Name: Arman B.

Gurra

BSBA-OM 4/1 AP

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.

The three primary ways that capital is transferred between savers (those who have extra income they
want to invest) and borrowers (those who need capital to fund their operations or investments) are:

a. Direct transfers: This is the simplest method, where businesses sell their securities directly to savers
without going through any type of financial institution. The business delivers the securities (like stocks or
bonds) to the savers, who in turn give the business the money it needs.

b. Investment Banks: In this a method, a business can sell its securities to an investment bank, which
then sells these securities to savers in the primary markets. The investment bank, acting as an
underwriter, facilitates the issuance of securities. The funds from the savers then go to the business.

c. Financial Intermediaries: Institutions such as banks, mutual funds, or pension funds act as
intermediaries between savers and borrowers. Savers deposit funds into these institutions, which then
use the money to buy a business's securities or to give out loans.

2. Why are financial markets essential for economic growth?

Financial markets play a crucial role in the overall development of an economy. They serve as the
medium where savers can invest their funds and where companies can raise capital to finance their
operations. They facilitate the flow of funds from those who have surplus capital to those who need it.
This capital can then be used for productive purposes like building infrastructure, expanding operations,
or investing in new projects, which contribute to economic growth.

Moreover, financial markets provide a platform for investors to diversify their portfolios, manage risk,
and get a return on their investments. They also contribute to the creation of wealth by allowing
individuals and businesses to invest in a variety of financial instruments.
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?

This transaction would be a primary market transaction. In the primary market, securities are sold for the
first time by the issuing company to investors. Mac & Co., acting as an underwriter, is facilitating the sale
of newly issued Apple stock to investors. Juan is buying these newly issued shares directly from Apple
through Mac & Co.

4.Would it make a difference if Juan purchased previously outstanding Apple stock in the dealer market?
Explain.

Yes, it would make a difference. If Juan purchased previously outstanding Apple stock, it would be a
secondary market transaction. The secondary market is where investors buy and sell securities they
already own. The company that issued the shares does not participate in the transaction or receive any
proceeds from the sale. In this case, Juan would be buying shares from another investor, not directly
from Apple. The price of the shares could be different from the original issue price, as it would be
influenced by Apple's current perceived value and market conditions.

Efficiency in a financial market refers to how well it incorporates all available information into asset
prices. A market is considered efficient when prices reflect all known information, making it difficult for
investors to consistently earn abnormal profits by trading on publicly available information alone. The
Efficient Market Hypothesis (EMH) distinguishes between three forms of market efficiency:

1. Weak Form Efficiency: Prices already incorporate all past trading information, such as historical stock
prices and trading volumes. Technical analysis is not effective in such markets.

2. Semi-Strong Form Efficiency: Prices reflect all publicly available information, including past data and all
public news. Neither technical analysis nor fundamental analysis can consistently provide an edge.

3. Strong Form Efficiency: Prices reflect all information, including public and private, making it impossible
for anyone to gain an advantage over others.

Now, addressing Pedro Juan's two stock purchase scenarios:

a. Pedro Juan overheard "hot" information about a medical research company receiving FDA approval. If
the stock market is highly efficient, it means this information is already incorporated into the stock's
price, and there may be little room for further gains. Thus, I would advise Pedro Juan to exercise caution
and consider whether he has any unique insights or information that the market might not have factored
in. Blindly following "hot" tips can be risky.
b. Pedro Juan wants to buy shares in a leading technology company's IPO. In this case, the market may
not yet have fully digested the information because IPOs involve new shares entering the market.
However, participating in IPOs can be risky, as initial prices can be inflated. I would advise Pedro Juan to
thoroughly research the company, its financials, and the IPO's offering price. Buying shares in the open
market immediately after the IPO should be done with care, considering the potential for price volatility.

In both scenarios, it's crucial for Pedro Juan to make informed decisions and not solely rely on
information that might already be widely known by other market participants, especially if he believes
the market is highly efficient. Diversification and a long-term investment strategy are also important
factors to consider.