Final-capital-market.docx

Rosemarie Subalisid BAENT-1M 1. What are financial markets? How are they classified? A financial market is a broad term describing any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees, and market forces determining the prices of securities that trade. Financial markets can be found in nearly every nation in the world. Some are very small, with only a few participants, while others - like the New York Stock Exchange (NYSE) and the force markets - trade trillions of dollars daily. Investors have access to a large number of financial markets and exchanges representing a vast array of financial products. Some of these markets have always been open to private investors; others remained the exclusive domain of major international banks and financial professionals until the very end of the twentieth century. Capital Markets A capital market is one in which individuals and institutions trade financial securities. Organizations and institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets.

Any government or corporation requires capital (funds) to finance its operations and to engage in its own long-term investments. To do this, a company raises money through the sale of securities - stocks and bonds in the company's name. These are bought and sold in the capital markets.

Stock Markets Stock markets allow investors to buy and sell shares in publicly traded companies. They are one of the most vital areas of a market economy as they provide companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance. This market can be split into two main sections: the primary market and the secondary market. The primary market is where new issues are first offered, with any subsequent trading going on in the secondary market. Bond Markets A bond is a debt investment in which an investor loans money to an entity (corporate or governmental), which borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds can be bought and sold by investors on credit markets around the world. This market is alternatively referred to as the debt, credit or fixed-income market. It is much larger in nominal terms that the world's stock markets. The main categories of bonds are corporate bonds, municipal bonds, and U.S. Treasury bonds, notes and bills, which are collectively referred to as simply "Treasuries." (For more, see the Bond Basics Tutorial.)

Money Market The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), banker's acceptances, U.S. Treasury bills, commercial paper, municipal notes, euro dollars, federal funds and repurchase agreements (repos). Money market investments are also called cash investments because of their short maturities. Cash or Spot Market Investing in the cash or "spot" market is highly sophisticated, with opportunities for both big losses and big gains. In the cash market, goods are sold for cash and are delivered immediately. By the same token, contracts bought and sold on the spot market are immediately effective. Prices are settled in cash "on the spot" at current market prices. This is notably different from other markets, in which trades are determined at forward prices. Derivatives Markets The derivative is named so for a reason: its value is derived from its underlying asset or assets. A derivative is a contract, but in this case the contract price is determined by the market price of the core asset. If that sounds complicated, it's because it is. The derivatives market adds yet another layer of complexity and is therefore not ideal for inexperienced traders looking to speculate. However, it can be used quite effectively as part of a risk management program.

Force and the Interbank Market The interbank market is the financial system and trading of currencies among banks and financial institutions, excluding retail investors and smaller trading parties. While some interbank trading is performed by banks on behalf of large customers, most interbank trading takes place from the banks' own accounts. The force market is where currencies are traded. The forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion per day and includes all of the currencies in the world. The forex is the largest market in the world in terms of the total cash value traded, and any person, firm or country may participate in this market. 2. Define capital market? How does it differ from money market? Money Market

Meaning

Capital Market

A segment of the financial market

A section of financial market

where lending and borrowing of

where long term securities are

short term securities are done.

issued and traded.

Informal

Formal

Financial

Treasury Bills, Commercial

Shares, Debentures, Bonds,

instruments

Papers, Certificate of Deposit,

Retained Earnings, Asset

Trade Credit etc.

Securitization, Euro Issues etc.

Nature of Market

Institutions

Central bank, Commercial bank,

Commercial banks, Stock

non-financial institutions, bill

exchange, non-banking

brokers, acceptance houses, and

institutions like insurance

so on.

companies etc.

Risk Factor

Low

Comparatively High

Liquidity

High

Low

Purpose

To fulfill short term credit needs of

To fulfill long term credit needs of

the business.

the business.

Time Horizon

Within a year

More than a year

Merit

Increases liquidity of funds in the

Mobilization of Savings in the

economy.

economy.

Less

Comparatively High

Return on Investment

3. What comprises the Philippine financial market? The Philippine financial system is structured by type of bank including universal, commercial, savings and cooperative banks, according to statistics compiled by Asianbanks.net from noted bank adviser Paul Sheehan. Although the country’s banking system primarily consists of rural and thrift banks, universal and commercial banks account for larger market shares.

Universal and commercial banks make up less than 5 percent of the total banking institutions in the Philippines but account for a much larger portion of the market share, explains data from Asianbanks.net. Universal and commercial banks differ from other banking institutions by offering a wider variety of financial services, according to Investopedia. In the Philippines, these banks have asset values of over 3 trillion pesos, making up over 90 percent of the banking market share in the country.

The Philippine financial system consists mainly of rural banks, which make up the majority of total banking institutions, notes Asianbanks.net. Rural banks provide credit to farmers and agricultural-related businesses, according to Investopedia. These banks, along with cooperative banks that provide similar services, have the lowest asset values and market shares relative to universal and commercial banks. However, rural and cooperative banks have higher yearly growth rates than universal and commercial banks combined.

4. In the quest for additional capital, what factors must be considered?

Trading on Equity- The word “equity” denotes the ownership of the company. Trading on equity means taking advantage of equity share capital to borrowed funds on reasonable basis. It refers to additional profits that equity shareholders earn because of issuance of debentures and preference shares. It is based on the thought that if the rate of dividend on preference capital and the rate of interest on borrowed capital is lower than the general rate of company’s earnings, equity shareholders are at advantage which means a company should go for a judicious blend of preference shares, equity shares as well as debentures. Trading on equity becomes more important when expectations of shareholders are high. Degree of control- In a company, it is the directors who are so called elected representatives of equity shareholders. These members have got maximum voting rights in a concern as compared to the preference shareholders and debenture holders. Preference shareholders have reasonably less voting rights while debenture holders have no voting rights. If the company’s management policies are such that they want to retain their voting rights in their hands, the capital structure consists of debenture holders and loans rather than equity shares. Flexibility of financial plan- In an enterprise, the capital structure should be such that there is both contractions as well as relaxation in plans. Debentures and loans can be refunded back as the time requires. While equity capital cannot be refunded at any point which provides rigidity to plans. Therefore, in order to make the capital structure possible, the company should go for issue of debentures and other loans.

Choice of investors- The company’s policy generally is to have different categories of investors for securities. Therefore, a capital structure should give enough choice to all kind of investors to invest. Bold and adventurous investors generally go for equity shares and loans and debentures are generally raised keeping into mind conscious investors. Capital market condition- In the lifetime of the company, the market price of the shares has got an important influence. During the depression period, the company’s capital structure generally consists of debentures and loans. While in period of boons and inflation, the company’s capital should consist of share capital generally equity shares. Period of financing- When company wants to raise finance for short period, it goes for loans from banks and other institutions; while for long period it goes for issue of shares and debentures. Cost of financing- In a capital structure, the company has to look to the factor of cost when securities are raised. It is seen that debentures at the time of profit earning of company prove to be a cheaper source of finance as compared to equity shares where equity shareholders demand an extra share in profits. Stability of sales- An established business which has a growing market and high sales turnover, the company is in position to meet fixed commitments. Interest on debentures has to be paid regardless of profit. Therefore, when sales are high, thereby the profits are high and company is in better position to meet such fixed commitments like interest on debentures and dividends on preference shares. If company is having unstable

sales, then the company is not in position to meet fixed obligations. So, equity capital proves to be safe in such cases. Sizes of a company- Small size business firms capital structure generally consists of loans from banks and retained profits. While on the other hand, big companies having goodwill, stability and an established profit can easily go for issuance of shares and debentures as well as loans and borrowings from financial institutions. The bigger the size, the wider is total capitalization

5. What is meant by corporate securities?

Corporate securities can be termed as – shares, debentures, public deposits and loans from institutions. For the purpose of building fixed capital, joint stock companies mobilize funds from the public in the form of equity or ordinary shares or preference shares. Ordinary shares are not preferred shares and they do not have any predetermined dividend amount. The dividend payable to the ordinary shareholders may be high when the company performs well and it may be low or nil when the performance of the company is found to be poor. Preference shares are those shares for which preference is given in regard to dividend payment and repayment of capital. Joint stock companies borrow funds from the public in the form of debentures or bonds for which they pay interest on periodical basis. Joint stock companies also borrow funds from the public in the form of public deposits. Joint stock companies also avail long term loans from financial institutions like SIDBI, IFCI or IIBI.

6. What are the types of securities? Certificated securities are those that are represented in physical, paper form. Securities may also be held in the direct registration system, which records shares of stock in book-entry form. In other words, a transfer agent maintains the shares on the company's behalf without the need for physical certificates. Modern technologies and policies have, in some cases, eliminated the need for certificates and for the issuer to maintain a complete security register. A system has developed wherein issuers can deposit a single global certificate representing all outstanding securities into a universal depository known as the Depository Trust Company (DTC). All securities traded through DTC are held in electronic form. It is important to note that certificated and uncertificated securities do not differ in terms of the rights or privileges of the shareholder or issuer. Bearer securities are those that are negotiable and entitle the shareholder to the rights under the security. They are transferred from investor to investor, in certain cases by endorsement and delivery. In terms of proprietary nature, pre-electronic bearer securities were always divided, meaning each security constituted a separate asset, legally distinct from others in the same issue. Depending on market practice, divided security assets can be fungible or (less commonly) non-fungible, meaning that upon lending, the borrower can return assets equivalent either to the original asset or to a specific identical asset at the end of the loan. In some cases, bearer securities may be used to aid tax evasion, and thus can sometimes be viewed negatively by issuers, shareholders and fiscal regulatory bodies alike. They are therefore rare in the United States.

Registered securities bear the name of the holder and other necessary details maintained in a register by the issuer. Transfers of registered securities occur through amendments to the register. Registered debt securities are always undivided, meaning the entire issue makes up one single asset, with each security being a part of the whole. Undivided securities are fungible by nature. Secondary market shares are also always undivided. Letter securities are not registered with the SEC, and therefore cannot be sold publicly in the marketplace. A letter security (also known as a restricted security, letter stock or letter bond) is sold directly by the issuer to the investor. The term is derived from the SEC requirement for an "investment letter" from the purchaser, stating that the purchase is for investment purposes and is not intended for resale.

Cabinet securities are listed under a major financial exchange, such as the NYSE, but are not actively traded. Held by an inactive investment crowd, they are more likely to be a bond than a stock. The "cabinet" refers to the physical place where bond orders were historically stored off of the trading floor. The cabinets would typically hold limit orders, and the orders were kept on hand until they expired or were executed.

Residual Securities Residual securities are a type of convertible security – that is, they can be changed into another form, usually that of common stock. A convertible bond, for example, would be a residual security because it allows the bond holder to convert the security into common shares. Preferred stock may also have a convertible feature. Corporations may

offer residual securities to attract investment capital when competition for funds is highly competitive. 7. What constitutes the term “securities”?

The entity that creates the securities for sale is known as the issuer, and those that buy them are, of course, investors. Generally, securities represent an investment and a means by which municipalities, companies and other commercial enterprises can raise new capital. Companies can generate a lot of money when they go public, selling stock in an initial public offering (IPO), for example. City, state or county governments can raise funds for a particular project by floating a municipal bond issue. Depending on an institution's market demand or pricing structure, raising capital through securities can be a preferred alternative to financing through a bank loan.

On the other hand, purchasing securities with borrowed money, an act known as buying on a margin, is a popular investment technique. In essence, a company may deliver property rights, in the form of cash or other securities, either at inception or in default, to pay its debt or other obligation to another entity. These collateral arrangements have been growing of late, especially among institutional investors.

Market Placement Publicly traded securities are listed on stock exchanges, where issuers can seek security listings and attract investors by ensuring a liquid and regulated market in which to trade. Informal electronic trading systems have become more common in recent

years, and securities are now often traded "over-the-counter," or directly among investors either online or over the phone.

As mentioned above, an IPO represents a company's first major sale of equity securities to the public. Following an IPO, any newly issued stock, while still sold in the primary market, is referred to as a secondary offering. Alternatively, securities may be offered privately to a restricted and qualified group in what is known as a private placement – an important distinction in terms of both company law and securities regulation. Sometimes companies sell stock in a combination of public and private placement. In the secondary market, also known as the aftermarket, securities are simply transferred as assets from one investor to another: shareholders can sell their securities to other investors for cash and/or capital gain. The secondary market thus supplements the primary. The secondary market is less liquid for privately-placed securities, since they are not publicly tradable and can only be transferred among qualified investors.

8. What is secondary market?

The secondary market is where investors buy and sell securities they already own. It is what most people typically think of as the "stock market," though stocks are also sold on the primary market when they are first issued. The national exchanges, such as the New York Stock Exchange (NYSE) and the NASDAQ, are secondary markets.

The secondary market can be further broken down into two specialized categories: auction market and dealer market.



Auction market- In the auction market, all individuals and institutions that want to trade securities congregate in one area and announce the prices at which they are willing to buy and sell. These are referred to as bid and ask prices. The idea is that an efficient market should prevail by bringing together all parties and having them publicly declare their prices. Thus, theoretically, the best price of a good need not be sought out because the convergence of buyers and sellers will cause mutually-agreeable prices to emerge. The best example of an auction market is the New York Stock Exchange (NYSE).



Dealer market- In contrast, a dealer market does not require parties to converge in a central location. Rather, participants in the market are joined through electronic networks. The dealers hold an inventory of a security, then stand ready to buy or sell with market participants. These dealers earn profits through the spread between the prices at which they buy and sell securities. An example of a dealer market is the Mazda, in which the dealers, who are known as market makers, provide firm bid and ask prices at which they are willing to buy and sell a security. The theory is that competition between dealers will provide the best possible price for investors.

9. In what ways are securities marketed?

One key aspect in investing that we sometimes overlook is how to buy different securities. With the introduction of lower commission rates, loosening of regulatory regulations, and increased public interest in investing, the financial industry is blooming

with different avenues for buying and selling stocks, bonds, and mutual funds. In North America, there are four main avenues of trading investment securities:

1. through brokerages, 2. directly from the company that issues them, 3. through banks, and 4. Through individual investors.

References: https://www.investopedia.com/investing/ways-to-buy-and-sell-securities/ https://www.investopedia.com/investing/primary-and-secondary-markets/ https://www.managementstudyguide.com/capital-structure.htm https://www.investopedia.com/terms/s/security.asp https://www.investopedia.com/terms/f/financial-market.asp https://www.investopedia.com/terms/c/capitalmarkets.asp https://prezi.com/kndqn2t8ivim/the-philippine-financial-system/