Understanding Financial Markets: Primary, Secondary, Money, and Capital Markets, Exercises of Financial Accounting

Download Understanding Financial Markets: Primary, Secondary, Money, and Capital Markets and more Exercises Financial Accounting in PDF only on Docsity! Types of Financial Markets The primary market is where securities are issued and investors can purchase shares directly from the company The secondary market is where those pre-owned securities are traded by investors. It helps companies fulfill short-term liquidity requirements. The Money Market is securities are short-term instruments with an original maturity of less than one year or less from their original issue date. Most of the money market instruments maturing in less than 120 days. Money market securities are used to “warehouse” funds until needed. The returns earned on these investments are low due to their low risk and high liquidity. Securities included: Treasury bills, commercial paper, federal funds, repurchase agreements, negotiable certificates of deposit, bankers acceptances, and Eurodollars. The Main capital markets where buyers and sellers are engage in the trade of financial securities or place that allows the trading of funding instruments such as shares, debentures, debt instruments, or bonds. It is issued by corporations and government units for long-term funds. Instruments included: stocks, bonds, mortgages, and loans. The Foreign Exchange Market (the price of one country’s currency in terms of another’s) an over-the-counter (OTC) marketplace that determines the exchange rate for global currencies. It is important because they affect the price of domestically produced goods sold abroad and the cost of foreign goods bought domestically. Dimensions of Financial Markets Financial markets can be distinguished along two major dimensions: (1) primary versus secondary markets and (2) money versus capital markets. Financial Market Regulation These are the laws and rules that govern the workings of financial institutions. Regulations of financial institutions basically focus on providing stability to the financial system, fair competition, consumer protection, and the prevention and reduction of financial crimes. In the Philippines, there are 3 agencies that supervised the financial service industry the BSP, the Securities and Exchange Commission (SEC), and the Insurance Commission (IC). Financial instruments are subject to regulations imposed by regulatory agencies such as the Securities and Exchange Commission (SEC)—the main regulator of securities markets since the passage of the Securities Act of 1934—as well as the exchanges (if any) on which the instruments are traded. Types of Financial Institutions Commercial banks —depository institutions whose major assets are loans and whose major liabilities are deposits. Commercial banks’ loans are broader in range, including consumer, commercial, and real estate loans, than are those of other depository institutions. Commercial banks’ liabilities include more non-deposit sources of funds, such as subordinated notes and debentures, than do those of other depository institutions. Thrifts —a depository institutions in the form of savings associations, savings banks, and credit unions. Thrifts generally perform services similar to commercial banks, but they tend to concentrate their loans in one segment, such as real estate loans or consumer loans. Insurance companies —financial institutions that protect individuals and corporations (policyholders) from adverse events. Life insurance companies protect the event of untimely death, illness, and retirement. Property-casualty insurance protects against personal injury and liability due to accidents, theft, fire, and so on. Securities firms and investment banks —financial institutions that help firms issue securities and engage in related activities such as securities brokerage and securities trading. Finance companies —financial intermediaries that make loans to both individuals and businesses. Unlike depository institutions, finance companies do not accept deposits but instead, rely on short- and long-term debt for funding. Mutual funds —financial institutions that pool financial resources of individuals and companies and invest those resources in diversified portfolios of assets. Hedge funds —financial institutions that pool funds from a limited number (e.g., less than 100) of wealthy (e.g., annual incomes of more than $200,000 or net worth exceeding $1 million) individuals and other investors (e.g., commercial banks) and invest these funds on their behalf, usually keeping a large proportion (commonly 20 percent) of any upside return and charging a= fee (2%) on the amount invested. Pension funds —financial institutions that offer savings plans through which fund participants. accumulate savings during their working years before withdrawing them during their retirement years. Funds originally invested in and accumulated in a pension fund are exempt from current taxation. Financial System