Rosemarie Subalisid

BAENT-1M

1. What are financial markets? How are they classified?

A financial market is a broad term describing 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.

Financial markets can be found in nearly every nation in the world. Some are very

small, with only a few participants, while others - like the New York Stock Exchange

(NYSE) and the force markets - trade trillions of dollars daily.

Investors have access to a large number of financial markets and exchanges

representing a vast array of financial products. Some of these markets have always

been open to private investors; others remained the exclusive domain of major

international banks and financial professionals until the very end of the twentieth

century.

Capital Markets

A capital market is one in which individuals and institutions trade financial securities.

Organizations and institutions in the public and private sectors also often sell securities

on the capital markets in order to raise funds. Thus, this type of market is composed of

both the primary and secondary markets.

engage in its own long-term investments. To do this, a company raises money through

the sale of securities - stocks and bonds in the company's name. These are bought and

sold in the capital markets.

Stock Markets

Stock markets allow investors to buy and sell shares in publicly traded companies. They

are one of the most vital areas of a market economy as they provide companies with

access to capital and investors with a slice of ownership in the company and the

potential of gains based on the company's future performance.

This market can be split into two main sections: the primary market and the secondary

market. The primary market is where new issues are first offered, with any subsequent

trading going on in the secondary market.

Bond Markets

A bond is a debt investment in which an investor loans money to an entity (corporate or

governmental), which borrows the funds for a defined period of time at a fixed interest

rate. Bonds are used by companies, municipalities, states and U.S. and foreign

governments to finance a variety of projects and activities. Bonds can be bought and

sold by investors on credit markets around the world. This market is alternatively

referred to as the debt, credit or fixed-income market. It is much larger in nominal terms

that the world's stock markets. The main categories of bonds are corporate bonds,

municipal bonds, and U.S. Treasury bonds, notes and bills, which are collectively

referred to as simply "Treasuries." (For more, see the Bond Basics Tutorial.)
Money Market

The money market is 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. Money market securities consist of negotiable certificates of

deposit (CDs), banker's acceptances, U.S. Treasury bills, commercial paper, municipal

notes, euro dollars, federal funds and repurchase agreements (repos). Money market

investments are also called cash investments because of their short maturities.

Cash or Spot Market

Investing in the cash or "spot" market is highly sophisticated, with opportunities for both

big losses and big gains. In the cash market, goods are sold for cash and are delivered

immediately. By the same token, contracts bought and sold on the spot market are

immediately effective. Prices are settled in cash "on the spot" at current market prices.

This is notably different from other markets, in which trades are determined at forward

prices.

Derivatives Markets

The derivative is named so for a reason: its value is derived from its underlying asset or

assets. A derivative is a contract, but in this case the contract price is determined by the

market price of the core asset. If that sounds complicated, it's because it is. The

derivatives market adds yet another layer of complexity and is therefore not ideal for

inexperienced traders looking to speculate. However, it can be used quite effectively as

part of a risk management program.

The interbank market is the financial system and trading of currencies among banks

and financial institutions, excluding retail investors and smaller trading parties. While

some interbank trading is performed by banks on behalf of large customers, most

interbank trading takes place from the banks' own accounts.

The force market is where currencies are traded. The forex market is the largest, most

liquid market in the world with an average traded value that exceeds $1.9 trillion per day

and includes all of the currencies in the world. The forex is the largest market in the

world in terms of the total cash value traded, and any person, firm or country may

participate in this market.

2. Define capital market? How does it differ from money market?

Money Market Capital Market

Meaning A segment of the financial market A section of financial market

where lending and borrowing of where long term securities are

short term securities are done. issued and traded.

Nature of Informal Formal

Market

Financial Treasury Bills, Commercial Shares, Debentures, Bonds,

instruments Papers, Certificate of Deposit, Retained Earnings, Asset

Trade Credit etc. Securitization, Euro Issues etc.

non-financial institutions, bill exchange, non-banking

brokers, acceptance houses, and institutions like insurance

so on. companies etc.

Risk Factor Low Comparatively High

Liquidity High Low

Purpose To fulfill short term credit needs of To fulfill long term credit needs of

the business. the business.

Time Horizon Within a year More than a year

Merit Increases liquidity of funds in the Mobilization of Savings in the

economy. economy.

Return on Less Comparatively High

Investment
3. What comprises the Philippine financial market?

The Philippine financial system is structured by type of bank including universal,

commercial, savings and cooperative banks, according to statistics compiled by

Asianbanks.net from noted bank adviser Paul Sheehan. Although the country’s banking

system primarily consists of rural and thrift banks, universal and commercial banks

account for larger market shares.

Universal and commercial banks make up less than 5 percent of the total banking

institutions in the Philippines but account for a much larger portion of the market share,

explains data from Asianbanks.net. Universal and commercial banks differ from other

banking institutions by offering a wider variety of financial services, according to

Investopedia. In the Philippines, these banks have asset values of over 3 trillion pesos,

making up over 90 percent of the banking market share in the country.

The Philippine financial system consists mainly of rural banks, which make up the

majority of total banking institutions, notes Asianbanks.net. Rural banks provide credit to

farmers and agricultural-related businesses, according to Investopedia. These banks,

along with cooperative banks that provide similar services, have the lowest asset values

and market shares relative to universal and commercial banks. However, rural and

cooperative banks have higher yearly growth rates than universal and commercial

banks combined.
4. In the quest for additional capital, what factors must be considered?

Trading on Equity- The word “equity” denotes the ownership of the company. Trading

on equity means taking advantage of equity share capital to borrowed funds on

reasonable basis. It refers to additional profits that equity shareholders earn because of

issuance of debentures and preference shares. It is based on the thought that if the rate

of dividend on preference capital and the rate of interest on borrowed capital is lower

than the general rate of company’s earnings, equity shareholders are at advantage

which means a company should go for a judicious blend of preference shares, equity

shares as well as debentures. Trading on equity becomes more important when

expectations of shareholders are high.

Degree of control- In a company, it is the directors who are so called elected

representatives of equity shareholders. These members have got maximum voting

rights in a concern as compared to the preference shareholders and debenture holders.

Preference shareholders have reasonably less voting rights while debenture holders

have no voting rights. If the company’s management policies are such that they want to

retain their voting rights in their hands, the capital structure consists of debenture

holders and loans rather than equity shares.

Flexibility of financial plan- In an enterprise, the capital structure should be such that

there is both contractions as well as relaxation in plans. Debentures and loans can be

refunded back as the time requires. While equity capital cannot be refunded at any point

which provides rigidity to plans. Therefore, in order to make the capital structure

possible, the company should go for issue of debentures and other loans.
Choice of investors- The company’s policy generally is to have different categories of

investors for securities. Therefore, a capital structure should give enough choice to all

kind of investors to invest. Bold and adventurous investors generally go for equity

shares and loans and debentures are generally raised keeping into mind conscious

investors.

Capital market condition- In the lifetime of the company, the market price of the

shares has got an important influence. During the depression period, the company’s

capital structure generally consists of debentures and loans. While in period of boons

and inflation, the company’s capital should consist of share capital generally equity

shares.

Period of financing- When company wants to raise finance for short period, it goes for

loans from banks and other institutions; while for long period it goes for issue of shares

and debentures.

Cost of financing- In a capital structure, the company has to look to the factor of cost

when securities are raised. It is seen that debentures at the time of profit earning of

company prove to be a cheaper source of finance as compared to equity shares where

equity shareholders demand an extra share in profits.

Stability of sales- An established business which has a growing market and high sales

turnover, the company is in position to meet fixed commitments. Interest on debentures

has to be paid regardless of profit. Therefore, when sales are high, thereby the profits

are high and company is in better position to meet such fixed commitments like interest

on debentures and dividends on preference shares. If company is having unstable

proves to be safe in such cases.

Sizes of a company- Small size business firms capital structure generally consists of

loans from banks and retained profits. While on the other hand, big companies having

goodwill, stability and an established profit can easily go for issuance of shares and

debentures as well as loans and borrowings from financial institutions. The bigger the

size, the wider is total capitalization

5. What is meant by corporate securities?

Corporate securities can be termed as – shares, debentures, public deposits and loans

from institutions. For the purpose of building fixed capital, joint stock companies

mobilize funds from the public in the form of equity or ordinary shares or preference

shares.

Ordinary shares are not preferred shares and they do not have any predetermined

dividend amount. The dividend payable to the ordinary shareholders may be high when

the company performs well and it may be low or nil when the performance of the

company is found to be poor. Preference shares are those shares for which preference

is given in regard to dividend payment and repayment of capital.

Joint stock companies borrow funds from the public in the form of debentures or bonds

for which they pay interest on periodical basis. Joint stock companies also borrow funds

from the public in the form of public deposits. Joint stock companies also avail long term

loans from financial institutions like SIDBI, IFCI or IIBI.

Certificated securities are those that are represented in physical, paper form. Securities

may also be held in the direct registration system, which records shares of stock in

book-entry form. In other words, a transfer agent maintains the shares on the

company's behalf without the need for physical certificates. Modern technologies and

policies have, in some cases, eliminated the need for certificates and for the issuer to

maintain a complete security register. A system has developed wherein issuers can

deposit a single global certificate representing all outstanding securities into a universal

depository known as the Depository Trust Company (DTC). All securities traded through

DTC are held in electronic form. It is important to note that certificated and un-

certificated securities do not differ in terms of the rights or privileges of the shareholder

or issuer.

Bearer securities are those that are negotiable and entitle the shareholder to the rights

under the security. They are transferred from investor to investor, in certain cases by

endorsement and delivery. In terms of proprietary nature, pre-electronic bearer

securities were always divided, meaning each security constituted a separate asset,

legally distinct from others in the same issue. Depending on market practice, divided

security assets can be fungible or (less commonly) non-fungible, meaning that upon

lending, the borrower can return assets equivalent either to the original asset or to a

specific identical asset at the end of the loan. In some cases, bearer securities may be

used to aid tax evasion, and thus can sometimes be viewed negatively by issuers,

shareholders and fiscal regulatory bodies alike. They are therefore rare in the United

States.
Registered securities bear the name of the holder and other necessary details

maintained in a register by the issuer. Transfers of registered securities occur through

amendments to the register. Registered debt securities are always undivided, meaning

the entire issue makes up one single asset, with each security being a part of the whole.

Undivided securities are fungible by nature. Secondary market shares are also always

undivided.

Letter securities are not registered with the SEC, and therefore cannot be sold publicly

in the marketplace. A letter security (also known as a restricted security, letter stock or

letter bond) is sold directly by the issuer to the investor. The term is derived from the

SEC requirement for an "investment letter" from the purchaser, stating that the

purchase is for investment purposes and is not intended for resale.

Cabinet securities are listed under a major financial exchange, such as the NYSE, but

are not actively traded. Held by an inactive investment crowd, they are more likely to be

a bond than a stock. The "cabinet" refers to the physical place where bond orders were

historically stored off of the trading floor. The cabinets would typically hold limit orders,

and the orders were kept on hand until they expired or were executed.

Residual Securities

Residual securities are a type of convertible security – that is, they can be changed into

another form, usually that of common stock. A convertible bond, for example, would be

a residual security because it allows the bond holder to convert the security into

common shares. Preferred stock may also have a convertible feature. Corporations may
offer residual securities to attract investment capital when competition for funds is highly

competitive.

7. What constitutes the term “securities”?

The entity that creates the securities for sale is known as the issuer, and those that buy

them are, of course, investors. Generally, securities represent an investment and a

means by which municipalities, companies and other commercial enterprises can raise

new capital. Companies can generate a lot of money when they go public, selling stock

in an initial public offering (IPO), for example. City, state or county governments can

raise funds for a particular project by floating a municipal bond issue. Depending on an

institution's market demand or pricing structure, raising capital through securities can be

a preferred alternative to financing through a bank loan.

On the other hand, purchasing securities with borrowed money, an act known as buying

on a margin, is a popular investment technique. In essence, a company may deliver

property rights, in the form of cash or other securities, either at inception or in default, to

pay its debt or other obligation to another entity. These collateral arrangements have

been growing of late, especially among institutional investors.

Market Placement

Publicly traded securities are listed on stock exchanges, where issuers can seek

security listings and attract investors by ensuring a liquid and regulated market in which

to trade. Informal electronic trading systems have become more common in recent
years, and securities are now often traded "over-the-counter," or directly among

investors either online or over the phone.

As mentioned above, an IPO represents a company's first major sale of equity securities

to the public. Following an IPO, any newly issued stock, while still sold in the primary

market, is referred to as a secondary offering. Alternatively, securities may be offered

privately to a restricted and qualified group in what is known as a private placement –

an important distinction in terms of both company law and securities regulation.

Sometimes companies sell stock in a combination of public and private placement. In

the secondary market, also known as the aftermarket, securities are simply transferred

as assets from one investor to another: shareholders can sell their securities to other

investors for cash and/or capital gain. The secondary market thus supplements the

primary. The secondary market is less liquid for privately-placed securities, since they

are not publicly tradable and can only be transferred among qualified investors.

8. What is secondary market?

The secondary market is where investors buy and sell securities they already own. It is

what most people typically think of as the "stock market," though stocks are also sold on

the primary market when they are first issued. The national exchanges, such as the

New York Stock Exchange (NYSE) and the NASDAQ, are secondary markets.

The secondary market can be further broken down into two specialized categories:

auction market and dealer market.

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 a 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 Mazda, 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.

9. In what ways are securities marketed?

One key aspect in investing that we sometimes overlook is how to buy different

securities. With the introduction of lower commission rates, loosening of regulatory

regulations, and increased public interest in investing, the financial industry is blooming
with different avenues for buying and selling stocks, bonds, and mutual funds. In North

America, there are four main avenues of trading investment securities:

1. through brokerages,

2. directly from the company that issues them,

3. through banks, and

4. Through individual investors.

References:
https://www.investopedia.com/investing/ways-to-buy-and-sell-securities/
https://www.investopedia.com/investing/primary-and-secondary-markets/
https://www.managementstudyguide.com/capital-structure.htm
https://www.investopedia.com/terms/s/security.asp
https://www.investopedia.com/terms/f/financial-market.asp
https://www.investopedia.com/terms/c/capitalmarkets.asp
https://prezi.com/kndqn2t8ivim/the-philippine-financial-system/