Capital Market Types: Perfect Competition & Monopoly

Capital Market - Perfect Competition

• Perfect competition refers to: many small compnaies competing, selling similar products.
• The market comprises numerous small companies, each with limited market power
• The products sold are identical or highly similar, making it difficult for individual companies to differentiate themselves
• Companies in perfect competition operate in a highly competitive environment where no single firm can influence market prices.

Capital Market - Monopoly

• A single company controls the entire market
• The company faces no competition, enjoying a dominant position
• The firm has the power to set prices for its products without fear of competitors undercutting them
• Examples include Meralco (electricity distribution) and Maynilad (water distribution) in the Philippines.

Capital Market - Monopolistic Competition

• Combines elements of both monopoly and competitive markets
• A significant number of firms compete, each differentiating their products through branding, quality, or features
• Although products are similar, there are enough differences to allow companies to control their prices to some extent.
• Examples: Shampoo brands like P&G (Head & Shoulders, Pantene), Unilever (Clear, Sunsilk), and Jack & Jill

Capital Market - Oligopoly

• Small number of large companies dominate a market
• Products are either differentiated or identical
• Companies are highly interdependent; the actions of one company have a notable impact on the others.
• Philippines major telecommunication companies (Smart, Globe, and Sun)

Capital Market - Debt Instruments

• Commercial Paper

• A short-term debt instrument used by companies to raise funds

• Maturity period typically ranges from one to 270 days

• Companies use it for short-term financing needs.

• Banker's Acceptance

• A short-term debt issued by a company but guaranteed by a bank

• Typically used for international trade transactions

• The bank guarantees payment, making it a safe investment

• Certificate of Deposit (CD)

• Issued directly by a commercial bank

• Investors lend money to banks for a fixed period at a fixed interest rate

• Typically used for short-term savings and considered relatively low-risk

• Repurchase Agreements (Repo)

• A short-term borrowing method where a security is sold with an agreement to repurchase it at a higher price at a later date.

• A form of short-term lending primarily used by dealers in government securities.

• The agreement's maturity can range from overnight to 30 days or more.

Capital Market - Equity Instruments

• Treasury Bills (T-Bills)

• Short-term debt instruments issued by governments

• Considered highly safe investments due to the government's backing

• Maturity periods are usually 91 days, 182 days, or 364 days

• The US T-Bill (USTB) is considered the safest T-Bill globally.

• Treasury Bonds

• Long-term debt instruments issued by governments

• Maturity periods are typically longer than one year, ranging from 5 to 30 years or more

• Carry slightly higher risk compared to Treasury Bills, but still considered safe investments.

Capital Market - Financial Market

• Functions of the Financial Market
• Price Determination: Market forces, involving investors, industries, and the overall economy, determine prices.
• Mobilization of Savings: The financial market channels funds from savers to borrowers, making capital available for investment.
• Ensures Liquidity: Facilitates the buying and selling of financial instruments, ensuring an active market for investors who need to access their funds quickly.
• Saves Time and Money: Provides a platform for transactions to occur efficiently, reducing the time, costs, and effort required for individuals and institutions to raise and allocate funds.

Capital Market - Structures of Financial Market

• By Nature of Claim

• Debt Market: Debt instruments are traded, representing fixed claims or loans.

• Equity Market: Shares of ownership in companies are traded, representing ownership claims.

• By Timing of Delivery

• Cash Market: Transactions settle immediately or within one or two business days.

• Futures Market: Agreements to deliver future cash flows of commodities or financial instruments at a predetermined future date.

• By Organizational Structure

• Exchange-Traded Market: A centralized market with standardized procedures and listed companies.

• Over-the-Counter Market: Decentralized, allowing for customized procedures and direct trading of instruments like bonds.

Key Definitions

• NGRAs (National Government Regulatory Agencies)
• SEC (Securities and Exchange Commission)
• BSP (Bangko Sentral ng Pilipinas)
• Corporate Bonds: Bonds issued by companies
• Treasury Bonds: Bonds issued by governments
• Certificates of Ownership for Equity Instruments
• Certificates of Indebtedness for Debt Instruments