Financial Markets Lesson 1

Study Notes

Financial Markets Overview

Financial markets connect individuals, corporations, and institutions needing capital with those able to lend or invest.
Primary function is to facilitate the transfer of funds from surplus to deficit units.

Functions of Financial Markets

Raising Capital: Crucial source of funding for businesses and individuals (e.g., home and vehicle purchases).
Commercial Transactions: Enable the execution of numerous commercial activities.
Price Setting: Help in determining market prices for financial assets.
Price Discovery: Establish relative values of different financial resources based on buyer and seller willingness.
Asset Valuation: Aid in determining the worth of companies and their assets.
Arbitrage: Involves buying and selling assets in different markets to exploit price discrepancies.
Risk Management: Provides derivative instruments (futures, options) to hedge against risks.

Role of Financial Intermediaries

Financial intermediaries (e.g., banks) facilitate the flow of funds between savers and borrowers.
Types of Financial Institutions:
- Depository Institutions: Accept deposits and provide loans.
- Non-depository Institutions: Include investment intermediaries and contractual savings institutions.

Functions of the Central Bank

Central banks are vital for maintaining economic stability, performing key functions such as:
- Implementing monetary policy.
- Regulating money circulation.
- Overseeing inter-bank transactions.
- Acting as a lender of last resort.
- Providing advisory services.

Types of Banks

Private Banking Institutions: Include universal, commercial, thrift, rural, and cooperative banks, as well as offshore banks.
Government Banking Institutions: Operate at the federal level to support policy functions.
Financial Intermediaries: Encompass depository institutions and investment intermediaries.

Types of Investment Products

Investment options have distinct risk and return profiles:
- Shares: Represent ownership in a corporation (e.g., SM Investments, Ayala Corporation).
- Bonds: Debt securities issued by governments or corporations (e.g., Philippine Government Bonds).
- Unit Trusts/Funds: Pool investments (e.g., Sun Life Prosperity Fund).
- Exchange-Traded Funds (ETFs): Trade like stocks on exchanges (e.g., FMETF).
- Real Estate Investment Trusts (REITs): Companies that own, operate or finance real estate properties (e.g., Ayala Land REIT).

Stock Market Significance

Stock markets support capital formation and wealth generation, offering opportunities for:
- High returns through investment.
- Portfolio diversification.
- Liquidity for investors.

Stock Market Returns

Returns come from two primary sources:
- Capital Gains: Increase in stock value over time.
- Dividends: Periodic payments made to shareholders.
Influenced by factors including economic conditions, company performance, interest rates, and investor sentiment.

Stock Market Efficiency

Refers to how well stock prices reflect all available information.
Efficient Market Hypothesis (EMH) posits that stock prices incorporate relevant information, complicating efforts to surpass market returns consistently.

Description

This quiz covers the basic functions and participants of financial markets, including the essential roles they play in economic transactions. Understand how money moves between lenders and borrowers in these markets, and learn about the different types of participants involved. This foundational knowledge is crucial for anyone interested in finance and investment.