OVERVIEW OF FINANCIAL

MARKETS AND FINANCIAL

INSTITUTIONS

JANUARY 26, 2022

 WHAT IS FINANCE?
• a term describing the study and system of money, investments,
and other financial instruments

• the management of money and includes activities such as

investing, borrowing, lending, budgeting, saving, and
forecasting
EXAMPLES:
• Investing personal money in stocks, bonds, etc.
• Borrowing money from institutional investors
• Lending money to people by providing them a mortgage to buy a house with
• Using Excel spreadsheets to build a budget and financial model for a
corporation
• Saving personal money in a high-interest savings account
• Developing a forecast for government spending and revenue collection
 WHAT IS A FINANCIAL SYSTEM?
• a complex, interrelated arrangement of financial institutions and markets
• Components:
 Private financial institutions (banks, insurance companies, mutual funds,
etc.)
 Government regulatory agencies which overlook these institutions
 The Central bank which decides the monetary policy and thereby impacts
all institutions in the financial market
 FINANCIAL SYSTEMS
• Financial institutions and markets are together called the
financial system.
• This financial system is the backbone of the national economy.
 FINANCIAL SYSTEMS & ECONOMIC
DEVELOPMENT
Important role of financial system in the economic development:
• Interest rates stabilization
• Aids trades and commerce
• Aids in attracting capital
• Aids in infrastructure development
• Helps in employment creation
 WHAT IS AN INVESTMENT?
• An investment is any vehicle into which funds can be placed with the
expectation that they will generate positive income and/or their value is
preserved or increased.
 PARTICIPANTS IN THE INVESTMENT
PROCESS
1. GOVERNMENT
Both local and national government need large amounts of money.
Government needs to fund operating costs that keep it running.
If government has temporary idle cash, it sometimes makes short-term
investments to earn positive returns.
 PARTICIPANTS IN THE INVESTMENT
PROCESS
2. BUSINESS
 To support operations in both the long term and short-term
 Also supply funds if they have excess cash.
 Net demanders of fund since they demand more funds than they supply.
 PARTICIPANTS IN THE INVESTMENT
PROCESS
3. INDIVIDUALS
 People need money, in the form of loans, to buy property like cars and
houses.
 Supply funds to help meet the needs of both government and businesses
through deposits in savings accounts, purchases of debt or equity securities,
buy insurance or various types of property.
As a group, individuals are net suppliers of funds; they put money into the
financial system than they take out.
 DIFFERENT TYPES OF INVESTORS
1. INDIVIDUALS
2. INSTITUTIONAL
 LIFE OF INVESTMENT
1. SHORT-TERM
2. LONG-TERM
 INVESTMENT VEHICLES
• SECURITIES
• SHORT-TERM INVESTMENT
• COMMON STOCK
• FIXED INCOME SECURITIES
• BONDS
• PREFERRED STOCKS
• MUTUAL FUNDS
• PROPERTY
• REAL ESTATE
• TANGIBLES
 IMPORTANCE OF INVESTING
• Investing is the process of placing funds in selected investment
vehicles with the expectation of generating positive income
and/or preserving and increasing their value.
• The availability of funds in the economy largely influences its
growth and continuity. A cyclical interdependence dictates the
flow of funds that are needed to finance the activities of
government, business firms, even individuals.
 REWARDS OF INVESTING
• The suppliers of funds must be sufficiently compensated by the
demanders of funds in exchange for the risk involved in
supplying the funds.
• Returns or rewards from investing are in the form of current
income or increase in value.
FINANCIAL MARKETS
 FINANCIAL MARKETS
• type of marketplace that provides an avenue for the sale and
purchase of assets such as bonds, stocks, foreign exchange, and
derivatives 
• provide a forum within which financial claims can be traded
under established rules of conduct and can facilitate the
management and transformation of risk
 MONEY MARKET
• where short-term funds are raised through the buying and
selling of short term debt securities such as commercial papers,
promissory notes
• transact in financial securities that have a maturity of less than
one year 
 CAPITAL MARKET
• where long-term funds are raised through the bond market,
which deals with long-term debt securities such as bonds, the
stock market which deals with equity securities or stocks
• securities sold have maturities that are at least longer than a
year or have long term maturities i.e., a decade or more
 PRIMARY MARKET
• new shares are issued and sold to the investing public for the first
time
• It is where capital is actually raised by the company selling stock
directly to investors typically through an initial public offering.
Initial Public Offering (IPO) – company is selling stocks to the
public for the first time
 SECONDARY MARKET
• where securities can be bought and sold after they have been issued to
the public in the primary market
• Investors can only buy shares from existing shareholders who are
willing to sell their shares.
• where the original shareholders sell their shares to other investors
• include the stock exchange and the over-the-counter (OTC) market
STOCK MARKET & STOCK EXCHANGE

• Stock market is an organized activity involving the buying

and/or selling of securities done within a stock exchange.
• Stock exchange is an organization whose function is to
facilitate the purchase and sale of stocks and other securities. It
is a market where investors can buy and sell securities after
they have been offered in the primary market.
 OVER-THE-COUNTER MARKET
• Stocks of corporations not listed and therefore not traded in the stock exchange
but registered and licensed by the Securities and Exchange Commission for
sale to the public are only available in the so-called over-the-counter (OTC)
market.
• This market is not a specific organization but another way of trading securities.
• OTC transactions are carried out by direct inquiries and negotiations among
the buyers and sellers through the use of mail, telephone, telegraph, Teletype,
or other forms of communications.
 ADVANTAGES OF STOCK MARKET
• Most accessible market
• Ready market
• Liquidity of market
• Operates in full public view
 PLAYERS IN THE STOCK MARKET
1. STOCK BROKER
- acts as an agent or middleman between the investor and other buyers/sellers.
- As an intermediary, the stockbroker executes orders for clients, purchasing or
selling the stocks on the stock exchange.
- He is the only person or corporation authorized and licensed by the Securities
and Exchange Commission to trade in securities. They are commonly known as
members, member-brokers, or member-firms of the Philippine Stock Exchange.
 PLAYERS IN THE STOCK MARKET
2. STOCK EXCHANGE
- the organization that oversees the transactions of the buyers and
sellers placed through the member-brokers
- Its professional management ensures that the market is
efficient, fair, transparent and orderly by enforcing its rules and
regulations.
 PLAYERS IN THE STOCK MARKET
3. TRANSFER AGENT
- When shares are purchased and transferred from the seller to the buyer, the transaction
should be recorded in the stock books of every listed company which record the complete
shareholdings of each stockholder of the company. But most companies have his record
keeping done by a separate agency, called the transfer agent.
- When a transaction has been done, the details are kept in a ledger or record book by the
company’s transfer agent. As such, the transfer agents maintains the ledgers for each
issuer company showing the name and address of, and the number of shares held by each
registered stockholder.
 PLAYERS IN THE STOCK MARKET
Another function of a transfer agent, which is either a commercial
bank or trust company, is to cancel old certificates, issue new
certificates and change the name of the certificates into the
buyer’s name when the shares have been sold.
 PLAYERS IN THE STOCK MARKET
4. CLEARING HOUSE
- To facilitate transactions and make the market more orderly, all payments
by all stockbrokers are done to a centralized institution, called the
clearinghouse.
- All stockbrokers will make payments to and receive payments from the
clearinghouse for purchases and sales they have made for their clients. At
the same time, all stock certificates will be delivered to and obtained from
this central institution.
 PLAYERS IN THE STOCK MARKET
5. LISTED COMPANY
- A corporation that offers and lists its shares in the stock exchange is
called a listed company or issuer.
- A listed company is also known as a publicly owned company in
view of the fact that its shares were sold to the investing public.
- These are the companies that raised their required funds through
such issuance of securities to the public.
WHY ARE FINANCIAL MARKETS
IMPORTANT?
IMPORTANCE OF FINANCIAL MARKETS

• Financial markets provide a place where participants like

investors and debtors, regardless of their size, will receive fair
and proper treatment.
• They provide individuals, companies, and government
organizations with access to capital.
• Financial markets help lower the unemployment rate because of
the many job opportunities it offers.
FINANCIAL INSTITUTIONS
 FINANCIAL INSTITUTIONS
• sells products to earn money so that it can run its operations and
provide services
• is a company engaged in the business of dealing with financial
and monetary transactions such as deposits, loans, investments,
and currency exchange
TYPES OF FINANCIAL INSTITUTIONS

1. COMMERCIAL BANKS
a type of financial institution that accepts deposits, offers
checking account services, makes business, personal, and
mortgage loans, and offers basic financial products
like certificates of deposit (CDs) and savings accounts to
individuals and small businesses
TYPES OF FINANCIAL INSTITUTIONS

2. INVESTMENT BANKS
 specialize in providing services designed to facilitate business
operations, such as capital expenditure financing and equity
offerings, including initial public offerings (IPOs)
They also commonly offer brokerage services for investors, act
as market makers for trading exchanges, and manage mergers,
acquisitions, and other corporate restructurings.
TYPES OF FINANCIAL INSTITUTIONS

3. INSURANCE COMPANIES
Providing insurance, whether for individuals or corporations
 Protection of assets and protection against financial risk,
secured through insurance products
WHY ARE FINANCIAL INSTITUTIONS
IMPORTANT?
 IMPORTANCE OF FINANCIAL
INSTITUTIONS
• Financial institutions serve most people in some way, as financial
operations are a critical part of any economy, with individuals and
companies relying on financial institutions for transactions and
investing.
• Governments consider it imperative to oversee and regulate banks and
financial institutions because they do play such an integral part of the
economy. Historically, bankruptcies of financial institutions can create
panic.