Unit 2

• Financial markets can be classified by type of claim, either as Debt markets or Equity markets.
• Such information includes stock price information, corporate condition and developments which tend to affect stock prices like dividend, mergers and joint ventures, and the like.
• Market Transparency proceeds from the assumption that the investor can only make informed and intelligent decisions about the stock they want to buy.
• The Philippine Stock Exchange requires listed companies to disclose timely, complete and accurate material information to the Exchange and the public on a regular basis.
• The most common method that funds can be obtained by a firm in the financial market is to issue a debt instrument such as a bond or a mortgage.
• A bond or a mortgage is a contractual agreement by the borrower (the firm needing funds) to pay the holder (the investor) of the instrument fixed peso amounts at regular intervals (composed of interest and principal payments) until a specified date (the maturity date), when a final payment is made.
• The maturity of a debt instrument is the number of years (or the term) until the instrument’s expiration date.
• A debt instrument is short-term if its maturity is less than a year, medium-term if more than one year up to 10 years, and long-term if its maturity is more than 10 years.
• The second method of raising funds is by issuing equity instruments, such as common or ordinary stocks, which are claims to share in the net income (income after deducting expenses and taxes) and the assets of a business.
• If you own one share of common stock in a company that has issued one million shares, you are entitled to 1/one million of the firm’s net income and 1/one million of the firm’s assets.
• Equities often make periodic payments (in the form of dividends) to their holders and are considered long-term securities because they have no maturity date.
• Owning stock means that you own a portion of the firm and thus have the right to vote on issues important to the firm and to elect its directors.
• The main disadvantage of owning a corporation’s equities, rather than its debt is that an equity holder is a residual claimant; that is, the corporation must pay all its debt holders first, before it pays its equity holders.
• The advantage of holding equities is that equity holders benefit directly from any increase in the corporation’s profitability or asset value, because equities confer ownership rights on the equity holders.
• Debt holders do not share in this benefit because their peso payments are fixed.
• Another classification of financial markets is by the maturity of the claim.
• Trading volume in secondary markets can be large.
• There is a financial market for short-term debt instruments, called the money market, and one for longer-maturity financial assets, called the capital market.
• The Philippine Stock Exchange (PSE), the New York Stock Exchange (NYSE), and the National Association of Securities Dealers Automated Quotation (NASDAQ) are examples of active stock exchanges.
• Secondary markets provide the quick opportunity to trade securities at their market values as well as to purchase securities with varying risk-return characteristics.
• The original issuer of the instrument (borrower) is not anymore involved in this transfer.
• Secondary markets save economic agents the search and other costs of seeking buyers or sellers of financial instruments on their own.
• In the Philippines, the PSE (Philippine Stock Exchange) is the secondary market engaged in trading stocks.
• The stock exchange has a physical location called the stock exchange floor where buying and selling transactions take place.
• Secondary markets provide a centralized marketplace where economic agents know they can transact quickly and efficiently.
• Information about the current market value of its financial instruments can be obtained by the issuing corporation.
• The stock exchange is an entity which is in the business of bringing buyers and sellers of stocks and securities together.
• The exchange is usually done with the help of a securities broker such as BPI Securities Corporation acting as intermediary between the buyer and the seller of the instrument.
• In order to bring liquidity, the stocks are traded systematically in a stock exchange.
• Secondary markets allow investors to trade these instruments at low transaction costs.
• The purpose of stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a market place which may be virtual or real or both.
• Broker may be assembled in a place called the “trading ring or floor” to buy and sell securities.
• The price information allows issuing corporations to evaluate how well they are using the funds generated from the financial instruments they have issued and provides information on how well any subsequent offerings of debt or equity might do in terms of raising additional money and at what cost.
• As an organized secondary market, it is where securities like shares and debentures of publicly listed companies, government securities and bonds, and other securities, are purchased and sold.
• When an investor buys a financial instrument in a secondary market, it results in an exchange of funds.
• Money markets are financial markets that trade debt securities or instruments with maturities of one year or less (which could be from overnight to one year).
• In the money markets, companies or individuals with short-term excess or unused funds can lend funds by buying money market instruments from big companies and financial institutions like banks and investment companies which have short-term needs for funds by selling their money market instruments or short-term debt instruments.
• The short-term nature of these instruments means that fluctuations in the prices of these instruments in the secondary markets in which they trade are usually quite small.
• Money markets do not operate in a specific location – rather, transactions occur via telephones, wire transfers, and computer trading.
• A fund manager which could be an investment company, handles the buying and selling of money market instruments.