FINANCIAL MARKETS
Chapter 2: Introduction and Overview of Financial Markets
BS in Accountancy 2-C ︳Prof. Jennivib D. Diamzon ︳Bafin 101B
Financial Markets
❖ any marketplace where the trading of
securities occurs, including the stock
market, bond market, forex market,
and derivatives market, among others.
❖ These markets may include assets or
securities that are either listed on
regulated exchanges or else trade
over the counter (OTC).
Role of Financial Markets
❖ Financial markets play a vital role in
facilitating the smooth operation of
capitalist economies by allocating
resources and creating liquidity for
businesses and entrepreneurs.
❖ The markets make it easy for buyers
and sellers to trade their financial
holdings.
❖ Create securities products that provide
a return for those who have excess
funds (Investors/lenders) and make
these funds available to those who
need additional money (borrowers).
Types of Financial Market
1. Stock Market
● The equities (stock) market is a
financial market that enables investors
to buy and sell shares of publicly
traded companies.
● Some markets are small with little
activity, like the PSE, Macao Stock
Exchange, Taiwan Stock Exchange
● Other trade trillions of dollars of
securities daily. Ex. New York Stock
Exchange, NASDAQ, Tokyo Stock
Exchange , Shanghai Stock
Exchange. HK Stock Exchange.
● The primary stock market is where
new issues of stocks, called initial
public offerings (IPOs) IPOs), are
● Any subsequent trading of stocks
occurs in the secondary market,
where investors buy and sell securities
that they already own
2. Over-the-Counter Markets
(OTC)
● is a decentralized market meaning it
does not have physical locations, and
trading is conducted electronically-in
which market participants trade
securities directly between two parties
without a broker.
● While OTC markets may handle
trading in certain stocks (e.g., smaller,
or riskier companies that do not meet
the listing criteria of exchanges), most
stock trading is done via exchanges.
● OTC markets and the transactions
that occur on them are far less
regulated, less liquid, and opaquer.
3. Bond Markets
● A bond is a security in which an
investor loans money for a defined
period at a preestablished interest rate
● Bonds are issued by corporations as
well as by municipalities, states, and
sovereign governments to finance
projects and operations.
● The bond market sells securities such
as notes, and bills issued by
government.
● The bond market also is called the
debt, credit, or fixed income market.
FINANCIAL MARKETS
Chapter 2: Introduction and Overview of Financial Markets
BS in Accountancy 2-C ︳Prof. Jennivib D. Diamzon ︳Bafin 101B
4. Money Markets
● Typically, the money markets trade in
products with highly liquid short-term
maturities (of less than one year) and
are characterized by a high degree of
safety and a relatively low return in
interes
● At wholesale level, the money markets
involve large volume trades between
institutions and traders
● At the retail level, they include money
market mutual funds bought by
individual investors and money market
accounts opened by bank customers
● Individuals may also invest in the
money markets by buying short term
certificates of deposit municipal notes
Treasury bills, among other examples
5. Derivative Markets
● Is a contract between two or more
parties whose value is based on an
agreed upon underlying financial asset
(like a security) or set of assets (like
an index)
● Are secondary securities whose value
is solely derived from the value of the
primary security that they are linked to
● In and of itself a derivative is worthless
● Trades in futures and options
contracts, and other advanced
financial products, that derive their
value from underlying instruments like
bonds, commodities, currencies,
interest rates, market indexes, and
stocks
6. Future Markets
● Where futures contracts are listed and
traded.
● Unlike forwards, which trade OTC,
futures markets utilize standardized
contract specifications, are well
regulated, and utilize clearinghouses
to settle and confirm trades.
● Options markets, such as the Chicago
Board Options Exchange (CBOE)
CBOE), similarly list and regulate
options contracts.
● Both futures and options exchanges
may list contracts on various asset
classes, such as equities, fixed
income securities, commodities, and
so on.
7. FOREX Markets
● Participants can buy, sell, hedge, and
speculate on the exchange rates
between currency pairs
● The forex market is the most liquid
market in the world, The currency
market handles more than 6 6 trillion
in daily transactions, which is more
than the futures and equity markets
combined 1
● As with the OTC markets, the forex
market is also decentralized and
consists of a global network of
computers and brokers from around
the world
● The forex market is made up of banks,
commercial companies, central banks,
investment management firms, hedge
funds, and retail forex brokers and
investors
8. Commodities Markets
FINANCIAL MARKETS
Chapter 2: Introduction and Overview of Financial Markets
BS in Accountancy 2-C ︳Prof. Jennivib D. Diamzon ︳Bafin 101B
● Are venues where producers and
consumers meet to exchange physical
commodities such as agricultural
products (e.g., corn, livestock,
soybeans), energy products (oil, gas,
carbon credits), precious metals (gold,
silver, platinum), or "soft" commodities
(such as cotton, coffee, and sugar).
● Known as spot commodity markets,
where physical goods are exchanged
for money.
● The bulk of trading in these
commodities, takes place on
derivatives markets that utilize spot
commodities as the underlying assets.
● Forwards, futures, and options on
commodities are exchanged both OTC
and on listed exchanges around the
world such as the Chicago Mercantile
Exchange and the Intercontinental
Exchange
9. CryptoCurrency Markets
● Rise of cryptocurrencies such as
Bitcoin and Ethereum decentralized
digital assets that are based on
blockchain technology
● Today, thousands of cryptocurrency
tokens are available and trade globally
across a patchwork of independent
online crypto exchanges
● These exchanges host digital wallets
for traders to swap one cryptocurrency
for another, or for fiat monies such as
dollars or euros
● Because most crypto exchanges are
centralized platforms, users are
susceptible to hacks or fraud •
Decentralized exchanges are also
available that operate without any
central authority These exchanges
allow direct peer to peer (P 2 P)
trading of digital currencies without the
need for an actual exchange authority
to facilitate the transactions
● Futures and options trading are also
available on major cryptocurrencies
HOW DO FINANCIAL MARKETS
WORK
➢ All financial markets work essentially
by bringing together buyers and
sellers in some asset or contract and
allowing them to trade with one
another.
➢ This is often done through an auction
or price discovery mechanism.
WHAT ARE THE MAIN FUNCTIONS
OF FINANCIAL MARKETS?
➢ Its fundamental function is to allow for
the efficient allocation of capital and
assets in a financial economy.
➢ By allowing a free market for the flow
of capital, financial obligations, and
money the financial markets make the
global economy run more smoothly
while also allowing investors to
participate in capital gains over time.
WHY ARE FINANCIAL MARKETS
IMPORTANT?
➢ Without financial markets, capital
could not be allocated efficiently, and
economic activity such as commerce
and trade, investments, and growth
opportunities would be greatly
diminished.
Who Are the Main Participants in
Financial Markets?
FINANCIAL MARKETS
Chapter 2: Introduction and Overview of Financial Markets
BS in Accountancy 2-C ︳Prof. Jennivib D. Diamzon ︳Bafin 101B
1. Firms - use stock and bond markets
to raise capital from investors.
2. Speculators - look to various asset
classes to make directional bets on
future prices.
3. Hedgers - use derivatives markets to
mitigate various risks, and
4. Arbitrageurs - seek to take
advantage of mispricing or anomalies
observed across various markets.
5. Brokers - often act as mediators that
bring buyers and sellers together,
earning a commission or fee for their
services.
WHAT IS A FINANCIAL
INSTITUTION (FI)
➢ Is a company engaged in the business
of dealing with financial and monetary
transactions such as deposits, loans,
investments, and currency exchange.
➢ Encompass a broad range of business
operations within the financial services
sector including banks, trust
companies, insurance companies,
brokerage firms, and investment
dealers.
TYPES OF FINANCIAL
INSTITUTIONS
1. Commercial Banks
● Accepts deposits, offers checking
account services, makes business,
personal, and mortgage loans, and
offers basic financial products like
certificates of deposit and savings
accounts to individuals and small
businesses
● Offer the most recognized and
frequently used financial services
checking and savings accounts, home
mortgages, and other types of loans
for retail and commercial customers
● Banks also act as payment agents via
credit cards, wire transfers, and
currency exchange
2. Investment Banks
● Specialize in providing services
designed to facilitate business
operations.
a. Capital expenditure
b. Financing and equity offerings,
including
c. Initial public offerings
d. Offer brokerage services for
investors,
e. Act as market makers for
trading exchanges, and
f. Manage mergers, acquisitions,
and other corporate
restructurings
3. Insurance Companies
● Providing insurance, whether for
individuals or corporations, is one of
the oldest financial services.
● Protection of assets and protection
against financial risk, secured through
insurance products, is an essential
service that facilitates individual and
corporate investments that fuel
economic growth.
4. Brokerage Firms
● Investment companies and
brokerages, such as mutual fund and
exchange traded fund (ETF) provider
Fidelity Investments, specialize in
providing investment services that
FINANCIAL MARKETS
Chapter 2: Introduction and Overview of Financial Markets
BS in Accountancy 2-C ︳Prof. Jennivib D. Diamzon ︳Bafin 101B

include wealth management and

financial advisory services.
● Provide access to investment products
that may range from stocks and bonds
all the way to lesser-known alternative
investments, such as hedge funds and
private equity investments.

5. Financial System

● Is the set of global, regional, or firm

specific institutions and practices used
to facilitate the exchange of funds.
● Can be organized using market
principles, central planning, or a hybrid
of both.
● Is a network of financial institutions
such as insurance companies, stock
exchanges, and investment banks that
work together to exchange and
transfer capital from one place to
another.
● investors receive capital to fund
projects and receive a return on their
investments.