Chapter 4:

Financial Markets
 Introduction

Why we need to study about financial market? Financial market is very

important because this market help to efficiently direct the flow of savings
and investment in the economy in ways that facilitate the accumulation of
capital and the production of goods and services.
In this chapter, you will learn about how business raise financial capital,
how household supply financial capital, and how to accumulate personal
wealth.
We will learn the two methods used in financial market and their
function. Also, the classification of financial markets, these are: primary
market, secondary market, money market, capital market, bond market,
stock market, organized market, over-the-counter market, spot market,
futures market, options market, and lastly the foreign exchange market.
Let see how important the financial market in our daily lives.
 I. Financial Markets

Awareness of the environment where the business operates provides a better

perspective to the making decisions relating to the finance function. An important
concern refers to financial markets which perform a vital role in the operation of
the overall financial system including business finance.

A financial market is broad term describing any marketplace where trading of

securities including equities, bonds, currencies, and derivatives occur.

Financial markets provide for the efficient allocation of the resources within
the economy. Through organized and regulated exchanges, financial markets
provide participants with some assurance that they will be treated fairly and
honestly. The financial markets provide business and governmental entities
access to capital. They also provide employment to many thousands of individuals
who work in the financial industry.

II. Benefits of Financial Markets

The operation of financial markets offer advantages which covers the following:

i. Funds are directed to DSUs which can use them most efficiently; and

ii. Liquidity is provided to savers.

Financial markets, just like any market, operates under the influence of the
demand and supply funds. DSUs that can use borrowed funds in the most
productive manner can afford to pay higher interest rates.

An additional benefit provided by financial market is liquidity. Without the

intervention of financial markets, savers will directly lend to borrowers.

III. Why Firms Invest and Borrow

Firms, at one time or another, are confronted by capital deficiency. This

happens when opportunities for investments come by. Additional investment may
bring additional income or economies in operation.
The immediate advantages that may be derived are as follows:

i. Quantity discounts for bulk purchases granted by suppliers; and

ii. Additional revenues from sales.

IV. METHOD BY WHICH FINANCIAL MARKETS TRANSFER FUNDS

When firms needs funds, the financial markets provide two methods by
which funds could be transferred to them. The methods consist of direct and
indirect finance.

i. Direct Finance

Direct finance refers to lending by ultimate borrowers with no intermediary.

Some disadvantages of direct finance:

 There are few DSUs which can transact in the direct market
because the denominations of securities sold are very large.
 It is difficult to match the requirements of SSUs and DSUs in terms
of denominations, maturity, and other factors.

Methods of Direct Financing

 Private placements;
 Brokers and dealers; and
 Investment brokers.

ii. Indirect Finance

Indirect finance (also called financial intermediation) refers to lending

by an ultimate lender to a financial intermediary that then relends to ultimate
borrowers. Financial intermediaries include commercial banks, mutual
savings banks, credit unions, life insurance companies, and pension funds.

Stocks are not the most important source of finance for businesses.
Issuing marketable securities is not the primary funding source for
businesses. Indirect finance (financial intermediation) is far more important
than direct finance. Banks are the most important source of external
finance.
V. Classification of Financial Markets

i. Primary Market
A financial market in which newly issued primary and secondary securities
are traded for the first time. An initial public offering, or IPO, is an example of a
primary market. These trades provide an opportunity for investors to buy
securities from the bank that did the initial underwriting for a particular stock.
The primary market is the part of the capital market that deals with the
issuance and sale of equity-backed securities to investors directly by the issuer.
Investor buy securities that were never traded before.

ii. Secondary Market

Financial market through which existing financial securities are traded.
Secondary market is an organized market for buying and selling of second
hand listed securities. Secondary market is also called as stock exchange.
They involve dealings between buying and selling investors, the issuing
company does not receive any money from these transactions.
When banks buy Treasury bills (T-bills) from the Bangko Sentral, they do
so in consideration of their clients who buy the T-bills from them and which
forms a solid secondary market.

iii. Money Market

The financial market on which debt securities with an original maturity of one
year or less are traded.
Money market is an important part of the economy which provides short-
term fund. The money market is the part of financial market which deals in the
borrowing and lending of short-term loans generally for a period of less than or
equal to 365 days.

iv. Capital Market

A capital market is a financial market in which long-term debt or equity-
backed securities are bought and sold. Capital markets channel the wealth of
savers to those who can put it to long-term productive use, such as companies
or governments making long-term investments.
The capital market plays an important role immobilizing saving and channel
is in them into productive investments for the development of commerce and
industry. As such, the capital market helps in capital formation and economic
growth of the country.
 v. Bond Market
The bond market is a financial market where participants can issue new
debt, known as the primary market, or buy and sell debt securities, known as
the secondary market. This is usually in the form of bonds, but it may include
notes, bills, and so on.
When the economy contracts, investors will buy bonds and be willing to
accept lower yields just to keep their money safe. Those who issue bonds can
afford to pay lower interest rates and still sell all the bonds they need. The
secondary market will bid up the price of bonds beyond their face values.

vi. Stock Market

A stock market, equity market or share market is the aggregation of buyers
and sellers of stocks, which represent ownership claims on businesses; these
may include securities listed on a public stock exchange, as well as stock that
is only traded privately.

vii. Mortgage Market

The portion of the financial market which deals with loans on residential,
commercial, and industrial real estate, and on farmland.
They are the ones that originate the mortgage loans. But they do not lend
the money themselves. A primary mortgage lender makes money from the loan
processing fees rather than the interest paid on the loan. The lenders on the
secondary market are the ones who make money from the interest.

viii. Consumer Credit Market

The market involved in loans on autos, appliances, education, travel. A
consumer credit system allows consumers to borrow money or incur debt, and
to defer repayment of that money over time. Having credit enables consumers
to buy goods or assets without having to pay for them in cash at the time of
purchase.

ix. Auction Market

One where trading is conducted by an independent third party according to
a matching of prices on orders received to buy and sell a particular security.
An auction market is a market in which buyers indicate the highest price
they are willing to pay and sellers indicate the lowest price they are willing to
accept. A trade occurs when the buyer and seller agree on a price.
 x. Negotiation Market
When buyers and sellers of securities negotiate with each other regarding
price and volume, either directly or through a broker or dealer.
Once in a while, the Philippine government negotiates with institutions like
the world bank for loans intended for various projects.

xi. Organized Market

A financial market with fixed trading rules. Another name for organized
markets are exchanges like the Philippine Stock Exchange and the Australian
Stock Exchange. Stock exchanges, financial futures exchanges, and
commodity markets are examples of organized markets.

xii. Over- the-Counter Market

Market consisting of large collection of brokers and dealers, connected
electronically by telephones and computers that provide for trading is unlisted
securities.
The over-the-counter market consists of facilities, namely:
 Relatively few dealers who hold inventories or over-the-counter
securities and act as securities market;
 The many brokers who act as agents in bringing these dealers together
with investor; and
 The computers, terminals, and electronic networks that provide a
communication link between dealers and brokers.

xiii. Spot Market

When securities are traded for immediate delivery and payments. the term
immediately may actually mean one or two days to one week depending on the
facilities used or the tradition in the area.
The spot market is an alternative to the future market.

xiv. Futures Market

Market where contracts are originated and traded that give the holder the
right to buy something in the future at a price specified by the contract.
Futures contracts are standardized agreements that typically trade on an
exchange. One party agrees to buy a given quantity of securities or a
commodity, and take delivery on a certain date.
xv. Options Market
One where stock option are traded. A stock option is a contract giving the
owner the right to either buy or sell a fixed number of share of a stock at any
time before the expiration date at a price specified in the option.
One purpose of the options market is to make possible for investors who
wish to reduce the risk of losing money due to price changes in the future.

xvi. Foreign Exchange Market

The market where people buy and sell foreign currencies. This market
composed of the following:
 Banks located throughout the world buying and selling foreign monies,
in the form of foreign currencies and deposits in foreign banks;
 Foreign exchange dealers; and
 Currency exchanges catering mostly to tourists and are found in the
downtown areas, airports, and railroad stations in major tourist centers.
 RECOMMENDATION

 Market – is any place where buyers and sellers meet to trade products - it could
be a high street shop or a website.
 Equities -the value of the shares issued by a company.
 Bonds - a bond is an instrument of indebtedness of the bond issuer to the holders.
 Currencies - is a kind of money and medium of exchange.
 Derivatives - a derivative is a contract that derives its value from the performance
of an underlying entity.
 Profits - is a financial benefit that is realized when the amount of revenue gained
from a business activity.
 Investment - is an asset or item acquired with the goal of generating income or
appreciation.
 Funds - is a supply of capital belonging to numerous investors used to collectively
purchase securities while each investor retains ownership and control of his own
share.
 Revenues - is the value of all sales of goods and services recognized by a
company in a period.
 Intermediaries - An intermediary is a third party that offers intermediation services
between two parties.
 SSU - A surplus spending unit is an economic unit with income that is greater than
or equal to expenditures on consumption throughout a period.
 DSU - A deficit spending unit is an economic term used to describe how an
economy, or an economic group within that economy, has spent more than it has
earned over a specified measurement period.
 Liquidity - describes the degree to which an asset or security can be quickly
bought or sold in the market at a price reflecting its intrinsic value.
 Broker - is a person or firm who arranges transactions between a buyer and a
seller for a commission when the deal is executed.
 Dealer - are people or firms who buy and sell securities for their own account,
whether through a broker or otherwise.
 Private placement - (or non-public offering) is a funding round of securities which
are sold not through a public offering, but rather through a private offering, mostly
to a small number of chosen investors.
 Trade - is a subset of business that involves buying and selling and in which one
purchases goods or services from another person and pays for them.
 Aggregation - in the futures markets is a principal involving the combination of all
future positions owned or controlled by a single trader or group of trader.
 Firms - is a business organization.
 Consumers - are people or organizations that purchase products or services.
 Conclusion

Financial market have a particular characteristics that make them

unique. They are considered to have cardinal regulations on trading, clear
pricing strategy and as well as costs and fees which are well defined.
Financial market are also institutions and procedures that facilitate
transactions in all types of financial securities and if the financial markets did
not exist, the wealth of the economy would decrease.
Financial markets also are efficient in the sense that price demanded
are fair and reflect all known and relevant information about investment.
We conclude that the financial success of any business firm will
depend much on the quality decisions made by management regarding the
firm’s financial activities.
 Group IV

LEADER: Mary Jean Ysula

MEMBERS:

Annie Rose Mananquil

Mary Jane Banico
Joanna Lopez
Rossie Baylen
Bemverly Olis
Joana Lopez Q. – absent

Date report: July 01 and July 6, 2019

 Bibliography

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sourceid=chrome&ie=UTF-8
 https://www.scribd.com/document/351973080/Classification-of-
Financial-Markets
 https://www.investopedia.com/ask/answers/012615/whats-difference-
between-primary-and-secondary-capital-markets.asp
 https://en.wikipedia.org/wiki/