M3

• Financial Markets – are structures through which funds flow. Financial markets can be distinguished along

  two major dimensions:

  
  

  (1) primary versus secondary markets and

  (2) money versus capital markets.
• Primary market issues are generally for public offerings or publicly traded securities like stocks of companies already selling stocks in the stock market or stock exchanges.
• Financial claims are initially sold by deficit units in primary markets.

  Primary markets are markets in which users of funds (e.g., corporations) raise funds, through new issues of financial instruments such as stocks and bonds (Saunders and Cornett 2011). They consist of underwriters, issuers, and instruments involved in buying and selling original or new issues of securities referred to as primary securities
• In other words, primary markets are markets for primary securities (new issues of financial instruments like stocks and bonds). They raise cash for the issuing company, which acts as borrower by increasing its current capital stock when it issues stocks, or outstanding liabilities when it issues bonds. The government also acts as a borrower when it issues bonds or Treasury bills. The primary market transaction involves either equity security (stock) debt security (bond). These new issues are issued to initial suppliers of funds or investors.
• The corporation needing funds issues new or original issues of either stocks or bonds directly to the investors or to underwriters/financial intermediaries who in turn sell them to the investors. Financial intermediary acts as the middleman or bridge that will satisfy the needs of the deficit units and the surplus units.
• Most primary market transactions are done through investment banks also called merchant banks, which

  help the corporations issuing the stocks or bonds sell these stocks or bonds to interested investors.
• Investment or merchant banks purchase shares issued by the issuing company in an underwriting transaction and then sell these issues to the public. An underwriter guarantees the sale of the issues, but does not intend to hold the shares or bonds in his own account. However, if the issue is unsuccesstul and public investors refuse to purchase the issues, the underwriter carries the issues as its own investment, while waiting for more favorable market conditions.
• Investment banks provide the following services:

  1. Provide funds in advance (giving cash to the issuer based on the agreed price of the security, usually a certain percentage of the total agreed price)
  2. Give advice to issuing corporations as to the price and number of securities to issue
  3. Attract the initial public purchasers of the securities
  4. Act as a market analyst and advisor to the issuing company
  5. Absorb the risk and cost of creating a market for the securities
• Primary market issues are generally for public offerings or publicly traded securities like stocks of companies already selling stocks in the stock market or stock exchanges.

  If these companies need additional funds, they create new issues to raise the firm's capitalization or create new issues of bonds or debt instruments, thereby increasing its outstanding liabilities to meet the need for the funds.
• First-time issues for the public are called initial public offerings (IPO). At times, it takes, several investment banks to undertake such issues. Primary market securities also include the issue of additional equity or debt instruments of an already publicly traded firm.
• Rather than public offering, primary market sale can also take the form of private placement, particularly for closed corporations, that is corporations whose stocks are only sold to family or a few close friends, relatives, and other private individuals. In addition, in private placement, the corporation issuing the stocks or bonds may seek to find an institutional buyer--such as a pension fund or group of buyers to purchase the whole issue.
• Merchant banks conduct private sale of shares to a few individuals or institutions but a vigorous and broad-based secondary market requires an efficiently operating securities exchange. Stocks of closed companies are not publicly traded. These banks remain under the management and control of private companies and individuals. Larger companies, on the other, like the San Miguel Corporation, PLDT, Petron, Yahoo and Google are publicly traded in large volumes.
• Secondary markets – Once financial instruments such as stocks are issued in primary markets, they are then traded that is, re-bought and resold in secondary markets.
• Secondary markets are like used car markets. Secondary markets are markets for currently outstanding securities, referred to as secondary securities. These securities were previously bought and owned and now being resold either by the initial investors or those who have purchased securities in the secondary market. Secondary markets provide liquidity for investors as they sell their financial securities when they need cash.
• All transactions after the initial issue in the primary market are done in the secondary markets. For instance, A owns stocks initially issued by Co. X and later on sells these Co.X stocks to B; the sale of A to B or anyone else is done in the secondary market. Transactions in the stock and bond market exchanges are secondary market transactions. Shares held by the public are termed outstanding shares or securities. They do not increase the capital stock of the original issuing company or its outstanding liabilities unlike in primary market transactions.
• Secondary markets only transfer ownership, but do not affect the total outstanding shares or securities in the market. Only when the issuing corporations redeem bonds or retire stocks will outstanding shares or securities be reduced. Redemption of bonds decreases total outstanding debt securities in the market and at the same time reduces the outstanding liabilities of the issuing company. Retirement of stocks reduces the total outstanding equity securities in the market and the outstanding capital of the issuing corporation
• Transfer of ownership does not affect the volume of these securities in the market. The securities simply change hands. Secondary markets transfer shares, but do not raise funds for companies which issued the securities. They do not affect the issuing company, except to transfer ownership of the stocks or bonds in its books for purposes of dividend or interest payments, respectively.
• Secondary markets exist for the purpose of marketability or easy selling/transfer of ownership and liquidity or easy convertibility to cash of securities. Marketable securities are classified in the balance sheet as cash equivalents because of these characteristics. The role of the secondary market is to assure that a holder can sell and convert to cash his security at any time.
• Commercial banks have trust departments and treasury departments that are major players in the secondary market. Trust departments recommend money market and capital market securities for their clients. Treasury departments carry inventories of market securities part of the bank's trading portfolio. Investment houses, finance companies, insuranace companies, and other financial institutions are also leading participants in the secondary market.
• Other than the financial institutions mentioned, securities brokers and securities dealers are included among the ones dealing in secondary markets. Securities dealer is a financial institution organized usually as a corporation or a partnership, which principal business is to buy and sell securities, whether registered or exempt from registration for the dealer's own account or the client's. Before dealing in securities, a securities dealer is required to obtain a license from SEC pursuant to the Revised Securities Act.
• Security dealers buy the securities as their assets and resell them. They earn from the difference of the cost of and the selling price of the sold securities. Securities brokers do not buy for their own account. Their earnings are mere commissions. Security brokers find the purchasers for the securities that others wish to sell. These are done in the secondary markets.
• The securities exchange serves the following purposes:

  1. Provides marketability by allowing savers to sell their securities immediately
  2. Provides liquidity by raising cash any time
  3. Provides valuation by serving as a means for determining current values of shares and ultimately of companies
• MONEY MARKETS

  Money markets cover markets for short-term debt instruments, usually issued by companies with high credit standing. They consist of a network of institutions and facilities for trading debt securities with a maturity of one year or less (Saldana 1997). They are markets in which commercial banks and other businesses adjust their liquidity position by borrowing, lending, or investing for short period of time. (Kidwell et al 2013)
• The government treasury uses money markets to finance day -to- day operations. Business and households

  also use money markets to borrow and lend. Money market instruments that generally have short maturities are highly liquid and low default risk. There is no formally organized exchange for money markets such as PSE.
• MONEY MARKETS

  Dealers and brokers are at the core of money market transactions. At the trading room of dealers and brokers, when the market is open , these rooms are characterized by tension and a frenzy of activities. Each trader sits in front of phones and computers that link the dealer/broker to other dealers/brokers and their major customers.
• Short-term means a period of one year or less. These securities usually comprise of short-term Treasury bills (T-bills) issued by the government, bankers acceptances, negotiable certificates of deposit, money market deposit accounts (MMDAs), money market mutual funds (MMMFS), and commercial papers (CPs). These are often termed marketable securities because they are highly marketable and highly liquid.
• They are issued by companies needing short-term funds and bought by investors with short-term excess funds. Those who buy these securities have excess funds in the short-term needing to convert the same quickly to cash as the need arises. These securities give higher yields than cash in the bank and have relatively low risk of default, particularly those issued by the government. 
• Individual investors deal with these securities indirectiy through the help of financial intermediaries. Being short-term, these securities are at low risk of interest rate changes. Money market securities are traded in massive quantities. Working capital needs like purchase of inventories, payment of operating expenses, and among others are met in the money markets. Major participants are electronically linked al over the United States and in major European and Asian financial centers.
• Money markets are also distinct from other financial markets because they are wholesale markets and because there are large transactions involved. Although some small transactions do take place, most involve $1 million or more (Kidwell et al. 2013). Most money market transactions are referred to as open market transactions due to their impersonal and competitive nature. Open market transaction is an order placed by an insider after all appropriate documentation has been filed, to buy or sell restricted securities openly in an exchange.
• The Philippine money market started in 1965 primarily as a facility for trading excess funds among commercial banks (Saldana 1997). The Bangko Sentral ng Pilipinas (BSP) requires banks to maintain a daily minimum cash reserve with them set as a percentage of deposit liabilities. Other than the level of cash reserves, BSP has certain strict requirements on banks. Banks with temporary cash surpluses led commercial banks to set up the money market as an auction house for excess reserves. It is called the interbank call market, a money market.
• Similarly, small bank deficits are funded through the money market. This allows banks tocorrect their reserve position in the interbank call loan market. Interbank call loans are credits of one bank to another for a period not exceeding 4 days. The 4-day limit is based on the BSP regulation and beyond this period, BSP presumes that a bank could not fund its assets from its deposit, that is, the bank is in trouble.
• Interbank call loans are treated as deposit substitutes. Deposit substitutes are alternative ways of getting money from the public other than traditional bank deposits. They are borrowings by commercial banks from the public through other banks or money market. Later on, other companies learned to borrow through the market for their temporary cash requirements.
• SUMMARY :

  Financial markets are structures through which funds flow. They are the institutions and systems that facilitate transactions in all types of hinancial claim. A financial claim entitles a creditor to receive payment from a debtor in circumstances specified in a contract between them, oral or written.
• SUMMARY:

  Primary markets are markets in which users of funds (e.g., corporations) raise funds through new issues of financial instruments such as stocks and bonds. They consist of underwriters, issuers, and instruments involved in buying and selling original or new issues of securities referred to as primary securities.

  Primary market issues are generally for public offerings or publicly traded securities like stocks of companies already selling stocks in the stock market or stock exchanges. First-time issues for the public are called initial public offerings or IPOs.
• Rather than a public offering, primary market sales can take the form of a private placement, particularly for

  closed corporations, that is, corporations whose stocks areo nly sold to family or a few close friends, relatives,

  and some other private individuals.
• Secondary markets are markets for currently outstanding securities referred to as secondary securities. All transactions after the initial issue in the primary market are done in the secondary markets. Secondary markets only transfer ownership, but do not affect the total outstanding shares or securities in the market.
• Money markets cover markets for short-term debt instruments usually issued by companies with high credit standing. They consist of a network of institutions and facilities for trading debt securities only with a maturity of one year or less.
• Banks with temporary cash surpluses led commercial banks to set up the money markets as an auction house for excess reserves. It is called the interbank call market, a money market.
• APPLICATION:

  FINANCIAL MARKETS --- These are structures through which funds flow: institutions and systems that facilitate transactions in all types of fnancial claims.

  FIANCIAL INTERMEDIARY --- This meeting place for deficit units and surplus/savings units.

  DEFICIT UNITS --- These units are also referred as borrowers or issuers of financial securities.

  SURPLUS UNITS --- These units are also referred as buyers of financial securities/investors.

  PRIMARY MARKETS --- These are markets in which users of funds raise funds through new issues of financial instruments.
• APPLICATION:

  PRIMARY SECURITIES --- These are the original or new issues of securities.

  EQUITY SEURITY --- Stocks are under this type of securities.

  DEBT SECURITY --- Bonds are under this type of securities.

  FINANCIAL INTERMEDIARY --- It is the middleman or bridge that satisfies the needs of the deficit units and the surplus

  units.

  UNDERWRITING --- It is a transaction where an investment or merchant bank purchases all the shares issued by a company and then sell these issues to the public.