FINANCIAL MARKETS FINANCIAL MAREETS ~ marketplace where securities ate traded = allocate reconrces and create liquidity for businesses and entrepreneurr = buyers and éellert trade Financial holdings TYPES OF FINANCIAL MARKETS H) STock manwers (Eoumies MARKET) : Companies list their charer and where tradert and investors can bay and cell them (publicly) firet time Issuance of new stocks (not firet time) = Seeondary markel- charet can be cubtequentiy iraded 3) OVER-THE-CoMNTER (orc) MARKETS = shaces are not publicly listed = no physical locationt, done elechonically (decentralized market) ~ without broker (direct trading) = Certain derivatives markets are entire ofe = highly liquid short-form maturities (<4 ye.) shorter maturity: | Fitk:d reba > high degree of safety and relatively low interest return + GC short-form certificates of cepocit, Treauury bile, commercial paper, ee: 4) DERIVATIVE MARKET + trades future and option tontracts, as wul as ofner advanced financial protuct Whore value is derived from underlying instmment such as bonds, tommoditier, Currencies, interest rates, market indever, andl Stroke = market fo manage the risk of related primary /underNing intmment ~ Fire Markete- where future contract are traded = wie Gandardired contract specifications , well-requlated, and use clearinghouses = Options Marken ty. Chicago Board Options Exchange 5) FOREX MARKET = buy, fell. hedge, and speculate on currency exchange rates = decentralised, concists of global network of computers ond rvkers = bomlkc, commercial companies, Central banks, invethment management firm, hedge funds. and tetail forex brokers and investors ©) COMMODITIES MARKETS = gathering acess of prraucert and contvmers ty trade Physical commodities = agriculwral products, eherqy products, precious metals, or “soft” commodities +) CRVP URE ENC MaRvEN = decentralized - not idsued oF backed by a central authority = higher Fick - Oxist ony a @ Shared digital record of ownercnip , Chred on Wlockchain * can be bought Isola via exchanges and stored in “walletc”PRIMARY vs. CECONDARY MARKET = Firms sell (float) new toces) powcs {tne public for the fleet Hime = issuing company 2 investor ~ 1P0 ~ Key ployer: +) Corpora tient 2 Inutitutiom (Fund Managerc on he “Buy Side” 3) bnvestmens Banks (full Side") 4) Firm that pwride public accounting 6a a = cubtequent felling of previously lawned Gecuritier wo the iduing companys involvement = Investor fo investor | Auction or Dealer market ~ Key Player: ¥ Gellert and Buyers and announce the prices Pritippine stock Exchar - Invests congregate in ene location = ec: New York Stock Exchange, e SEW $18 —4 $$$ T+, “INVESTMENT BANKS MNDERWRITERS ~ middleman in jorge and complex financial transaction; - Act as baker or financial odvicer = Asis corporations in iscuing Chocks + arrange corporate oebt Financing Buy 610¢ UN WANAGERE E odes aa RSA RETA ana manage their direction Tesponcibie fr managing a team Of investment analycts Terearen nd coleck bect Seewwities TP fit the funds Strategy prvide information fe retail and instittional Investert fy help itm determine whether issuers Of teewrities will we able to meet their obligations can be assigned t bot short and tong-term AU. Securities ised SPEURIC Ceeurities SECwRITIES 2 EXCHANGE Commission (cec) Participant are tinked tegerner via electronic nerworker dealen keep a chek cecuritiee on hand and are ready et. Nasda ~ determing the feuel oF risk involved In a tranaction | de dcion — thoy assume tne ricky ~ Participate in cate reated activities = manage tre public icenance and dishiulon Of common and preferred «tock = bared on PA deot and thei Censitiviy fe changu cuch at Interest rates ~ Investment grade ratings: from Aaa to BBG Clow 0 wo rick of devt defauit) ~ Won-inwtitimtnt gree vatingt: 86 - > (D= debtar hou defaulted ) slaveshment grade: Aas (highest) # Baa (aeotor is able te repay short-term debt) ~ High=Vield/ junk’ debt = epecwlative grades) ea ro c Cprepavitity of repay ment decreacing ar the Letter grade decreates ~ Mwwestment grade: AAA to BBS Cit can repay oebt wlo tue) ~ Speculative graded Bar te D Cuncertain’-fabnee) + { rating, T liketinod of defautt + Devating = Worst ~ ovtrcee organization: and individwall in the Securities markets = Promotes diselorure and dharing 0{ market-related information, fair dealing, and protection against frawaMONEY MARKETS = Trading in very short-term debt invertments ~ involves large volume trades between Initituions and dealers at the wholesale level MONEY MARKET INSTRUMENTS ® Money market fund ~ mama fund 2 Money market account - ovr bearing | anion ai a bank or credit wnion 3) Certificate of Depesinn - savings account thai holds a fixed amount of monty fir a fixed period of fime 8) Gmmmerdial Paper ~ unieewred, Short-term debt commonly ismed by amMpanies te finance their payrallr, Payablet, invenbries, ond omer chort -ferm liabiitiet $) Bankers Acceptance= similar te poitdated check, Bark guarantees tne poy ment Cy dollardeneminated depuine at foreign banks Or of ane oversea branches of American banks » Chort-term borrowing ; involve the purchate of cecurifes with the agrecmert 49 Jal them bauk at a specific dale, usnaly for # higher price [—“caruau wanver [Money warrer = feck and bond markers = wwestments wl) a mahnny of a a whole, less Hone 4 year CAPITAL MARKET: FIXED INCOME MARKET BOND MARKET = AeA. debt marke, fixed income market, oF credit market ~ refere tr all debt Seewrities satee and issues PRIMARY VS. SECONDARY BOND MARKET deuritie Hat have already been fald in the Primary marked are bought and fold in ARE Coumndary market at later date Eres = francaction that fake place Solely bebween bond isuert ‘ine ond buyert ‘TRADING _W THe BOND MARKETS 1) Bonds iceued by corporanions 3) Bonds of the government 3) Bonds from emerging markes (internafonal trading) STOOK VS. BOND MARKET = wed B fend equity = und # Finance debi = do wo} entitle the owner fy a vetwn of money OF the need fy pay interest (or dividends) = riskier and have a greater potential for larger gains oF testes = hype of credit in which tne oreewer (ond ieeuer) is vespuntible fer repaying the bondi owners principal 4 Intere ct = lets risky because of legal Safeguards nd guarantees tat stale payback 1 credirnsFIXED INCOME (ECupINES = investment Hat pays 4 fixed rate of interest over a certain period ot fime and returns the principal oF matwwiy Tres: © Treasury notes 3) Treassivy bills 3) Cerificate of Deposit 4) Prefured teks © Bonds Rusts: = low rehtrat ond ddlayed capital appre tiation = intereat cate vist ~ default risk = Fixed-rate bonds’ returns ave eveded by inflation YIELD To MATMRITY (vr) ON Bonds = the discount vate that equates He iceue prive, and precent value ef face value and future interect payment YIM = (Face Vawe x Present value factor) + (Annual interect Payment x Present value annuity ) Annwal Interest Payment 4 Yee to Matarity = sane MORTGAGE MARLET : PRIMARY AND SECONDARY MARKET ~ primary lenders where heme loans and cervieing Tights are bought and sold between fenders and investors CAPITAL MARKET: STock MARKET = publicly traded company shares B ‘Phivppine tek Fxchonge (2) - sole Shock exchange in the Philippines Issuing company ———+ investor ———» toeshoes py Tends shag ps Funcrions. 1) Fale Dealings 1m Securities Transactions ~ #9 avoid manipulations in trading, frand 2) Efficient Price Discovery 3) Support All Eligible pet of Participants 4) Investor Protection #) Balanced feguiation REGULATING THE STOCK MARKET = delegated tv a local financial requiater er competent monetary body er aguncy = Philippine Sock Exchange + SEC, ele.PARTICIPANTS a Certified prefesionalt that buy and cali shares On behalf of Investore 2 wranage client pertolior, or groupings of securities 5 ae = handle +e liskng prrcedure in accordance w) stock market’ requiainy standards ©) Cuitedian and depot service providers = keep people's money safe and work w) the stock exchange f move Shares between account HF peapie who WARE 19 buy and sell stocks ©) Market Maker - broker-dealer whe fault fer Fhe drading of Shokt by posting vid and aie prices A Wel a1 keeping 0 sok invont ry THEDRY OF MARKET EFFICIENCY = degret 12 which marke pricet reflect all available revant information = if marka ie dficient, atl information is already priced in, cind +here i Wo Way fe” beat” the market becawce Here are no undervalued oF overvalued secur ovailalele FUNDAMENTAL WS. TECHN\CAL ANALVCIS = measuring a seomritys inbinsic value by examining related cconomic | — ignore the funda mentalr ond financial fachrt such ai the state of the ccomMn and Indushy An favor of shudving the conditions fy microeconomic factoa Wke the efectiveners of the Wihoscal price frend of the stock| Companys management FORMS OF MARKET EFFICIENCY 1) Weale Form - past price movements aire not useful for predickng futwre prices ~ flue price changes tan only ve caused by new information becoming available = Fundamental anaiycis prevails wer technical analysis » ~ astumes that He stocks react quickly fy vew public iaformahon, So that an invecr cannot benehit above and veyond the marker by trading on that new information = neifter technical nor fundamental analycis are reliable = DON private infarmation ol available 4 the general market will be wef fir gaining a trading edvantage 2 = alcertt that market price feflect all public and pavate inftrmaton. building on and incorporating he weak and semi-ctong form = nv invertor, including o Corporate insider, Could profit above the average investor even if he had accecs fe new insider information STOCK MARVET’C ROLE IN THE ECONOMY VY enables businerses fr raite funds by Usuing chek and corporate: bonds Vv allows ordinary investor 1 chore ina company’ financial Succec, profit frm capital gaint, and Feetive money Via dividends, white Inset are algo conceivable Somes ac a conduit for individuals’ Savings oma investments ty be channeled intv profitable investment opporbanitier Voids the country? capital ‘nfrmation and economic progrecs EQUITY INCTRUMENTS Type. ) Common shrek / Ordinary Chares 2) Preferred Steck / Preference ShavesVAUUATION : ‘Capita Asset Pricing Model (cAPm) Ks= Kee + (tm ker) P cost of new common dtocks ink Free rate of refer rate of return if traded in the market @ * Bla 2) Dividend Growth Model or Dividendend-Vield-Plus-Growtn-Rate Ks +(1/ Po) +9 ost of new stocks Dividend at the tnd of the year Py = Market price per share = growin rate 9*(1- Payout) (Roe) 3) Own Bond: Yield: Plus: Rick Premium: ky = Ky 4 RP RELATIVE VAUATIDN METHODS » = indicates the peso amount an investor cam expect tv invest In a campany 18 order Fe Keecive F1 Of that company? earnings = a.k.a ne price multiple how much investre ave willing te pay pur peso oF earnings ~ may be estimated on a trailing (backward-Ieking) oF frrwara ( pajected) basit- W Price-per-Beok Ratio = Wed + compare a companys market capitalization tp His book value P/B Ratio = Market Price per Share | Book value per shore W Price-te-Salet Ratio ~ CKamines a companys market capitalization and revenue t determine whether or mot the Shek if appropnately valued Pls Ratio Marker capitatiza rion (tng noes) Total Sales or Revenue over the previous 12 months x shace price ~ ¥ PIs Ratio, more appealing the investment