Ambayec, Mounicha C.

June 21, 2020

BSA-1 Block 12 Mrs. Mary Joy Teodosio
FM 19

Activity 1. Introduction and Overview of Financial Markets (answers)

1. Surplus units are people or institutions who receive more than they spend thus having
extra funds to be lent by others. They are also termed savers or investors. Angel investors
and potential shareholders are examples of surplus units. Deficit units, on the other hand,
are people or institutions who have spent more than they have received. They need funds
and resources that’s why they go to financial markets to look for these hence being called
users or borrowers. The government and a business looking for a loan are examples of
deficit units.

2. A primary capital market is the market for securities sold directly by a company or other
entity (the issuer) to investors (the buyer). It offers an opportunity for investors to buy
securities directly from the issuing company. By buying securities or stock from the
primary market, investors help companies to raise capital. On the other hand, secondary
markets are where the securities issued in the primary market that already exist, are
bought and sold. Here, for instance, one can buy a share directly from a seller, and the
stock exchange or broker acts as an intermediary between two parties.

3. Money markets are used for short-term lending or borrowing. The assets are usually held
for one year or less. Some of the most common financial instruments traded in the money
markets include credit trade, commercial paper, certificate of deposits and treasury bills.
Meanwhile, capital markets are used for long-term securities. It allows long-term trading
for more than a year of debt and equity-backed securities. Instruments such as shares and
bonds (long-term assets) are traded in this market.

4. Under the Efficient Market Hypothesis (EMH) or theory, an efficient market is a market
that is able to correctly price securities in a timely manner based on the latest information
available. This principle states there are no undervalued or overvalued stocks since every
stock is always trading at a price equal to its intrinsic value.

5. We expect markets to be efficient most of the time in order to allow investors to make
more sensible choices. When the information that investors need to make investment
decisions is widely available, thoroughly analyzed, and extensively used, the result is an
efficient market. More importantly, in the absence of an efficient market, investors will
not be able to acquire the correct price of a security and the discrepancy between the
price and the information might yield poor investment decisions which will further affect
the economy.
6. Securities- claim ownership (in a form of a certificate)

7. Debt securities, bond

8. Examples of secondary markets- mutual funds (worry is lesser than stock investment
because in stock investment, you really have to manage it physically and financially on
your own; both mutual funds and stock market are examples of secondary markets)