AN INTRODUCTION TO

CAPITAL MARKETS
LESSON 1

Month
20XX
 FINANCIAL MARKET

A FINANCIAL MARKET is a market in which people

trade financial securities and derivatives at low transaction
costs. Some of the securities include stocks and bonds, and
precious metals.

The Financial Markets can broadly be divided into:

 MONEY MARKET
 CAPITAL MARKET

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MONEY MARKET VS. CAPITAL
MARKET
DIFFERENCE MONEY MARKET CAPITAL MARKET
PURPOSE The money market secures short term liquidity for The capital market secures long term financing and
both investors and sellers. investment opportunities.

TIME HORIZON Typically less than a year on the money market. Typically multiple years on the capital market.

ASSET TRADED The money market trades instruments such as
Treasury bills, certificates of deposit, promissory
notes, commercial papers and bonds redeemable in
less than a year.
RISK FACTOR  Money markets are considered low risk.
PROFITABILITY Money markets have low returns.
The capital market trades in most bonds, stocks and
other instruments either backed by equity or
redeemable in more than one year.
Capital markets are potentially high risk depending on
the asset.
Capital markets can have considerably higher returns.

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BENEFITS OF FINANCIAL MARKETS

1. Funds are directed to Deficit Spending Units (DSU) that can use
them most efficiently.
2. Liquidity is provided to savers.

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CLASSIFICATION OF FINANCIAL
MARKETS

Financial markets are of various kinds.

1. Primary market
2. Secondary market
3. Money market
4. Capital market
5. Bond market
6. Stock market
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CLASSIFICATION OF FINANCIAL
MARKETS (cont.)

7. Mortgage market
8. Consumer market
9. Auction market
10. Negotiation market
11. Organized market
12. Over-the-counter market
13. Spot market
14. Future market
15. Options market
16. Foreign exchange market
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SIGNIFICANCE OF CAPITAL
MARKET

• Link between savers and investors

• Stability in security prices
• Speed up economic growth and development
• Helps in capital formation
• Helps in creating liquidity

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• PRIMARY MARKET – a financial market on which newly issued
primary and secondary securities are traded for the first time.
• SECONDARY MARKET – a secondary market is that financial
market through which existing financial securities are traded.

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 MONEY MARKET
Money Market are used to facilitate the transfer of short-term
funds from individuals, corporations, or governments with
excess funds to those with deficient funds.

 The money market refers to trading in very short-term

debt investments. At the wholesale level, it involves
large-volume trades between institutions and traders. At
the retail level, it includes money market mutual funds
bought by individual investors and money market
accounts opened by bank customers.
 Example: Commercial Paper, Certificate of Deposit,
Repos.

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CAPITAL MARKET
• A Capital Market is a
financial market in which long-term
debt (over a year) or equity-backed
securities are bought and sold. Capital
markets channel the wealth of savers to
those who can put it to long-term
productive use, such as companies or
governments making long-term
investments.
• Capital markets are composed of
primary and secondary markets. The
most common capital markets are the 
stock market and the bond market.
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THE CAPITAL MARKET IS
SUBDIVIDED INTO THREE PARTS:

1. Bond Market
2. Mortgage Market
3. Stock Market

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• BOND MARKET – the market for debt instruments of any kind.

• MORTGAGE MARKET – the mortgage market is that portion of the

financial market which deals with loans on residential, commercial,
and industrial estate, and on farmland.

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STOCK MARKET

The stock market is that financial market where the common and
preferred stocks issued by corporations are traded.

• The stock market has 2 components:

1. the organized exchange
2. the less formal over-the-counter markets

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The companies whose stocks are traded
in the PSE are classified as follows:

1. Banks
2. Financial service
3. Communication
4. Power and energy
5. Transportation services
6. Construction and other related products
7. Food, beverages, and tobacco
8. Holding firms
9. Manufacturing, distribution and trading
10. Hotel, recreation, and other service
11. Bonds, preferred and warrants
12. others
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• CONSUMER CREDIT MARKET – the market involved in loans an
auto, appliances, education, travel, etc.

• AUCTION MARKET – the auction market is one where trading is

conducted by an independent third part according to a matching of
prices on orders received to buy and to sell a particular security.
Stocks are sold to the highest bidder, on the trading floors.

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• NEGOTIATION MARKET – when buyers and sellers of securities
negotiate with each other regarding price and volume, either directly
or through a broker or dealer, they are engaged in the financial market
called negotiation market.

• ORGANIZED MARKET – the organized market is that financial

market with fixed trading rules. It is situated at a central location in the
financial district in which trading is generally conducted by auction
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• OVER-THE-COUNTER MARKET – The OTC market is that market
consisting of a large collection of brokers and dealers, connected
electronically by telephones and computers, that provides fro trading
in unlisted securities.

• SPOT MARKET – when securities are traded for immediate delivery

and payment.

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• OPTIONS MARKET – the options market is one where stock options
are traded.

• FOREIGN EXCHANGE MARKET – the FOREX market is the

market where people buy and sell foreign currencies.

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 TYPES OF CAPITAL MARKET

• PRIMARY MARKET
• SECONDARY MARKET

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PRIMARY MARKET

• The primary market provides the channel for sale of new securities. The issuer of
securities sells the securities in the primary market to raise funds for investment
and/or or to discharge.
• The issue of securities by companies can take place in any of the following methods:
a. Initial Public Offering (IPO)
- securities issued for the first time to the public by the company.
b. Further issue of capital
c. Rights issue to the existing shareholder.
- on their renunciation, the shares can be sold by the company to others.
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d. Offer of securities under reservation/firm allotment basis to;
- foreign partners and collaborators
- mutual funds
- merchant bankers
- banks and institutions
- foreign corporate bodies
- employees
e. Offer to Public
f. Bonus Issue
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 SECONDARY MARKET

• Secondary Market refers to a market where securities are traded after

being initially offered to the public in the primary market and/or listed
on the Stock Exchange.
• Majority of the trading is done in the secondary market.
• The secondary market enables participants who hold securities to
adjust their holdings in response to changes in their assessment of risk
and return. They also sell securities for cash to meet their liquidity
needs.
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COMPONENTS OF SECONDARY
MARKET

1. Over-The-Counter (OTC) Market

2. Exchange-Traded Market

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CAPITAL MARKET INSTRUMENTS

1. Stocks
2. Mortgage-backed securities
3. Treasury bonds
4. Municipal bonds
5. Treasury notes
6. Long term corporate notes

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• STOCKS – a stock is an ownership equity in a corporation allowing
the holder to envoy some of the profits and share some of the risks.

2 types of stocks
- preferred stocks
- common stocks

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MORTGAGE-BACKED SECURITIES

- Are financial instruments that are issued against a pool of mortgage loans (usually
residential mortgages) that will be serviced by the interest and principal payments
generated by the mortgage loans.

Key advantages of mortgage-backed securities

1. higher pre-tax yields than on Treasury securities
2. safety
3. adequate resale market
4. good collateral for borrowing

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• CORPORATE BONDS – are long-term financial instruments issued by
corporations with very strong credit-ratings.
• TREASURY BONDS – government bonds are long-term financial instruments
issued by the government to finance the deficits of the national government.
• TREASURY NOTES – is a negotiable debt obligation issued by the
government and backed by its full faith and credit having a maturity of one
year and 25 years
• LONG-TERM CORPORATE NOTES – are commercial papers issued by
corporations to finance various requirements.
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• MUNICIPAL BONDS – are certificates of long-term indebtedness
issued by towns, cities, or provinces, and are secured by the taxing
power of these entities. These instruments are tax-free.
2 types
1. general obligation bonds
2. revenue bonds

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THANK
YOU!
DENIA H.
MARADDAG
Instructor