TYPES OF MARKET

(CAPITAL MARKET)
Prof. Jeanlie C. Valenzuela
Capital Market
• This is where the long-term financial instruments
being traded.
• This includes issuance of securities and long-term
obligations by business and government
agencies..
• Some of the financial instrument have no maturity
date as in the case of common stocks and
preferred stocks while others have a maturity date
that last more than a year as in case of bonds.
Elements of Capital Market
1. Organized securities exchange. A securities exchange
operates under the rules and regulations formulated by and
exchange. Investors actively trading on the exchange are
aware of the rules and conduct trades accordingly. In the
Philippines, the most active security exchange is the
Philippine Stock Exchange.
2. Over-the-counter markets (OTC). It is involved in the
buying and selling of financial instruments but not in
organized exchanges. These are stocks of corporations that
were registered and licensed by the Securities and
Exchange Commission (SEC) to sell stocks, which were not
being traded in the PSE to the public.
Other Example of Financial Markets

Foreign
Bond Commodity Stock Derivatives
Exchange
Market Market Market market
Market
Bond Market
• It is a place where long-term debt instruments are issued by
firms and government agencies to raise money.
• Participants are buying and selling bonds and participated by
individuals , the government or private firms who have excess
money and are looking for avenue where can invest to
generate additional income in the form of interest and capital
gain on bonds.
• Interest rate and bond price have inverse relationship. When
the interest rate is high, the price of bond is low, and when the
interest is low, the price of bond is high.
Commodity Market
• It is a place where raw or primary commodities are traded.
• The commodities are traded on regulated commodities
exchange where they are bought and sold in standardized
contracts.
• Eg. Corn, sugar, coffe, cotton, copra, and tea
Stock Market
• It is a place where publicly listed stocks are bought and sold. If
the firm would like to raise money in the form of stocks, they
normally go to an investment banker to facilitate the selling.
• This is in the form of an Initial Public Offering (IPO), where the
stocks are sold for the first time to the general public.
Derivative Market
• Derivative Market is the financial market for derivatives,
financial instruments like futures contracts or options, which
are derived from other forms of assets.
• This provide instruments to manage financial risk. The market
can be divided into two: exchange-traded derivatives and
over-the-counter derivates.
• Eg. Future Market, Insurance Market, Options Market
Foreign Exchange Market
• The foreign exchange market is an over-the-counter (OTC)
marketplace that determines the exchange rate for global
currencies.
• Banks normally have this as one of their functions.
• It is a global decentralization or over-the-counter (OTC)
market for the trading of currencies.
• This market determines foreign exchange rates for every
currency. It includes all aspect of buying, selling, and
exchanging currencies in the current or determined price.
Efficient Market Hypothesis (EMH)
• It is a hypothesis that serves as one of the foundation of
modern finance theory.
• It state that the stock price already reflects all available
information in the market and this information is immediately
available to the investing public. It directly imply that nobody
can bet the market consistently on a risk-adjusted basis
because the market prices only react to new information.
• This hypothesis also describes that the market is perfect and
nobody should benefit from the fluctuation of the prices.
Efficient Market Hypothesis (EMH)
• Behavior of a “perfect market” specifically states that:
1. Securities are typically in equilibrium: fairly priced and
expected returns equal their required returns
2. At any point in time, securities prices fully reflect all public
information available about the firm and its securities, and
these prices react swiftly to new information
3. Because stocks are fully and fairly priced, investors need not
waste their time trying to find and to capitalize or mispriced
securities
3 types of Market Efficiency
1. Strong-form. It is a concern with all information sets,
including private information, are incorporated in price trends
and it states no monopolistic information can entail profits.
Insider trading cannot make a profit in the strong-form
market efficiency world.
2. Semi-strong form. It requires that all public information is
reflected in prices already, such as companies’
announcements or annual earning figures.
3. Weak efficiency. It is saying that the information set is just
historical prices, which can be predicted from historical price
trends; thus, it is impossible to profit from it.