LESSON 1INTRODUCTION TO FINANCIAL MARKETS  Money market consists of financial institutions and dealers in money or credit

who wish to either borrow or lend

Financial market is where financial securities like stocks and bonds and commodities  Money market developed because there are parties. That had surplus funds,
like valuable metals are exchanged at efficient market prices. while others needed cash.
 Efficient market prices means the unbiased price that reflects belief at CAPITAL MARKETS
collective speculation of all investors about the future prospect.
 The trading of stocks and bonds in the financial market can take directly  Generally understood as the market for long-term funds. However, also
between buyers and sellers or by medium of stock exchange. includes the market for term funds
 For instance, capital market is the market for all the financial instruments,
Financial Markets short-term. and long-term, as also short-commercial, industrial and government
 Markets in which funds are transferred from people who have an excess of paper
available funds to people who have a shortage of funds  It consists of a number of individuals and institutions that canalize the supply
and demand for long-term capital and claims on capital.
The Financial System
CONSTITUENTS OF CAPITAL MARKET

o Stock exchanges
o Commercial banks
o Co-operative banks
o Saving banks
o Developed banks
o Insurance companies
o Investment

Classifications of Financial Markets

1. Debt Markets

Short-term (maturity < 1 year) Money Market

Types of Market
Long-term (maturity > 1 year) Capital Market
 Financial Market
2. Equity Markets
o Capital Market
o Commodity Market Common stocks
o Money Market
1. Primary Market
o Derivatives Market
o Insurance Market New security issues sold to initial buyers
Money Market 2. Secondary Market
 Money market is a centre for dealing mainly of a short term character, in Securities previously issued are bought and sold
monetary assets, it meets the short-term requirements of the borrowers and
provides liquidity or cash to lenders. 1. Exchanges
 Money market become a component of the financial markets for assets Trades conducted in central locations (e.g., Toronto Stock Exchange and New
involved in short term borrowing, lending. buying and selling with original York Stock Exchange)
maturities of one year or less.
2. Over-the-Counter Markets
 Dealers at different locations buy and sell f. Islamic banks as defined in Republic Act No. 6848, otherwise known as the
"Charter of Al Amanah Islamic Investment Bank of the Philippines"; and
Economic Function g. Other classifications of banks as determined by the Monetary Board of the
The primary market is the "new securities" market where securities are sold to the public Bangko Sentral ng Pilipinas
for the first time. Banking and Financial Institutions
The secondary market is the "used securities" market, where previously issued securities  Financial Intermediaries—institutions that borrow funds from people who have
are traded among security holders saved and make loans to other people
The Bond Market and Interest Rates  Banks—institutions that accept deposits and make loans
 Other Financial Institutions—insurance companies, finance companies, pension
 A security (financial instrument) is a claim on the issuer’s future income or funds, mutual funds and investment banks
assets  Financial Innovation—in particular, the advent of the information age and e-
 A bond is a debt security that promises to make payments periodically for a finance
specified period of time
 An interest rate is the cost of borrowing or the price paid for the rental of funds Money and Business Cycles

The Stock Market  MEvidence suggests that money plays an important role in generating business
cycles
 Common stock represents a share of ownership in a corporation  Recessions (unemployment) and booms (inflation) affect all of us
 A share of stock is a claim on the earnings and assets of the corporation  Monetary Theory ties changes in the money supply to changes in aggregate
economic activity and the price level
The Foreign Exchange Market
Money and Inflation
 The foreign exchange market is where funds are converted from one currency
into another  The aggregate price level is the average price of goods and services in an
 The foreign exchange rate is the price of one currency in terms of another economy
currency  A continual rise in the price level (inflation) affects all economic players
 The foreign exchange market determines the foreign exchange rate  Data shows a connection between the money supply and the price level
Broker Vs. Dealer Money and Interest Rates
“Broker” is a person engaged in the business of buying and selling securities for the  Interest rates are the price of money
account of others. “Dealer” means any person who buys and sells securities for his/her  Prior to 1980, the rate of money growth and the interest rate on long-term
own account in the ordinary course of business. Treasure bonds were closely tied
 Since then, the relationship is less clear but still an important determinant of
Classification of Banks Banks shall be classified into:
interest rates
a. Universal banks;
Monetary and Fiscal Policy
b. Commercial banks;
c. Thrift banks, composed of:  Monetary policy is the management of the money supply and interest rates
i. Savings and mortgage banks, o Conducted in the U.S. by the Federal Reserve Bank (Fed)
ii. Stock savings and loan associations, and  Fiscal policy is government spending and taxation
iii. Private development banks, as defined in the Republic Act No. 7906 o Budget deficit is the excess of expenditures over revenues for a
(hereafter the “Thrift Banks Act”); particular year
d. Rural banks, as defined in Republic Act No. 73S3 (hereafter the "Rural Banks o Budget surplus is the excess of revenues over expenditures for a
Act"); particular year
e. Cooperative banks, as defined in Republic Act No 6938 (hereafter the o Any deficit must be financed by borrowing
"Cooperative Code");