Lesson 1.
Financial Markets
Business Finance
Accountancy, Business, and Management
1
If you want to start a small
business, where would you get
the required capital? Would
you use your savings or borrow
money from others?
2
If you have excess funds, would
you lend them to individuals in
exchange for revenue? What are
the risks involved?
3
These questions are just some of the concerns that occur in
financial markets.
4
Quick Look
Interest in Financial Markets
Suppose you want to cook your favorite dish, where would you go to
buy the ingredients? You go to the market where sellers offer their
products, and you, as a buyer, could choose which ones to purchase.
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Quick Look
Interest in Financial Markets
The financial market is similar to ordinary markets. But instead of
trading manufactured goods and products, such as the ingredients of
your favorite dish, the financial market offers financial products and
resources.
Financial markets are the spaces where sellers and buyers meet to
trade their financial assets and instruments.
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Quick Look
Questions to Ponder
1. When does an individual, business organization, or government
engage in the financial market?
2. Is there a difference between purchasing and selling financial
products and manufactured goods? Explain your answer.
3. What interests you the most about financial markets?
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Learning Objectives
At the end of this lesson, you should be able to do the following:
● Define financial markets and its types.
● Distinguish the role and function of financial markets from
financial institutions and financial instruments.
● Reflect on the importance of the financial market.
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How can the financial markets
affect the financial decisions of
individuals, businesses, and
governments?
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Financial Market
● a component of the financial
system
● aids in the efficient transfer of
funds from lenders to borrowers
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Financial Market
● a marketplace
○ to buy financial securities
○ to sell assets and create
liquidity
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Financial Market
● Importance to businesses
○ fund expansion activities
○ maintain cash reserves
○ acquire capital and funds
from other sources
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Financial Market
Definition
Financial Markets Financial Financial Instruments
Institutions
platforms for intermediaries financial assets or
efficient allocation of between those who securities which hold
funds from lenders to need funds and those monetary value and can
borrowers who have excess be traded in the market
funds
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Financial Market
Role in the Financial System
Financial Markets Financial Financial Instruments
Institutions
provide avenues serve as primary serve as means of
where financial intermediaries payment and could be
instruments can be between buyers and traded to increase the
traded sellers of financial wealth of an individual
instruments
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Financial Market
Examples
Financial Markets Financial Financial Instruments
Institutions
Philippine Stock stock brokerage firms stocks and bonds
Exchange (PSE) and mutual fund
companies
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Check Your Progress
How are financial markets connected to financial
1 institutions and financial instruments?
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Types of Financial Market
Money Market
● trading of financial
assets that are easily
convertible to cash
● ideal for those needing
liquidity
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Types of Financial Market
Money Market
● trading of short-term
securities, such as
○ deposits
○ treasury bills
○ interbank loans
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Types of Financial Market
Money Market
● safe and low-risk
investment
● lower rate of return
● examples:
○ bank deposits that
earn interests
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Types of Financial Market
Capital Market
● a platform for buying and
selling long-term
securities, such as
○ stocks
○ bonds
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Types of Financial Market
stocks (or shares) bonds
● represent ownership to
● represent obligations
a portion of a
● also known as debt
corporation
securities
● stock markets are
known as equity
markets
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Types of Financial Market
stocks (or shares) bonds
● those who buy stocks ● those who buy bonds
are investors are creditors and not
○ expect to receive owners of corporations
dividends
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Types of Financial Market
Capital Markets
● largest and most complex
type of market
○ stock markets
○ bond markets
○ foreign exchange
markets
○ spot markets
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Types of Financial Market
Capital Markets
● categorized into two
types
○ primary market
○ secondary market
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Types of Financial Market
primary market secondary market
● where investors and
● where long-term
traders sell their
securities are created
securities
and traded for the first
● example: stock
time
exchange
● example: initial public
offering (IPO)
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Types of Financial Market
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Check Your Progress
2 How are money markets different from capital markets?
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Functions of Financial Market
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Functions of the Financial Market
Price
Determination
The demand and supply for
financial capital determine
the price of assets and rate
of return.
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Functions of the Financial Market
Funds Mobilization
Excess funds are directed
towards productive
investments.
Fund Mobilization
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Functions of the Financial Market
Liquidity
Traders could sell their
assets and convert them
into cash.
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Functions of the Financial Market
Risk Sharing
Groups of people transfer
or share the risk of
potential gains or losses.
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Functions of the Financial Market
Easy Access
Provides a platform where
buyers and sellers can
trade securities.
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Functions of the Financial Market
Reduction of Costs
The costs related to the
acquisition and disposal of
securities are lessened.
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Functions of the Financial Market
Capital Formation
Enterprises can increase
their capital and nations
can increase their net
investments.
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The Effect of COVID-19 Pandemic to Financial Markets
Closer
Look
In early 2020, governments imposed economic and social
restrictions to manage the spread of the deadly COVID-19
disease. Many businesses were forced to temporarily
suspend or scale down their activities, and supply chains
were interrupted.
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The Effect of COVID-19 Pandemic to Financial Markets
Closer
Look
The uncertainty of the situation led many investors to sell-
off their securities due to the fear of losing their assets. The
demand for stocks plunged causing the yield of securities to
further fall down. Major financial markets crashed and led to
closure of big and small companies. The world has faced
one of the deepest economic recessions in world history
(Fong 2021).
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individuals can
increases the
meet short-term
productivity and
and long-term
efficiency of the
financial needs
economy and the
financial system
Importance of
Financial Markets
individuals, companies can
businesses, and raise capital and
governments can increase
raise funds production level
balanced flow of
funds
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An Investment Firm and the World Financial Crisis of 2008
Case S
tudy
An investment firm was established in 1847 and became
one of the largest investment banks in the United States.
Before it filed for bankruptcy in 2008, this company and
other investment firms were heavily involved in buying
subprime mortgage-backed securities, a type of bond
that bundles the home loans of borrowers with poor credit
history.
Josef T. Yap, Janet S. Cuenca, Celia M. Reyes, Impact of the Global and Economic Crisis in the Philippines, (PIDS
Discussion Paper Series No. 2009-30, 2009), 39
http://hdl.handle.net/10419/126792, last accessed on October 24, 2021.
An Investment Firm and the World Financial Crisis of 2008
Case S
tudy
There was a high demand for these types of securities
back then because it was believed that the value of real
estate would keep on increasing despite the defaults in
individual payments.
Josef T. Yap, Janet S. Cuenca, Celia M. Reyes, Impact of the Global and Economic Crisis in the Philippines, (PIDS
Discussion Paper Series No. 2009-30, 2009), 40
http://hdl.handle.net/10419/126792, last accessed on October 24, 2021.
An Investment Firm and the World Financial Crisis of 2008
Case S
tudy
When borrowers failed to repay the loan, the housing
market began to collapse. Big investment banks that
heavily invested in these securities suffered heavy losses.
Since these banks are also major players in capital
markets, the meltdown triggered the biggest stock
market crash that occured in 2008 and caused a world
financial crisis.
Josef T. Yap, Janet S. Cuenca, Celia M. Reyes, Impact of the Global and Economic Crisis in the Philippines, (PIDS
Discussion Paper Series No. 2009-30, 2009), 41
http://hdl.handle.net/10419/126792, last accessed on October 24, 2021.
An Investment Firm and the World Financial Crisis of 2008
Case S
tudy
The Philippines, like anywhere else in Southeast Asia, is
not an exemption to the crisis. It experienced rapid
deceleration of its GDP growth for the last half of 2008 and
the first half of 2009. investments have been pulled out by
individuals and companies since there are insufficient
funds circulating in the system.
The unemployment rate in the country increased.
Josef T. Yap, Janet S. Cuenca, Celia M. Reyes, Impact of the Global and Economic Crisis in the Philippines, (PIDS
Discussion Paper Series No. 2009-30, 2009), 42
http://hdl.handle.net/10419/126792, last accessed on October 24, 2021.
Keep in Mind
● A financial market is a marketplace where buyers and
sellers, or lenders and borrowers gather to trade financial
securities. It facilitates the flow of funds from those with
excess funds and those with insufficient funds.
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Keep in Mind
● The two (2) main types of financial markets :
○ Money market : where short-term securities are traded
○ Capital market : where long-term securities are traded
● Role of financial markets
○ provide a platform for financial instruments to be
traded
○ aid financial institutions in mediating between buyers
and sellers
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Keep in Mind
● Functions of the financial markets
○ price determination
○ funds mobilization
○ liquidity
○ risk sharing
○ easy access
○ reduction in transaction cost and provision of
information
○ capital formation 45
Keep in Mind
● Importance of financial markets
○ efficiently allocating financial resources from those who
have surplus of funds to those who need funds
○ raise capital through investments
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