M4: THE FINANCIAL MARKET 2 ( Capital Markets)

• CAPITAL MARKETS

  These are markets for long-term securities. Long-term securities are either debt securities (notes, bonds, mortgages, leases) or equity securities (stocks). Major suppliers of capital market securities are corporations for stocks and corporation and government for bonds. Long-term securities have maturities of more than a year. These instruments often carry greater default and market risks than money market instruments generally because they are long-term. In return, they carry a higher return yield. They suffer wider price fluctuations than money market instruments
• Capital markets are composed of stock market for equity or stock securities; bond markets for debt securities, mortgage market for mortgages, foreign exchange markets, derivative securities markets, direct loan market, and lease market, among others.
• Capital markets are composed of stock market for equity or stock securities; bond markets for debt securities, mortgage market for mortgages, foreign exchange markets, derivative securities markets, direct loan market, and lease market, among others.
• The need for long-term assets or capital goods as purchase of land or building or expansion will resort to the capital market as a source of funds. Capital goods are used to produce goods and services to generate revenues. It is in the capital market that long-term users of funds and those with long-term excess funds meet. These long-term securities include long-term loans, mortgages, and financial leases; corporate stocks and bonds and government long-term Treasury notes and bonds.
• Security exchanges, over-the counter markets, investment banks, mortgage banks, insurance companies, and other financial institutions deal with the capital markets. Over-the-counter transactions are done through a loose network of security traders known as broker-dealer, dealers and brokers.
• The capital market consists of :

  1. Securities market; and
  2. Negotiated (or non-securities) market
• Securities market is where companies issue common stocks or bonds which are marketable/negotiable to obtain long-term funds.

  An instrument which is transferable by endorsement or delivery is negotiable. Negotiability allows securities to be traded anonymously. The identity of the seller need not be known. Negotiability improves liquidity because anyone who holds the security can immediately sell the security when the holder needs cash. The holder can even sell the security prior to maturity.
• Securities market is composed of :

  1. Stock market for equity or stock securities
  2. Bond market for debt securities, and
  3. Derivative securities market for securities deriving their value from another security
• Stock market serves as the medium or agent of exchange transactions dealing with equity securities.

  
  

  It involves institutions and analysts who review the performance of listed companies. When companies are successful in their operations and investments, analysts recommend buying of their stocks creating demand and increasing share prices and shareholders wealth. Shareholders can penalize poor management of companies by seling off their holdings driving share prices down.
• All markets follow the basic economic law of supply and demand. If there a lot of shares of any one company in the market, its prices go down. The scarcity of the shares drives the share prices up. If many are buying the stocks, it creates demand and raises prices up. 
• Classifying stocks into boards enabled PSE to calculate stock indexes (indices) for each group. A stock index is a measure of the price level of the shares listed in the exchange by the indicated category. Index reflects the prices of selected stocks. It is useful as a track record of changes in stock prices over time. PSE tracks four indices: commercial and industrial, property, mining, and oil. The overall index, which is called the Philippine stock index (Phisix), is a composite of the four indices. (Saldana 1997)
• Saldana (1997) listed the following prices in a trading day:

  1. Open- the stock price for the first transaction at the start of trading day
  2. Low - the lowest stock price for transactions during the day
  3. High- the highest stock price for transactions during the day
  4. Close - the stock price for the last transaction of the day
• Index also reports price movements of groups and the entire market. Other indicators of the market are changes in averages and prices movements of stocks according to the number of stocks that increased in price( advances) or decreased in price (declines).
• Bond Market is the market where bonds are issued and traded. It is generally classified into:

  1. Treasury notes and bonds market;
  2. Municipal bonds market; and
  3. Corporate bonds market
• Treasury Notes and bonds – these are issued by the government’s treasury. Like T-bills, T-notes and T-bonds are backed by the full faith and credit of the government and are therefore free from risks. As a result, they pay relatively low rates of interest (yields to maturity) to investors. However, because of longer maturity, they are subject to wider price fluctuation than money market instruments and therefore subject to interest rate risk. In contrast to T-bills that sell at a discount, T-notes and T bonds pay coupons interest semi-annually. They have maturities of over 1 to 10 years.
• Municipal bond (LGU) is an important financial instrument for development. In the Philippines, LGU bonds have only recently been acknowledged as a potential tool for development. LGU bond reduces the dependence of LGUs on the national government in implementing their development programs, and most importantly, encourages and rewards transparent good governance among local government executives. LGU bond does all these while attracting private institutional capital and providing the investing public with alternative long-term investment instrument.
• Corporate bonds are long-term bonds isued by private corporations. Bond indenture is the legal contract that specifies the rights and obligations of bond issuer and bondholders (investors), term of the bond, interest rate and interest payment dates. It may include such restrictions on the on the issuer's dividend payments, among others.
• Derivative Securities Market

  The term "derivative" is commonly used to describe a type of security which market value is directly related

  to or derived from another traded security.

  Derivative securities market refers to the market where derivative securities are traded. These are finaincial instruments which payoffs are linked to another, previously issued securities. They represent agreements between two parties to exchange a standard quantity of an asset or cash flow at a predetermined price at a specified date in the future.