02 Task Performance 1

Katelyn Mae H. Sungcang BSBAOM – 401A

Financial Markets and Institutions (8 items x 5 points)

Assume that you recently graduated with a degree in finance and have just reported working as
an investment adviser at the brokerage firm of Mac & Co. Your first assignment is to explain the
nature of the Philippine financial markets to Pedro Juan, a professional basketball player. He
recently came to the Philippines from the United States. Juan is a highly ranked basketball player
who expects to invest substantial amounts of money through Mac & Co. He would like to
understand in general terms what will happen to his money. Your boss has developed the
following questions that you must use to explain the Philippine financial system to Juan.

1. Discuss the three (3) primary ways in which capital is transferred between savers
and borrowers.
i. Direct Transfer
A direct transfer is a kind of bank-to-bank transaction in which funds are
transferred between accounts. There are direct transfers between a company and
an investor. An initial public offering that is promoted to investors directly is an
illustration of this. There is no intermediary.
ii. Indirect Transfer through Investment Bankers
An investment banker purchases a security from a firm and then resells it to
individual investors. The "same securities" are subsequently sold to the savings by
the underwriters. The investment banks are merely "passing through" the
securities to the savers.
iii. Indirect Transfer through a Financial Intermediaries
Those borrowers receive money from savers through financial intermediaries. As
an illustration, if a saver deposits extra cash in a bank and receives a deposit
certificate, the bank will utilize that cash to lend to a borrower under a mortgage.
2. Why are financial markets essential for economic growth?
Although financial markets may appear complex, their main purpose is to unite
individuals so that money can be distributed where it is most needed. Markets finance
businesses so they can expand through hiring, investing, and expanding. They give the
government money to assist in financing the construction of new highways, schools, and
hospitals. Without financial markets, capital could not be distributed effectively, which
would significantly reduce economic activities including trade, investments, and growth
potential.

3. Suppose Apple decided to issue additional common stock, and Juan purchased 100
shares of this stock from Mac & Co., the underwriter. Would this transaction be a
primary or a secondary market transaction?
Because Juan purchased his 100 shares of stock from the underwriter, Mac Lyn Don &
Co., his transaction would be on the secondary market.

4. Would it make a difference if Juan purchased previously outstanding Apple stock in

the dealer market? Explain.
Yes, given that it was bought directly from Apple, it would grow to be a major market.
Security creation takes place in the primary market. Companies that conduct initial public
offerings (IPOs) and other new stock and bond sales to the general public do so in the
main market.

5. What does it mean for a market to be efficient? Explain why some stock prices may
be more efficient than others.
Market efficiency is the degree to which market prices accurately reflect all pertinent
information that is currently accessible. There is no way to "beat" the market if it is
efficient because all information is already priced in and there are no assets that are
undervalued or overvalued. Investors can purchase and sell stocks with the knowledge
that they are getting fair prices if the market is efficient. If it's the opposite, investors
 won't invest out of fear, which would result in a poor allocation of resources and
economic stagnation.

6. After your consultation with Pedro Juan, he wants to discuss these two (2) possible
stocks purchases:

a. While in the waiting room of your office, he overheard an analyst on a

financial TV network say that a particular medical research company just
received Food and Drug Administration (FDA) approval for one of its
products. Based on this “hot” information, Pedro Juan wants to buy many
shares of that company’s stock. Assuming the stock market is highly efficient,
what advice would you give him?
Because mispricing can happen in the first place, I believe it is crucial to remind
Pedro Juan that it is challenging or risky to profit from mispriced assets.
According to the most efficient version of EMH, the market price of this stock
already takes into account all information that is publicly available, hence there
are no profits to be earned on this stock as a result of the recent FDA clearance.
This information is already reflected in the price.

b. He has read several newspaper articles about a huge initial public offering
(IPO) being carried out by a leading technology company. He wants to
purchase as many shares in the IPO as possible and would even be willing to
buy the shares in the open market immediately after the issue. What advice
do you have for him?
Not every IPO is a success. Even if you can see a hot subject, buying shares in the
initial sale is frequently challenging. The demand for shares at the offering price
typically outpaces the supply of shares issued in these transactions, which is
known as oversubscription.