FINANCIAL

ENVIRONMENT
 FINANCIAL ENVIRONMENT
 FINANCIAL MARKET
 FINANCIAL INTERMEDIARIES
 TRANSFER OF SECURITIES
 DIRECT TRANSER
 INDIRECT TRANSFER
 STOCK MARKET TRANSACTION
 INITIAL PUBLIC OFFERING
 SEASONED OFFERING
 PRIMARY MARKET TRANSACTION
 SECONDARY MARKET TRANSACTION
 STOCK MARKET EFFICIENCY
 WEAK FORM
 SEMI-STRONG FORM
 STRONG FORM
FINANCIAL ENVIRONMENT
 Is an economic setup that brings together the people that has
shortage of funds and the people who has surplus funds.

COMPONENTS OF FINANCIAL ENVIRONMENT

1. FINANCIAL MANAGER 2. INVESTORS

3. FINANCIAL MARKET
1. FINANCIAL MANAGER

 Are responsible for deciding how to raise and invest company

funds.

2. INVESTORS

 Investors represent individuals or financial institution that provide

funds to firms, government agencies or individuals who need funds.

3. FINANCIAL MARKET

 Represent forums facilitate the flow of funds between investors

firm, and government units and agencies
Financial market
The financial market refers to the market
where the sale and purchase of financial products
occurs. Such products include stocks, bonds,
currencies, derivatives, commodities,
cryptocurrencies, etc.

It acts as a platform for sellers and buyers

to connect and deal in their desired financial assets
at a price determined by market forces.
 1. Stock Market

This is the hub for companies looking forward to raising their

capital. First, they register their shares and issue them to
interested traders via an initial public offering (IPO) in the
secondary market.

TYPES OF FINANCIAL
2. Bond Market
MARKET
It is the marketplace, allowing investors to buy bonds from
companies to finance theirprojects. The bonds are a promise
of repayment to the companies or the government purchasing
them within a specified period. The companies have to pay
the principal amount and interest for a complete settlement
 3. DERIVATIVES MARKET

The derivatives market refers to the financial market for financial instruments such as
futures contracts or options that are based on the values of their underlying assets.

4 different types of derivatives are as follows:

FORWARD CONTRACTS

FUTURE CONTRACTS

OPTIONS CONTRACTS

SWAP CONTRACTS
 4. FOREX MARKET
The foreign exchange (Forex) market helps conduct currency trade. These markets are
operated through financial institutions and are used to determine foreign exchange
prices for every money.

5. COMMODITIES MARKET
A commodity market is a marketplace for buying, selling, and trading raw materials
or primary products.

6. CRYPTOCURRENCY MARKET
Digital assets are trending, given the opportunities offered to investors and traders.
The transactions occur and are recorded using block chain technology.
 A financial intermediary is a financial institution
that connects surplus and deficit agents. An entity
FINANCIAL
that acts as the middleman between two parties in
INTERMEDIARIES a financial transaction.

A financial intermediary is typically an institution that facilitates the

channeling of funds between lenders and borrowers indirectly. That is,
saver (lenders) gives funds to and intermediary institution (such as
bank), and that institution gives those funds to spenders (borrowers).
This may be in the form of loans or mortgages.
DIRECT AND INDIRECT FINANCE

Direct Finance
- borrowers borrow funds directly from the lenders in the financial
markets by selling them securities (financial instruments), which are claims on
the borrower’s future income assets.
Securities are assets for the person who buys them but liabilities to the person or
firms that sells or issue them.
Benefits of Direct Finance
• Borrowers communicate directly to investors
• Raise funds at a faster rate
• High liquidity
Financial liquidity refers to how easily assets can be converted into cash.

• Indirect Finance- Borrowers borrow funds through financial

intermediaries (banks, insurance companies, pension funds) in the form of loans
and deposits.

Benefits of Indirect Finance

• Financial intermediaries are very efficient in reducing the information

costs associated with lending.

• Done through economies of scale and expertise

CLASSIFICATION OF FINANCIAL INTERMEDIARIES
DEPOSITORY AND NON-DEPOSITORY INSTITUTION

1. Depository Institutions- A financial institution that obtains its funds mainly

through deposits from the public. They issue checking accounts (or demand
deposits/current accounts), savings and time deposits.

2. Checking Accounts- can be withdrawn by issuing checks.

3. Saving Accounts- can be withdrawn by using passbooks given by bank to the

depositors when they initially make their deposits.

4. Time deposits- refer to deposits that have maturity of 30-days, 60-days, 180-
days or one year. These may not be withdrawn without penalty prior to maturity,
but they earn more interest that the savings account. Time deposits are evidences
by certificate of deposits; however, these are not negotiable.
 TYPES OF DEPOSITORY INSTITUTION BASED ON BSP
SUPERVISED BANKS
1. UNIVERSAL AND COMMERCIAL BANKS

- offer the widest variety of banking services among financial institutions

- authorized to engage in underwriting and other functions of investment
houses
2. THRIFT BANK

- Is engaged in accumulating savings of depositors

3. RURAL AND COOPERATIVE BANK

- to promote and expand the rural economy in an orderly effective manner by

providing the people in the rural communities with basic financial services.
- Rural banks are privately owned and managed
- Cooperative banks are organized/owned by cooperatives or federation or
 Non-Depository Institution- issue contracts that are not deposits. They perform
financial services and collect fees for them as primary means of business.

TYPES OF NON-DEPOSITORY INSTITUTION

A). INSURANCE COMPANY

- insurance companies protect their customers from the financial distress that can
be caused by unforeseen events, such as accidents or premature death. They pool the small
premiums of the insured to pay the larger claims to those who have losses. The premium
payments are regular while the losses are irregular, both in timing and amount.

• Life insurance companies- are financial intermediaries that sell insurance policies.

• Property/casualty insurance company- offer protection against pure risk. It gives

protection against properly losses in one’s business, or a car against legal liability that may
result from injury or damage to property of others.
 B). PENSION FUNDS

- pension funds are financial institutions which accept saving to provide

pension and other kinds of retirement benefits to the employees of government
units and other corporations. Pension funds are basically funded by corporation and
government units for their employees, which make a periodic deposit to the pension
fund and the fund provides benefits to associated employees on the retirement. The
pension funds basically invest in stocks, bonds and other type of long-term
securities including real estate.
C). FUND MANAGERS

- are pension fund companies and mutual fund companies. Pension

companies sell contracts to provide income to policyholders during their retirement
years. Mutual fund companies are companies that allow investors, including
individuals, to buy into mutual funds that by different securities in the securities
market.
 D). INVESTMENT COMPANY

-are financial intermediaries that pool relatively small amounts of

investors money to finance large portfolios of investments that justify the cost
of professional management.
E). FINANCE COMPANIES

- are profit oriented financial institutions that borrow and lend funds
to households and businesses. Finance companies, consumer finance
companies, and commercial finance companies.
F).SECURITIES DEALERS AND
BROKERS
-Securities brokers are only compensated by means of commission.
-they act as financial intermediaries in the sense that they look for
investors or saving unit for the benefit up the borrowers or deficit units.
• They only earn commission on any sale they make. They do not buy the securities directly.

• Securities dealers, on the other hand, buy securities and resell them and make a profit on
the difference between their purchase price and their selling price.

G). PAWNSHOP
- are the agencies that end money on the security of pledge goods left in pawn.

H). TRUST COMPANIES

- are corporation organized for the purpose of accepting an executing trust an acting as
trustee, as executor, or as guardian.

I). LENDING INVESTORS

- are individuals or companies who loan funds to borrowers, generally consumers or

households.
TRANSFER OF SECURITIES

DIRECT TRANSFER
 Occur when a business sells its securities directly to the savers in
exchange for money. This producer does not involve any institution.
Direct transfer used generally by small firms and relatively little
capital is raised in this process.
INDIRECT TRANSFER
 Involves the disposition of an indirect ownership interest in an asset
in whole or in part. It is the underlying asset that is being indirectly
transferred.
INDIRECT TRANSFER THROUGH INVESTMENT BANKS
 In this process of money flows from saver to borrowers through an
investment bank that underwrites the issue.

INDIRECT TRANSFER THROUGH FINANCIAL INTERMEDIARY

 Trough financial intermediary such as bank, insurance company, or
mutual fund the intermediary obtain funds from saver in exchange for its
securities. Then the intermediary uses this money to buy and hold
businesses securities, while the savers hold the intermediary’s securities.
STOCK MARKET TRANSACTION

INITIAL PUBLIC PRIMARY MARKET

OFFERING TRANSACTION

SECONDARY MARKET
SEASONED OFFERING
TRANSACTION
 1. INITIAL PUBLIC OFFERING

An initial public offering (IPO), or stock market launch, is a type of public

offering where share of stock in a company are sold to the general public, on a
securities exchange, for first time.

2. SEASONED OFFERING

Is defined as the additional offering of shares by the business after bringing in

its initial public offering in the stock markets. It is also referred to as secondary
equity offering, wherein such activity is done basically to increase the capital by
approaching the financial markets.
 3. PRIMARY MARKET
TRANSACTION

Where stocks and bonds are publicly traded for the first time. therefore,
investors aren’t buying and selling securities from each other ( like on
the secondary market) but are instead buying securities directly from the
banks responsible for underwriting the initial public offering (IPO).

4. SECONDARY MARKET
TRANSACTION

Is more commonly referred to as “the stock market”. It is the secondary

market where investors trade among themselves on all the major
indices.
 STOCK MARKET EFFICIENCY
 Market efficiency refers to the degree to which market prices reflect all
available, relevant information. If markets are efficient, then all information is
already incorporated into prices, and so there is no way to "beat" the market
because there are no undervalued or overvalued securities available.

 Market efficiency refers to how well current prices reflect all available, relevant
information about the actual value of the underlying assets.

 A truly efficient market eliminates the possibility of beating the market, because any
information available to any trader is already incorporated into the market price.

 As the quality and amount of information increases, the market becomes more efficient
reducing opportunities for arbitrage and above market returns.
 1. WEAK FORM

of market efficiency is that past price movements are not

useful for predicting future prices. If all available, relevant information is
incorporated into current prices, then any information relevant information
that can be gleaned from past prices is already incorporated into current
prices. Therefore, future price changes can only be the result of new
information becoming available.
Weak form efficiency claims that past price movements, volume,
and earnings data do not affect a stock’s price and can’t be used to predict its
future direction.
 Weak form efficiency states that past prices, historical values, and trends
can’t predict future prices.
 Weak form efficiency is an element of efficient market hypothesis.
 Weak form efficiency states that stock prices reflect all current information.

The Basics of Weak Form Efficiency

Weak form efficiency, also known as the random walk theory, states that future
securities' prices are random and not influenced by past events. Advocates of
weak form efficiency believe all current information is reflected in stock prices
and past information has no relationship with current market prices.
USES FOR WEAK FORM EFFICIENCY
The key principle of weak form efficiency is that the randomness of stock prices
make it impossible to find price patterns and take advantage of price
movements. Specifically, daily stock price fluctuations are entirely independent
of each other; it assumes that price momentum does not exist. Additionally, past
earnings growth does not predict current or future earnings growth.
EXAMPLE:
let’s assume Apple Inc. (APPL) has beaten analysts’ earnings expectation in the
third quarter consecutively for the last five years. Jenny, a buy-and-hold investor,
notices this pattern and purchases the stock a week before it reports this year’s third
quarter earnings in anticipation of Apple’s share price rising after the release.
Unfortunately for Jenny, the company’s earnings fall short of analysts’ expectations. The
theory states that the market is weakly efficient because it doesn’t allow Jenny to earn
an excess return by selecting the stock based on historical earnings data.
2. SEMI-STRONG FORM

is an aspect of the Efficient Market Hypothesis (EMH) that

assumes that current stock prices adjust rapidly to the release of all new public
information.
The semi-strong form of market efficiency assumes that stocks adjust quickly
to absorb new public information so that an investor cannot benefit over and
above the market by trading on that new information. This implies that neither
technical analysis nor fundamental analysis would be reliable strategies to
achieve superior returns, because any information gained through fundamental
analysis will already be available and thus already incorporated into current
prices. Only private information unavailable to the market at large will be
useful to gain an advantage in trading, and only to those who possess the
information before the rest of the market does.
 The semi-strong form efficiency theory follows the belief that because all
information that is public is used in the calculation of a stock's current price,
investors cannot utilize either technical or fundamental analysis to gain higher
returns in the market.

EXAMPLE:
Suppose stock ABC is trading at $10, one day before it is scheduled to report earnings.
A news report is published the evening before its earnings call that claims ABC's
business has suffered in the last quarter due to adverse government regulation. When
trading opens the next day, ABC's stock falls to $8, reflecting movement due to
available public information. But the stock jumps to $11 after the call because the
company reported positive results on the back of an effective cost-cutting strategy.
 3. STRONG FORM

The strong form of market efficiency says that market prices

reflect all information both public and private, building on and
incorporating the weak form and the semi-strong form. Given the assumption
that stock prices reflect all information (public as well as private), no investor,
including a corporate insider, would be able to profit above the average
investor even if he were privy to new insider information.
The strong form version of the efficient market hypothesis
states that all information—both the information available to the public and
any information not publicly known—is completely accounted for in current
stock prices, and there is no type of information that can give an investor an
advantage on the market.
 HOW DOES STRONG FORM EFFICIENCY WORK
The strong form efficiency is one that maintains that securities or stock prices reveal
the overall information about a market, whether the information is public or private
(insider). The strong form efficiency holds that the overall market is affected by past events
of market history and not just random occurrences. In contrast, the weak form efficiency
maintains that the overall market is not influenced by past events. That means, current price
movements and trends are not affected by past events.

EXAMPLE:
Shintaro Ishihara works at Osaka Automobiles as their chief engineer. He was working on a new
advanced model of automobiles and the project was a big success. He was sure that this project will
result in an increase in price so he purchased 10,000 shares of Osaka Automobiles for $25 per
share. He was surprised to see that even after the news of the project being a success spread, the
share price did not increase.
The market seems to be strong form efficient, because it had already adjusted Osaka Automobiles'
stock price for the expected net present value of the new project. It already reflected the inside
information.
THREE DEGREES OF MARKET EFFICIENCY

 NOT POSIBLE FOR ABNORMAL GAIN

WEAK FORM  PAST PRICE MOVEMENT ARE NOT USEFUL FOR
PREDICTING FUTURE PRICE

 NOT POSIBLE FOR ABNORMAL GAIN

SEMI-STRONG FORM  PAST INFORMATION AND PUBLICLY AVAILABLE
INFORMATION ( FINANCIAL PRESS, COMPANY
FINANCIAL STATEMENT & PAST PRICE MOVEMENT

 PUBLICLY AVAILABLE INFORMATION, PAST

STRONG FORM
INFORMATION & PRIVATE INFORMATION
(INSIDER INFORMATION).