FINANCIAL MARKETS

Chapter 2: Introduction and Overview of Financial Markets

BS in Accountancy 2-C ︳Prof. Jennivib D. Diamzon ︳Bafin 101B

Exchange , Shanghai Stock

Exchange. HK Stock Exchange.
Financial Markets
● The primary stock market is where
new issues of stocks, called initial
❖ any marketplace where the trading of public offerings (IPOs) IPOs), are
securities occurs, including the stock ● Any subsequent trading of stocks
market, bond market, forex market, occurs in the secondary market,
and derivatives market, among others. where investors buy and sell securities
❖ These markets may include assets or that they already own
securities that are either listed on
regulated exchanges or else trade
2. Over-the-Counter Markets
over the counter (OTC).
(OTC)

Role of Financial Markets

● is a decentralized market meaning it
does not have physical locations, and
❖ Financial markets play a vital role in trading is conducted electronically-in
facilitating the smooth operation of which market participants trade
capitalist economies by allocating securities directly between two parties
resources and creating liquidity for without a broker.
businesses and entrepreneurs. ● While OTC markets may handle
❖ The markets make it easy for buyers trading in certain stocks (e.g., smaller,
and sellers to trade their financial or riskier companies that do not meet
holdings. the listing criteria of exchanges), most
❖ Create securities products that provide stock trading is done via exchanges.
a return for those who have excess ● OTC markets and the transactions
funds (Investors/lenders) and make that occur on them are far less
these funds available to those who regulated, less liquid, and opaquer.
need additional money (borrowers).

3. Bond Markets
Types of Financial Market
● A bond is a security in which an
1. Stock Market investor loans money for a defined
period at a preestablished interest rate
● Bonds are issued by corporations as
● The equities (stock) market is a well as by municipalities, states, and
financial market that enables investors sovereign governments to finance
to buy and sell shares of publicly projects and operations.
traded companies. ● The bond market sells securities such
● Some markets are small with little as notes, and bills issued by
activity, like the PSE, Macao Stock government.
Exchange, Taiwan Stock Exchange ● The bond market also is called the
● Other trade trillions of dollars of debt, credit, or fixed income market.
securities daily. Ex. New York Stock
Exchange, NASDAQ, Tokyo Stock
FINANCIAL MARKETS
Chapter 2: Introduction and Overview of Financial Markets
BS in Accountancy 2-C ︳Prof. Jennivib D. Diamzon ︳Bafin 101B

● Where futures contracts are listed and

4. Money Markets
traded.
● Unlike forwards, which trade OTC,
● Typically, the money markets trade in futures markets utilize standardized
products with highly liquid short-term contract specifications, are well
maturities (of less than one year) and regulated, and utilize clearinghouses
are characterized by a high degree of to settle and confirm trades.
safety and a relatively low return in ● Options markets, such as the Chicago
interes Board Options Exchange (CBOE)
● At wholesale level, the money markets CBOE), similarly list and regulate
involve large volume trades between options contracts.
institutions and traders ● Both futures and options exchanges
● At the retail level, they include money may list contracts on various asset
market mutual funds bought by classes, such as equities, fixed
individual investors and money market income securities, commodities, and
accounts opened by bank customers so on.
● Individuals may also invest in the
money markets by buying short term
7. FOREX Markets
certificates of deposit municipal notes
Treasury bills, among other examples
● Participants can buy, sell, hedge, and
5. Derivative Markets speculate on the exchange rates
between currency pairs
● The forex market is the most liquid
● Is a contract between two or more market in the world, The currency
parties whose value is based on an market handles more than 6 6 trillion
agreed upon underlying financial asset in daily transactions, which is more
(like a security) or set of assets (like than the futures and equity markets
an index) combined 1
● Are secondary securities whose value ● As with the OTC markets, the forex
is solely derived from the value of the market is also decentralized and
primary security that they are linked to consists of a global network of
● In and of itself a derivative is worthless computers and brokers from around
● Trades in futures and options the world
contracts, and other advanced ● The forex market is made up of banks,
financial products, that derive their commercial companies, central banks,
value from underlying instruments like investment management firms, hedge
bonds, commodities, currencies, funds, and retail forex brokers and
interest rates, market indexes, and investors
stocks

8. Commodities Markets
6. Future Markets
FINANCIAL MARKETS
Chapter 2: Introduction and Overview of Financial Markets
BS in Accountancy 2-C ︳Prof. Jennivib D. Diamzon ︳Bafin 101B

● Are venues where producers and need for an actual exchange authority
consumers meet to exchange physical to facilitate the transactions
commodities such as agricultural ● Futures and options trading are also
products (e.g., corn, livestock, available on major cryptocurrencies
soybeans), energy products (oil, gas,
carbon credits), precious metals (gold,
silver, platinum), or "soft" commodities
(such as cotton, coffee, and sugar).
HOW DO FINANCIAL MARKETS
● Known as spot commodity markets,
WORK
where physical goods are exchanged
for money. ➢ All financial markets work essentially
● The bulk of trading in these by bringing together buyers and
commodities, takes place on sellers in some asset or contract and
derivatives markets that utilize spot allowing them to trade with one
commodities as the underlying assets. another.
● Forwards, futures, and options on ➢ This is often done through an auction
commodities are exchanged both OTC or price discovery mechanism.
and on listed exchanges around the
world such as the Chicago Mercantile WHAT ARE THE MAIN FUNCTIONS
Exchange and the Intercontinental OF FINANCIAL MARKETS?
Exchange

➢ Its fundamental function is to allow for

9. CryptoCurrency Markets the efficient allocation of capital and
assets in a financial economy.
● Rise of cryptocurrencies such as ➢ By allowing a free market for the flow
Bitcoin and Ethereum decentralized of capital, financial obligations, and
digital assets that are based on money the financial markets make the
blockchain technology global economy run more smoothly
● Today, thousands of cryptocurrency while also allowing investors to
tokens are available and trade globally participate in capital gains over time.
across a patchwork of independent
online crypto exchanges WHY ARE FINANCIAL MARKETS
● These exchanges host digital wallets IMPORTANT?
for traders to swap one cryptocurrency
for another, or for fiat monies such as
➢ Without financial markets, capital
dollars or euros
could not be allocated efficiently, and
● Because most crypto exchanges are
economic activity such as commerce
centralized platforms, users are
and trade, investments, and growth
susceptible to hacks or fraud •
opportunities would be greatly
Decentralized exchanges are also
diminished.
available that operate without any
central authority These exchanges
allow direct peer to peer (P 2 P) Who Are the Main Participants in
trading of digital currencies without the Financial Markets?
FINANCIAL MARKETS
Chapter 2: Introduction and Overview of Financial Markets
BS in Accountancy 2-C ︳Prof. Jennivib D. Diamzon ︳Bafin 101B

1. Firms - use stock and bond markets checking and savings accounts, home
to raise capital from investors. mortgages, and other types of loans
2. Speculators - look to various asset for retail and commercial customers
classes to make directional bets on ● Banks also act as payment agents via
future prices. credit cards, wire transfers, and
3. Hedgers - use derivatives markets to currency exchange
mitigate various risks, and
4. Arbitrageurs - seek to take 2. Investment Banks
advantage of mispricing or anomalies
observed across various markets.
● Specialize in providing services
5. Brokers - often act as mediators that
designed to facilitate business
bring buyers and sellers together,
operations.
earning a commission or fee for their
a. Capital expenditure
services.
b. Financing and equity offerings,
including
WHAT IS A FINANCIAL c. Initial public offerings
INSTITUTION (FI) d. Offer brokerage services for
investors,
➢ Is a company engaged in the business e. Act as market makers for
of dealing with financial and monetary trading exchanges, and
transactions such as deposits, loans, f. Manage mergers, acquisitions,
investments, and currency exchange. and other corporate
➢ Encompass a broad range of business restructurings
operations within the financial services
sector including banks, trust 3. Insurance Companies
companies, insurance companies,
brokerage firms, and investment ● Providing insurance, whether for
dealers. individuals or corporations, is one of
the oldest financial services.
TYPES OF FINANCIAL ● Protection of assets and protection
INSTITUTIONS against financial risk, secured through
insurance products, is an essential
service that facilitates individual and
1. Commercial Banks corporate investments that fuel
economic growth.
● Accepts deposits, offers checking
account services, makes business, 4. Brokerage Firms
personal, and mortgage loans, and
offers basic financial products like ● Investment companies and
certificates of deposit and savings brokerages, such as mutual fund and
accounts to individuals and small exchange traded fund (ETF) provider
businesses Fidelity Investments, specialize in
● Offer the most recognized and providing investment services that
frequently used financial services
FINANCIAL MARKETS
Chapter 2: Introduction and Overview of Financial Markets
BS in Accountancy 2-C ︳Prof. Jennivib D. Diamzon ︳Bafin 101B

include wealth management and

financial advisory services.
● Provide access to investment products
that may range from stocks and bonds
all the way to lesser-known alternative
investments, such as hedge funds and
private equity investments.

5. Financial System

● Is the set of global, regional, or firm

specific institutions and practices used
to facilitate the exchange of funds.
● Can be organized using market
principles, central planning, or a hybrid
of both.
● Is a network of financial institutions
such as insurance companies, stock
exchanges, and investment banks that
work together to exchange and
transfer capital from one place to
another.
● investors receive capital to fund
projects and receive a return on their
investments.