Lecture 1_Capital Markets PDF

# Capital Market ## Overview of Financial Markets ### Markets and Market Structure - Market - is a place where buyers and sellers can meet to facilitate the exchange or transaction of goods and services. - Market structure - refers to how different industries are classified and differentiated ba...

# Capital Market ## Overview of Financial Markets ### Markets and Market Structure - Market - is a place where buyers and sellers can meet to facilitate the exchange or transaction of goods and services. - Market structure - refers to how different industries are classified and differentiated based on their degree and nature of competition for goods and services. ## Types of Market Structures The image shows a diagram of market structures. | Market Structure | | - | | Market Structures | | Perfect Competition | | Monopolistic Competition | | Oligopoly | | Monopoly | ### Perfect Competition - Occurs when there is a large number of small companies competing against each other. - Sell similar products (homogeneous), lack price influence over the commodities, and are free to enter or exit the market. - For example: Market sellers of meat, fruits, and vegetables. ### Oligopoly - Consists of a small number of large companies that sell differentiated or identical products. - Competitive strategies are dependent on each other.  - Strategic planning by these types of players is a must.  - For example: Smart, Globe, Sun ### Monopoly - A single company represents the whole industry. - No competitor, and it is the sole seller of products in the market. - Restrict other companies from entering the market; has the power to control the market and set prices for its goods. - For example: Meralco, Maynilad ### Monopolistic Competition - Refers to an imperfectly competitive market with the traits of both the monopoly and competitive market. - Sellers compete amongst themselves and can differentiate their goods in terms of quality and branding to look different.  - For example: P & G, Jack & Jill, Unilever. ## Financial Market - Primarily refers to a marketplace where buyers and sellers participate in the trade. - Known for transparent pricing, strict regulations, costs and fees and clear guidelines. - Acts as an intermediary between savers and investors, or they help savers become investors. On the other hand, they also help businesses to raise money to expand their business. ## Functions of Financial Markets ### Price Determination - Interaction between investors, industries and other market forces helps to determine the price. ### Mobilization of Savings - Helps in connecting those with money with those who require money. ### Ensures liquidity - Investors can easily sell those assets and convert them into cash whenever they want. ### Saves time and money - Serve as a platform where buyers and sellers can easily find each other without making too much effort or wasting time. ## Structures of Financial Markets The image shows a diagram of financial markets. | Category | Options | | - | - | | Nature of Claim | Debt Market <br> Equity Market <br> | | Maturity of Claim | Money Market <br> Capital Market <br> | | Timing of Delivery | Cash Market <br> Future Market <br> | | Organizational Structure | Exchange Traded Market <br> Over-the-Counter Market <br> | ### By Nature of Claim - **Debt Market:** The market is the market wherein fixed claims or debt instruments, such as debentures or bonds, are traded between investors. - **Equity Market:** A market wherein the investors buy and sell equity instruments. It is the market for equity claims. ### By Timing of Delivery - **Cash Market:** This market can be defined as a market where all the transactions are settled in real-time between buyers and sellers. - **Futures Market:** Futures market is one wherein commodities are delivered at a future specified date. ### By Organizational Structure - **Exchange-Traded Market:** This market has a centralized organization with the standardized procedure. - **Over-the-Counter Market:** This market is characterized by a decentralized organization, having customized procedures. ### By Maturity of Claim - **Money Market:** The market where monetary assets such as commercial paper, certificate of deposits, treasury bills, etc. which mature within one year or less, are traded is called money market. - **Capital Market:** The capital market is defined as a market wherein medium and long term financial assets are dealt with. It can be further divided into two types:  - **Primary Market:** A financial market, wherein the company listed on a stock exchange, for the first time, issues new security or already listed company brings the fresh issue. It is also known as IPO.  - **Secondary Market:** Alternately known as the Stock market, a secondary market can be defined as an organized marketplace, wherein already issued securities are traded between investors, such as individuals, merchant bankers, stockbrokers and mutual funds. ## The Money Market - An organized exchange market where participants can lend and borrow short-term, high-quality debt securities with average maturities of one year or less. ## Types of Instruments Traded in the Money Market ### Treasury Bills - Issued with a full guarantee by the government. - Issued to refinance Treasury bills reaching maturity and to finance the government's deficits. - Short-term in nature, usually with tenors of 91, 182 and 364 days and sold at a discount. ### Certificate of Deposit (CD) - Issued directly by a commercial bank, but it can be purchased through brokerage firms. - Fixed maturity date and interest rate, and they attract a penalty for withdrawing prior to the time of maturity. - Short-term in nature, usually with maturity date ranging from three months to five years and can be issued in any denomination. ### Commercial Paper - Unsecured loan issued by large institutions or corporations to finance short-term cash flow needs. - Only institutions with a high credit rating can issue commercial paper. - Issued in denominations of $100,000 and above. - Comes with a maturity date between one month and nine months. ### Banker’s Acceptance - A form of short-term debt that is issued by a firm but guaranteed by a bank. - Created by a drawer, providing the bearer the rights to the money indicated on its face at a specified date. - Often used in international trade because of the benefits to both the drawer and the bearer. - Maturity date usually lies between one month and six months from the issuing date. ### Repurchase Agreement (Repo) - A short-term form of borrowing that involves selling a security with an agreement to repurchase it at a higher price at a later date.  - Commonly used by dealers in government securities who sell Treasury bills to a lender.  - Agreements' date of maturity ranges from overnight to 30 days or more. - Federal Reserve buys repurchase agreements as a way of regulating the money supply and bank reserves. ### Eurodollars - Dollar-denominated deposits held in foreign banks, and are thus, not subject to Federal Reserve regulations. - Very large deposits of eurodollars are held in banks in the Cayman Islands and the Bahamas. - Pay a slightly higher interest rate than U.S. government debt. ## The Bond Market - Is where investors go to trade (buy and sell) debt securities, prominently bonds, which may be issued by corporations or governments. By buying a bond, credit, or debt security, you are lending money for a set period and charging interest-the same way a bank does to its debtors. ## The Equity Market - A market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets. - Gives companies access to capital to grow their business, and investors a piece of ownership in a company with the potential to realize gains in their investment based on the company's future performance. ## The Derivatives Market - Refers to the financial market for financial instruments such as futures contracts or options that are based on the values of their underlying assets.