OVERVIEW OF FINANCIAL
issuing financial instruments which
MARKET
Market
- A venue where goods and services are
exchanged.
Financial market
- A place where individuals and
organizations wanting to borrow funds
are brought together with those having
surplus funds.
Types of FM
 Physical assets vs. Financial assets
 Money vs. Capital
 Primary vs. Futures
 Spot vs. Futures
 Public vs. Privates
Function of FM
 Allows transfers of funds from a
person or business w/o investment
opportunities (i.e. lender-savers) to
one who has them (i.e. borrower-
spenders)
 Improves economic efficiency.
The Big Picture
 How the Pieces Fit Together
Why FMs exist
 To facilitate the transfer of money between
dates and between agents
FMs funds transferees
Segments of FMs
1. Direct Finance
 Borrowers borrow directly from
lenders in FMs by selling financial
instruments which are claims on the
borrower’s future income or assets.
2. Indirect Finance
 Borrowers borrow indirectly from
lenders via financial intermediaries
(established to source both loanable
funds and loan opportunities) by
on the borrower’s future income or
assets.
Function of FMs
Importance of FMs
 FMs are critical for producing an
efficient allocation of capital, which
contributes to higher production and
efficiency for the overall economy,
as well as economic security for the
country as a whole
 Financial markets also improve a lot
of individuals participants by
providing investment returns to
lender-savers and profit and/or use
opportunities to borrower-spenders
Financial Ecosystem
  Short-term (maturity < 1 year)
Money Market
 Long-term (maturity > 1 year)
Capital Market
2. Equity Market
 Common stock
Characteristics of Debt Markets
Instruments
 Debt instruments
- Buyers of DI are suppliers (of capital)
to the firm, not owners of the firm.
Financial Instruments - DI have a finite life or maturity date.
- Advantage: DI is a contractual promise
to pay with legal rights to enforce
repayment.
- Disadvantage: return/profit is fixed or
limited
Characteristics of Equity Markets
Instruments
 Equity instruments (common stock is
most prevalent EI)
- Buyers of common stock are owners of
the firm
- Common stock has no finite life or
maturity date
- Advantage of CS: potential high
income since return is not fixed or
limited
- Disadvantage: debt payments must be
made before equity payments can be
made
Characteristics of FMs
1. Debt markets
Classifications of FMs - Much larger than equity markets.
1. Debt Markets
- Less well-known by the average
person.
2. Equity markets
- Highly efficient
- World’s largest and more familiar to
the ave. person
- Far smaller than the debt markets
Classifications of FM
1. Primary market
- New security issues sold to initial
buyers
2. Secondary market
- Securities previously issued are bought
and sold
3. Exchanges
- Trades conducted in central locations
(e.g., BSE/NSE)
4. Over-the-Counter-Markets (NASDAQ,
OTCEI)
- Dealers at different locations buy and
sell
- Now a part of normal SEs
Internationalization of FMs
 International Bond Market
- Foreign bonds
- Eurobonds (now larger than U.S.
corporate bond market)
 World Stock Markets
- U.S. stock markets are no longer
always the largest-at one point, Japan’s
was larger
Function of Financial Intermediaries
(FIs)
 FI
1. Engage in process of indirect finance
2. More important source of finance
than securities markets
3. Needed because of transactions costs
and asymmetric info.
 Transaction Costs
1. FIs make profits by reducing
transactions costs
2. Reduce transactions costs by
developing expertise and taking
advantage of economies
 A FI’s low transaction costs mean that it
can provide its customers with liquidity
services, services that make it easier for
customers to conduct transactions.
1. Banks provide depositors with
checking accounts that enable them
to pay their bills easily
2. Depositors can earn interest om
checking and savings accounts and
yet still convert them into goods and
services whenever necessary
Types of FIs
 Financial Institutions
- Commercial banks
- Specified institutions
- Mutual funds
 Contractual Savings Institutions
- Life insurance companies
- General insurance companies
- PPF’s
- Post offices
- Pension funds, government retirement
funds
 Investment Intermediaries
- Finance companies (NBFCs)
- Brokers
- Agents
Depository Institutions (Banks)
 Commercial banks
- Raise funds primarily by issuing
checkable, savings, and consumer and
mortgage loans
- Collectively, these banks compromise
the largest FI and have the most
diversified asset portfolio
Contractual Savings Institutions (CSIs)
 All CSIs acquire funds from clients at
periodic intervals on contractual basis
and have fairly predictable future payout
requirements.
- Life insurance comps.
They receive fund from policy
premiums, can invest in less liquid
corporate securities and mortgages
since actual benefit pay outs are
close to those predicted by
actuarial analysis.
- General insurance comps.
They receive funds from…., must
invest most in liquid government
and corporate secs., since lost
events are harder to predict.
 All CSIs acquire funds from clients at
periodic intervals on a contractual basis
and have fairly predictable future payout
requirements.
- Pension and Government
Retirement Funds hosted by
corporations and state and local
governments acquire funds through
employee and employer payroll
contributions, invest in corporate
securities, and provide retirement
income via annuities
Investment Intermediaries
 Finance Companies sell commercial
paper (a short-term debt instrument) and
issue bonds and stocks to raise funds to
lend to consumers to buy durable goods,
and to small businesses for operations
 Mutual Funds acquire funds by selling
shares to individual investors (many of
whose shares are held in retirement
accounts) and use the proceeds to
purchase large, diversified portfolios of
stocks and bonds
 Money Market Mutual Funds acquire
funds by selling checkable deposit-like
shares to individual investors and use the
proceeds to purchase highly liquid and
safe short-term money market
instruments
Regulatory Agencies
 SEC
 BOI
 BIR
 Other government agencies 2. Provide a medium of exchange
3. “ mechanism for a rish sharing
Regulation of FMs 4. Provide a channel through which central
 Three main reasons for regulation bank can influence the economy, in
1. Increase info. to investors general and the FS
2. Ensure the soundness of FMs
3. Improve monetary control Basic Functions of the FS
1. Fund acquisition
2. “ allocation
3. “ distribution
4. “ utilization PRIMARY AND SECONDARY
MARKETS
FS Participants
1. Household or consumers What FM do
2. Financial institutions/intermediaries  Raising capital
3. Non-financial institutions  Commercial transactions
4. Government  Price setting
5. Central bank  Asset valuation
6. Foreign participants  Arbitrage
 Investing
 Risk management

Two ways to obtain funds in FMs

Debt instruments
Equity instruments

FINANCIAL SYSTEM Debt Instruments

DEFINITION AND - contractual agreement by the borrower
to pay the holder of the instrument
PARTICIPANTS fixed peso amounts at regular intervals
until a specified date, when a final
Financial System – collectively the FMs, payment is made.
the financial system participants, and the Example: bond or mortgage
financial instruments and securities that - Short-term (less than one year)
traded in FMs - Intermediate (between on and ten
years)
Function of FS - Long-term (ten years or longer)
1. Channel the funds from lenders to
borrowers
Equity Instruments
- claims to share in the net income and
the assets of a business.
- provide dividends to shareholders
- right to vote
Example: common stocks or ordinary shares
- No maturity date
FMs functions as both Primary and
Secondary Markets
Primary Markets
- Original sales of securities by
governments and corps.
- Transaction raises money for the corp.
of the government
Two type of PM Transactions
1. Public offerings – selling securities
to the general public
2. Private placements – negotiated
sale involving a specific buyer
Secondary Markets
- Known as Stock Market or Exchange
Brokers – agent of investors who match
buyers with sellers of secs.
Dealers – link buyers and sellers buying and
selling secs and stated prices
Two broad segments of SM
1. Organized Stock Exchange
- Location where stocks buying and
selling transactions take place in the
stock exchange floor
Ex. Philippine Stock Exchange
monitoring of trading for the benefits
2. Over the Counter (OTC) Exchange of all participants in the market.
- Shares, bonds, and money market
instruments are traded using a system
of computer screens and telephones Philippine Stock Exchange
Pamilihang Sapi ng Pilipinas
Stock Exchange - is the national stock exchange of the
- An entity which is in the business of Philippines
bringing buyers and sellers of stocks - Created in 1992 from the merger of the
and securities together Manila Stock Exchange and the
Makati Stock Exchange.
Purpose of SE - Operating since 1927
- Facilitate the exchange of secs. - Overseen by a 15-member Board of
between buyers and sellers, thus Directors
providing a market place, virtual or
real
Listing Agreement
- Requires agreed upon by the company
in order to be list
- Ensures the company provides all the
info pertaining to its working from
time to time PSE Composite Index (PSEi)
- main index for PSE
Listing - composed of thirty listed companies
- Admission of secs to dealings on a
recognized stock exchange of any
incorporated company, central and
stage governments, quasi
governmental and other financial
institutions/corporations,
municipalities and others.
Principal Objective Listing
- To provide liquidity and marketability
to listed securities and ensure effective
How does the PSE protect my rights as an
investor?
1. Self Regulatory Organization Status
2. Customer First Policy Risk
3. Based Capital Adequacy
4. Disclosure Rules (10-minute Rule,
Online Disclosure System, and
Selective Disclosure Rule)

Stocks
- Stocks are shares of ownership in a
corporation. When you buy stocks of a
publicly listed company, you become a
stockholder or shareholder of a
company. In other words, you become
part-owner of that company. As such,
you participate in that company’s
growth and future profits. Conversely,
you may also lose if the company
suffers a loss or performs below
market expectations