HERNANANDEZ, NINA CASSANDRA M.

BSBA FM2-G2
BANKING AND FINANCIAL INSTITUTION

STRUCTURE OF FINANCIAL MARKETS

- The essential categories and features of these markets are described in the following sections. There
are many different financial markets in a developed economy each dealing with a different type of
security serving a different set of costumers, or operatings in a different part of economy.

DEBT AND EQUITY MARKETS

- Funds in a financial market can be obtained by a firm or an individual in two ways. The most
common method is to issue a debt instrument, such as a bond ora mortgage, which is a contractual
agreement by the borrower to pay the holder of the instrument fixed peso amounts at regular
intervals (interest and principal payments) until a specified date (the maturity date), when a final
payment is made. The maturity of a debt instrument is the number of years (term) until that
instrument's expiration date. A debt instrument is short- term if its maturity is less than a year and
long-term if its maturity is ten years or longer. Debt instruments with a maturity between one and ten
years are said to be intermediate-term.
- The second method of raising funds is by issuing equity instruments, such as common or ordinary
stock, which are claims to share in the net income (income after expenses and taxes) and the assets
of a business.
- Equities often make periodic payments (dividends) to their holders and are considered long-term
securities because they have no maturity date.
- The main disadvantage of owning a corporation's equities rather than its debt is that an equity holder
is a residual claimant, that is.
- The advantage of holding equities is that equity holders benefit directly from any increases in the
corporation's profitability or asset value because equities confer ownership rights on the equity
holders.

Financial Market functions as both primary and secondary markets for debt and equity securities.
 Primary Market
- Primary Market refers to original sale of securities by governments and corporations. The primary
markets for securities are not well known to the public because the selling of securities to initial
buyers often takes place behind closed door.
- Corporations engage in two types of primary market transactions, public offerings and private
placements. A public offering, as the name suggests, involves selling securities to the general public
whereas private placement is a negotiated sale involving a specific buyer.
- To avoid partly the various regulatory requirements and the expense of public offerings, debt and
equity are often sold privately to large financial institutions such as insurance companies or mutual
funds.
  Secondary Market
- After the securities are sold to the public (institutions and individuals) they can be traded in the
secondary market between investors. Secondary market is popularly known as Stock Market or
Exchange.
- Securities brokers and dealers are crucial to a well-fimctioning secondary market. Brokers are agents
of investors who match buyers with sellers of securities; dealers link buyers and sellers by buying
and selling securities and stated prices.

There are two broad segments of the stock markets

1. 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 (eg, Philippine Stock Exchange, New York Stock
Exchange, Japan Nikkei, Shanghai Components, NASDAQ, etc.)
2. The Over-the-Counter (OTC) Exchange. Where shares, bonds and money market instruments are traded
using a system of computer screens and telephones. The NASDAQ is an example of an over-the- counter
market in which dealers linked by computer buy and sell stocks. Dealers in an over-the-counter market attempt
to match up the orders they receive from investors to buy and sell its stock. Dealers maintain an inventory of the
stocks they trade to help balance buy and sell orders, Many common stocks are traded over the counter although
the majority of the largest corporations have their shares traded at organized stock exchange.

Secondary markets serve two lmportant functions:

1. They make it easier to sell these financial instruments to raise cash; that is they make the financial
instruments more liquid. The increased liquidity of these instruments then makes them more desirable and thus
easier for the issuing firm to sell in the primary market.
2. They determine the price of the security that the issuing firm sells in the primary market. The firms that buy
securities in the primary market will pay the issuing corporation no more than the price that they think the
secondary market will set for this security. The higher the security's price in the secondary market, the higher
will be the price that the issuing firm will receive for a new security in the primary market and hence the grater
the amount of capital it can raise. Conditions in the secondary market are therefore the most relevant
corporations issuing securities.

Stock Exchange
- Stock exchange is an organized secondary market where securities like shares. debentures of public
companies, government securities and bonds issued by municipalities, public corporations, utility
undertakings, port trusts and such other local authorities are purchased and sold.
- The purpose of stock exchange is to facilitate the exchange of securities between buyers and sellers,
thus providing a market place, virtual or real.
- This is called a listing agreement which ensures that the company provides all the information
pertaining to its working from time to time, including events that affect its valuation, such as
mergers, amalgamations and such other sensitive matters.
- The stock market is known as barometer of the company's economy. The companies listed on stock
exchanges collectively contribute to the country's gross domestic product (GDP).
Listing of Securities on Stock Exchange
- Listing means adinission of securities to dealings on a recognized stock exchange of any incorporated
company. central and stage governments, quad governmental and other financial
institutions/corporations, municipalities electricity boards, housing boards and so forth.
- A recognized stock exchange means a stock exchange being recognized by the national government
through the Securities and Exchange Commission (SEC). Securities are bought and sold in recognized
stock exchanges through members who are known as brokers. The price at which the securities are
bought and sold on a recognized stock exchange is known as official quotation.

The securities of an entity may be listed at any of the following stages:

• At the time of public issue of shares or debentures
• At the time of rights issue of shares or debentures • At the time of bonus issue of shares
• Shares issued on amalgamation or merger

THE PHILIPPINE STOCK EXCHANGE

- The Philippine Stock Exchange, Inc. (Filipino: Pamilihang Sapi ng Pilipinas, PSE: PSE) is the national
stock exchange of the Philippines. The exchange was created in 1992 from the merger of the Manila
Stock Exchange and the Makati Stock Exchange. Including previous forms, the exchange has been in
operation since 1927.

Snapshot of PSE History

- On February 3, 1963, the Securities and Exchange Commission announced that it had "relinquished
control of the Manila Stock Exchange
- The Philippine Stock Exchange was formed on December 23, 1992 from the merger of the Manila
Stock Exchange (MSE) (established on August 12, 1927, based on Muelle de la Industri, Binondo,
Manila) and the Makati Stock Exchange (MSE) (established on May 15, 1963, based in the Makati
Central Business District, within Ayala Tower One). Both exchanges traded the same stocks of the same
companies.
- In June 1998, the Securities and Exchange Commission (SEC) granted the PSE a "Self-Regulatory
Organization" (SRO) status, which meant that the bourse can implement its own rules and establish
penalties on erring trading participants (TPS) and listed companies
- In 2001, the PSE was transformed from a non-profit, non-stock, member- governed organization into a
shareholder-based, revenue-earning corporation headed by a president and a board of directors and on
December 15, 2003 listed its own shares on the exchange (traded under the ticker symbol PSE) On July
26, 2010 the PSE launched its new trading system. PSEtrade, which was acquired from the New York
Stock Exchange.
- In 2019, the PSE introduced a new index that will help track the overall returns of the main index. The
Total Return Index (PSE, TRI), is part of the effort to create a broader investor base for the market The
Philippine newspapers publish daily the activities in the Philippine Stock Exchange by reporting (a) the
PSE index. gain / loss and (b) individual trading outcome of publicly-listed securities. A list of
 companies (323) registered with the Philippine Stock Exchange where stock are actively traded as of
September, 2019 is shown in Appendix B.

THE OVER-THE-COUNTER MARKET

- 106 Chapter 7 The vast majority of publicly available equities are seldom bought or sold and are of no interest
to institutional investors. Such shares are usually traded over the counter (OTC), In the United States, which has
far more publicly traded companies than any other country, an estimated 25,000 firms trade over the counter,
about three times as many as trade on organized exchanges. Most of these are very small firms, and some do
not file the periodic financial reports and audited financial statements required by stock exchanges. (In the
United States, trading on the NASDAQ stock market is sometimes referred to as over-the counter trading, but
this convention is outdated).

Day Trading
- Day trading is the buying and selling of shares, currency, or other financial instruments in a single day.
The intention is to profit from small price fluctuations-sometimes traders hold shares for only a few
minutes.