Summary of Learnings Module 2
The financial system is essential for channeling funds from savers to those with productive investment
opportunities, impacting everyone from individuals to governments. It consists of financial intermediaries,
markets, and infrastructure that facilitate efficient fund allocation.
Key Functions
1. Risk Sharing: Distributes risk among multiple parties to mitigate potential losses.
2. Liquidity: Measures how easily assets can be converted into cash.
3. Information: Provides insights on borrowers and investment returns.
Challenges:
1. Adverse Selection: Occurs when investors struggle to differentiate between low-risk and high-risk
borrowers before investment.
2. Moral Hazard: Arises when investors cannot ensure that borrowers are using funds as intended.
Costs:
1. Transaction Costs: Costs associated with buying or selling financial assets.
2. Information Costs: Expenses incurred to assess borrower creditworthiness and monitor fund use.
Solutions by Financial Intermediaries:
1. Reducing Adverse Selection:
- Mandating disclosure of financial performance and position.
- Selling detailed firm information to investors.
- Requiring collateral from borrowers.
2. Mitigating Moral Hazard:
- Monitoring borrowers and ensuring funds are used correctly.
- Imposing restrictive covenants on the use of borrowed funds.
3. Lowering Transaction Costs:
- Leveraging economies of scale.
- Using technology, such as ATMs.
- Employing sophisticated software for credit evaluations.
Understanding these aspects helps investors and finance managers operate effectively within the financial
environment.
Module 3
1. Financial Markets Overview:
- Definition: Platforms for buying and selling financial instruments like stocks, bonds, currencies, and
commodities.
- Types: Stock markets (e.g., NYSE), bond markets, forex markets, commodity markets, and derivatives
markets.
- Functions: Efficient capital allocation, price discovery, liquidity provision, risk management, and
economic growth facilitation.
2. Financial Markets in Action:
- Activities: Real-time buying and selling of financial instruments driven by supply and demand,
economic conditions, and investor sentiment.
- Participants: Investors, traders, brokers, exchanges, and regulators.
3. Functions of Financial Markets:
- Capital Allocation: Directs funds from savers to borrowers.
- Price Discovery: Determines market prices based on supply and demand.
- Liquidity Provision: Facilitates easy buying and selling of assets.
- Risk Management: Offers instruments for hedging and insurance.
- Information Dissemination: Provides market information for informed decision-making.
- Economic Growth: Supports investment, innovation, and job creation.
4. What Financial Markets Do:
- Raising Capital: Enables firms and individuals to obtain funds for growth and purchases.
- Commercial Transactions: Facilitates payment and working capital arrangements.
- Price Setting and Asset Valuation: Determines values of financial instruments.
- Arbitrage: Corrects price discrepancies between markets.
- Investing and Risk Management: Provides returns and manages financial risks.
5. Structure of Financial Markets:
- Debt and Equity Markets:
- Debt Instruments: Bonds and mortgages with regular payments.
- Equity Instruments: Stocks representing ownership in a company.
- Primary vs. Secondary Markets:
- Primary Market: Original sale of securities.
- Secondary Market: Trading of already issued securities (e.g., stock exchanges, OTC).
6. Stock Exchanges:
- Features: Listing requirements, trading mechanisms, market participants, and regulatory oversight.
- Role: Provides a regulated platform for trading securities and capital formation.
7. Listing of Securities:
- Process: Companies apply to exchanges, meet requirements, and are approved to list securities.
- Benefits: Access to capital and enhanced credibility.
8. Philippine Stock Exchange (PSE):
- History: Established in 1927, evolved through mergers, demutualization, and technological
advancements.
- Function: Facilitates trading, provides market data, and promotes investor protection.
9. Over-the-Counter (OTC) Markets:
- Features: Decentralized trading, informality, diverse instruments, and participant risks.
- Role: Provides trading opportunities for instruments not listed on formal exchanges.
10. Day Trading:
- Definition: Buying and selling financial instruments within the same day to profit from short-term price
movements.
- Risks: High volatility and potential for significant losses.
11. Rise of the Formal Market:
- Advantages: Transparency, liquidity, security, and regulation.
- Drivers: Technology, regulatory reforms, globalization, and institutional investment.
12. Forces of Change:
- Technological Advancements: Improved trading efficiency and access.
- Deregulation and Liberalization: Increased competition and innovation.
- Consolidation and Globalization: Reshaped industry landscape and global market integration.
13. Code of Ethics in the Philippines:
- Regulations: Consumer protection, electronic transactions, competition law, SEC rules, accounting
ethics, and corporate governance.
- Purpose: Ensure fair practices, transparency, and investor protection.
