Topic: The Philippine Financial Market

Financial market - is a market in which people and entities can trade financial
securities, commodities, and other fungible items of valueat low transaction cost
and at prices that reflect supply and demand.Securities include stocks and bonds,
and commodities include precious metals and agricultural goods.

Financial markets - refer broadly to any marketplace where the trading of

securities occurs, including the stock market, bond market, forexmarket, and
derivatives market, among others.
Part I The Investment Scenario
1.What is an investment?

An investment is any vehicle into which funds can be placed with the expectation that they will
generate positive income and/or their value is preserved or increased.

So basically Investment is the act of putting money into a business or organization to earn a profit.

An investor - is an individual that puts money into an entity such as a business for a financial
return. The main goal of any investor is to minimize risk and maximize return. It is in contrast
with a speculator who is willing to invest in a risky asset with the hopes of getting a higher
profit.

2. What is the Investment Process?

The overall investment process is the mechanism for bringing together suppliers (those having extra
funds) with demanders (those needing funds).

Normally it goes like this, suppliers or savers and demanders or issuers are brought together through a
financial institution or a financial market although there are instances, such as property transactions,
where buyers and sellers directly deal with one another. Financial institutions are organizations through
which the savings of individuals, corporations and governments are channeled into loans or
investments.

Example of financial institutions is banks, investment houses, mutual funds, pension funds and insurance
companies. Financial markets provide the legal and tax framework/environment that bring together
suppliers and demanders of funds to make safe and quick financial transactions, often though
intermediaries such as organized securities exchanges.

Suppliers or savers may transfer their funds through financial markets, financial institutions, or directly
to the demanders or issuers. Financial institutions can also participate in the investment process either
as suppliers or demanders of funds.

The financial markets consist of two parts, namely, the money market and the capital market. The
money market deals with short-term investments while the capital market is for long-term investments.
A more thorough discussion about these markets will be discuss by my co- reporter.

3.Who are the Participants in the investment process?

The three key participants in the investment process are government, business and individuals. They
can either be a demander or supplier of funds.
Government

Both local and national government need large amounts of money. Funds are needed to finance capital
expenditures like long-term infrastructure projects – road building, schools and hospitals through the
issuance of different types of long-term debt securities. Also, government needs to fund operating costs
that keep it running. Normally these funds are sourced from taxes and fees collections. In cases where
the operating expenditures exceed government revenues or if government receipts are not yet available
to meet government payments, government resorts to borrowing funds by issuing short-term debt
securities. If government has temporary idle cash, it sometimes makes short-term investments to earn
positive returns. As such, government becomes suppliers of funds.

Business

Most businesses require big sums of money to support operations in both the long term and short-term.
On the short-term, funds are used to meet operating cost like financing inventory and accounts
receivables. Long-term needs of businesses are concentrated on seeking funds to develop products,
build plants and buy equipment. Financing these needs require businesses to issue a variety of debt and
equity securities. Like government, business firms also supply funds if they have excess cash. At the
same time, they are both net demanders of fund since they demand more funds than they supply.

Individuals

We are more familiar of the fact that people need money, in the form of loans, to buy property like cars
and houses. Yet individuals supply funds to help meet the needs of both government and businesses
through deposits in savings accounts, purchases of debt or equity securities, buy insurance or various
types of property. As a group, individuals are net suppliers of funds; they put money into the financial
system than they take out

4.What are the different types of investors?

Investors can either be individual or institutional.

Individual
A retail or individual investor is someone who invests in securities and assets on their own, usually in
smaller quantities.

Individual investors personally handle their funds to meet their financial goals. Earning interest from idle
funds, ensuring the family’s security and building a retirement fund are some reasons why the individual
investor invests.

Institutional

An institutional investor is a company or organization that invests money to buy securities or assets such
as real estate. Institutional investors are legal entities that participate in trading in
the financial markets. They also have the advantage of professional research,
traders, and portfolio managers guiding their decisions.

An institutional investor is a company or organization that invests money on

behalf of clients or members.

Hedge funds, mutual funds, and endowments are examples of institutional

investors. They make substantial investments in the companies, very often
reaching millions in dollars in value.

The institutional investor is not the beneficiary of the earnings from the
investment, but the company as a whole act as a beneficiary.

5.What are the investment vehicles?

There is a wide range of investment vehicles available to the investor such as securities, mutual funds,
property and others.
Securities

Securities are investments that represent evidence of debt or ownership interest in a business or other
assets. Bonds and stocks are the most frequently used types of securities.

Investment in securities represents either a debt or an equity interest. Debt represents funds borrowed
in exchange for receiving interest income and the promise that the loan will be repaid at a given future
date. Bonds and commercial papers are example of debt securities. Equity represents a current
ownership interest in a specific business or property. Typically, an investor obtains an equity interest in a
business by buying securities collectively known as stocks (i.e., common, preferred and convertible
preferred).

Debt securities are similar to bank loans, in that the corporation promises to pay the face value on the
maturity date together with interest payments at regular intervals. But unlike a bank loan, bonds and
commercial papers are represented by certificates, which are handed over to the buyer who becomes
the holder of the certificates. In this way, stocks are also similar to debt securities – a stock certificate is
issued – but differ in a way that the issuing company does not have the obligation to pay interest to the
holder or repay the face value of the stock.

The investor also has a choice, of which type of securities to invest in depending on such considerations
like cost, rate of return, risk involved and taxes to be paid.

Short-term investment

Examples of short-term investment vehicles are deposit accounts, Treasury bills (T-bills), commercial
papers, certificates of deposit, promissory notes and the like. The maturity of all these instruments is
under one year. These instruments are suitable for temporarily investing idle funds and earning a return,
usually interest. Generally, they are popular to conservative investors because they carry little or no risk
at all. They are highly liquid since they can be easily converted to cash with little or no loss in value, thus,
enabling the investor to quickly obtain funds to meet unexpected obligations or shift to more attractive
investment opportunities.

Common stock

Buying a share of common stock is in fact buying a share of a business. An individual who owns shares
in, say Petron or PLDT has an ownership interest in that company and is called a stockholder or
shareholder. The he holds are evidence of ownership in the corporation. The percentage or proportion
of ownership depends on how many of the company’s shares he owns.
For example, 1000 shares of common stock in a corporation that has 100,000 outstanding shares
represent 1,000/100,000 ownership interest. This means you have a one percent ownership interest in
the company’s plant, its building, its inventories and, last but not the least, its management. You own
one percent in everything that the company has or may have in the future. This type of ownership is also
referred to as having equity in a company; hence, stocks are also called equity securities.

Fixed-income securities

Common examples of fixed-income securities are bonds, preferred stocks and convertible securities.
These groups of investment vehicles offers a fixed periodic return and are quite popular investments
during periods of high interest rates since investors like to have guaranteed high returns.

Bonds

Are long-term debt instruments that offer the holder a known interest return along with a return of the
bond’s face value (the value stated on the face of the certificate) at maturity (usually 20 years). Bonds
are commonly issued by corporations and governments.

Preferred stocks

Represent an ownership interest in a firm and like common stocks, has no maturity date. It has however
a specific dividend rate. This dividend payment has preference ove stock dividends paid to common
stockholders. Aside from the dividends it pays, investors buy preferred stocks for the possibility of
earning capital gains from its sale.

Convertible security

Is a special type of fixed-income obligation (bond or preferred stock) with a feature permitting the
investor the benefit of earning fixed income such as interest (for bonds) or dividends (for preferred
stocks), while offering the potential of capital gains (like common stocks)

Mutual funds

A mutual fund is the commonly used name for an investment company, which pools the money of many
investors into a large fund. It is managed by a financial professional, called an investment adviser or fund
manager. who invest this large accumulation of funds into a large portfolio of securities, such as debt
and equity securities, and other financial instruments.

Property
Investments in property can either be in real property or tangible personal property.

Real estate

This term usually refers to raw land, buildings and that which is permanently affixed to the land such as
residential homes, commercial property (condominiums, office and apartment buildings), and the like.
Returns normally received from this form of investment are in the form of capital gains, rental income,
etc.

Tangibles

Examples of tangibles include gold, precious metals and gemstones, along with collectible items such as
artwork, antiques, coins and stamps. Investors purchase these in anticipation of price increases.

Time Deposit

This is the option worth exploring if you want the same level of security that a savings account offers but
higher returns. Time deposits yield better than a savings account as the interest can range from 0.25% to
2%. This depends on the maturity period of the cash you deposited. The catch is that you won’t be
able to use the money you put in for a certain time frame.

6.What is the life of an investment?

The life of an investment can either be short or long-term.

Sort-term investments usually mature within one year like Money market accounts; Savings accounts;
Certificates of Deposit; Treasury bills; Government bonds.

Long-term investments have longer maturities, like bonds, or with no maturity at all, like common
stocks.

7. What is the importance of investing?

Investing is the process of placing funds in selected investment vehicles with the expectation of
generating positive income and/or preserving and increasing their value.

The availability of funds in the economy largely influences its growth and continuity. A cyclical
interdependence dictates the flow of funds that are needed to finance the activities of government,
business firms, even individuals.
For instance, if fewer individuals save their money in financial institutions, supply of funds for
investments or borrowings will decline. A shortage in funds for housing loans will result to fewer houses
being bought. Corollary, fewer houses being bought will mean fewer people being employed to build
houses and lower demand for construction materials.

As well as being important for an individual or household, investments are

important for the broader economy.

There is interdependence between the household sector and other sectors of

the economy, such as the corporate sector. For example, in the act of saving,
households are not buying the goods and services that firms sell. However, by
saving, households are placing money in financial institutions and this provides
a potential source of funds for firms to expand and to invest themselves.

8.What are the rewards of investing?

It must be noted that for the investment process to run smoothly, the suppliers of funds must be
sufficiently compensated by the demanders of funds in exchange for the risk involved in supplying the
funds.

Returns or rewards form investing are in the form of current income or increase in value. An example of
earning current income is placing money in a savings account that would give periodic (usually quarterly)
interest payments or insurance policy that offers dividends. On the other hand, investing ina piece of
property entails expectations of an increase in its value between the time it was bought and the time it
will be sold.