IN-TEXT ACTIVITY

Millions wish for financial freedom, but only A financial market is a place where individuals and
those that make it a priority have millions. organizations wanting to borrow funds are brought together with those
― Oscar Auliq-Ice ― having a surplus of fund

It is a system comprised of individuals and institutions,

instrument and procedures that brings together borrowers and savers

The financial market further

 Improved the interactions of buyers and sellers determines price or the price discovery process.
 Provides a mechanism to sell.
 Reduces transactions costs
o As for the search cost, that the buyer or seller reduces cost of searching available person to transact
with because of the existence of the financial markets.
o Information costs are also reduced, because majority of the financial market as well as the financial
institutions offers the data and relevant information for transparency and public consumption.

Financial market can be illustrated by the image below.

Securities offered in the financial markets must be classified accordingly because different securities require different
treatment for reporting purposes of the entity.
Classification of Securities
Basic Types Definition Major Subtypes
Interest-Bearing Interest-bearing assets (as the name suggests) pay
interest. Money Market Instruments
Some pay interest implicitly and some pay it explicitly,
but the common denominator is that the value of Fixed-Income Securities
these assets depends, at least for the most part, on
interest rates.

Equities represent the equity ownership of a corporation

divided up into units, so that multiple people can own Common Shares
a percentage of a business
Preferred Shares

Derivatives a derivative asset is a financial asset that is derived

from an existing primary asset rather than issued by a Futures
business or government to raise capital. As we will
see, derivative assets usually represent claims either

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 on other financial assets, such as shares of stock or Options
even other derivative assets, or on the future price of
a real asset such as gold

Security Definition
Money Market Money market instruments generally have the following two properties:
Instruments 1. They are essentially IOUs sold by large corporations or
governments to borrow money.
2. They mature in less than one year from the time they are sold,
meaning that the loan must be repaid within one year.
Most money market instruments trade in very large denominations, and
most, but not all, are quite liquid.

Examples of this include Treasury Bills, PH T-Bills, or 3Months IOU

Fixed-Income Securities Are securities that promise to make fixed payments according to some
preset schedule. The other key characteristic of a fixed-income security is
that, like a money market instrument, it begins life as a loan of some sort.

Fixed-income securities are therefore debt obligations. They are typically

issued by corporations and governments.

Unlike money market instruments, fixed-income securities have lives that

exceed 12 months at the time they are issued.

Example is of 3 Year notes payable of a corporation with interest rate of

12% per annum.
Common Shares Common Shares represent ownership in a corporation.

For example you own 1,000 shares of Puregold Price Club Inc,(PGold) as
a part owner you are entitled to receive pro rata share of anything paid out
by PGold, have the right to vote, and to received your share of whatever
was left over after all PGold’s debts and other obligations were paid.

Preferred Shares Are equities different from common shares. It is treated with preference or
with advantage and commonly sold for a price higher than common
shares because of the advantageous treatment.

Some of the preference share right is to received payment in dividends

first.
Futures Contract A futures contract is just an agreement made today regarding the terms of
a trade that will take place later.

For example, suppose you know that you will want to buy 100 ounces of
gold in six months. One thing you could do is to strike a deal today with a
seller in which you promise to pay, say, P2,000 per ounce in six months
for the 100 ounces of gold. Simply, you and the seller agree that six
months from now, you will exchange P200,000 for 100 ounces of gold.
The agreement that you have created is a futures contract.

Options An option contract is an agreement that gives the owner the right, but not
the obligation, to buy or sell (depending on the type of option) a specific
asset at a specific price for a specific period of time.

The most familiar options are stock options.

There are call option and put option. The owner of a call option has the
right, but not the obligation, to buy an underlying asset at a fixed price for
a specified time. The owner of a put option has the right, but not the
obligation, to sell an underlying asset at a fixed price for a specified time

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Financial Markets can be classified unto

Classification by nature of claim.

 Debt market - is financial market that the principal instruments sold were debt instrument such as bonds and
notes.
 Equity market – is financial market that the principal object sold is share of stocks.

Classification by maturity of claim.

 Money market is financial market which sells money market instruments or short-term investments. And may
include the
Philippine Treasury bills: short-term debts of PH government;
Bank Certificates of Deposits—liabilities of issuing bank, interest bearing to corporations that hold them;
Commercial paper—short-term liabilities of prime business firms and finance companies
Federal Funds: exchange of excess/deficient reserves between banks on an overnight basis.
 Capital market is financial market which sells long-term assets
And may include the following
Stock market: largest part of capital market and held by private and institutional investors
Corporate bond market held by insurance companies, pension, and retirement funds
Local and state government bonds: Primarily held for tax-exempt feature
Government securities: held by commercial banks, the Fed, individual Americans/foreigners, and dealers

Classification by seasoning of claim.

 Primary market refers when the instruments being sold to the first holder. For example, the stocks of newly
formed corporation were sold through this market- the seller is the company itself to the buyer who held it as
the initial holder.
 Secondary market is when the instrument can be bought from an entity other than the issuing entity. For
example, Corporation A sold its share to Mr. Me, then Mr. Me sold to you, the transaction between Mr. Me and
you is covered under the secondary market.

Classification by immediate delivery or future delivery

 Cash or spot market refers to the delivery and perfection of the contract should occur in relatively short period
of time or at instant.
 Derivative market refers to the instrument where the perfection of the contract and the actual delivery or
performance of the obligations will occur in a distant future.

Classification by organizational structure

 Auction market refers to a market where the selling of goods is through bidding.
 Over-the-counter market refers to the market where transactions were facilitated in the front desk. For
example, you can purchase a share of stock of another corporation in the office of a bank.
 Intermediated market refers to a market where the transactions were being mediated or with the presence of a
middleman or of an agent.

The Philippine Stocks Exchange (PSE):

According to its general information sheet, the company:

The Philippine Stock Exchange, Inc. (PSE) was incorporated on July 14, 1992 as a non-stock corporation with the
primary objective of providing and maintaining a convenient and suitable market for the exchange, purchase and sale of
all types of securities and other instruments. The Company eventually became a stock corporation on August 3, 2001.
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 On December 15, 2003, pursuant to the demutualization mandate of Republic Act No. 8799 or the Securities
Regulation Code, PSE&#s capital stock was listed by way of introduction. The following year, PSE sold 6,077,505 shares
from its unissued stock to five strategic investors by way of private placement. These strategic investors were the PLDT
Beneficial Trust Fund, SMC Retirement Fund, Government Service Insurance System, Kim Eng Investment Ltd., and KE
Strategic Pte. Ltd.

The PSE has two wholly-owned subsidiaries, the Securities Clearing Corporation of the Philippines, which was
primarily organized as a clearing, and settlement agency for; and the Capital Markets Integrity Corporation, which
functions as the PSE's independent audit, surveillance and compliance unit over the trading activities of brokers.

The Company likewise owns 20.98% of the Philippine Dealing System Holdings Corporation, the holding
company of the country’s fixed income exchange operator, and 80% of Premier Software Enterprise, Inc.

PSE is the only operating stock exchange in the Philippines. Its main function is to facilitate the buying and selling
of stocks and other securities through its accredited stockbrokers or trading participants.

The PSE’s trading floor is located at the PSE Tower in Bonifacio Global City, Taguig City - where trading
participants execute transactions daily from 9:30 AM to 12:00 NN and 1:30 PM to 3:30 PM, except Saturdays, Sundays,
legal holidays and days when the Bangko Sentral ng Pilipinas Clearing Office is closed.

SESSION SUMMARY

There are selection of financial instruments and securities you can select with. Each has its own characteristics and
operates on different manner.

Financial market is where you can transact your investments and similar with financial instruments, financial markets can
be classified unto different classes. PSE is the operating stock exchange in the Philippines.

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