What are financial markets?

A financial market is a market in which people and entities can trade financial securities,
commodities, and other fungible items of value at low transaction costs and at prices that reflect
supply and demand. Securities include stocks and bonds, and commodities include precious
metals or agricultural goods.
Broad term describing any marketplace where buyers and sellers participate in the trade
of assets such as equities, bonds, currencies and derivatives.

Benefits of Financial Markets

-Funds are directed to deficit spending units (DSUs) can use them most efficiently
-Liquidity is provided to savers

Why Firms Invest and Borrow

There are times when companies are confronted by capital deficiency. And there are
times when opportunities for investment come by but the company cannot provide the needed
amount of money to take advantage of these opportunities. Thus, when firms borrow, they
enjoy the following:
-Quantity discounts for bulk purchases granted by suppliers
-Additional revenues from sales

Methods by which financial markets transfer funds

-Direct Finance
Refers to lending by ultimate borrowers with no intermediary. Under this method, the
SSU gives money to the DSU in exchange for financial claims on the DSU. The claims issued
by the DSU are called direct claims.
SSUs have a venue for savings with expected returns while DSUs are provided with a
source of funds for consumption or investment.

Disadvantages of Direct Financing

There are few DSUs which can transact in the direct market because the denominations
of securities sold are very large.
It is difficult to match the requirements of SSUs and DSUs in terms of denomination,
maturity, and other factors.

-Private Placement
Selling of securities by private negotiation directly to insurance companies, commercial
banks, pension funds, large-scale corporate investors, and wealthy individual investors.

-Broker and Dealers

A broker is one who acts as an intermediary between buyers and sellers but does not
take title o the securities traded.
A dealer is one who is in the security business acting as a principal rather than an agent.
The dealer buys for his account and sells to customers from inventory. He makes profits by
selling this inventory of securities at a price higher than the acquisition cost.

Examples of Brokers in Baguio City

R. Coyiuto Securities, Inc.
Regina Capital Development Corp.

-Investment Brokers / Investment Banker

A person who provides financial advice and who underwrites and distributes new
investment securities.

-Indirect Finance
Also called financial intermediation
Refers to lending by an ultimate lender to a financial intermediary that then relends to
ultimate borrowers.
Financial intermediaries include commercial banks, mutual savings banks, credit unions,
life insurance companies, and pension funds.

Classification of Financial Markets

Primary market
Secondary market
Money market
Capital market
Bond market
Stock market
Mortgage market
Consumer credit market
Auction market
Negotiation market
Organized market
Over-the-counter market
Spot market
Futures market
Options market
Foreign exchange market

Primary Market
This is where newly issued primary and secondary securities are traded for the first time.
Large corporations needing large amount of funds usually tap the primary market
through issuance of bonds.
The primary markets are where investors can get first crack at a new security issuance.
The issuing company or group receives cash proceeds from the sale, which is then used to fund
operations or expand the business. Exchanges have varying levels of requirements which must
be met before a security can be sold. (investopedia)

Secondary Market
Financial market through which existing financial securities are traded.
A market where investors purchase securities or assets from other investors, rather than
from issuing companies themselves. (investopedia)

Money Market
Financial market on which debt securities with an original maturity of one year or less are
traded.
The money market is where short-term funds are raised through the buying and selling
of short term debt securities such as commercial papers. (PSE)

Capital Market
Portion of the financial market where trading is undertaken for securities with maturity of
more than one year. In the Philippines, it is subdivided into 3 parts: bond market, stock market,
and the mortgage market
The capital market is where long-term funds are raised through the bond market, which
deals with long-term debt securities such as bonds, the stock market which deals with equity
securities or stocks. (PSE)
Capital markets channel savings and investment between suppliers of capital such as
retail investors and institutional investors, and users of capital like businesses, government and
individuals. Capital markets are vital to the functioning of an economy, since capital is a critical
component for generating economic output. Capital markets include primary markets, where
new stock and bond issues are sold to investors, and secondary markets, which trade existing
securities. (investopedia)

Bond Market
Market for debt instruments of any kind.
The bond market primarily includes government-issued securities and corporate debt
securities, and facilitates the transfer of capital from savers to the issuers or organizations
requiring capital for government projects, business expansions and ongoing operations.
(investopedia)

Stock Market
Financial market where the common and preferred stocks issued by corporations are
traded.
A place, whether physical or electronic, where stocks, bonds, and/or derivatives in listed
companies are bought and sold. (financial dictionary)

Mortgage Market
Deals with loans on residential, commercial, and industrial real estate, and on farmland.
A market for loans to people and organizations buying property a market for mortgages
that have been bought by financial institutions and are then traded as asset-backed securities.
(financial times)

Consumer Credit Market

Involved in loans on autos, appliances, education, travel, etc.

Auction Market
One where trading is conducted by an independent third party according to a matching
of prices on orders received to buy and sell a particular security. If there is a match, trade is
consummated.
A market in which buyers enter competitive bids and sellers enter competitive offers at
the same time. The price a stock is traded represents the highest price that a buyer is willing to
pay and the lowest price that a seller is willing to sell at. Matching bids and offers are then
paired together and the orders are executed. (investopedia)

Negotiation Market
When buyers and sellers of securities negotiate with each other regarding price and
volume, either directly or through brokers to dealers, they are engaged in the negotiation
market.
Through the negotiation market, the situation wherein securities are not frequently
traded and which are in large volumes may not be readily accommodated in the auction market
for lack of time is remedied.

Organized Market
Financial market with fixed trading rules.
PSE is an example of an organized market

Over-the-Counter Market
Stocks of corporations not listed and therefore not traded in the stock exchange but
registered and licensed by the Securities and Exchange Commission for sale to the public are
only available in the so-called over-the-counter (OTC) market. This market is not a specific
organization but another way of trading securities. OTC transactions are carried out by direct
inquiries and negotiations among the buyers and sellers through the use of mail, telephone,
telegraph, Teletype, or other forms of communications.(PSE)

Spot Market
This is where securities are traded for immediate delivery and payment.
The spot price is the main feature of the market.
The Wholesale Electricity Spot Market (also known as WESM) is the Philippine spot
market for the trading of electricity as a commodity.

Futures Market
Market where contracts are originated and traded that give the holder the right to buy
something in the future at a price specified by the contract.

Options Market
Market where stock options are traded. A stock option is a contract giving the owner the
right to either buy or sell a fixed number of shares of stock at any time before the expiration date
at a price specified in the option.

Foreign Exchange Market

Market where people buy and sell foreign currencies.