Chapter 1: Rationale in Studying Financial Markets and Chapter 2: Introducing Money and Interest Rates

Institutions
Money – any item or commodity that is generally accepted as a
Financial markets and institutions not only influence your means of payments for goods and services or for repayment of
everyday life but also involve huge flows of funds (trillions) debt, and that serves as an asset to its holder.
throughout the world economy which in affect business profits, - It is composed of bills and coins.
production of goods and services and economic well-being of the - The financial system works on an entirely fiduciary basis,
countries. relying on the public’s confidence in the established forms
of monetary exchange
Activities in financial markets also have direct effects on personal - The federal reserve is the central bank in the US while in
wealth, behavior of business and consumers and the cyclical the Philippines it is the Bangko Sentral ng Pilipinas or BSP
performance of the economy.
Characteristics and Key Functions of Money
Financial markets have been around since mankind settled down 1. Store of Value
to growing crops and trading them with others. - People can store their wealth for future use.
2. Item of Worth
Financial markets - Money has an intrinsic value, such as that of the precious metal
1. Stocks that was used to make the coin.
2. Bonds 3. Means of Exchange
3. Foreign Currency Exchange - Exchange money freely and widely for goods and its value
should be as stable as possible.
Financial Institutions 4. Unit of Account
1. Banks - Money can be used to record wealth possessed, traded or spent
2. Insurance Companies personally and nationally.
3. Mutual Funds 5. Standard of Deferred Payment
- Money is useful because of its ability to serve as a standard of
Direct Fund Transfer – Are common among individuals and small deferred payment. Money can facilitate exchange at a given point
businesses and in economies where financial markets and by providing a medium of exchange and unit of account.
institutions are less developed.
The Evolution of Money
Financial institutions – Financial intermediaries that acquire funds 1. Barter (10000 – 3000 BCE)
by issuing liabilities and in turn use those funds to acquire assets - Specific items were exchanged for others agreed by the
by purchasing securities or making loan. negotiating parties to be of similar value
They reduce transaction costs, allow sharing and solve problems - The direct exchange of goods formed the basis of trade for
created by adverse relation and moral hazard. thousands of years. Adam Smith, 18 th century author of the
Wealth of Nations, was one of the first to identify it as a precursor
Framework Underlying All Discussions to money.
1. Understanding
2. Evaluating
3. Predicting
Advantages and Disadvantages of Barter
Advantages Disadvantages 6. Han Dynasty Coin (200 BCE)
- Trading Relationship - Market needed - Often made of bronze or copper, early Chinese coins had holes
- Physical goods are - Hard to establish a set value punched in their center.
exchanged on items 7. Roman Coin (27 BCE)
- Goods may not be easily - Bearing the head of the emperor, these coins circulated
divisible throughout the Roman Empire
- Large-scale transactions can 8. Byzantine Coin (700 CE)
be difficult. - Early Byzantine coins were pure gold, later ones also contained
metals such as copper.
2. Evidence of Trade Records (7000 BCE) 9. Anglo-Saxon Coin (900 CE)
- Pictures of items were used to record trade exchanges, - This 10th century silver penny has an inscription stating that Offa
becoming more complex as values were established and is King of Mercia
documented. 10. Arabic Dirham (900 CE)
3. Coinage (600 BCE – 1100 CE) - Many silver coins from the Islamic empire were carried to
- Defined weights of precious metals used by some merchants Scandinavia by Vikings
were later formalized as coins that were usually issued by states.
4. Bank Notes (1100-2000) The Economics of Money
- States began to use bank notes, issuing paper IOU’s that were - Understanding of the nature of money became more
traded as currency, and could be exchanged for coins at any time. sophisticated in the 16th century.
5. Digital Money (2000 onwards) - National banks were established in the late 17 th century, with
- Money can now exist virtually on computers, and large the duty of regulating the countries money supplies.
transactions can take place without any physical cash changing - By early 20th century, money became separated from its direct
hands. relationship to precious metal. By mid-20 th century, new ways of
money appeared such as credit cards, digital transactions, and
Artifacts of Money even forms of money such as cryptocurrency
1. Barter (5000 BCE) - The gold standard collapsed altogether in the 1930s.
- Early trade involved directly exchanged items
2. Sumerian Cuneiform Tablets (4000 BCE) 1. Potosi Inflation (1540-1640)
- Scribes recorded transactions on clay tablets, which could also - The Spanish discovered silver in Potosi, Bolivia, and caused a
act as receipts. century of inflation by shipping 350 tons of the metal back to
3. Cowrie Shells (1000 BCE) Europe annually.
- Used as currency across India and the South Pacific, they 2. The Great Debasement (1542-1551)
appeared in many colors and sizes. - England’s Henry VIII debased the silver penny, making it three-
4. Lydian Gold Coins (600 BCE) quarters copper. Inflation increased as trust dropped.
- In Lydia, a mixture of gold and silver was formed into disks, or 3. Early Joint-Stock companies (1553)
coins, stamped with inscriptions - Merchants in England began to form companies in which
5. Athenian Drachma (600 BCE) investors bought shares and shared its rewards.
- The Athenians used silver from Laurion to mint a currency used
right across the Greek world
4. Bank of England (1694) - Silver coins minted in Mexico were predominantly used in 1861,
- The bank of England was created as a body that could raise the first mint was established in order to standardize coinage.
funds at a low interest rate and manage national debt. American Regime
5. The Royal Mint (1696) - First local currency, the Philippine Peso was introduced replacing
- Issac Newton became warden and argued that debasing the Spanish-Filipino Peso.
undermined confidence. All coins were recalled, and new silver - The PNB was authorized to issue Bank Notes. Later, the BPI was
ones were minted. authorized to issue its own bank notes that were redeemable but
6. US Dollar (1775) not made legal tender.
- The Continental Congress authorized the issue of United States Japanese Regime
dollars in 1775, but the first national currency was not minted by - Issued Japanese War Notes. These bills had no reserves nor
the US Treasury until 1794. backed up by any government asset and were called “mickey
7. Gold Standard (From 1844) mouse” money.
- The British pound was tied to a defined equivalent amount of Post War Period
gold; other countries adopted a similar gold standard. - All Japanese currencies were declared illegal; all banks were
8. Credit Cards (1970s) closed and all Philippine National Bank Notes were withdrawn
- The creation credit cards enabled consumers to access short- from circulation.
term credit to make smaller purchases. This resulted in the - The new treasury certificate called victory money were printed
growth of personal debt. denominations with the establishment of the Central Bank. In
9. Digital Money (1990s) 1949 a new currency called Central Bank Notes was issued.
- The easy transfer of funds and convenience of electronic - The Central Bank launched the New Generation Currency, which
payments became increasingly popular as internet use increased. is uniform in size where significant events in history, buildings
10. Euro (1999) and heritage sites were featured in 2010
- Twelve EU countries joined together and replaced their national - In 2018, the New Generation Coin series were put in circulation
currencies with the Euro. Bank notes and coins were issued three
years later. The Supply and Demand for Money
11. Bitcoin (2008)
- A form of electronic money that exists solely as encrypted data M1 (Money used as a Medium of Exchange) – The narrowest
on servers is announced. The first transaction took place in measure of the money supply. Includes currency in circulation
January 2009 held by the nonbank public, demand deposits, other checkable
deposits and travelers check.
Highlights in the History of Money in the Philippines M2 (Money used as a store of value) – Includes money held in
savings deposits, money market deposit accounts,
Pre-Spanish Regime noninstitutional money market mutual funds and other short-term
- The prevailing medium of exchange was barter; some coins money market assets
were circulating as early as the 8th century. M3 (Money used as a Unit of Account) – Includes the financial
- Commodity money as gold, gold dust, silver, wires, coffee, sugar institutions.
rice, spices, carabao were used as money. Piloncitos and other L – Includes liquid and near-liquid assets (short-term treasury
commodities were in circulation. notes, high-grade commercial paper)
Spanish Regime
- Introduced coins in 1521. BSP – Responsible for determining the supply of money
The Demand for Money FV =PV x (1+i)
n

1. Transaction Demand
- Money demanded for day-to-day payments through balances FV = Future Value
held by households and firms. PV = Present Value
- Varies with GDP, it does not depend on the rate of interest I = Interest
2. Precautionary Demand N = Number of Terms
- Money demanded as a result of unanticipated payments
- Varies with GDP
3. Speculative Demand According to Keynesian Theory, the rate of interest is determined
- Money demanded because of expectations about interest rates as a price in two markets:
in the future. 1. Investment Funds
Rate of Interest – The price paid in the money market for the use 2. Liquid Assets
of money.

The Quantity Theory of Money Three Components of Money Interest

- Changes in the money supply directly influences the economy’s 1. Risk Premium
price level. - Probability of default (risk imposed on the lender by the
possibility that the borrower may be unable to repay the loan)
M x V =P x Y 2. Inflationary Premium
- Expectation that the loan will be repaid with pesos of less
Where: purchasing power as the result of inflation
M = Quantity of Money 3. Pure Interest
V = Velocity of Money - The real price one must pay for earlier availability
P = Price Level
Y = Real GDP

- The economy’s nominal GDP (P x Y) is equal to money actually

used in the economy (M x V)
- Velocity (V) and potential real GDP (Y) is not affected by the
quantity of money (M) and are constant

The Time Value of Money

Interest – The cost of using money over time

Present Value
- Based on the commonsense notion that a peso of cash flow paid
to you one year from now is less valuable to you than a peso paid
to you today.
Simple Loan – simplest kind of debt instrument
Chapter 3: Payment System
Automated Clearing House (ACH)
Money facilitates transactions in the economy. This mechanism is - Direct deposits of payroll checks into the checking accounts of
called a payment system workers and electronic payments on car loans and mortgages.
Automated Teller Machine (ATM)
Commodity Money
- Good used as money that has value independent of its use as E-Money
money - Digital cash people use to buy goods and services.
Fiat Money - The central bank does not control e-money and is essentially a
- Money such as paper currency that has no value apart from its private payments system.
use as money. Bitcoin
Checks - The product of decentralized system of linked computers.
- Promises to pay on demand money deposited with a bank or - Produced by people performing the complicated calculations
other financial institutions. necessary to ensure that online purchases made with bitcoins are
legitimate (25)
New Technology and the Payments System - 21 million bitcoins before mining; expected to be reached in
The BSP supervises the payments system but doesn’t directly 2030
control it because many payments are processed by banks and Blockchain
other private firms. - A distributed ledger or an online network that registers
ownership of funds, securities, or any other good, including
Five most desirable outcomes for a payment system movies and songs.
1. Security
- Better security increases consumers and businesses confidence Cashless Society
that funds will not be stolen electronically - Electronic payments make up more than two-thirds of all
2. Efficiency noncash payments.
- Increasing the efficiency of the payments system allows it to Cashless Society may be difficult to attain because:
function using fewer workers and computer or other capital, which 1. The infrastructure for an e-payments system is expensive
benefits the economy. to build.
3. Speed 2. Many households and firms worry about protecting their
- Fast settlement of payments facilitates transactions by both privacy in an electronic system that is subject to computer
households and businesses hackers, although supporters of blockchain believe its
4. Smooth International Transactions encryption technology can overcome this problem.
- Increasing amount of business that takes place across borders
can be facilitated if payments can be made quickly and
conveniently
5. Effective Collaboration among participants in the
system.
- Payment’s system needs to efficiently involve government,
financial firms such as banks, and other business around the
world.
Chapter 4: Financial Instruments - Interest Rate Swaps
Financial Liabilities
Financial Instruments – Any contract that gives rise to a A financial liability is any liability that is:
financial asset of one entity and a financial liability or equity (a.) A contractual obligation
instrument of another entity. These include primary instruments - To deliver cash or another financial asset to another entity
and derivative financial instruments. - To exchange financial assets or financial liabilities with
Contract – An agreement between two or more parties that has another entity under conditions that are potentially
clear economic consequences that the parties have little, if any, unfavorable to the entity.
discretion to avoid, usually because the agreement is enforceable (b.) A contract that will of may be settled in the entity’s own
by law. equity instruments and is:
- A non-derivative for which the entity is or may be obliged
Financial Instruments to deliver a variable number of the entity’s own equity
1. Financial Assets instruments
2. Financial Liabilities - A derivative that will or may be settled other than by the
3. Equity Instruments exchange of a fixed amount of cash or another financial
4. Derivatives asset for a fixed number of the entity’s own equity
instruments.
Financial Asset
Any asset that is Examples:
1. Cash - Accounts, Notes, and Loans Payable from other entities and
- Petty Cash bonds and other debt instruments issued by the entity.
- Demand, Savings and Time Deposit - Derivative financial liabilities
- Undeposited Checks - Obligations to deliver own shares worth a fixed amount of cash
- Foreign Currencies - Some derivatives on own equity instruments
- Money Orders
- Bank Drafts Equity Instruments
2. Equity instrument of another entity (investment in ordinary An equity instrument is any contract that evidence a residual
shares) interest in the assets of an entity after deducting all of its
- Stock Certificate liabilities.
- Publicly Listed Securities
3. Receivables (Accounts, notes, loans and investment in bonds Examples:
and other debt instrument issued by other entities) - Ordinary Shares
- Trade-Receivables - Preference Shares
- Promissory Notes - Warrants or written call option that allow the holder to subscribe
- Bond Certificates or purchase ordinary shares in exchange for a fixed amount of
4. Derivatives each or another financial asset.
- Future Contracts
- Forward Contracts Derivative Financial Instruments
- Call Options
- Foreign Currency Futures
- Derivatives are financial instruments that “derive” their value on - If exchange rates change, the peso equivalent of the foreign
contractually required cash flows from some other security or currency that must be repaid differs from the peso equivalent of
index. the foreign currency borrowed.
- A contract allowing a company to purchase a particular asset a
designated future date, at a predetermined price is a financial 5. Interest Rate Swaps
instrument that derives its value from expected and actual - Exchange cash flows as of a specified date or a series of
changes in the price of the underlying asset. specified dates based on a notional amount and fixed and floating
Examples of Derivatives: rates.
1. Future Contracts
- An agreement between a seller and a buyer that requires that
seller to deliver a particular commodity at a designated future Chapter 5: Overview of the Financial System
date, at a predetermined price. The financial system consists of all financial intermediaries and
- Generally referred to as commodity future contract financial markets and their relations with respect to the flow of
- Purchased either as an investment or as a hedge against the funds to and from households, governments, business firms and
risks of future price changes foreigners, as well as the financial infrastructure.

2. Forward Contracts
Like a future contract but differs in three ways:
- Calls for delivery on a specific date
- Usually not traded on a market exchange
- Does not call for a daily cash settlement for price changes
in the underlying contracts.
- Gains and losses on forward contracts are paid only when
they are closed out

3. Call Options
- Options give its holder the right either to buy or sell an
instrument at a specified price and within a given time period.
- Frequently are purchased to hedge exposure to the effects of
changing interest rates.
- An option holder has no obligation to exercise the option.
- The holder of a future contract must buy or sell within a
specified period unless the contract is closed out before delivery Key Components of Financial System
comes due. 1. Financial Instruments
2. Financial Markets and Financial Institutions
4. Foreign Currency Futures 3. The Central Bank and Other Financial Regulators.
- Foreign loans frequently are denominated in the currency of the
lender (Japanese Yen, Swiss Franc, German mark) Functions of the Financial System
- The main task of the financial system is to channel funds from
sectors that have a surplus to sectors that have a shortage of
funds.
- Banks, insurance companies, mutual funds, stockbrokers and Transaction Costs – Cost of a trade or a financial transaction
other financial services firms compete to provide financial e.g. the brokerage commission charged for buying or selling a
services to households and businesses financial asset.
Information Costs – Cost that savers incur to determine the
Three key services that the financial system provides to savers creditworthiness of borrowers and to monitor how they use the
and borrowers funds acquired.
1. Risk Sharing
- Risk is the chance that the value of financial assets will change How Financial Intermediaries Reduce “Adverse Selection”
relative to what one expects to. The problem of adverse selection can be minimized if not totally
- Splitting of wealth into many assets to reduce risk is known as avoided using the following approaches:
diversification 1. Requiring borrowers to disclose material information on their
- The financial system provides risk sharing by allowing savers to financial performance and financial position
hold many assets 2. Collecting information on firms and selling that information to
investors
2. Liquidity 3. Convincing lenders to require borrowers to pledge some of
- The ease with which an asset can be exchanged for money their assets as collateral which the lender can claim of the
which savers view as a benefit. borrower defaults.
- Assets created by financial system are more liquid than physical
assets. How Financial Intermediaries Reduce Moral Hazard
- The financial system has increased the liquidity of many assets Problems
through the process of securitization Financial Intermediaries can reduce moral hazard problems by
adopting more stringent procedures in monitoring the borrowers
3. Information use of funds. This will include:
- Collection and communication of information, or facts about 1. Specializing in monitoring borrowers and developing effective
borrowers and expectations of returns on financial assets. techniques to ensure that the funds they loan are actually used
- Financial markets convey information to both savers and for their intended purpose.
borrowers by determining the prices of stocks, bonds and other 2. Imposing Restrictive Covenants
securities.
How Financial Intermediaries Reduce Transaction Costs
Asymmetric Information – The situation in which one party to an Transaction Costs may be reduced by adopting the following
economic transaction has better information than does the other techniques:
party. The borrower has more information than does the lender. 1. Financial intermediaries take advantage of economies of
scale – reduction in average costs that results from an increase
Two problems arising from asymmetric information: in the volume of a good or service produced
1. Adverse Selection – The problem investors experience in 2. Financial Intermediaries can also take advantage of economies
distinguishing low-risk borrowers from high-risk borrowers of scale in other ways.
before making an investment 3. Financial Intermediaries also take advantage of technology to
2. Moral Hazard – The problem investors experience in provide financial services such as those that atm networks
verifying that borrowers are using their funds as intended. provide.
4. Financial intermediaries also increasingly rely on sophisticated
software to evaluate the creditworthiness of loan applicants.
Chapter 6: The Philippine Financial System accumulated funds, together with its capital for loans and
investment insecurities of productive enterprises.
Structure of the Philippine Financial System 4. Rural Banks (RB)
I. Banko Sentral ng Pilipinas (BSP) - Any bank authorized by the Central Bank to accept deposits and
make credit available to farmers, businessmen and cottage
II. Banking Institutions industries in the rural areas.
A. Private Banking Institutions 5. Cooperative Banks
1. Universal Bank (UB) or Expanded Commercial Bank - Banks established to assist the various cooperatives by lending
(EKB) those funds at reasonable interest rates.
- Any commercial bank, which performs the investment house
function in addition to its commercial banking authority. B. Government Banks or Specialized Government Banking
- It may invest in equities of allied and non-allied enterprises Institutions
which may either be financial or non-financial
2. Commercial Bank or Domestic Bank (KB) 1. Development Bank of the Philippines (DBP)
- Any commercial bank that is confined only to commercial - Provides loans for developmental purposes, gives loans to the
bank functions such as accepting drafts and issuing letters of agricultural sector, commercial sector and the industrial sector.
credit, discounting and negotiating promissory notes. 2. Land Bank of the Philippines (LBP)
3. Thrift Banks (TB) - A government bank which provides financial support in the
- Includes savings and mortgage banks, stock savings and loan implementation of the Agrarian Reform Program (CARP) of the
associations and private development banks. government.
- Their function is to accumulate the savings of depositors and 3. Al-Amanah Islamic Investment Bank (R.A. No. 6048)
invest them together with their capital, loans secured by - Authorizes the bank to promote and accelerate the socio-
bonds, mortgages in real estate and insured improvements economic development of the Autonomous Region of Muslim
thereon. Mindanao (ARMM) by performing banking, financing and
a. Stock Savings and Mortgage Bank (SSMB) investment operations, and to establish and participate in
- Any corporation organized for the purpose of agriculture, commercial and industrial ventures based on the
accumulating the savings of depositors and investing them, Islamic concept of banking.
together with its capital, in readily marketable bonds and
debt securities: checks, bills of exchange and acceptance III. Non-Bank Financial Institutions
or notes arising out of commercial transactions. A. Private Non-Bank Financial Institutions
b. Private Development Bank (PDB) 1. Investment House
- A bank that exercises all the powers and assumes all the - Any enterprise which engages in underwriting securities of
obligations of the savings and mortgage bank as provided other corporations. It also generates income from sale of
in the General Banking Act except other stated. investment in securities.
- The Development Bank of the Philippines is the 2. Investment Banks
government counterpart of the PDB and helps the PDB - Do not take in deposits and until very recently rarely lent
augment their capitalization as provide under R.A. 4093 directly to households.
c. Stock Savings and Loan Association (SLA) - Engaged in underwriting – guarantee a price to a firm issuing
- Any corporation engaged in the business of accumulating stocks or bonds and then make a profit by selling the stocks or
the savings of its member or stockholders and using such bonds at a higher price.
3. Financing Company B. Government Non-Bank Financial Institutions
- Primary purpose is to extend credit facilities to consumers 1. Government Service Insurance System
and to industrial, commercial or agricultural entities by - Provides retirement benefits, housing loans, personal loans,
discounting, factoring, leasing etc. emergency and calamity loans to government employees.
4. Securities Dealer 2. Social Security System (SSS)
- Any person or entity engaged in the business of buying and - Provides retirement benefits, funeral benefits, housing loans,
selling securities for his own or its client’s account. personal loans and calamity loans to employees who are
5. Savings and Loan Associations (S&Ls) working in private companies and offers.
- Accumulate the funds of many small savers and then lend 3. Pag-Ibig
this money to home buyers and other types of borrowers. - Provides housing loans to both government and private
- The most significant economic function of the S&Ls is to employees.
“create liquidity”
6. Mutual Funds The Evolving Philippine Financial System
- Corporations which accept money from savers and then use To counteract the downside risks and smooth functioning of the
these funds to buy stocks, bonds or short term debt Philippine financial system, more stringent initiatives are being
instruments issued by business or government units. pursued by the four regulatory agencies namely:
7. Pawnshops 1. Bangko Sentral ng Pilipinas (BSP)
- Persons or entities engaged in the business of lending money 2. Securities and Exchange Commission
with personal property, jewelry, and other durable goods as 3. Insurance Commission (IC)
collateral for the loans given. 4. Philippine Deposit Insurance Commission (PDIC)
8. Lending Investor
- Any person or entity engaged in the business of effecting
securities transactions, giving loans and earns interest from
them.
9. Pension Funds
- Retirement plans funded by corporations or government
agencies for their workers and administered primarily by the
trust departments of commercial banks.
10. Insurance Companies
- Take savings in the form of annual premiums, then invest
these funds in stocks, bonds, or real estate and finally make
payments to the beneficiaries of the insured parties.
11. Credit Unions
- Cooperative association whose members have a common
bond, such as being employees of the same firm. They are the
cheapest source of funds available to individual borrowers.
Chapter 7: Financial Markets: An Overview - Market prices offer the best way to determine the value of a firm
or of the firm’s assets, or property.
Financial Markets – The meeting place for people, corporations 5. Arbitrage
and institutions that either need money or have money to lend or - Currencies may trade at very different prices in different
invest. locations. As traders in financial markets attempt to profit from
these divergences, prices move towards a uniform level, making
Function of Financial Markets the entire economy more efficient.
- Financial markets and financial intermediaries have the basic 6. Investing
function of getting people together by moving funds from those - The stock, bond and money markets provide an opportunity to
who have a surplus of funds to those who have a shortage of earn a return on funds that are not needed immediately, and to
funds. accumulate assets that will provide an income in future.
7. Risk Management
- They also enable the markets to attach a price to risk, allowing
firms and individuals to trade risks so they can reduce their
exposure to some while retaining exposure to others.

Debt and Equity Markets

Funds in a financial market can be obtained by a firm or an
individual in two ways:

Debt Instrument
- Most common method to issue such as bond or mortgage
- A contractual agreement by the borrower to pay the holder
of the instrument fixed peso amounts at regular intervals
until a specified date.
- Maturity – The number of years until that instrument’s
expiration date.
What Financial Markets Do - < 1 year = Short term,
1. Raising Capital - > 1 year < 10years = Intermediate term
- Financial markets are also an important source of capital for - >10 years = Long term
individuals who wish to buy homes or cars, or even to make
credit-card purchases. Equity Instruments
2. Commercial Transactions - Examples are common or ordinary stocks
- Financial markets provide the grease that makes many - Claims to share in the net income and the assets of a
commercial transactions possible. business
3. Price Selling - Equities often make periodic payments (dividends) to their
- Financial Markets provide price discovery, a way to determine holders
the relative values of different items, based upon the prices at - Long term because they have no maturity date.
which individuals are willing to buy and sell them.
4. Asset Valuation
Residual Claimant – The corporation must pay all its debt holders municipalities, public corporations, and other local authorities are
before it pays its equity holders. purchased and sold.
Financial Market – Functions both as primary and secondary - Purpose is to facilitate the exchange of securities between
markets for debt and equity securities. buyers and sellers, thus providing a market place, virtual or real.
Listing Agreement – Ensures that the company provides all the
Primary Market information pertaining to its working from time to time.
- Original sale of securities by governments and corporations. - Known as barometer of the company’s economy
There are two types of primary market transactions: Listing of Securities on Stock Exchange
Public Offerings – Selling securities to the general public. It must - Listing – Admission of securities to dealings on a recognized
be registered with the SEC stock exchange of any incorporated company, central and stage
Public Placement – Negotiated sale involving a specific buyer. governments.
- Objective is to provide liquidity and marketability to listed
Secondary Market securities and ensure effective monitoring of trading for the
- After securities are sold to the public, they can be traded in the benefits of all participants of the market.
secondary market between investors. - Recognized stock exchange – Stock exchange being recognized
- Known as Stock Market or Exchange by the national government through the SEC.
Brokers – Agents of investors who match buyers with sellers of - Brokers – Securities bought and sold in recognized stock
securities exchange through members
Dealers – Link buyers and sellers by buying and selling securities - Official Quotation – Price at which the securities are bought and
and stated prices. sold on a recognized stock exchange.

Two broad segments of the stock market: The securities of an entity may be listed at any of the following
1. The Organized Stock Exchange stages:
- Have a physical location where stocks buying and selling - At the time of public issue of shares or debentures
transactions take place in the stock exchange floor (e.g. PSE, New - At the time of rights issue of shares or debentures
York Stock Exchange) - At the time of bonus issue of shares
2. The Over the Counter (OTC) Exchange - Shares issued on amalgamation or merger
- Shares, bonds and money market instruments are traded using
a system of computer screens and telephones. Example is The Philippine Stock Exchange
NASDAQ
- National stock exchanged of the Philippines.
- Created in 1992 from the merger of the Manila Stock Exchange
Secondary Markets serve two important functions:
1. The make it easier to sell these financial instruments to raise and Makati Stock Exchange
cash and make it more liquid. - The main index for PSE is the PSE composite Index (PSEi)
2. They determine the price of the security that the issuing firm composed of thirty listed companies.
sells in the primary market. - Overseen by a 15-member BOD chaired by Jose T. Pardo
- Formed on December 23, 1992
Stock Exchange - MSE is established on August 12, 1927, on Muelle de la
- An organized market where securities like shares, debentures of industria, Binondo Manila, MkSE is established on May 15, 1963
public companies, government securities and bonds issued by based in the Makati Central Business District.
 - The ease with which trading can be conducted.
Day Trading – Buying and selling of shares, currency, or other 2. Transparency
financial instruments in a single day. The intention is to profit from - Availability of prompt and complete information about trades
small price fluctuations. and prices.
3. Reliability
- Ensuring that trades are completed quickly according to the
terms agreed.
Potential Day Traders Should Be Knowledgeable of the 4. Legal Procedures
Following: - Adequate to settle disputes and enforce contracts.
1. Market Data
- Current trading information for each day-trading market.
2. Scalping 5. Suitable Investor Protection and Regulation
- Strategy in which traders hold their share or financial asset for - Trading will be deterred if investors lack confidence in the
just a few minutes or even seconds. available information about the securities they wish to trade, the
3. Margin Trading procedures for trading, the ability of trading partners.
- Buying shares that involves the day trader borrowing a part of 6. Low Transaction Costs
the sum needed from the broker who is executing the transaction. - Participants will strive to complete them in places where trading
4. Bid-Offer Spread costs, regulatory costs and taxes are reasonable
- The difference between a price at which a share is sold, and that
at which it is bought. The Forces of Change
1. Technology
Potential Day Traders Should Be Aware That - Abundant computing power and cheap telecommunications
1. Day Trading is a High-Risk Occupation have encouraged the growth of entirely new types of financial
- Day traders suffer severe losses in their first months to trading, instruments.
and many never graduate to profit-making status. 2. Deregulation
2. Day trading is Stressful - Individual investors need substantial protection, but that dealing
- Day traders must watch the market nonstop during the day, involving institutional investors requires little regulation.
concentrating on dozens of fluctuating indicators in the hope of 3. Liberalization
spotting market trends. - Reduction of regulations has been accompanied by a general
3. Day Trading is Expensive liberalization of rules governing participation in the markets.
- Day traders pay large sums in commissions, for training and for 4. Consolidation
computers. - Liberalization has led to consolidation, as firms merge to take
advantage of economies of scale or to enter other areas of
Rise of Formal Markets finance.
5. Globalization
Important attributes that smaller markets often lack: - Most of the important financial firms are now highly
1. Liquidity international, with operations in all the major financial centers.