficient for individual stocks than for entire companies; so for investors with
enough capital, it does make sense to seek out badly managed companies that can be acquired and
improved.
Even if markets are efficient and all stocks and companies are fairly priced, an investor should
still be careful when selecting stocks for his or her portfolio.
The portfolio should be diversified, with a mix of stocks from various industries along with
some bonds and other fixed income securities

Application
1. Is an initial public offering an example of a primary or a secondary market transaction?
Explain.

Your answer:
An initial public offering is an example of a primary market transaction. This is because a Primary market
transaction is partnerships raise capital by giving new protections and introductory public contributions issue new
protections

_
 Assessment
Explain whether the following statements are true or false.
FALSE a. Derivative transactions are designed to increase risk and are used almost exclusively by
speculators who are looking to capture high returns.
TRUE_b. Hedge funds typically have large minimum investments and are marketed to institutions and
individuals with high net worth’s.
FALSE_c. Hedge funds have traditionally been highly regulated.
TRUE_d. The New York Stock Exchange is an example of a stock exchange that has a physical location.
FALSE_e. A larger bid-ask spread means that the dealer will realize a lower profit.
TRUE_f. The efficient markets hypothesis assumes that all investors are rational.
Good job! You are finished with Module 2.
Congratulations for doing your best. You
may run through the module once again to
fully understand the lesson. The learnings
you gained here comes handy in our
future endeavors.
Module Summary
You have completed the second module of Financial Management. Key points covered in the
module include:
 There are three capital formation processes: Direct transfers, Indirect transfers through
an investment bank (primary market transaction) and; Indirect transfers are through a
financial intermediary (bank, insurance company, or mutual fund).
 Financial Markets have different types namely Physical asset markets, Financial asset
markets, Spot markets, Futures markets, Money markets, Capital markets, Primary
markets, Secondary markets, Private markets and Public markets.
 There different types of Financial Institutions: Investment banks/underwriters,
Commercial banks, Financial services corporations, Credit unions, Pension funds, Life
insurance companies, Mutual funds, Exchange Traded Funds (ETFs), Hedge funds
and; Private equity companies.
 Stock Market is where the prices of firms’ stocks are established. It is the most active
secondary market and the most important one to financial managers.
 The two leaders of stock markets are the New York Stock Exchange (NYSE) and the
Nasdaq stock market.
 There are a number of different stock markets, the Physical Location Exchanges
Electronic Dealer-based Markets.
 Common Stock has two markets are categorized into Closely Held Corporation and
Publicly Owned Corporation.
 There are three types of Stock Market Transactions: (1) The secondary market where
outstanding shares of established publicly owned companies are traded, (2) The
primary market is when additional shares sold by established publicly owned
companies and; (3) The Initial Public Offering (IPO) market.
 Going Public is the act of selling stock to the public at large by a closely held
corporation or its principal stockholders.
 Market price is the current price of a stock.
 Intrinsic value is the price at which the stock would sell if all investors had all knowable
information about a stock. It is based on its expected future cash flows and its risk.
 Equilibrium price is the price that balances buy and sell orders at any given time.
 Efficient market is a market in which prices are close to intrinsic values and stocks
seem to be in equilibrium.
 When markets are efficient, investors can buy and sell stocks and be confident that
they are getting good prices.
 When markets are inefficient, investors may be afraid to invest and may put their
money “under the pillow,” which will lead to a poor allocation of capital and economic
stagnation.
 If the stock market is efficient, it is a waste of time for most people to seek bargains by
analyzing published data on stocks. That follows because if stock prices already reflect
all publicly available information, they will be fairly priced; and a person can beat the
market only with luck or inside information.
 Markets are more efficient for individual stocks than for entire companies; so for
investors with enough capital, it does make sense to seek out badly managed
companies that can be acquired and improved.
 Even if markets are efficient and all stocks and companies are fairly priced, an investor
should still be careful when selecting stocks for his or her portfolio.
 The portfolio should be diversified, with a mix of stocks from various industries along
with some bonds and other fixed income securities