Emmanuelle P.

Rojas March 30, 2020

BSAIS-2A
FINANCIAL MARKETS

1. Describe what financial markets are.

Financial Markets are the meeting place for people, corporations and institutions that either need money or
have money to lend or invest. Financial Markets exist as a vast global network of individuals and financial
institutions that may lenders, borrowers or owners of public companies worldwide. It refers to a marketplace
where creation and trading of financial assets, such as shares, debentures, bonds, derivatives, currencies,
etc. take place. It plays a crucial role in allocating limited resources, in the country’s economy.

2. Distinguish between public financial markets and corporate financial

market.

Participants in the financial markets also include national, state and local governments that are primarily
borrowers of funds for highways, education, welfare and other public activities; their markets are referred to
as Public Financial Markets. A company that has held an initial public offering and whose shares are traded
on a stock exchange or in the over-the-counter market while large Corporations raise funds in the Corporate
Financial Markets.

3. Distinguish between primary market and secondary market.

The investors in a Primary Market can directly purchase the shares from an entity and the prices of the
newly launched securities in this market is generally fixed whereas the investors in a Secondary Market do
not have the chance to purchase the shares directly since these are traded amongst investors and the
prices of securities in this market tend to fluctuate as a result of security’s demand and supply.

4. What are the basic functions of the financial markets? Explain them
briefly.

Financial markets and financial intermediaries 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. Well-functioning
financial markets and financial intermediaries are crucial to our economic health. When the financial system
breaks down, severe economic hardship results.

5. What are the two principal sources of funds in financial market?

Explain briefly.

The Debt Market is the market where debt instruments are traded. Debt instruments are assets that require
a fixed payment to the holder, usually with interest. Examples of debt instruments include bonds
(government or corporate) and mortgages.
The Equity Market (often referred to as the stock market) is the market for trading equity instruments. Stocks
are securities that are a claim on the earnings and assets of a corporation.
6. Distinguish between the organized stock exchange and over-the-
counter exchange.

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.
The Over-The-Counter Exchange. Where shares, bonds and money market instruments are traded using a
system of computer screens and telephones.

7. What are the attributes of financial markets that investors as well

as creditors are looking for?

Liquidity, the ease with which trading can be conducted. Liquidity benefits almost everyone, trading usually
concentrates in markets that are already busy.
Transparency is the availability of prompt and complete information about trades and prices. Generally, the
less transparent the market, the less the people willing are to trade there.
Reliability, particularly when it comes to ensuring that trades are completed quickly according to the terms
agreed.
Legal Procedures adequate to settle disputes and enforce contracts.
Suitable Investor Protection and Regulation. Excessive regulation can stifle a market. Trading will also be
deterred if investors lack confidence in the available information about securities they may wish to trade, the
procedures for trading, the ability of trading partners and intermediaries to meet their commitments.
Low Transaction Costs. Many financial market transactions are not tied to a specific geographic location,
and the participants will strive to complete them in places where trading costs, regulatory costs and taxes
are reasonable.

8. What are the forces that brought about major changes in the
financial markets for the last two or three decades?

Technology. Almost everything about the markets has been reshaped by the forces of technology. Abundant
computing power and cheap telecommunications have encouraged the growth entirely new types of
financial instruments and have dramatically changed the cost structure of every part of the financial industry.
Deregulation. The trend deregulation has been worldwide. It is not long since authorities everywhere kept
tight controls of financial markets in the name of protecting consumers and preserving financial stability.
Liberalization. The reduction of regulations has been accompanied by a general liberalization of rules
governing participation in the markets.
Consolidation. Liberalization has led to consolidation, as firms merge to take advantage of economies of
scale or to enter other areas of finance.
Globalization. Most of the important financial firms are now highly international, with operations in all the
major financial centres. Investors increasingly take a global approach as well, putting their money wherever
they expect the greatest return for the risk involved, without worrying about geography.

9. What benefits could be achieved if the Code of Ethics governing

Financial Market Activities would be implemented and followed by the
participants.

The Code was designed to be generally principles-based which can be applied as a minimum standard in
trading across financial product markets. It is aimed to guide members in decision-making when faced with
ethical situations; and determining the nature of their responsibilities to one another, to clients and the
market. It is important then that all market practitioners observe the guiding principles embodied in this Code
 to continue to promote greater professionalism in our treasury markets. Thus it includes Professionalism,
Integrity if Capital Markets, Duties to Clients, Conflicts of Interest and Duties to Market Counterparties.

10. What is a stock exchange? What is its main purpose?

A stock exchange is a place where different financial instruments are traded – stocks, commodities
derivatives, etc. – bringing corporations and governments together with investors. Exchanges help provide
liquidity in the market, giving sellers a place to liquidate their shareholdings. The fundamental purpose of
stock exchanges is capital formation and intermediation: they provide a central marketplace to help
companies raise capital from investors who have it.

11. What does “listing of securities” mean?

Listing means admission of securities to dealings on a recognized stock exchange. The securities may be of
any public limited company, Central or State Government, quasi-governmental and other financial
institutions/corporations, municipalities, etc. The objectives of listing are mainly to provide liquidity to
securities, mobilize savings for economic development, and to protect interest of investors by ensuring full
disclosures.

12. What is the implication of the SEC granting a “Self-Regulation

Organization” status to the Philippine Stock Exchange?

It was June 1998, the Securities and Exchange Commission (SEC) granted Philippine Stock Exchange a
“Self-Regulatory Organization” status, which meant that the bourse can implement its own rules and
establish penalties on erring trading participants and listed companies.