Financial Market

Review Question:

1. Describe what financial markets are.

2. Distinguish between public financial markets and corporate financial market.
3. Distinguish between primary market and secondary market.
4. What are the basic functions of the financial markets? Explain them briefly.
5. What are the two principal sources of funds in the financial market? Explain briefly.
6. Distinguish between the organized stock exchange and over-the-counter exchange.
7. What are the attributes of financial markets that investors as well as creditors are looking for?
Explain them briefly.
8. What are the forces that brought about the major changes in the financial markets for the last
two to three decades?
9. What benefits could be achieved if the Code of Ethics governing Financial Market Activities
would be implemented and followed by the participants.
10. What is a stock exchange? What is its main purpose?
11. What does "listing of securities" mean?
12. What is the implication of the SEC granting "Self-Regulation Organization" status to the
Philippine Stock Exchange?

Answer:

1. Any location or system that gives buyers and sellers the ability to exchange financial assets, such
as bonds, shares, the different international currencies, and derivatives, is referred to as a
financial market. The connection between people with capital to invest and those who need
capital is facilitated by financial markets.
2. Public finance is the management of a country’s revenue, expenditures, and debt load through
various government and quasi-government institutions. This guide provides an overview of how
public finances are managed, what the various components of public finance are, and how to
easily understand what all the numbers mean. A country’s financial position can be evaluated in
much the same way as a business’ financial statements. The Corporate finance is the subfield of
finance that deals with how corporations address funding sources, capital structuring,
accounting, and investment decisions.
3. The primary market is where securities are created, while the secondary market is where those
securities are traded by investors and In the primary market, companies sell new stocks and
bonds to the public for the first time, such as with an initial public offering (IPO). The secondary
market is basically the stock market and refers to the New York Stock Exchange, the Nasdaq,
and other exchanges worldwide.
4. Basic Function of Financial Market:
 Price Determination:
- The financial market performs various functions for price discovery of different financial
instruments traded among the buyers and the sellers on the platform.
 - The price depends upon the demand and supply factors (market forces) which thereby
assists in deciding the prices of various financial securities as well.
 Liquidity in financial markets:
- Financial markets provide a platform for security to be bought and sold easily, hence (cash)
liquidity for tradable assets increases.
- Investors can sell the asset at any moment, at their fair price prevailing in the market if
they feel it is necessary to recoup their investment. Thus, financial markets provide liquidity.
 Risk sharing:
- The financial market performs the function of risk sharing as the person who is making the
investments is different from the person who is selling their assets/fund.
- Here, the risk is transferred from the person who is selling the investments to those who
are buying the assets.
- Further, it can be liquidated from the buyer to the next buyer of the financial security.
Hence, risk sharing is swiftly completed between parties.
 Easy Access:
- Industries require the investors to raise funds, and the investors require the industries to
invest their money and earn profitable returns.
- Financial markets provide a venue for potential buyers and sellers to meet, interact, agree,
and deal.
- This feature of the financial market not only helps in saving resources like time and money
but also makes trading much easier.
 Reduction in transaction costs and provision of the information:
- It takes a lot of effort and time to operate in a typical market where people trade. The
financial market provides complete information regarding the price of securities, availability
of relevant derivatives, and cost of various financial securities.
- Investors and companies do not have to spend much on resources for getting any kind of
information as it is readily available in financial markets.
- Usually, any trader requires various types of information for doing the transaction of
buying and selling the securities, which is obtained with the disposal of time and money.
- Here, the financial market helps provide every type of information to the traders without
the requirement of spending any money by them, hence reducing the cost of the
transactions.
 Capital formation:
- Financial markets provide the channel for the new savings or cash flow, thus aiding in the
country’s capital formation.
5. the two principal sources of funds in the financial market:
 Debt finance
- Money provided by an external lender, such as a bank, building society or credit union.
It is the opposite of equity financing, which entails issuing stock to raise money. Debt
financing occurs when a firm sells fixed income products, such as bonds, bills, or notes.
Unlike equity financing where the lenders receive stock, debt financing must be paid
back.

 Equity finance
 - Money sourced from within your business. When companies sell shares to investors to
raise capital, it is called equity financing. The benefit of equity financing to a business is
that the money received doesn't have to be repaid. If the company fails, the funds
raised aren't returned to shareholders.
6. The Over the Counter or OTC is a decentralized dealer market wherein brokers and dealers
transact directly via computer networks and phone, while Exchange is an organized and
regulated market, wherein trading of stocks takes place between buyers and sellers in a safe,
transparent and systematic manner. In exchanges, there is only one market maker or dealer per
stock called the specialist. In the OTC market, there may be many dealers for a stock depending
on the trading volume.
7. Finance and the financial markets play a critical role in the market economy by allocating capital
to productive investment, creating a virtuous circle of wealth which drives economic growth.
Beyond pooling savings into capital and allocating that as investment, a well-functioning and
sophisticated financial marketplace also does the following:
 Provides liquidity, the ability to rapidly access cash: Many businesses have seasonal changes
in their cash needs, for example, retail during major holidays, or agriculture during
harvesting season. Liquidity also provides investors’ confidence that they can sell their
financial asset for cash if needed or desired.
 Facilitates price discovery, the act of determining the proper price of a security, commodity,
or good or service through the competitive market forces of supply and demand: This allows
prices to efficiently signal the most productive use of financial resources.
 Allows for the sharing and management of risk via the diversification of investments as well
as by matching the risk appetite of individual investors to the risk profile of different
investments.
8. Financial markets have experienced many changes during the last two decades. Technological
advances in computers and telecommunications, along with the globalization of banking and
commerce, have led to deregulation, and this has increased competition throughout the world.
The result is a much more efficient, internationally linked market, but one that is far more
complex than existed a few years ago. While these developments have been largely positive,
they have also created problems for policy makers. Large amounts of capital move quickly
around the world in response to changes in interest and exchange rates, and these movements
can disrupt local institutions and economies. The subprime mortgage crisis illustrates how
problems in one country quickly affect the economies of other nations.
Globalization has exposed the need for greater cooperation among regulators at the
international level. Factors that complicate coordination include the differing structures among
nations' banking and securities industries, the trend in Europe toward financial services
conglomerates, and reluctance on the part of individual countries to give up control over their
national monetary policies. Regulators are unanimous about the need to close the gaps in the
supervision of worldwide markets. Another important trend in recent years has been the
increased use of derivatives. The market for derivatives has grown faster than any other market
in recent years, providing corporations with new opportunities but also exposing them to new
risks. Derivatives can be used either to reduce risks or to speculate. It's not clear whether recent
innovations have "increased or decreased the inherent stability of the financial system." And
Exchanging, trading, selling and borrowing had never been more flexible, complex, and vast
 after two to three decades without technology, deregulation, liberalization, consolidation and
globalization that took place.
9. In the observance of professionalism, integrity of capital markets, duties to clients, conflicts of
interest and duties to market counterparts, as mentioned by the issued circular letter no. CL
2010-013, can achieve the following:
- Transactions are carried in a right manner of transaction.
- Capital markets will gain more trust from their clients by serving them with honesty.
- Individuals will continue to patronize financial markets if markets are able to prioritize
client’s preference or just simply conducting proper regulations.
- Less dispute or complaint is likely to arise from investors or other traders regarding an
unsettled transaction.
- All financial participants are recognized and queries are addressed as regards to
financial transactions that takes place.
10. A stock exchange is also a financial market that bridges primary sources of shares, debentures,
government securities and bonds with those who want to buy it. The stock exchange’s main
purpose lies in the need for sellers and buyers to have a place to communicate, transact and
settle the sale of financial assets, with less ease while ensuring transparent exchange of financial
assets.
11. Under stock exchange, transparency of financial participants is observed to carry out financial
transactions that meets both buyers and sellers needs and wants such as assuring that expected
return of stock is achievable or such company issuing stocks are solvent enough to liquidate
stocks when the time comes. Listing of securities requires the disclosure of important
information of stocks being bought and sold.
12. “Self-Regulatory Organization” status implies that the bourse, or stock market, which is the PSE
in this instance, can implement its own rules and establish penalties on erring trading
participants and listed companies.