Chapter 1: Financial Systems and the Financial Market

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Financial market based on country's perspective are: national and external markets.

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Financial market based on manner of financial intermediaries are: dealer market and broker market.

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Financial market is not the same with the other economic markets where suppliers and buyers of financial instruments meet.

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The financial system permits an efficient method to move funds between entities who have funds and entities who need funds.

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Finance is the application of economic principles to decision-making that involves the allocation of money under conditions of certainty.

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Finance provides the framework for making decisions as to how those funds should be obtained and then invested.

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Financial instruments are medium of exchange of contractual obligation of a party, where such contract cannot be traded.

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Financial instruments can be classified into two types: cash or derivative financial instrument.

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Financial instruments can only be tangible, and not intangible, to consider as legitimate.

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Financial instruments represent claims on the future income or assets of the lender.

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A properly functioning financial system also enhances welfare of individual consumers as they have immediate access to funds allowing them to purchase things as they prefer.

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All types of financial markets offer different degrees of liquidation.

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Although original issuers are not involved, they also benefit from the transactions in the secondary market.

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An underwriter provides an undertaking to purchase the remaining securities if the offer will not be fully subscribed by the public. As consequence, there is no fee paid by the issuing company to the underwriters.

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Another way to offer securities to a private entity is through an auction process.

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Auction can be done in three methods: Dutch auction, American auction, and Descending price sealed auction.

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Auction is usually used for issuance of treasury bills, bonds, and other securities issued by the government and are commonly executed exclusively with market makers.

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Broker market is where the buyer and seller are not brought directly together by a third party.

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Capital can only be financial, not physical, of which are used to produce more wealth.

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Capital generates profit.

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Capital market instruments are very liquid and easily convertible to cash and has very little default risk because of the associated short maturity term.

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Capital market is the sector of financial markets where financial instruments issued by governments and corporations that will mature beyond one year from issuance date are traded.

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Capital market securities are classified into two: equity and stock.

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Capital markets are expected to be a liquid market where fund demanders can interact with potential investors to acquire external financing resources.

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Cash financials instruments are exchange in money market as well as in the capital market.

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Efficient allocation of capital occurs when funds are invested in productive investments that yield return for the fund providers and not to fund demanders.

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Dealer market is where the buyer and seller of the securities are brought together by a broker and the trade occurs at that point.

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Dealer markets have centralized trading floors like the exchange markets.

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Derivative financial instruments are exchange in capital market.

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Descending price sealed auction is also known as first-price sealed auction.

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Descending price sealed auction is where the prospective buyers commence the auction by submitting an initial bid price. Other buyers interested to purchase the securities submit a new bid to top the previous one.

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Direct financing is where the borrowing activity between both parties still happens though indirectly through the intervention of a financial intermediary.

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Domestic market refers to the market where issuers who are considered residents in a country issue the securities and where these securities are traded afterwards.

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Dutch auction is where seller begins the sale at a high price From that point, the price of the securities is continuously lowered down at specific intervals until the potential buyer agrees to purchase at that price.

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Easy access to a venue where investors can sell financial instruments for cash is an appealing feature when circumstances may occur that push investors to sell a financial instrument.

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Efficient financial markets enhance the economic well-being of all members of the society.

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English auction is where bidders submit sealed bids to the sellers. The sealed bids are ranked from highest to lowest price. The number of securities is allocated first to the highest priced bid, in full amount, and the remaining amount of securities is allocated pro rata to the lowest priced bids.

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Entrepreneurial skills generate profit.

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Examples of secondary market include foreign exchange market, futures market, and option market.

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Exchange (or formalized) is the place where unlisted financial instruments are allowed to be traded, in addition to listed financial instruments.

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Exchanging of financial instruments is also more commonly known as trading.

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Explicit search cost include value of time consumed to look for a counter-party for the transaction.

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External market has two characteristics: -upon issuance, these securities are offered simultaneously to investors in different countries -securities are issued in accordance to the regulatory jurisdiction of the country where it is issued

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Money markets are exclusive for short-term investors.

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Finance came from the Greek word "finer" which means "to end and settle a debt"

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Financial market refers to channels or places where funds and financial instruments such as stocks, bonds, and other securities are exchanged between willing individuals and/or entities.

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Financial markets are special type of financial entity that acts as a third party to facilitate the borrowing activity between lenders and borrowers.

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Financial markets based on instruments traded: Primary market and Secondary market.

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Financial markets based on market type: Money market and Capital market.

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Financial markets do not provide additional options to lender and borrowers on which form they want their transaction to be in.

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Financial markets help in creating more efficient allocation of capital which results in higher production and efficient that ultimately leads to economic growth.

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Financial system is composed of network of inter-related systems of financial market, intermediaries, and services.

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Financial system serves as an irregular, time-efficient and cost-effective link between fund providers and fund demanders.

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Financial systems allows households, companies, and the governments who have available funds to invest these funds in more potentially productive vehicles that can result in faster growth in the economy.

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Foreign market refers to the market where issuers who are not residents of a country can sell or issue securities and subsequently traded.

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Implicit search cost are expenses needed to advertise intent to purchase or sell a financial instrument.

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In an efficient market, the price of securities, which is a product of interaction between buyers and sellers in the market, is believed to be a fair estimate of its real value.

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In the world of commerce, finance is a key player in ensuring continuity of operations.

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Indirect financing is where the borrower-spenders borrow and deal directly with lenders through selling financial instruments or securities. Buying stocks directly from the company is considered as indirect financing.

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Information cost are costs incurred to look for financial instruments that can be purchased or sold by a party.

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Information symmetry causes inefficient allocation of financial resources as one party may be in a better negotiating position because of the lacking information of the other party.

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Information symmetry occurs when one stake holder to a transaction holds superior information than the other party.

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Initial Public Offering are usually done with investment banks.

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Labor generates salary or wages.

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Land generates rent.

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Lender and borrowers are also known as fund demanders and fund providers, respectively.

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Lenders recognize financial instruments as liabilities while borrowers recognize it as assets.

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Long term financial instruments encompasses financial instruments that have maturity dates longer than one year, excluding those that have no maturity at all.

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Market makers are dealers who create market by offering to sell/buy securities at stated ask/bid price, respectively.

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Market structure refers to the mechanisms how buyers and sellers interact to arrive at the price and quantity of the securities to be traded.

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Matching the difference in spending (excess funds from one party to the fund gap of another party) is the main reason for the existence of a financial system.

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Money market is the sector of financial market where financial instruments that will mature or be redeemed in one year or less from issuance date are traded.

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Money markets serve as the conduit to efficiently transfer large amounts of money from fund providers to fund demanders for short maturity term quickly and at a cheap cost for the parties involved

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Most of the time, an undertaker is appointed for public offerings.

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Non-negotiable instruments like mortgage loans, savings deposits and life policies are issued only in secondary markets and are not traded in primary markets.

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Offering to the general public is done through issuing a prospectus or placing document which contains an offer to the general public to subscribe or purchase securities at a stated price.

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Order-driven structure is where the buyers and sellers propose their price through their brokers who conveys the bid in a centralized location.

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Order-driven structure is where the market makers establish a price quote at which the market participants should trade with.

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Over-the counter (or informal) are centralized trading locations where financial instruments are purchased or sold between market participants.

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Participants in financial markets include ultimate lenders and borrowers such as households, government, and businesses, financial intermediaries, broker and dealers, regulators, fund managers and fund exchanges.

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People who save frequently are the same people who have access to profitable investment opportunities.

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Price is normally driven by the level of risk on how the issuer of the financial instruments.

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Price valuation is the process of determining or valuing the financial instrument in the market.

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Price valuation refers to the interaction between buyers and sellers in the financial market in order to come up with price of the traded financial instruments.

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Primary market is a type of financial market wherein fund demanders such as corporation or a government agency raise funds through new issuances of financial instruments.

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Primary market securities do not include issuance of additional debt or equity securities of an already publicly traded company.

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Private companies who will sell shares to the general public for the very first time is said to undergo an initial private offering.

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Private placement is also called as limited private offer.

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Private placement occurs when the issuer looks for a single investor, an institutional buyer or a group of buyers to purchase the whole securities issuance instead of offering it to the general public.

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Subsequent transactions in secondary markets affect the original issuer of financial instrument.

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Public offering can only be an offer for subscription and not an offer for sale.

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Public offering occurs when securities are offered for sale to the general public.

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Quote-driven structure is also called as primary dealer market, professional market or market-made market.

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Regulatory environment is the governance body to ensure that the transaction that occur within the financial systems complies with the laws and regulations imposed to the actors as well as the elements that plays within the system.

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Salaries are earned on a daily or weekly basis, more than that is called Wages

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Search cost are costs related in evaluating investment characteristics of a financial instrument.

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Secondary market allows the buyers and seller to save on search and information cost as they do not need look for transactions on their own.

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Secondary market based on market structure: number-driven and quote-driven.

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Secondary market refers to the market wherein the securities issued in primary market are subsequently traded.

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Tap issue occurs when issuers are open to receive bids for their securities at all times. Issuers maintain the right to accept or reject the bid prices based on their how much fund they need, when they need the fund and what is their outlook of the market.

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The four economic functions of secondary market are: price discovery, liquidity and reduction in borrowing cost, support to the primary market, and implementation of fiscal policy.

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The main economic function of financial intermediaries is to serve as channel to transfer excess funds from fund providers to fund demanders.

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The price discovery function of financial market determines how the available funds from the fund demanders are allocated towards the fund providers based on the fund providers' willingness to accept the return required by the fund demanders.

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The sources of wealth are: -Labor -Land -Interest -Entrepreneurship

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The theoretical foundations for finance draw from the field of commerce and, for this reason, finance is often referred to as financial commerce.

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The three main economic functions of the financial market are: price valuation, liquidity, reduction in transaction cost.

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There are four type of isuue methods that can be done in a secondary market: public offering, private placement, auction, and tap issue.

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Trading of bonds and currency are usually done in an order-driven structure.

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Transaction cost can be classified into two types: search cost and information cost.

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Types of orders that go into an oder-driven structure: market orders (or at-best orders), limit orders, day orders, and good-until-cancelled orders.

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Underwriting means that investment banks do not guarantee the price for the securities of the issuing company and then sells these to the general public.

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Usually, primary markets transactions are coursed through investment banks which are financial institutions that act as intermediaries between issuing companies and potential investors.

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Usually, the demanders of fund in the financial market determine the required return for a financial instrument.

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With the flow of financial instruments, price is created. Money is used to either be reinvested or earned out from the system flows.