Motivation

Does the financial system matter for economic growth?

 
Articulation of Purpose and Objectives
  The Program Educational Objectives of the College of Accountancy (COA) in First City Providential
College are for COA students to:
 Show the ability to synthesize knowledge continuously in solving problems for the improvement of
life;
 Perform work responsibly guided by the institution’s core values;
 Engage in career advancements for professional development; and,
 Actualize high ethical standards in working singly or collaboratively.
 Thus, at the end of this lesson, the students could attain the following Course Outcome (CO):
CO1. Understand the concept of the Project Execution Phase. Identify the activities included in the project
execution process. Learn and apply the preparation of project report.
CO2. Conduct accounting research through independent studies of relevant literature       and appropriate
use of accounting theory and methodologies related to the topics; and
CO4. Apply knowledge and skills that will successfully respond to various types of assessments which are
all geared towards the realization of our Program Educational Objectives.
 
Objectives:
 Distinguish different classifications of financial markets.
Differentiate primary and secondary market.
Explain the Globalization of Financial Markets
 
LESSON Presentation: 
Distinguish different classifications of financial markets. 
Financial Markets is a marketplace where creation and trading of financial assets including shares, bonds,
debentures, commodities, etc take place is known as Financial Markets. Financial markets act as an
intermediary between the fund seekers (generally businesses, government, etc.) and fund providers
(generally investors, households, etc.). It mobilizes funds between them, helping in the allocation of the
country’s limited resources. Financial Markets can be classified into four categories. There are different
ways of classifying financial markets. One way is to classify financial markets by the type of financial claim.
The debt market is the financial market for fixed claims (debt instruments) and the equity market is the
financial market for residual claims (equity instruments).
 
1. By: Nature of Claim
a. Debt Market
  Debt market refers to the market where debt instruments such as debentures, bonds, etc. are
traded between investors. Such instruments have fixed claims, i.e. their claim in the assets of the entity is
restricted to a certain amount. These instruments generally carry a coupon rate, commonly known as
interest, which remains fixed over a period of time.
b. Equity Market
In this market, equity instruments are traded, as the name suggests equity refers to the owner’s capital
in the business and thus, have a residual claim, implying, whatever is left in the business after paying off
the fixed liabilities belongs to the equity shareholders, irrespective of the face value of shares held by them.
While making an investment, the time period plays an important role as the amount of investment depends
on the time horizon of the investment, the time period also affects the risk profile of an investment. An
investment with a lower time period carried lower risk as compared to an investment with a higher time
period.
 
2. By: Maturity Claim
2.1 Money Market
Money market is for short term funds, where the investors who intend to invest for not longer than a
year enter into a transaction. This market deals with Monetary assets such as treasury bills, commercial
paper, and certificates of deposits. The maturity period for all these instruments doesn’t exceed a year.
Since these instruments have a low maturity period, they carry a lower risk and a reasonable rate of return
for the investors, generally in the form of interest.
c. Capital Market
Capital market refers to the market where instruments with medium- and long-term maturity are traded.
This is the market where the maximum interchange of money happens, it helps companies get access to
money through equity capital, preference share capital, etc. and it also provides investors access to invest
in the equity share capital of the company and be a party to the profits earned by the company.
This market has two verticals:
Primary Market – Primary Market refers to the market, where the company lists security for the first time or
where the already listed company issues fresh security. This market involves the company and the
shareholders to transact with each other. The amount paid by shareholders for the primary issue is
received by the company. There are two major types of products for the primary market, viz. Initial Public
Offer (IPO) or Further Public Offer (FPO).
Secondary Market – Once a company gets the security listed, the security becomes available to be traded
over the exchange between the investors. The market that facilitates such trading is known as
the secondary market or the stock market.
In other words, it is an organized market, where trading of securities takes place between investors.
Investors could be individuals, merchant bankers, etc. Transactions of the secondary market don’t impact
the cash flow position of the company, as such, as the receipts or payments for such exchanges are settled
amongst investors, without the company being involved.
By Time of Delivery
In addition to the above-discussed factors, such as time horizon, nature of the claim, etc, there is another
factor that has distinguished the markets into two parts, i.e. timing of delivery of the security. This concept
generally prevails in the secondary market or stock market. Based on the timing of delivery, there are two
types of market:
Cash Market
In this market, transactions are settled in real-time and it requires the total amount of investment to be paid
by the investors, either through their own funds or through borrowed capital, generally known as margin,
which is allowed on the present holdings in the account.
Futures Market
In this market, the settlement or delivery of security or commodity takes place at a future date. Transactions
in such markets are generally cash-settled instead of delivery settled. In order to trade in the futures
market, the total amount of assets is not required to be paid, rather, a margin going up to a certain % of the
asset amount is sufficient to trade in the asset.
By Organizational Structure
Markets are also categorized based on the structure of the market, i.e. the manner in which transactions
are conducted in the market. There are two types of market, based on organizational structure:
Exchange-Traded Market
Exchange-Traded Market is a centralized market, that works on pre-established and standardized
procedures. In this market, the buyer and seller don’t know each other. Transactions are entered into with
the help of intermediaries, who are required to ensure the settlement of the transactions between buyers
and sellers. There are standard products that are traded in such a market, there cannot need specific or
customized products.
Over-the-Counter Market
This market is decentralized, allowing customers to trade in customized products based on the
requirement.
In these cases, buyers and sellers interact with each other. Generally, Over-the-counter market
transactions involve transactions for hedging of foreign currency exposure, exposure to commodities, etc.
These transactions occur over-the-counter as different companies have different maturity dates for debt,
which generally doesn’t coincide with the settlement dates of exchange-traded contracts.
Over a period of time, financial markets have gained importance in fulfilling the capital requirements for
companies and also providing investment avenues to the investors in the country. Financial markets
provide transparent pricing, high liquidity, and investor protection, from frauds and malpractices.
Objective:
Differentiate primary and secondary market.
 
 Primary Market 
 
The primary market is where securities are created. It's in this market that firms sell (float) new stocks and
bonds to the public 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. An IPO occurs when a private company issues stock to the public for the
first time.
For example, company ABCWXYZ Inc. hires five underwriting firms to determine the financial details of
its IPO. The underwriters detail that the issue price of the stock will be $15. Investors can then buy the IPO
at this price directly from the issuing company. 
This is the first opportunity that investors have to contribute capital to a company through the purchase of
its stock. A company's equity capital is comprised of the funds generated by the sale of stock on the
primary market.
A rights offering (issue) permits companies to raise additional equity through the primary market after
already having securities enter the secondary market. Current investors are offered prorated rights based
on the shares they currently own, and others can invest anew in newly minted shares.
Other types of primary market offerings for stocks include private placement and preferential
allotment. Private placement allows companies to sell directly to more significant investors such as hedge
funds and banks without making shares publicly available. While preferential allotment offers shares to
select investors (usually hedge funds, banks, and mutual funds) at a special price not available to the
general public.
Similarly, businesses and governments that want to generate debt capital can choose to issue new short-
and long-term bonds on the primary market. New bonds are issued with coupon rates that correspond to
the current interest rates at the time of issuance, which may be higher or lower than pre-existing bonds.
The important thing to understand about the primary market is that securities are purchased directly from
an issuer.
Secondary Market 
 
For buying equities, the secondary market is commonly referred to as the "stock market." This includes the
New York Stock Exchange (NYSE), Nasdaq, and all major exchanges around the world. The defining
characteristic of the secondary market is that investors trade among themselves.
That is, in the secondary market, investors trade previously issued securities without the issuing
companies' involvement. For example, if you go to buy Amazon (AMZN) stock, you are dealing only with
another investor who owns shares in Amazon. Amazon is not directly involved with the transaction.
In the debt markets, while a bond is guaranteed to pay its owner the full par value at maturity, this date is
often many years down the road. Instead, bondholders can sell bonds on the secondary market for a tidy
profit if interest rates have decreased since the issuance of their bond, making it more valuable to other
investors due to its relatively higher coupon rate.
The secondary market can be further broken down into two specialized categories:
Auction Market 
In the auction market, all individuals and institutions that want to trade securities congregate in one area
and announce the prices at which they are willing to buy and sell. These are referred to as bid and ask
prices. The idea is that an efficient market should prevail by bringing together all parties and having them
publicly declare their prices. Thus, theoretically, the best price of a good need not be sought out because
the convergence of buyers and sellers will cause mutually agreeable prices to emerge. The best example
of an auction market is the New York Stock Exchange (NYSE).
Dealer Market 
In contrast, a dealer market does not require parties to converge in a central location. Rather, participants
in the market are joined through electronic networks. The dealers hold an inventory of security, then stand
ready to buy or sell with market participants. These dealers earn profits through the spread between the
prices at which they buy and sell securities. An example of a dealer market is the Nasdaq, in which the
dealers, who are known as market makers, provide firm bid and ask prices at which they are willing to buy
and sell a security. The theory is that competition between dealers will provide the best possible price for
investors.
Objectives:
 
Explain the Globalization of Financial Markets
 
Globalization
It refers to the integration  of financial markets throughout the world into an international financial markets.
Because of the globalization of financial markets, entities in any country seeking to raise funds need not be
limited to their domestic financial market.
The factors contributing to the integration of financial market include:
Deregulation or liberalization of markets and the activities of market participants in key financial centers of
the world.
Technological advances for monitoring world markets, executing orders, and analyzing financial
opportunities
Increase institutionalization of financial markets.
Classification of Global Financial Markets
                                                                                          

Functions of Financial Market

The functions of the financial market are explained with the help of points below:
        It facilitatesmobilization of savings and puts it to the most productive uses.
        It helps indetermining the price of the securities. The frequent interaction between investors helps in
fixing the price of securities, on the basis of their demand and supply in the market.
       It providesliquidity to tradable assets, by facilitating the exchange, as the investors can readily sell their
securities and convert assets into cash.
     It saves the time, money and efforts of the parties, as they don’t have to waste resources to find
probable buyers or sellers of securities. Further, it reduces cost by providing valuable information,
regarding the securities traded in the financial market.
The financial market may or may not have a physical location, i.e. the exchange of asset between the
parties can also take place over the internet or phone also.