INTRODUCTION

What is financial markets? Financial markets refer to the platforms or systems where
various financial instruments are bought and sold. These markets facilitate the exchange
of assets such as stocks, bonds, currencies, derivatives, commodities, and more. Financial
markets play a crucial role in the global economy by providing a mechanism for
companies, governments, and individuals to raise capital, manage risk, and invest in a
broad range of assets.

There are different types of financial markets, including:

Stock market: This is where shares of publicly traded companies are bought and sold.
Examples include the New York Stock Exchange (NYSE) and Nasdaq.

Bond market: The bond market facilitates the buying and selling of debt securities
issued by governments, municipalities, and corporations.

Foreign exchange market: Commonly known as the forex market, it enables the trading
of different currencies and determines exchange rates.

Commodity market: This market allows for the trading of raw materials, such as metals,
energy products, agricultural products, and more.

Derivatives market: Derivatives are financial instruments that derive their value from an
underlying asset. Examples include options, futures, and swaps.

Financial markets provide a platform for investors to allocate capital efficiently, enabling
the flow of funds from those who have surplus capital to those who need it. They offer
opportunities for investors to buy and sell assets, potentially earn returns, and manage
risks. These markets are influenced by various factors like economic conditions,
geopolitical events, and investor sentiment.

It's worth noting that financial markets are highly regulated to ensure fair trading
practices, transparency, and investor protection. Regulatory bodies, such as the U.S.
Securities and Exchange Commission (SEC) and the Financial Conduct Authority (FCA)
in the UK, oversee and regulate financial markets to maintain integrity and stability.

FINANCIAL MARKETS IN ACTION

Financial markets in action refer to the real-time activities that take place within various
financial markets. These include the buying and selling of financial instruments such as
stocks, bonds, derivatives, currencies, and commodities. These activities are driven by
various factors, including supply and demand dynamics, market participants'
expectations, and economic and geopolitical events.

Financial markets provide a platform for corporations, governments, and individuals to

raise capital, manage risks, and allocate resources efficiently. The activities within
financial markets are facilitated by market participants such as investors, traders, brokers,
exchanges, and regulatory bodies.

Financial markets are composed of different types of markets, including:

Stock markets: These markets facilitate the buying and selling of shares or ownership
stakes in publicly traded companies.

Bond markets: Bond markets allow the issuance and trading of fixed-income securities,
which represent debt obligations of governments, corporations, and other entities.

Foreign exchange markets: Also known as forex markets, they enable the trading of
different currencies, allowing companies and individuals to exchange one currency for
another.
Commodity markets: These markets enable the trading of physical goods like
agricultural products (e.g., wheat, corn), energy products (e.g., oil, natural gas), and
metals (e.g., gold, silver).

Derivatives markets: Derivatives are financial contracts whose value is derived from an
underlying asset, such as stocks, bonds, commodities, or currencies. These markets allow
investors to hedge risks or speculate on future price movements without owning the
underlying asset.

Financial markets serve several important functions, including price discovery

(determining the fair value of financial instruments), liquidity provision (enabling buy
and sell transactions), and risk management. They also play a crucial role in channeling
funds from savers to borrowers, thereby facilitating economic growth and development.

Overall, financial markets in action are constantly evolving and influenced by various
factors, making them dynamic and essential components of the global economy.

FUNCTION OF FINANCIAL MARKETS

Financial markets serve several important functions. One of the key roles is providing a
means for firms and individuals to raise capital. This allows businesses to expand their
operations, build new facilities, or replace machinery, while individuals can finance
purchases such as homes or cars. These functions include:

Capital allocation: Financial markets help in the efficient allocation of capital by

directing funds from savers to borrowers. This allows businesses and governments to
raise funds for investments and projects that contribute to economic growth.

Price discovery: Financial markets provide a platform for the buying and selling of
financial instruments, which leads to the determination of their market prices. These
prices reflect the collective assessment of market participants' expectations, supply and
demand dynamics, and other relevant factors.

Liquidity provision: Financial markets provide liquidity by allowing investors to buy

and sell financial instruments easily. This enhances the efficiency of capital markets and
allows investors to convert their investments into cash when needed.

Risk management: Financial markets offer a range of instruments that provide

opportunities for risk management. For example, derivatives allow investors to hedge
against price fluctuations, and insurance contracts help individuals and businesses
mitigate various risks.

Information dissemination: Financial markets facilitate the flow of information. Market

prices and trading activities reflect the available information about the financial
instruments and the companies or entities issuing them. This information can help
investors make informed decisions.

Facilitate economic growth: By allocating capital efficiently and providing a platform

for investment, financial markets play a vital role in promoting economic growth and
development. They help facilitate entrepreneurship, innovation, and job creation.

Enforce corporate governance: Financial markets impose regulatory requirements and

disclose information about companies, promoting transparency and providing a
mechanism to monitor and enforce good corporate governance practices.

Establish benchmark interest rates: Financial markets, particularly bond markets, play
a crucial role in establishing benchmark interest rates that serve as reference rates for
various lending and borrowing activities in the economy.

These functions collectively contribute to the overall stability, efficiency, and

development of the financial system and the economy as a whole.
 WHAT FINANCIAL MARKETS DO

Financial markets encompass a wide range of markets that serve various purposes. Here
are some of the major financial markets:

Raising capital: Firms often require funds to build new facilities, replace machinery or
expand their business in other ways. Shares, bonds and other types of financial
instruments make this possible. The financial markets are also an important source of
capital for individuals who wish to buy homes or cars, or even to make credit-card
purchases.

Commercial transactions: As well as long-term capital, the financial markets provide

the grease that makes many commercial transactions possible. This includes such things
as arranging payment for the sale of a product abroad, and providing working capital so
that a firm can pay employees if payments from customers run late.
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Price setting: The value of an ounce of gold or a share of stock is no more, and no less,
than what someone is willing to pay to own it. Markets provide price discovery, a way to
determine the relative values of different items, based upon the prices at which
individuals are willing to buy and sell them.

Asset valuation: Market prices offer the best way to determine the value of a firm or of
the firm's assets, or property. This is important not only to those buying and selling
businesses, but also to regulators. An insurer, for example, may appear strong if it values
the securities it owns at the prices it paid for them years ago, but the relevant question for
judging its solvency is what prices those securities could be sold for if it needed cash to
pay claims today.

Arbitrage: In countries with poorly developed financial markets, commodities and

currencies may trade at very different prices in different locations. As traders in financial
markets attempt to profit from these divergences, prices move towards a uniform level,
making the entire economy more efficient.

Investing: The stock, bond and money markets provide an opportunity to carn a return
on funds that are not needed immediately, and to accumulate assets that will provide an
income in future.

Risk management: Futures, options and other derivatives contracts can provide
protection against many types of risk, such as the possibility that a foreign currency will
lose value against the domestic currency before an export payment is received. 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.

STRUCTURE OF FINANCIAL MARKETS

Financial markets can be divided into different categories based on the type of
instruments being traded and the way in which they are traded. Here are the main
structures of financial markets:

Debt and Equity Markets

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

The most common method is to issue a debt instrument, such as bond or a mortgage,
which is a contractual agreement by the borrower to pay the holder of the instrument
fixed peso amounts at regular intervals (interest and principal payments) until a specified
date (the maturity date), when a final payment is made.

The second method of raising funds is by issuing equity instruments, such as common or
ordinary stock, which are claims to share in the net income(income after expenses and
taxes) and the assets of a business.
The following markets are of most interest to the financial manager:

Financial Market functions as both primary and secondary markets for debt and equity
securities.

• Primary Market: refers to original sale of securities by governments and

corporations. The primary markets for securities are not well known to the public because
the selling of securities to initial buyers often takes place behind closed door.

• Secondary Market: After the securities are sold to the public (institutions and
individuals)market is popularly known as Stock Market or Exchange.

There are two broad segments of the stock markets:

1. The Organized Stock Exchange. The stock exchanges will have a physical location
where stocks buying and selling transactions take place in the stock exchange floor (e.g.,
Philippine Stock Exchange, New York Stock Exchange, Japan, Nikkei, Shanghai
Components, NASDAQ, etc.)

2. The Over-the-Counter (OTC) Exchange. Where shares, bonds and money market
instruments are traded using a system of computer screens and telephones. The
NASDAQ is an example of an over-the-counter market in which dealers linked by
computer buy and sell stocks. Dealers in an over-the-counter market attempt to match up
the orders they receive from investors to buy and sell its stock. Dealers maintain an
inventory of the stocks they trade to help balance buy and sell orders. Many common
stocks are traded over the counter although the majority of the largest corporations have
their shares traded at organized stock exchange.

Secondary markets serve two important functions:

1.They make it easier to sell these financial instruments to raise cash; that is they make
the financial instruments more liquid. The increased liquidity of these instruments then
makes them more desirable and thus easier for the issuing firm to sell in the primary
market.

2. They determine the price of the security that the issuing firm sells in the primary
market. The firms that buy securities in the primary market will pay the issuing
corporation no more than the price that they think the secondary market will set for this
security.

STOCK EXCHANGE

A stock exchange is a regulated platform or marketplace where buyers and sellers come
together to trade stocks and other securities. It provides a centralized and organized
marketplace for companies to list their shares and for investors to buy and sell those
shares.

Here are some key features of a stock exchange:

Listing Requirements: Before a company can have its shares traded on a stock
exchange, it must meet specific listing requirements. These requirements typically
include financial stability, corporate governance standards, minimum market
capitalization, and regular reporting obligations.

Trading Mechanism: Stock exchanges facilitate the trading of securities through various
mechanisms. The most common method is the auction-style system, where buyers and
sellers place competing bids and offers, and transactions occur when the bid and ask
prices match. This process helps ensure fair and transparent price discovery.

Market Participants: Stock exchanges attract a diverse group of participants, including

individual investors, institutional investors, brokers, market makers, and high-frequency
trading firms. These participants bring liquidity to the market and contribute to efficient
price discovery.
Regulation and Oversight: Stock exchanges are subject to strict regulatory oversight.
Regulatory bodies, such as the Securities and Exchange Commission (SEC) in the United
States, set rules and regulations to ensure fair trading practices, protect investors, and
promote market integrity. Exchanges also have their own rules and regulations governing
listing requirements, trading behavior, and market surveillance.

Overall, stock exchanges play an essential role in facilitating the buying and selling of
securities, promoting capital formation for companies, and providing opportunities for
investors to participate in the growth of businesses and the economy.

LISTING OF SECURITIES ON STOCK EXCHANGE

The listing of securities on a stock exchange refers to the process by which a company
makes its shares or other types of securities available for trading on that particular
exchange. Typically, a company must meet certain requirements and comply with
regulations set by the exchange in order to be listed. Listings provide a range of benefits
to both companies and investors.

The process of listing securities on a stock exchange typically involves submitting an

application to the exchange, along with relevant documents and disclosures. The
exchange will evaluate the company's qualifications, such as its financial health,
corporate governance practices, and shareholder rights. If the company meets the listing
criteria, it will be approved for listing and assigned a trading symbol.

Once listed, the securities will be traded on the exchange through brokers or electronic
trading platforms. The price and volume of trading will be determined by market forces,
such as supply and demand.

It's important to note that different stock exchanges may have different listing
requirements and processes. Companies listing their securities on exchanges must also
comply with ongoing disclosure and reporting obligations to keep investors informed
about their financial performance and other material information.

In summary, the listing of securities on a stock exchange provides companies with access
to capital and credibility, while offering investors a regulated and transparent marketplace
for buying and selling securities.

THE PHILIPPINE STOCK EXCHANGE

The Philippine Stock Exchange (PSE) is the national stock exchange of the Philippines. It
is one of the oldest stock exchanges in Southeast Asia, tracing its origins back to 1927.
The PSE plays a vital role in the country's capital market by facilitating the buying and
selling of securities, including stocks, bonds, mutual funds, and other investment
instruments.

The PSE operates as a self-regulatory organization authorized by the Securities and

Exchange Commission (SEC) of the Philippines. It provides a fair and transparent
platform for companies to list their securities and for investors to trade those securities.
The PSE is responsible for ensuring compliance with listing rules, monitoring market
activity, and enforcing trading rules and regulations.

The main index of PSE is the PSE Composite Index (PSEi). The PSEi is a benchmark
index that comprises the 30 largest and most actively traded stocks listed on the PSE. It
serves as a barometer of the overall performance of the Philippine stock market.

Listing requirements on the PSE include, among other criteria, the company's financial
health, corporate governance practices, and compliance with disclosure and transparency
rules. The listing process involves the submission of an application, review by the PSE
listing committee, and approval by the PSE board of directors.
The PSE also provides market data, research reports, and educational programs to help
investors make informed investment decisions. It promotes investor protection through
initiatives aimed at increasing market integrity and transparency.
Overall, the Philippine Stock Exchange serves as a key platform for companies to raise
capital and for investors to participate in the growth of the Philippine economy through
stock market investments.

SNAPSHOT OF PSE HISTRORY

The Philippine Stock Exchange (PSE) has a fascinating history that dates back to the
early 20th century. Here is a brief overview of the PSE's history:
Establishment of the Manila Stock Exchange (MSE): The PSE traces its roots to the
establishment of the Manila Stock Exchange on August 8, 1927. It was initially located in
the Binondo district of Manila and aimed to provide a platform for buying and selling
stocks and other securities.

Post-War Period: During World War II, trading operations at the MSE were halted.
However, after the war, the exchange played a vital role in the reconstruction and revival
of the Philippine economy.

Name Change to Philippine Stock Exchange: In 1992, in line with its aspirations to be
more inclusive and national in scope, the Manila Stock Exchange changed its name to the
Philippine Stock Exchange (PSE).

Merger with the Makati Stock Exchange: In 1992, the PSE merged with the Makati Stock
Exchange (MkSE), resulting in the consolidation of resources, trading activities, and the
establishment of a single exchange.

Demutualization: In 2001, the PSE underwent a significant transformation known as

demutualization. This process involved converting the PSE from a member-owned
organization into a shareholder-owned corporation. Demutualization aimed to enhance
transparency, governance, and market competitiveness.

Technology Advancements: The PSE has embraced technological advancements to

improve the efficiency and reliability of its operations. It introduced computerized trading
systems in the 1990s, enabling faster and more transparent transactions.

Listing Growth: The PSE has experienced significant growth in the number of listed
companies over the years. From around 40 listed companies in the early 1990s, the
exchange now boasts over 300 listed companies across various industries.
Market Indices: The PSE has several stock market indices that track the performance of
specific sectors or the overall market. The PSE Index (PSEi), which includes the top 30
companies in terms of market capitalization, is one of the key indices used to gauge the
performance of the Philippine stock market.
Volatility and Growth: The PSE has gone through periods of both volatility and growth,
influenced by factors such as economic conditions, political stability, and investor
sentiment.
This is just a snapshot of the PSE's history. The exchange continues to play a crucial role
in the Philippine economy, providing a platform for companies to raise capital and
investors to participate in the stock market.

THE OVER THE COUNTER MARKETS

The over-the-counter (OTC) market refers to a decentralized marketplace where financial

instruments, such as stocks, bonds, derivatives, and currencies, are traded directly
between parties without the involvement of a formal exchange. In contrast to exchange-
traded markets like the Philippine Stock Exchange, the OTC market operates through a
network of dealers and brokers who facilitate transactions directly with buyers and
sellers.

Key features of the OTC market include:

Decentralization: OTC transactions occur between individuals, institutional investors,
and dealers who are connected through various communication channels. There is no
physical location or central exchange where trading takes place.

Informality: Unlike exchanges, the OTC market is less regulated, allowing for more
flexibility in the negotiation of terms and pricing. This can simplify the trading process
and provide more customization options for participants.

Diverse Instruments: The OTC market encompasses a wide range of financial

instruments, including stocks of small and unlisted companies, bonds, derivatives (such
as swaps and options), and foreign currencies.

Market Participants: Participants in the OTC market include institutional investors,

banks, brokerage firms, and individual traders. These participants engage in direct
transactions or utilize electronic trading platforms to facilitate OTC trades.

Risks and Regulatory Considerations: OTC trading carries certain risks, such as higher
counterparty and liquidity risks compared to exchange-traded markets. Due to its
decentralized nature, OTC transactions are subject to regulatory oversight to ensure
fairness, transparency, and investor protection.

Price Discovery: OTC trades may lack the transparency provided by centralized
exchanges, which can make it challenging to determine the fair market value of certain
assets. However, market participants can rely on dealer quotes and market data to gauge
pricing information.

The OTC market plays a significant role in global finance, providing an avenue for
trading financial instruments that may not be easily accessible on traditional exchanges. It
offers flexibility and efficiency for participants looking to engage in customized
transactions and access a broader range of investment opportunities.

DAY TRADING

Day trading is a type of trading strategy where traders buy and sell financial instruments,
such as stocks, currencies, or commodities, within the same trading day. The goal of day
traders is to take advantage of short-term price fluctuations and make profits based on
their predictions of market movements.

Day traders typically rely on technical analysis and short-term price patterns to identify
trading opportunities. They may use various tools and techniques, such as chart patterns,
indicators, and candlestick patterns, to make their trading decisions. Some day traders
also use algorithmic trading strategies to automate their trades.

While day trading can be profitable for some traders, it is important to note that it also
comes with significant risks. The volatile nature of financial markets can result in
substantial losses if not managed properly. Day traders need to have a solid
understanding of the markets they trade, be well-equipped with reliable information and
analytical tools, and have a disciplined approach to risk management.

It is always advisable to thoroughly educate oneself about day trading and practice with
virtual trading accounts or simulation platforms before risking real capital. Additionally,
consulting with a financial advisor or reputable trading mentor can help individuals
navigate the complexities of day trading more effectively.

THE RISE OF THE FORMAL MARKET

The rise of the formal market refers to the growth and development of regulated and
organized financial markets. These markets provide a platform for investors and traders
to trade financial instruments, such as stocks, bonds, commodities, and currencies,
through regulated exchanges or electronic trading platforms.
The formal market offers several advantages over informal or over-the-counter (OTC)
markets. Firstly, it provides transparency as all the trades are monitored and recorded,
ensuring fair pricing and preventing manipulation. Secondly, the formal market provides
liquidity as there is a large pool of buyers and sellers, making it easier for investors to
buy and sell securities.

Additionally, the formal market offers a level of security and protection for investors, as
it operates under regulatory bodies and has established rules and regulations.

The rise of the formal market can be attributed to various factors. One of the main factors
is the advancement in technology, which has facilitated electronic trading and made it
more accessible to individual investors. The Internet and online trading platforms have
made it possible for traders to participate in the formal market from anywhere in the
world.

Furthermore, regulatory reforms and increased investor protection measures have helped
to enhance trust and confidence in the formal market. Governments and regulatory bodies
have implemented stricter rules and regulations to prevent fraud, market manipulation,
and insider trading, thereby making the formal market a safer place for investors.

The formal market also attracts institutional investors who prefer the stability and
reliability of regulated exchanges. Institutional investors, such as pension funds, hedge
funds, and mutual funds, have significant capital and play a crucial role in driving
liquidity and stability in the formal market.

Overall, the rise of the formal market has democratized access to financial markets,
increased transparency and investor protection, and provided opportunities for individuals
and institutions to participate in the global economy.

THE FORCES OF CHANGE

The forces of change in the context of markets and trading can refer to various factors
that influence the dynamics and structure of financial markets. These forces can include
technological advancements, regulatory changes, economic shifts, and market trends.

Technological Advancements: Advances in technology have greatly transformed the

way financial markets operate. Electronic trading platforms, algorithmic trading, and
high-frequency trading have revolutionized market efficiency and accessibility. The use
of artificial intelligence and machine learning in trading and investment strategies is also
gaining momentum.

Deregulation: Deregulation involves reducing government oversight and restrictions on

financial markets. When regulators relax rules and regulations, it can lead to increased
competition and innovation in financial services. However, it can also introduce risks if
not done carefully.

Liberalization: Liberalization refers to the process of reducing restrictions and barriers

on trade, investment, and financial activities. It involves allowing businesses and
individuals to engage more freely in economic activities both within a country and with
other countries. The goal of liberalization is to promote economic growth, increase
competition, and create opportunities for businesses.

Consolidation: Liberalization has led to consolidation, as firms merge to take advantage

of economies of scale or to enter other areas of finance. Consolidation is a force of
change in financial markets because it can reshape the industry's landscape by creating
larger, more diversified, and potentially more powerful financial institutions. It offers
advantages such as cost savings and expanded services.

Globalization: Globalization is the process by which financial markets become

increasingly interconnected on a global scale. Most of the important financial firms are
now highly international and it allows investors to access opportunities and diversify their
portfolios across different countries and regions. However, it can also lead to contagion
risks where financial crises in one part of the world can quickly spread to others.
CODE OF ETHICS GOVERNING MARKET ACTIVITIES IN THE
PHILIPPINES

In the Philippines, market activities are regulated by various laws and regulations to
ensure fair and ethical practices. Below are some key principles and codes of ethics
governing market activities in the country:

Republic Act No. 7394 or the Consumer Act of the Philippines: This law protects the
rights of consumers and promotes fair trade practices. It prohibits unfair and deceptive
sales acts, misleading advertising, and other unfair trade practices that may harm
consumers.

Republic Act No. 9292 or the Electronic Commerce Act of 2000: This law provides
guidelines for electronic transactions and electronic signatures. It promotes the integrity
and security of electronic transactions, ensuring that consumers can trust online market
activities.

Republic Act No. 10667 or the Philippine Competition Act: Enforced by the Philippine
Competition Commission (PCC), this law aims to promote market competition and
prevent anti-competitive behavior. It prohibits anti-competitive agreements, abuse of
dominant market positions, and mergers and acquisitions that may substantially lessen
competition.

Securities and Exchange Commission (SEC) Rules and Regulations: The SEC regulates
the capital market, ensuring that market players comply with disclosure requirements,
insider trading regulations, and other rules to protect investors' interests.

Philippine Institute of Certified Public Accountants (PICPA) Code of Ethics: This code
provides guidelines for professional accountants in the Philippines. It promotes integrity,
objectivity, and confidentiality in financial reporting and auditing practices.

Philippine Marketing Association (PMA) Code of Ethics: The PMA has a code of ethics
that guides marketing professionals to uphold honesty, fairness, and social responsibility
in their marketing activities. It emphasizes the importance of transparency, consumer
protection, and truthful advertising.

Corporate Governance Code: Companies listed on the Philippine Stock Exchange are
expected to adhere to the Corporate Governance Code, which promotes transparency,
accountability, and responsible board practices.

These are some of the key regulations and codes of ethics that govern market activities in
the Philippines. Adhering to these guidelines promotes fair and ethical business practices,
protects consumers, and fosters a competitive and sustainable market environment.