GUNGON, Rena Marie C.

(A-116) May 5, 2021

(TTh 10:10AM – 11:40AM) 10:41AM

YMATHBUSFIN – 6219
Final Assignment #3: Financial Markets and Institution

1. What is a financial market? How are financial markets differentiated from markets for
physical assets?

According to Module 9, “financial markets are a system that includes individuals and institutions,
instruments, and procedures that bring together borrowers and savers no matter the location”.
The primary role of financial markets is to facilitate the flow of funds from individuals and
businesses that have surplus funds to individuals, businesses, and governments that need funds
in excess of their incomes.

Financial markets are intangible, they cannot be seen or felt, except for the documents
representing ownership of an asset. Some examples of financial asset markets are stocks, bonds,
savings, investments, accounts receivable, options and much more. Financial assets do not
depreciate or loss value due to wear and tear like physical assets, it mainly loss value depending
on the market conditions.

On the other hand, markets for physical assets are tangible assets and can be seen and
touched and can be liquidated in the event of default to pay off debts, in an accounting point of
view. Examples of physical assets are vehicles, real estate, machinery, gold, and other form of
tangible resources. Physical assets are subject to depreciation, in other words, they usually
experience a reduction in value due to wear and tear of the asset through continuous use.

Lastly, physical assets also require maintenance, upgrades and repairs, whereas financial assets
do not incur such expenses.

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2. Differentiate between money markets and capital markets.

The money market is the trade in short-term debt. It is a constant flow of cash between
governments, corporations, banks, and financial institutions, borrowing and lending for a term as
short as overnight and no longer than a year. Capital markets encompass the trade in both
stocks and bonds. These are long-term assets bought by financial institutions, professional
brokers, and individual investors. (Majaski, 2021)

3. Securities can be traded on physical stock exchanges or in the over-the-counter

market. Define each of these markets and describe how stocks are traded in each one.

Physical stock exchanges are places where stocks are traded. They allow investors to buy and
sell shares of a company among each other in a regulated physical space. (Kennon, 2020) NYSE,
AMEX, and regional exchanges are some examples of physical stock exchanges. Stocks are
traded in physical stock exchanges like an auction and traders who believe a company will do
well bid the price up, while those who believe it will do poorly bid it down. Buyers want to get the
lowest price they can so they can sell for a profit later, while sellers are usually looking for the
best price.

Over-the-counter market (or OTC) is a decentralized market in which market participants trade
stocks, commodities, currencies, or other instruments directly between two parties and without a
central exchange or broker. (Kramer, 2020) Over-the-counter markets do not have physical
locations; instead, trading is conducted electronically. In an OTC market, dealers act as market-
makers by quoting prices at which they will buy and sell a security, currency, or other financial
products. A stock trade can be executed between two participants in an OTC market without
others being aware of the price at which the transaction was completed. An OTC market is also
less formal and less regulated. OTC-traded shares typically will involve smaller (and riskier)
companies, such as penny stocks that do not meet the listing requirements for established stock
exchanges.

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REFERENCES

Module 9: Financial Markets and Institutions: Mathematics in Business Finance. (2021).

Instructure.com. https://hau.instructure.com/courses/4974/pages/module-9-financial-markets-
and-institutions?module_item_id=310763

What is the difference between the physical asset market and the financial asset market? - Quora.
(2020). Quora.com. https://www.quora.com/What-is-the-difference-between-the-physical-asset-
market-and-the-financial-asset-market

Majaski, C. (2021). The Difference Between Money Market and Capital Market. Investopedia.
https://www.investopedia.com/articles/investing/052313/financial-markets-capital-vs-money-
markets.asp

Kennon, J. (2020). Is a Stock Exchange? The Balance. https://www.thebalance.com/what-is-a-

stock-exchange-
358113#:~:text=Definition%20%26%20Examples%20of%20Stock%20Exchanges&text=Stock%
20exchanges%20are%20places%20where,regulated%20physical%20or%20electronic%20spac
e.

Kramer, M. (2020). What Is an Over-The-Counter Market? Investopedia.

https://www.investopedia.com/terms/o/over-the-countermarket.asp