FINANCIAL INTERMEDIARIES,

FINANCIAL INSTRUMENTS,
AND FINANCIAL MARKETS
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FINANCIAL INSTITUTION
AND BANKING
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 FINANCIAL INSTITUTIONS

OBJECTIVES:

▰ Differentiate Financial Institutions from Banking

▰ To know the roles of financial institution and banking
▰ Types of financial institution and banks

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FINANCIAL INTERMEDIARIES

FINANCIAL INSTITUITION

BANKS

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 FINANCIAL INTERMEDIARIES vs. BANKS

ROLES

Only two main functions best Only two main functions

describe financial institution: best describe Banking:
▰ Intermediary between industries. ▰ Lending
▰ Provide liquidity to the economy ▰ Accepting
and permit higher level of
economic activity.
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 FINANCIAL INTERMEDIARIES vs. BANKS

TYPES

FINANCIAL INSTITUTION: BANKS:

▰ Banks ▰ Commercial Banks
▰ Non-Banks ▰ Thrift Banks
▰ Insurance Company ▰ Small Banks
▰ Brokerage ▰ Government Bank
▰ Mortgage 6
 2
FINANCIAL MARKETS
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 FINANCIAL MARKETS

Market
▰ a venue where goods and Definition of financial markets
services are exchanged
Financial Market
▰ any marketplace where buyers and
sellers participate in the sale and
purchase of assets such as equities,
bonds, currencies, and derivatives
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 ACTORS OPERATING IN FINANCIAL MARKETS

FINANCIAL INTERMEDIARIES:
▰ Banks – Act as a go-between to facilitate exchanges
▰ Investment Funds – Collect savings and invest them in a
variety of options such as shares and bonds
▰ Insurance Company – Takes on the risk with customers
in exchange for the payment of a periodic premium
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 FUNCTIONS OF FINANCIAL MARKETS
Mobilizing Funds
▰ Investors can invest their savings
according to their choices and risk
assessment. This will utilize idle
funds and the economy will boom.
Liquidity
▰ The investors can sell their
financial commodities at any
given time and convert them to
cash in a very short period.
Price Determination
▰ Financial markets allow for the
determination of price of the traded
financial assets through the interaction of
buyers and sellers.
Easy Access
▰ Saves time, money and efforts of
buyers as well as sellers.
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 TYPES OF FINANCIAL MARKETS

Stock Markets Bond market

▰ The stock market trades shares of ▰ Provide financing through the
ownership of public companies. issuance of bonds.

Commodities market Derivatives market

▰ Physical or virtual marketplace
for buying, selling and trading
raw or primary products.
▰  Involves derivatives or contracts
whose value is based on the
market value of the asset being
traded. 
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EQUITY MARKET
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EQUITY MARKET

WHAT IS EQUITY MARKET?

The equity market (often referred to
as the stock market) is the market
for trading equity instruments.

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 In a nutshell, stock
EQUITY MARKET
markets provide a secure
HOW THE STOCK and regulated environment
MARKET WORKS? where market participants
can transact in shares and
other eligible financial
instruments with
confidence with zero- to
low-operational risk.
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EQUITY MARKET

PRIMARY FUNCTIONS OF Security and Validity

STOCK MARKET of Transactions
Fair Dealing in
Investor Protection
Securities Transactions
Efficient Price Discovery
Balanced Regulation
Liquidity Maintenance

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EQUITY MARKET
WHO WORKS IN THE
STOCK MARKET?

Stockbrokers
Custodian
Portfolio
Market Maker Managers
Investment
Bankers
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EQUITY MARKET

HOW STOCK EXCHANGES

MAKES MONEY?
Stock exchanges operate as for-
profit institutes and charge a fee
for their services.

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PRIMARY MARKET
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 PRIMARY MARKET

▰The primary market, also known as a

New Issue Market, is the part of the
capital market that deals with
issuing of new securities.
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PRIMARY MARKET

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PRIMARY MARKET

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PRIMARY MARKET

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PRIMARY MARKET

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SECONDARY MARKET
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 SECONDARY MARKET

▰ It is a market where investors buy already

issued securities (equity and debt),
derivatives and options to each other and
not from the issuing company.

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 FEATURES OF A SECONDARY MARKET

▰ gives liquidity, helps in savings

▰ lower transaction cost
▰ heavy regulations and ensures safety
▰ flexible, helps in price determination

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 INSTRUMENTS AND PLAYERS IN A
SECONDARY MARKET
MAJOR INSTRUMENTS:
▰ Fixed Instruments – bonds, MAJOR PLAYERS:
debentures ▰ Brokerage and Advisory
▰ Variable Instruments – Services
equity, derivatives ▰ Financial Intermediaries
▰ Hybrid Instruments – ▰ Retail Investors
preference shares,
convertible debentures 27
 TYPES OF SECONDARY MARKET
EXCHANGES OVER-THE=COUNTER
▰ A marketplace wherein (OTC)
there is no direct contact ▰ A decentralized place, where
between buyer and the the market is made up of
seller members trading among
▰ An exchange is a themselves.
guarantor and is heavily ▰ It also suffers from
regulated making it safe counterparty risk as parties
for investors to trade deal with each other directly.
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securities.
 IMPORTANCE OF SECONDARY MARKET
▰ It provides help to the company to look over or observe and to manipulate public
perceptions.
▰ It benefit investors by letting them to earn some returns using their idle money.
▰ It also let investors ensure their liquidity as one can buy or sell securities.
▰ It helps on giving value to a company as the price is determine by economic forces
of supply and demand.
▰ It is a good barometer to know a country’s economic state. The boom or recession
in an economy is indicated by the rise or drop of the stock market.

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 PRIMARY MARKET vs. SECONDARY MARKET
▰ The investors can purchase shares directly from the company in primary
market. In secondary market, the investors buy and sell the stocks and
bonds among themselves.
▰ In the primary market, security can be sold only once. Whereas in
secondary market it can be done in infinite number of times.
▰ Unlike in the stock market, the price of securities doesn’t flunctuate in the
primary market.
▰ The investors of the secondary market hire brokers to carry their trade.
While in the primary market, issuing company hire investment banks to
manage their IPO. 30
“ Thanks for
listening!
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