Capital Market - is the market where investment instruments like bonds, equities and

mortgages are traded.

primal role of this market - is to make investment from investors who have surplus funds to the
ones who are running a deficit.

Secondary Market- a market where securities are traded after being initially traded to the
public in the primary market and/ or listed in the stock exchange. This market comprises of
equity market and debt market.
Secondary Market provides liquidity to the securities on the exchange(s) and this activity
commences subsequent to the original issue.

Difference between Primary and Secondary Market

Primary market, securities are offered to public for subscription for the purpose of raising
capital or fund.

Secondary market is an equity trading avenue in which already existing/ pre- issued securities
are traded among investors. Secondary market could be either auction or dealer market. While
Stock Exchange is a part of an auction market.

Financial Institution- is an institution that provides financial services for its clients or members.
One of the most important financial services provided by a financial institution is acting as a
financial intermediary.
Most financial institutions are regulated by the government.

Functions of Financial Institutions

1. Depository Institutions- deposit taking institutions that accept and manage deposits and
make loans, including banks, credit unions, trust companies, and mortgage loan companies.
2. Contractual Institutions- insurance companies and pension funds
3. Investment Institutions- investment banks, underwriters, brokerage firms

Why Study Financial Institutions

1. Financial institutions are the institutions that make financial market work.
2. Financial institutions are the intermediaries, that take funds from people who have save and
lend it to people who have productive investment opportunities.

Financial Market- is a mechanism that allows people to easily buy and sell financial securities
(stocks and bonds), and other fungible items of value at low transaction costs and at a prices
that reflect the efficient- market hypothesis

Why Study Financial Markets

1. Financial markets, such as bond and stock market are crucial in our economy.
2. These markets channel funds from savers to investors, thereby promoting economic
efficiency.
3. Market activity affects personal wealth, the behaviour of business firms, and economy as a
whole.
4. Well functioning financial markets, such as the bond market, stock market and foreign
exchange market are the key factors in producing high economic growth.

Importance of Financial Market

1. Financial markets provide financing to the corporations.
2. A modern financial system offers financing in many different forms, depending on the
company’s age, growth rate and nature of its business.

Why Study Financial Markets

1. Financial markets, such as bond and stock market are crucial in our economy.
2. These markets channel funds from savers to investors, thereby promoting economic
efficiency.
3. Market activity affects personal wealth, the behaviour of business firms, and economy as a
whole.
4. Well functioning financial markets, such as the bond market, stock market and foreign
exchange market are the key factors in producing high economic growth.

Importance of Financial Market

1. Financial markets provide financing to the corporations.
2. A modern financial system offers financing in many different forms, depending on the
company’s age, growth rate and nature of its business.

Key Players of Capital Market

1. Corporations- behave as operating businesses that require capital to grow and run their
operations. These corporations can vary in industry, size, and geographical location. 

2. Institutions (“Buy Side” Fund Managers)

- consist of fund managers, institutional investors, and retail investors. These investment
managers provide capital to corporations that need the money to grow and operate their
businesses. In return for their capital, corporations issue debt or equity to the institutions in the
forms of bond and shares, respectively. The exchange of capital and debt or equity completes
the cycle of the two key players in the capital markets.

3. Investment Banks- acting as an intermediary. The job of investment banks is to connect

institutional investors with corporations based on risk and return expectations, and investment
styles.
4. Public Accounting Firms- depending on their divisions, they can engage in multiple roles in
the primary market. These roles include financial reporting, auditing financial statements, taxes,
consulting on accounting systems, M&A advisory, and capital raising.

Other Players of Capital Market

1. Stock Exchange
* a market in which securities are bought and sold
* makes it easy for investors to buy and sell securities in secondary market
* freeze active shares and debentures certificates in the safe custody
* computerise trading
* credit dividend payment directly to the account of the shareholders in the bank through
electronic clearing mechanism
* to act as a bank for shares.

2. Merchant Banker
* Placing equity in the primary market, through the Initial Public Offers route
* Play major role in the space of mergers and acquisitions
* Play a huge role in hostile takeovers.

3. Underwriters
* Underwriting is like insurance against the failure of an issue
* For the risk that the underwriter takes, he is paid commission
* Underwriting is a device that ensures the success of new issues

4. Venture Capital
* Venture capital means funds made available for start-up firms and small business with
exceptional growth potential
* It helps to bridge the gap between capital and knowledge

5.Brokers
* Buys and sells securities for others

6. Portfolio Managers
* Responsible for investing a mutual, exchange traded or close-end assets.
* Most of the important factors to consider when looking at fund investing.

Capital market- can be divided into Bond Market and Stock Market. In Bond Market, buying
and selling of newly issued and existing bonds takes place. In Stock Market, exchange of newly
issued and existing shares or stocks is carried out.

The participants of capital market are mainly those who have a surplus of funds and those who
have a deficit of funds. The persons having surplus money want to invest in capital market in
hope of getting high returns on their investment. On the other hand, people with fund deficit
try to get financing from the capital market by selling stocks and bonds. These two kinds of
activities keep the capital market going.

Money Market- is a segment of the financial market in which financial instruments with high
liquidity and very short maturities are traded. It is used by participants as a means for
borrowing and lending in the short term, from several days to a just under a year. Money
market investments are called cash investments because of their short maturities.

Purpose of Money Markets

1. Provides a place for warehousing surplus funds for short period of time.
2. Borrowers from money market provide low-cost source of temporary funds.
3. Corporations and government use these markets because the timing of cash inflows and
outflows are not well synchronized. Money market provide a way to solve these cash- timing
problems.

Characteristics of Money Market

1. The money market is the mechanism through which holders of temporary cash surpluses
meet holders of temporary cash deficits.
2. The money market arises because for most individuals and institutions, cash inflows and
outflows are rarely in perfect harmony with each other, and holding of idle surplus is expensive.
3. Money market investors seek mainly safety and liquidity, plus the opportunity to earn some
interest income.
4. Because funds invested in the money market represent only temporary cash surpluses and
are usually needed in the near future, money market investors are especially sensitive to risk.
5. Original maturities on money market instruments range from as short as one day on many
loans to banks and security dealers to a full of one year on some bank deposits and T-bills.
6. But because there are as many money market securities outstanding, some of which reach
maturity each day, investors have a wide methods of actual maturities from which to make
their selections.
7. The money market is extremely broad and deep. It can absorb a large volume of transactions
with only small effects on security prices and interest rates

Money Market Securities

1. Treasury Bills
- issued by the Central Bank to fulfil the requirements of the government
- sold weekly through an auction
- have a par value of P200,000
- attractive to investors because they are backed up the government and are free of default risk
- liquid
- can be sold to in the secondary market through the government security dealers
2. Commercial Paper
- short-term debt instrument issued by well-known creditworthy firms
- typically unsecured
- issued to provide liquidity to finance a firm’s investment in inventory and accounts receivable
- an alternative to short-term bank loans
- has a typical maturity between 20 and 270 days
- Issued by financial institutions such as finance companies and bank holding companies
- has no active secondary market
- not purchased directly by individual investors

3. Negotiable Certificates of Deposits

- issued by large commercial banks and other depository institutions as a short-term source of
funds
- often purchased by non-financial institutions
- sometimes purchased by money market funds
- typical maturity between two weeks and one year
- have a secondary market

4. Repurchase Agreement- (REPO) is an agreement in which one party sells securities or other
assets to a counterparty, and simultaneously commits to repurchase the same or similar assets
from the counterparty, at an agreed future date or on demand, at a repurchase price equal to
the original sale price plus a return on the use of the sale proceeds during the term of the repo.

5. Banker’s Acceptances
-The banker's acceptance is a negotiable piece of paper that functions like a post-dated check
- The banker's acceptance is a form of payment that is guaranteed by a bank rather than an
individual account holder
- Banker's acceptances are traded at a discount in the secondary money markets.

Types of Investment Risks

1. Market Risk (Interest Risk)- the risk that the market value of an asset will decline, resulting in
a capital loss when sold.

2. Reinvestment Risk- the risk that an investor will be forced to place earnings from a security to
a lower yielding investment because interest have been fallen.

3. Default Risk- the probability that a borrower fails to meet one or more promised principal or
interest payments on a security.
4. Inflation Risk- the risk that increases in the general price level will reduce the purchasing
power of earnings from the investment.

5. Currency Risk (Exchange Rate Risk)- risk that adverse movements in the price of a currency
will reduce the net rate of return from foreign investment.
6. Political Risk- the profitability that changes in government laws or regulations will reduce the
expected return from an investment.

Risk of Money Market Securities

1. Because of the short maturity, money market securities are generally not subject to interest
rate risk, but hey are subject to default risk
2. Although investors can assess economic and firm- specific conditions to determine credit risk,
information about the issuer’s financial condition is limited.
3. Money market participants can use sensitivity analysis to determine how the value of money
market securities may change in response to a change in interest rates.

What is Stock?
-Stock is ownership in a publicly traded company.
-Stock is a claim on the company’s assets and earnings.
-The more stock you have, the greater your claim as an owner.

Types of Stocks
1.Common Stock – most common form of stock.
One vote per share
Dividends are not guaranteed
2.Preferred Stock
Fixed dividend
May not include voting
Companies may customize other “classes” of stock

Initial Public Offering (IPO)

-The first time a stock is sold to the public
-Sold in the Primary Market

The Markets
Primary Markets – where stocks are created
Secondary Markets – investors trade previously issued stocks
The Stock Market
Companies are not involved in the buying and selling of their stock.

Reading a Stock Table

Ticker Symbol – the alphabetic name that identifies the stock.
Price – current stock price
Open – current day’s opening price
Close – the last trading price from the previous day
Net Change – the net change from the previous day
Day’s Range – the current day’s price range
52-Week Hi and Low – the highest and lowest prices at which a stock has traded over the past
year
Trading Volume – the total number of shares traded for the day
Market Capitalization – the market value of the company
Dividend Per Share – annual dividend payment per share.
Price/Earnings Ratio – the current stock price divided by earnings per share for the last four
quarters

Bulls and Bears

Bull Market – the economy is great and stock prices are rising

Bear Market –the economy is bad and a recession is looming