CONGAYO,ERICA ELAIZA T.

BSMA-1B

ASSIGNMENT:

1. Identify the different types of financial markets and financial institutions and explain how these
markets and institutions enhance capital allocation.

Types of Financial Markets

 1. Stock market

The stock market trades shares of ownership of public companies. Each share comes with a
price, and investors make money with the stocks when they perform well in the market. It is
easy to buy stocks. The real challenge is in choosing the right stocks that will earn money for
the investor.There are various indices that investors can use to monitor how the stock market is
doing, such as the Dow Jones Industrial Average (DJIA) and the S&P 500. When stocks are
bought at a cheaper price and are sold at a higher price, the investor earns from the sale.

 2. Bond market

The bond market offers opportunities for companies and the government to secure
money to finance a project or investment. In a bond market, investors buy bonds from a
company, and the company returns the amount of the bonds within an agreed period,
plus interest.

 3. Commodities market

The commodities market is where traders and investors buy and sell natural resources or
commodities such as corn, oil, meat, and gold. A specific market is created for such
resources because their price is unpredictable. There is a commodities futures
market wherein the price of items that are to be delivered at a given future time is
already identified and sealed today.

 4. Derivatives market

Such a market involves derivatives or contracts whose value is based on the market
value of the asset being traded. The futures mentioned above in the commodities
market is an example of a derivative.
Types of Financial Institutions
  Central Bank: Central Banks are referred to as the main financial institutions in an
economy. This is because of the reason that the Central Bank is primarily
responsible for overseeing the operations and managing all other banks within the
company. In most cases, the Central Bank is also responsible for drafting the
monetary policy and supervising the regulation of existing financial institutions.
 Retail and Commercial Banks: Retail banks offer products to retail customers,
whereas commercial banks work directly with businesses. In this regard, this
particular financial institution is seen to serve both commercials, and individual
account holders, so that they are able to offer financial services in accordance with
the policies that are set forth by the Central Bank.
 Internet Banks: Internet Banks are a fairly new addition to the financial institution
market. They work on a similar domain as retail and conventional banks. However,
the underlying difference between internet banks, and typical banks, is the fact that
internet banks rely on the virtual presence and virtual functioning, as opposed to
typical brick and mortar structures.
 Credit Unions: Credit Unions are mainly established to extend financial services to a
particular demographic. They operate like retail banks but offer lesser services in
comparison. Additionally, it can also be seen that credit unions are mainly owned by
the members of the respective demographic, and therefore, they work for the benefit
of the members only.
 Savings and Loan Associations: Savings and Loan Associations are held mutually,
and they mainly rely on collaborative efforts to reach respective financial goals.
Furthermore, individual consumers also make use of savings and loan associations
for deposit accounts, personal loans, as well as mortgage lending.
 Investment Banks and Companies: Investment Banks do not accept deposits. They
are mainly formed with the objective of helping businesses, individuals as well as
governments to raise capital, with the help of securities. They are also referred to as
mutual fund companies. They pool funds from individual and institutional investors in
order to provide them access to considerably larger avenues in the securities
market.
 Brokerage Firms: Brokerage firms mainly help individuals to buy and sell securities
from the existing available investors. In this regard, users of brokerage firms have
exposure to different types of stocks, securities as well as mutual funds.
 Insurance Companies: Insurance Companies are mainly Financial Institutions that
are formed with the objective to mitigate the inherent risk involved. Therefore,
individuals and companies mainly use it to protect against the financial loss because
of health, or any other unprecedented action.
 Mortgage Companies: Mortgage Companies are financial institutions that are formed
with the basis to originate or subsequently fund mortgage loans. Some of these
mortgage companies are established with the basis to serve clients who are in
between real estate transactions only.
 2. Explain how the stock market operates and list the distinctions between the different
types of stock markets.

How Does The Stock Market Work?

You can think of a stock market as a safe and regulated auction house where buyers and sellers
can negotiate prices and trade investments.

A stock market is a network of exchanges of sorts, and companies list shares on an exchange.
Investors then purchase shares and buy and sell them among one another. Many of the investors
are major funds controlling lots of money, but individuals can buy and sell through a broker like
Acorns.You might’ve watched scenes in movies or on TV shows where buyers and sellers are on
the floor of the New York Stock Exchange fervently yelling, “Buy, buy, buy!” or “Sell, sell,
sell!” Whereas historically the stock market has been a physical marketplace, such as the New
York Stock Exchange and the American Stock Exchange, these days securities are more
commonly traded through a collection of trading platforms.Nearly all transactions these days are
done digitally – not in person.Although many stocks are listed on the exchange, public listing
itself is not a requirement for stock sales. We’ll go over private stocks and over-the-counter
markets a bit later on.

Distinctions Between the Different Types of Stock Markets

Stocks are a central part of many investment portfolios and a good way to add diversity to
more conservative investments. The question of which stocks to buy is complicated by the
many stock exchanges and markets that investors can choose from. While many investors go
straight for the large, well-known markets in New York and elsewhere, other types of stock
markets stand out for their distinctive offerings, size, access or other features.

SIZE
Size can be a major distinction between different stock markets. Small markets only offer
local and regional stocks, typically in small companies. Large markets host stock trading for
hundreds or even thousands of companies, including the largest and most valuable publicly
traded companies in the world. Large markets give investors more choices, while also pitting
similar stocks directly against one another. They also offer "one-stop shopping" for brokers
and investors, covering broad ranges of industries and sectors of the economy.

LISTING COST
Companies that want to go public must pay a listing fee to have their stock made available for
trade on a stock exchange. Each market and exchange sets its own policies and prices. Large
markets, such as the New York Stock Exchange or Nasdaq in the United States, charge
companies initial listing fees of $100,000 or more and annual fees of up to $500,000,
according to Forbes. Smaller markets charge significantly less, allowing smaller businesses to
go public and attract investors while keeping more money for operations.
ACCESS
Large stock markets around the world dominate the financial news, just as the companies
they trade in dominate industry news. Stock indexes, such as the Dow Jones Industrial
Average and the Standard & Poor's 500, only include stocks from large markets. Investors
need to work harder to keep up with smaller markets. Brokers may not offer access to smaller
markets or have experience in them to impart to their investor clients.

NATIONALITY
Major stock markets around the world are organized around companies that are based in the
same country as the stock exchange. For example, the London Stock Exchange is the primary
source of investments in U.K.-based businesses. Stock exchanges in Europe and Asia deal in
regional companies, while the major U.S. markets offer trading of shares in American
businesses. As the economy becomes more globally connected, investors need to understand
the opportunities available in international markets as well as domestic ones.

3. Discuss the importance of market efficiency and explain why some markets are more
efficient than others.
The market efficiency refers to that particular situation of a market in which the market price
can be estimated as an unbiased form of the actual value which is in the investment.  Thus for a
market to be efficient, it is not at all necessary that the market price is equal to the true value. 
And this is true at every point of time.
Thus for an efficient market, it is required that all the errors in the market price should be
unbiased. Here this price can be either higher than or less than the true value of that was at the
time of the investment.Now since there is a deviation from the true value of any product, there
are likely chances that either the value of stocks is undervalued or they are overvalued.  Also,
these deviations are often co-related with any of the other variables that are observable. For
example- In an efficient market, it is seen that those stock that has a lower value of PE ratios
are most often less likely to be undervalued as compared to those stocks that have high PE
ratios.Also, one thing to note is that most of the times the deviation from the correct value for a
market price is usually random. Thus none of the investors can find the undervalued or the
overvalued stocks consistently.Now market efficiency strongly proclaims that is not possible to
remain consistent in terms of outperforming the market. And this scenario becomes strong
special in the short term of duration or especially less amount of time.This is because in such a
short period it becomes impossible to predict the stock market prices.  Now to understand this
with a simple example let consider a scenario. In general, market efficiency is divided into two
different categories. One is the strong form of efficiency, and the other one is weak from
efficiency.
Now while the strong form of the market depicts that any information which may be either
public or private will in many ways benefit the investor to the analyst, this is because many a
time it has been seen that even the inside information is shown in the stock prices that are
going on currently. The other one is that was a form of efficiency in which any of the public
information will not benefit the investor or the analyst of the undervalued securities.This is so
because, in most of these cases, the market automatically incorporates the information to the
stocks.