Financial Market - FM2 12

FINANCIAL
MARKET
BY: JOSEPH M. SUGUILON
• What is a Financial Market
- Any marketplace where buyers and sellers participate in the trade of assets such
as equities, bonds, currencies and derivatives.
- Financial markets are typically defined by having transparent pricing, basic

regulations on trading, costs and fees and market forces determining the prices of
securities that trade.
• Three Principal Players in the Financial Market
- Borrowers
- Savers (Investors)
- Financial Institutions (Intermediaries)
• Financial Markets
- Institutions that help bring borrowers and savers together.
1. Money Market
2. Capital Market
3. Securities Market
- Stock Market
• Money Market
-A segment of the financial market in which financial instruments
with high liquidity and very short maturities are traded.
-The money market is used by participants as a means for borrowing
and lending in the short term, from several days to just under a
year.
• Capital Market
-Capital markets typically involve issuing instruments such as stocks and
bonds for the medium-term and long-term.
-In this respect, capital markets are distinct from money markets, which
refer to markets for financial instruments with maturities not exceeding
one year.
• Security Market
- A financial that represents: an ownership position in a publicly- traded
corporation (stock), a creditor relationship with governmental body or a
corporation (bond)
- Securities are typically divided into debt securities and equities
- Discussed in terms of Primary and Secondary Markets
• Security Market
- Primary Market
• Firms issue new securities to raise money and are bought and
sold for the first time
- Secondary Market
• Trading of previously issued securities
• Process of Raising Money Through Securities Market
1.Firm sells securities to investors
2.Firm invest funds it raises in its business
3.Firm distributes cash earned from its investors
4.Securities trading in the secondary market
• Types of Securities
- Debt Securities
- Equity Securities
• Common Stock
• Preferred Stock
• Debt Security
-Any debt instrument that can be bought or sold between two parties and
has basic terms defined, such as notional amount (amount borrowed),
interest rate and maturity/renewal date
-Debt securities include government bonds, corporate bonds
-The interest rate on a debt security is largely delete determined by the
perceived repayment ability of the borrower
• Equity Security
-An instrument that signifies an ownership position (called equity) in a
corporation, and represents a claim on its proportional share in the
corporation's assets and profits
-Ownership in the company is determined by the number of shares a
person owns divided by the total number of shares outstanding\
-Can either be common stock or preferred stock
• Equity Security
-Common Stock
 A security that represents ownership in a corporation
- Preferred Stock
 A class of ownership in a corporation that has a higher claim on the assets and earnings than
common stock.
 Preferred stock generally has a dividend that must be paid out before dividends to common
stockholders and the shares usually do not have voting rights.
• Stock Market
-The market in which shares of publicly held companies are issued and traded
either through exchanges or over-the-counter markets.
- Classification
• Organized (instruments are traded within the premises)
• Over the counter (other than those organized)
The Philippine Financial System
• The Philippine Financial System
- Banks
• universal banks (or expanded commercial banks)
• commercial banks
• thrift banks (savings and mortgage banks, stock savings and loan associations, and private
development banks)
• rural banks
• cooperative banks
• Islamic banks.
• The Philippine Financial System
- Nonbank Financial Institutions (NBFIs)
• Insurance companies
• Investment houses
• Financing companies
• Securities dealers and brokers
• Fund managers
• Lending investors
• Pension funds
• Pawn shops, and
• Nonstock savings and loan associations
• Nonbank Financial Institutions (NBFIs)
-Is a financial institution that does not have a full banking license or is not
supervised by a national or international banking regulatory agency.
- NBFIs facilitate bank-related financial services, such as investment, risk
pooling, contractual savings, and market brokering
- they provide "multiple alternatives to transform an economy's savings into
capital investment [which] act as backup facilities should the primary form of
intermediation fail
• Central Banks
- A central bank, reserve bank, or monetary authority is an institution that manages a
state's currency, money supply, and interest rates.
- In contrast to a commercial bank, a central bank possesses a monopoly on
increasing the amount of money in the nation, and usually also prints the national
currency.
- Examples include the Banko Sentral ng Pilipinas (BSP)
• Monetary Policy
- Monetary policy is the process by which the monetary authority of
a country controls the supply of money, often targeting a rate of
interest for the purpose of promoting economic growth and stability.
- Can either be Expansionary or Contractionary
• Monetary Policy
-Expansionary
• an expansionary policy increases the total supply of money in the economy more rapidly than
usual
• is traditionally used to try to combat unemployment in a recession by lowering interest rates in
the hope that easy credit will entice businesses into expanding.
• Fiscal Policy
-Is the use of government revenue collection (taxation) and
expenditure (spending) to influence the economy.
-Three Main Stances
• Neutral fiscal policy
• Expansionary fiscal policy
• Contractionary fiscal policy
• Fiscal Policy
- Neutral fiscal policy
• Is usually undertaken when an economy is in equilibrium. Government spending is fully
funded by tax revenue and overall the budget outcome has a neutral effect on the level of
economic activity.
• Monetary Policy
- Contractionary
• contractionary policy expands the money supply more
slowly than usual or even shrinks it
• is intended to slow inflation in order to avoid the resulting

distortions and deterioration of asset values.
• Fiscal Policy
- Expansionary fiscal policy
• Involves government spending exceeding tax revenue, and is usually undertaken during
recessions.
• Fiscal Policy
- Contractionary fiscal policy
• Occurs when government spending is lower than tax revenue, and is usually undertaken
to pay down government debt
• Monetary policy differs from fiscal policy, which refers to taxation,
government spending, and associated borrowing

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FINANCIAL

- Financial markets are typically defined by having transparent pricing, basic

• is intended to slow inflation in order to avoid the resulting

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