FM 111

FINANCIAL MARKETS

MODULE 1
The Financial Markets
 Table of Contents

Title Page
Preface 3
Study Guides and House Rules 4
Study Schedule 5
Learning Outcomes 6
Module 1: The Financial Markets
Topic 1:
Overview of Finance and the Financial System
Learning Outcomes 7
Pretest 1.1 7
Learning Tasks / Activities 7
Information Sheet 1.1 8
Assessment 1.1 11
Answer Key 12
Topic 2:
Nature, Purpose, Structure and Role of Financial Markets
Learning Outcomes 14
Pretest 2.1 14
Learning Tasks / Activities 14
Information Sheet 2.1 15
Assessment 2.1 19
Answer Key 20
Topic 3:
The Types of Financial Markets and Major Players and Their
Roles in the Financial Markets
Learning Outcomes 21
Pretest 3.1 21
Learning Tasks / Activities 22
Information Sheet 3.1 23
Assessment 3.1 32
Answer Key 34
Quiz on The Financial Markets 35
References 36

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Preface

“Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1”
– Warren Buffett

Dear Future Player in the Financial Market,

This module for the course FM 111 – Financial Markets is designed to provide you
with the fundamental framework of the financial markets – its importance, roles in the
financial system, structure, and types. Along with those, the major players of financial
markets and the types of investors are also discussed in this module.

Financial Markets is a three-unit course required for the Bachelor of Science in

Accountancy degree program per CMO No. 27 Series of 2017. The knowledge and skills you
will obtain on this module will help you in passing the Auditing subject of the Certified Public
Accountant licensure examination and will also prepare you to become a competent
professional in the field of finance and investments.

You should have passed the course ACC 101 – Intermediate Accounting I to be able
to take this course.

At the end of the course, you are expected to be able to:

1. Explain the importance of financial markets in the financial system;
2. Explain the structure and role of financial markets in the financial system;
3. Identify the different financial institutions and intermediaries;
4. Identify the different key players and their roles in financial markets; and
5. Identify the different types of investors within the financial system.

To ensure that you will demonstrate the cited course learning outcomes at the end of the
semester, this module for you is divided into the following:

Module 1: The Financial Markets - This module aims to introduce to you the financial
markets. This will allow you to explore and understand the financial markets,
differentiate their types, identify their roles, illustrate their structures, and identify
the key players in the financial market.

Module 2: The Financial Institutions - This module aims to introduce to you the financial
institutions. This will allow you to be familiar with the different financial institutions
and specific financial intermediaries. Market interest rates, its determinants and
its relationship with inflation rate are also covered in this module.

Module 3: Stock Market and Market Interest Rates - This module aims to introduce to
you the stock market and the rates of interest in markets. This will allow you to
assess the risks and returns of a financial investment, apply the necessary
conceptual and theoretical strategies in investing, and explain the relevance of
the existing interest rates adapted by the financial markets.

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 Study Guides and House Rules

The key to successfully finish this module lies in your hands. This module was
prepared for you to learn diligently, intelligently, and independently. As a BS Accountancy
student, doing these will greatly help and prepare you to become a CPA and a great
professional in the field of finance and investments. Aside from meeting the content and
performance standards of this course in accomplishing the given activities, you will be able
to learn other invaluable learning skills which you will be very proud of as a responsible
learner. The following guides and house rules will help you further to be on track and to say
at the end of the module, “I did well!”

1. Schedule and manage your time to read and understand every part of the module.
Read it over and over until you understand the point.
2. Study how you can manage to do the activities of this module in consideration of your
other modules from other courses. Be very conscious of the study schedule. Post it in
a conspicuous place so that you can always see or make a schedule. Do not ask
questions that are already answered in the guide.
3. If you did not understand the readings and other tasks, re-read. Focus, if this will not
work, engage all possible resources. You may ask other family members to help you.
If this will not work again, text me or message me in messenger first so that I can call
you or message you back for assistance.
4. Do not procrastinate. Remember, it is not others who will be short-changed if you do
not do your work on time. It will be you.
5. Before you start doing your tasks, read and understand the assessment tools
provided. Do not settle with the low standards, target the highest standards in doing
your assigned tasks. I know you can.
6. You are free to browse and read the different units of the module even prior to doing
the tasks in each unit. However, you need to ensure that you will not miss any part of
the module and to accomplish every activity in every unit as scheduled.
7. If needed, do not hesitate to keep in touch with me through any available means.
Remember, if there is a will, there is a way.
8. In answering all the assessment and evaluation activities, write legibly. It will help if
you will not write your answers in the module if you are not yet sure of your answers.
You must remember that all activities in the module are academic activities, which
means that the relevant academic conventions apply. Think before you write. Do not
read back the lesson while answering the assessment.
9. Lastly, you are the learner; hence, you do the module on your own. Your family
members and friends at home will support you but the activities must be done by you.

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STUDY SCHEDULE

Date Topic Learning Outcomes Activities

MODULE 1 The Financial Markets
Topic 1 Nature, Purpose, Structure and Role of Financial Markets
August 25 1. Define and explain the overview and 1. Answer the pre-test
importance of financial markets; and 2. Read the information
2. Explain the structure and role of sheet.
financial markets in the financial 3. Answer the assessment.
system. 4. Answer again the
pre-test.
5. Check, review and
analyze all your answers
and other choices.

Topic 2 Types of Financial Markets

August 27 3. Identify and explain the different 1. Answer the pre-test
types of financial markets. 2. Read the information
sheet.
3. Answer the assessment.
4. Answer again the
pre-test. Check, review
and analyze all your
answers and other
choices.

Topic 3 The Major Players and Their Roles in the Financial Markets
August 29 4. Identify and describe the roles of the 1. Answer the pre-test
major players in financial markets. 2. Read the information
sheet.
3. Answer the assessment.
4. Answer again the
pre-test. Check, review
and analyze all your
answers and other
choices.

September 25 Quiz on The Financial Markets

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 FM 111
FINANCIAL MARKETS

The Financial Markets

Learning Outcomes:

At the end of the module, you are expected to be able to:

1. Define and explain the overview and importance of financial markets;

2. Explain the structure and role of financial markets in the financial system;
3. Identify and explain the different types of financial markets;
4. Identify and describe the roles of the major players in financial markets; and
5. Identify the different types of investors within the financial system.

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 Learning Outcomes:
1. Define and explain the concept of finance and its related categories and career
paths; and
2. Explain the financial system through its major components and the flow of
funds associated with it.

Information Sheet 1.1:

Overview of Finance
Finance refers to the management of money, which encompasses forecasting,
budgeting, borrowing, lending, and investing. It is the study of allocating resources over time,
involving various disciplines like law, accounting, and economics. It involves players such as
households, companies, governments, and foreign participants, and includes concepts like
investment, financial instruments, and financial markets.

Categories of Finance
1. Personal Finance
It refers to the management of an individual's financial resources and decisions.
Furthermore, personal finance includes budgeting, saving, investing, planning for retirement,
education, and major purchases. It focuses on achieving financial goals and managing
personal income, expenses, and debt.
2. Corporate Finance
This category deals with the financial decisions made by corporations and involves
managing the company's financial resources. Included are capital investment decisions,
financing decisions (such as issuing stocks or bonds), and dividend policy decisions. It aims
to maximize shareholder value through effective financial management, risk management,
and strategic planning.
3. Government or Public Finance
This concerns the financial management of public entities, such as governments at
various levels (local, state, national) and public institutions. Also, it involves budgeting,
taxation, spending policies, borrowing, and management of public funds. This classification
of finance aims to ensure sustainability, equity, and efficiency in the allocation of public
resources for the benefit of society. It also deals with economic stabilization and public
sector investments.

Related Career Paths towards Finance

In addition, there are many different career paths and jobs that perform a wide range
of finance activities. Here is a list of the most common examples:
1. Investing personal money in stocks, bonds, or guaranteed investment
certificates (GICs).

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 2. Borrowing money from institutional investors by issuing bonds on behalf of a
public company.
3. Lending money to people by providing them with a mortgage to buy a house.
4. Saving personal money in a high-interest savings account.
5. Developing a forecast for government spending and revenue collection.

Overview of the Financial System

A financial system can be perceived on a company, regional, or global scale, which
facilitates the practice of exchanging funds between one entity to another. It involves various
players such as insurance companies, stock exchanges, investment banks, and more. To
add, these systems are regulated, as their processes influence and contribute to the growth
of many assets.
The financial system consists of all financial intermediaries and financial markets and
their relations concerning the flow of funds to and from households, governments, business
firms, and foreigners, as well as the financial infrastructure.

Key Components of the Financial System

The major components of the financial system include:
1. Financial Instruments – These are documents that grant the buyer the right to
future income from the seller, bridging the gap between investors and borrowers.
2. Financial Markets – These markets facilitate the creation and trading of
financial assets, efficiently moving funds from savers to borrowers and ensuring
liquidity.
3. Financial Institutions – They connect lenders and borrowers through various
financial services, contributing to the overall efficiency and liquidity of the financial
system.
4. The Central Bank and other Financial Regulators – They play a crucial role by
setting monetary policy, acting as a lender of last resort, and regulating the
banking system to control money supply and interest rates.

Flow of Funds through the Financial System

Figure 1.1. Structured Flow of Funds in the Financial System

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 Learning Outcomes:
3. Define and explain the overview and importance of financial markets; and
4. Explain the structure and role of financial markets in the financial system.

Information Sheet 1.2:

Financial Market
● broad term describing any marketplace where trading of securities including equities,
bonds, currencies, and derivatives occur.
● any marketplace where trading of securities including equities, bonds, currencies,
and derivatives occur.
● provides a platform to the buyers and sellers, to meet, for trading assets at a price
determined by the demand and supply forces.

Purposes of Financial Markets

● Transfer of resources – facilitate the transfer of real economic resources from
lenders to ultimate borrowers.
● Enhancing income – allow lenders to earn interest or dividend on their surplus
invisible funds, thus contributing to the enhancement of the individual and the
national income.
● Productive usage – Financial markets allow for the productive use of the funds
borrowed. The enhancing the income and the gross national production
● Capital formation – Financial markets provide a channel through which new savings
flow to aid capital formation of a country.
● Price determination – Financial markets allow for the determination of price of the
traded financial assets through the interaction of buyers and sellers. They provide a
sign for the allocation of funds in the economy based on the demand and to the
supply through the mechanism called price discovery process.
● Sale mechanism – Financial markets provide a mechanism for selling of a financial
asset by an investor so as to offer the benefit of marketability and liquidity of such
assets.
● Information – The activities of the participants in the financial market result in the
generation and the consequent dissemination of information to the various segments
of the market. So as to reduce the cost of transaction of financial assets.

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Structure of Financial Markets

Figure 1.2. Structure of the Financial System

Roles of Financial Market

1. Raising Capital. Firms often require funds to build new facilities, replace machinery,
or expand their business in other ways. Shares, bonds and other types of financial
instruments make this possible. The financial markets are also an important source
of capital for individuals who wish to buy homes, cars, or even to make credit card
purchases.
2. Commercial Transactions. Financial markets provide the grease that makes many
commercial transactions possible. This includes such things as arranging payment
for the sale of a product abroad and providing working capital so that a firm can pay
employees if payments from customers run late.
3. Price Setting. Markets provide price discovery, a way to determine the relative values
of different items based on the prices at which individuals are willing to buy and sell
them.
4. Asset Valuation. Market prices offer the best way to determine the value of a firm or
of the firm’s assets, or property. This is important not only to those buying and selling
businesses but also to regulators.
5. Arbitrage. As traders in financial markets attempt to profit from divergences among
various countries, prices move towards a uniform level, making one’s entire
economy more efficient.
6. Investing. The stock, bond, and money markets provide an opportunity to earn a
return on funds that are not needed immediately, and to accumulate assets that will
provide an income in the future.
7. Reduction in transaction costs and provision of the Information. The trader requires
various types of information while doing the transaction of buying and selling the
securities. For obtaining the same time and money is required. But the financial
market helps in providing every type of information to the traders without the

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 requirement of spending any money by them. In this way, the financial market
reduces the cost of the transactions.
8. Risk Management. Futures, options, and derivative contracts can provide protection
against many types of risk, such as the possibility that a foreign currency will lose
value against the domestic currency before an export payment is received. They
also enable the markets to attach a price to risk, allowing firms and individuals to
trade risks so they can reduce their exposure to some while retaining exposure to
others.

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 Learning Outcome:
5. Identify and explain the different types of financial markets.
6. Identify and describe the roles of the major players in financial markets.

Information Sheet 3.1:

Types of Financial Markets

Physical Market vs. Financial Market
PHYSICAL MARKET FINANCIAL MARKET

- refers to the market of those tangible - refers to the market of intangible assets
assets which can be liquidated for the where securities such as bonds, stocks, and
payment of unpaid debts. - Examples bank deposits are traded. - Some examples
include machinery, gold, and real estate. are debt security markets, equity security
markets, Derivative security markets

Spot Market vs. Future Market

SPOT MARKET FUTURE MARKET

-refers to the market for financial -refers to the market where the securities are
securities where securities are traded for traded for delivery in the future.
their current and immediate exchange - Included here are agricultural futures,
and delivery. energy futures, metal futures, soft commodity
- Examples: commodity markets, foreign futures, and more.
exchange markets, and interest rates

Money Market vs. Capital Market

MONEY MARKET CAPITAL MARKET

- refers to the market for raising the funds - refers to the market for raising the funds
for meeting the short-term cash requirement for meeting the long-term cash requirement
for one year or less than one year. which exceeds one year.
- Commercial papers, treasury bills, and - Examples: stocks, bonds, and derivatives
certificates of deposit are some examples.

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 Private vs. Public Market
PRIVATE MARKET PUBLIC MARKET

-are financial market which refers to any -financial markets where investments are
investments that cannot be traded on a traded on exchanges and easily invested in
public exchange or the stock market. by the public. Examples of traditional asset
- Examples: Linqto, Goldman Sachs, CVC classes include company stocks, mutual
Capital Partners, HarbourVest Partners, funds, ETFs, and bonds.
EQT - Examples: New York Stock Exchange
(NYSE), Nasdaq, London Stock Exchange
(LSE)

Primary Market vs. Secondary Market

PRIMARY MARKET SECONDARY MARKET

-a financial market where new securities are -is a financial market in which securities that
issued for the first time. It’s the initial step in have been previously issued can be resold.
raising capital for corporations, - Investors trade securities without the
governments, or other entities. involvement of the issuing companies.
- It isn't a physical place; it reflects more the Investors buy and sell securities among
nature of the goods. The key defining themselves.
characteristic of a primary market is that - The secondary market does not provide
securities on it are purchased directly from financing to issuing companies
an issuer- as opposed to being bought from -they are not involved in the transaction.
a previous purchaser or investor, "second The amount received for a security in the
hand" so to speak secondary market is income for the investor
- Examples: Initial Public Offering, Rights who is selling the securities
Offering Issue, Preferential Allotment - Included here are the stock exchange,
over the-counter market, auction market,
dealer market

Debt Market vs. Equity Market

DEBT MARKET EQUITY MARKET

-a platform where debt securities are traded -meeting points for issuers and buyers of
by investors. stocks in a market economy. It's where
- crucial in connecting borrowers and companies raise capital to start or expand
lenders, facilitating the flow of capital, and their enterprises.
promoting investment. - Types of Equity Markets:
- Types of Debt Markets: 1) Common stock - an ownership stake in a
1) Primary Market - a platform where newly company and typically comes with voting
created debt securities are first issued and rights.
sold to raise capital. 2) Preferred stock - offers fixed dividends
2) Secondary market- also referred to as and takes precedence over common stock
the resale market, begins after closing the should there be a bankruptcy.
primary market.

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The Major Players in the Financial Market
1. Philippine Stock Exchange
● It was incorporated on July 14, 1992 as a non-stock corporation.
● It has two wholly-owned subsidiaries, the Securities Clearing Corporation of the
Philippines, and Philippine Dealing System Holdings Corporation.
● It is a member of the ASEAN Exchanges.
Roles of PSE:
o Brings together companies which aim to raise capital through the issue of new
securities.
o Facilitates the selling and buying of the issued stocks and warrants.
o Provides a suitable market for the trading of securities to individuals and
organizations seeking to invest their savings or excess funds through the purchase of
securities.
o Plays a vital role in the financing of productive enterprises that use the funds for
growth and expansion of new jobs.
o It has committed itself to (a) protecting the interest of the investing public; and
(b) developing and maintaining an efficient, fair, orderly and transparent market.
Efficient - This means that orders are executed and transactions are settled in the
fastest possible way.
Fair - This means that the PSE assures that no investor will have an undue
advantage over another market player in trading by manipulating prices and
engaging in insider trading. Insider trading is the act of buying or selling a particular
stock based on certain privileged information which is not available to the public. As
such, it is considered as illegal and prohibited by the PSE.
Market Transparency - Transparency proceeds from the assumption that the investor
can only make informed and intelligent information about the particular stock he
wants to buy. The PSE requires listed companies to disclose timely, complete and
accurate material information to the Exchange and the public on a regular basis.
Such information would include stock price information, corporate conditions and
developments which tend to affect stock prices like dividend, mergers and joint
ventures, and the like.
2. Listed Companies
● Firms whose shares are listed/quoted on a stock exchange for public trading.
● In the Philippines, large companies often become corporations to get listed on the
stock exchange, comply with the regulatory agencies and gain access to capital
from stock markets.
● They are essential to the financial system because they foster economic
expansion, present avenues for investment, and uphold regulations and
transparency.
Roles of Listed Companies:
o Comply with listing rules
o Continuing disclosure obligations such as price sensitive information, financial
information, corporate actions and other notifiable transactions.
o New rules to boost corporate governance standards.

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 Figure 1.3. Publicly-listed vs. Privately-listed Company
3. Stockbrokers
● A stockbroker is a professional who executes buy and sell orders for stocks and
other securities on behalf of clients. A stockbroker may also be known as
a registered representative, investment adviser or simply, broker. Stockbrokers
are usually associated with a brokerage firm and handle transactions for retail
and institutional customers alike. Stockbrokers often receive commissions for
their services, but individual compensation can vary greatly depending on where
they are employed. Brokerage firms and broker-dealers are also sometimes
referred to as stockbrokers themselves. The most commonly referenced
stockbroker firms are discount brokers.
● Stockbrokers assist clients in making well-informed investment decisions that are
parallel with their financial objectives by offering market-based suggestions. By
giving them solutions for risk mitigation and portfolio diversification, they also help
in risk management.
● A bachelor's degree in finance or business administration is typically required for
stockbrokers working with institutional clients. A strong understanding of financial
laws and regulations, accounting methods, principles of economics and currency,
financial planning and financial forecasting are useful for working in the field as
well. Most successful stockbrokers have strong interpersonal skills and are able
to maintain strong sales relationships.
Roles of Stockbrokers:
o Buying. One of the most basic responsibilities of a stockbroker is to buy
stocks on behalf of his client; he may do this in different ways, depending on
the type of account the client has. In a discretionary account, the stockbroker
buys stock for a client based on some pre-arranged guidelines. In an advisory
account, however, the stockbroker only advises a client on what stock to buy,
while in an execution account, the stockbroker only buys stock that the client
has specifically indicated.
o Selling. The other responsibility a stockbroker has is selling stock on behalf
of a client. Just as in the case of buying stock, the stockbroker can only sell
stocks of a client based on the account that a client signed up for. If a client

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 has an execution-only account, the stockbroker can only sell a client's stock
when asked to do so. If a client has an advisory account, a stockbroker can
only advise the client to sell his stocks, while if a client has a discretionary
account, a stockbroker has some leeway on selling the stocks based on a
pre-arranged guideline.
o Research. Competent stockbrokers research accounting, economic and
technical analysis of different companies and stocks. Their findings form the
basis of their feedback to a client. If a stockbroker believes a client’s stock's
price will drop drastically, he'll advise him to sell when the price is still high. If,
on the other hand, a stockbroker believes the price of a client's stock will rise
significantly, he may advise him to retain the stock. A stockbroker also
advises a client about which stocks he should buy to add to his financial
portfolio and looks for profitable companies' stocks.
o Marketing. A stockbroker finds prospective clients and builds a customer
base. He may do this by writing articles in newspapers and magazines,
hosting radio and television shows or taking time to call prospective clients. A
stockbroker can also receive new clients through referrals from other
individuals and organizations or by attending social events where he can
market his services.
4. Clearing House
● Clearing houses act as central counterparties (CCPs), an intermediary between a
buyer and seller and seek to ensure that the process from trade inception to
settlement is smooth. Its main role is to make certain that the buyer and seller
honor their contract obligations. Responsibilities include settling trading
accounts, clearing trades, collecting and maintaining margin monies, regulating
delivery of the bought/sold instrument, and reporting trading data. Clearing
houses act as third parties to all futures and options contracts, as buyers to
every clearing member seller, and as sellers to every clearing member buyer.
● A common fear of traders about the market is getting involved in transactions that
don’t end well, with one of the parties not fulfilling their end of the agreement.
Clearing houses function to provide extra security so that investors can trade
freely, knowing that their investment decisions will be honored and enforced by
the clearing firm.
● The clearing house enters the picture after a buyer and seller have executed a
trade. Its role is to consolidate the steps that lead to settlement of the transaction.
In acting as the middleman, a clearing house provides the security and efficiency
that is integral for financial market stability.
● Clearing houses take the opposite position of each side of a trade which greatly
reduces the cost and risk of settling multiple transactions among multiple parties.
While their mandate is to reduce risk, the fact that they have to be both buyer and
seller at trade inception means that they are subject to default risk from both
parties. To mitigate this, clearing houses impose margin (initial and maintenance)
requirements. This function helps mitigate the risk that a counterparty will default
on its obligations. They conduct regular risk assessments and maintain default
funds to cover potential losses in case of a participant’s default.

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 ● The futures market is most commonly associated with a clearing house, since its
financial products are leveraged and require a stable intermediary.
Each exchange has its own clearing house. All members of an exchange are
required to clear their trades through the clearing house at the end of
each trading session and to deposit with the clearing house a sum of money,
based on the clearing house's margin requirements, sufficient to cover the
member's debit balance.
Roles of Clearing House:
o The clearing house guarantees that the transactions will occur smoothly and
that both parties will receive what is due to them. This is done by checking the
financial capabilities of both parties to enter into a legal transaction,
regardless of whether they are an individual or an organization.
o The clearing firm makes sure that the parties involved respect the system and
follow the proper procedures for a successful transaction. They standardize
trade terms and processes, which enhances market efficiency and liquidity.
The facilitation of smooth transactions leads to a more liquid market.
o Clearing houses enhance market transparency by providing detailed reports
on trade volumes, settlement status, and financial obligations. This
transparency helps market participants make informed decisions.
o It is the clearing house firm that provides a level playing field for both parties,
where they can agree on the terms of their negotiation. This includes having
the responsibility for setting the price, quality, quantity, and maturity of the
contract.
o The clearing house makes sure that the right goods are delivered to the
buyer, in terms of both quantity and quality, so that at the end of the
transaction, there are neither complaints nor arbitration necessary.

Additional resources:
In addition, the Philippine Stock Exchange (PSE) Annual Reports
provide insights into the operations of the clearing house associated with the
Philippine Stock Exchange.
Meanwhile, "The Philippine Financial System" by Benedict A. T. Wong
offers a comprehensive overview of financial institutions and market
infrastructures in the Philippines, including clearing houses.
To add, "Financial Markets and Institutions: A Modern Perspective" by
Peter S. Rose and Milton H. Marquis: Although not specific to the Philippines,
this text provides a broader understanding of the roles and functions of
clearing houses in financial markets, which can be useful for contextual
understanding.
These references should give you a more detailed picture of how
clearing-houses function within the Philippine financial system.
5. Financial Regulators
● They regulate the financial services industry, including markets, exchanges and
firms. They typically work for government bodies or independent standards
organizations to ensure financial services meet industry-specific regulations.

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 ● Financial regulators can work in different departments to ensure financial service
companies are compliant with the law and financial regulations.
● Regulators also provide information to consumers to protect them from improper
practices.
A. The Securities and Exchange Commission (SEC)
➢ The main role of the Securities and Exchange Commission is to enforce regulations
to ensure fair trading practices and prevent market manipulation. Such regulations
are also created to oversee the work of various entities. These include public utility
companies, stockbrokers, investment advisers and companies, as well as publicly
held companies.They enforce rules to prevent fraudulent activities and exploitation. It
oversees securities issuance and trading to maintain market integrity (Securities
Regulation Code, Republic Act No. 8799).
➢ Its major functions include registration of securities, analysis of every registered
security, and the evaluation of the financial condition and operations of applicants for
security issues.
➢ The functions of the SEC are defined in Section 5 of the Securities Regulation Code,
and include the following major areas:
● Supervision over all registered business entities in the country,
including suspensions and revocations of their registrations
● Policy-making with regard to the market in securities
● Control over and approval of security registration statements
● Power to investigate violations of securities laws and to impose
sanctions for such violations
● Power to issue subpoenas, punish for contempt, and issue cease and
desist orders in furtherance of its law enforcement mission
B. Insurance Commission
➢ Insurance Commission is an attached agency of the Department of Finance (DOF).
One of its major functions is to promulgate and implement policies, rules and
regulations governing the operations of entities engaged in insurance and pre-need
activities.
➢ The purpose of insurance commissioners is to maintain fair pricing for insurance
products, protecting the solvency of insurance companies, preventing unfair practices
by insurance companies, and ensuring availability of insurance coverage.
➢ The Insurance Commission (IC) implements measures to safeguard investors from
unfair practices and ensure that they have access to accurate and timely information.
The IC oversees insurance companies and pension funds to ensure consumer
protection.
C. Bangko Sentral ng Pilipinas (BSP)
➢ The powers and functions of Bangko Sentral are exercised by its Monetary Board,
whose seven members are appointed by the President of the Philippines. As
provided for in RA 7653 or the New Central Bank Act, one of the government sector
members of the Monetary Board must also be a member of Cabinet. Members of the
Monetary Board are prohibited from holding certain positions in other government
agencies and private institutions that may give rise to conflicts of interest. The
members have fixed and overlapping terms, except for the Cabinet Secretary
representing the incumbent administration.

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 Main Functions:
o Liquidity management, by formulating and implementing monetary
policy aimed at influencing money supply, consistent with its primary
objective to maintain price stability,
o Currency issue. The BSP has the exclusive power to issue the national
currency. All notes and coins issued by the BSP are fully guaranteed by
the Government and are considered legal tender for all private and public
debts,
o Lender of last resort, by extending discounts, loans and advances to
banking institutions for liquidity purposes,
o Financial supervision, by supervising banks and exercising regulatory
powers over non-bank institutions performing quasi-banking functions,
o Management of foreign currency reserves, by maintaining
sufficient international reserves to meet any foreseeable net demands for
foreign currencies in order to preserve the international stability and
convertibility of the Philippine peso,
o Determination of exchange rate policy, by determining the exchange
rate policy of the Philippines. Currently, the BSP adheres to
a market-oriented foreign exchange rate policy, and
o Being the banker, financial advisor and official depository of the
Government, its political subdivisions and instrumentalities and GOCCs.
D. Philippine Deposit Insurance Corporation (PDIC)
➢ Primary Functions of PDIC is to protect the small investors/depositors and to build a
strong banking confidence.
➢ PDIC is a government instrumentality created in 1963 by virtue of Republic Act 3591
to insure the deposits of all banks. PDIC exists to protect depositors by providing
deposit insurance coverage for the depositing public and help promote financial
stability.
Mandates of PDIC:
o Deposit Insurance. The PDIC provides a maximum deposit insurance
coverage of PHP500,000 per depositor per bank. To pay insured deposits,
the PDIC builds up the Deposit Insurance Fund primarily through
assessments of member-banks at an annual flat rate of 1/5 of 1% of their
total deposit liabilities.
o Examination and Resolution. The PDIC works closely with the Bangko
Sentral ng Pilipinas (BSP) to help maintain stability in the banking system.
PDIC is authorized to issue regulations to implement its Charter, conduct
bank examinations and investigations to assess financial safety and
soundness of banks and their adherence to banking and deposit
insurance rules and regulations, and extend financial assistance to eligible
distressed banks.
o Receivership and Liquidation. The PDIC is the statutory receiver and
liquidator of closed banks. Upon order of the Monetary Board of the BSP,
PDIC takes over closed banks; administers their assets, records and
affairs; and manages and preserves these assets for the benefit of the
closed banks' creditors. Under RA 10846 or the amended PDIC Charter, a

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 closed bank transitions seamlessly from closure to liquidation, enabling
PDIC to dispose and distribute assets and settle claims of creditors in
accordance with the preference and concurrence of credits as provided by
the Civil Code of the Philippines.
E. Department of Finance
➢ The Department of Finance (DOF) is responsible for the management of the
government’s financial resources. Its duties include policy formulation, revenue
generation, resource mobilization, debt management, and financial market
development. The DOF is also tasked with the rationalization, privatization, and
public accountability of corporations and assets owned, controlled, or acquired by the
government.
➢ The following agencies are attached to the DOF:
● Bureau of Customs (BOC)
● Bureau of Internal Revenue (BIR)
● Bureau of the Treasury (BTr)
● Philippine Deposit Insurance Corporation (PDIC)
● Central Board of Assessment Appeals
● Cooperative Development Authority
● Insurance Commission
● National Tax Research Center
● Privatization and Management Office
● Philippine Export-Import Credit Agency
● Securities and Exchange Commission (SEC)
● Fiscal Incentives Review Board
Powers and Functions:
o Formulate goals, action plans and strategies for the Governments
resource mobilization effort;
o Formulate, institutionalize and administer fiscal and tax policies;
o Supervise, direct and control the collection of government revenues;
o Act as custodian of, and manage all financial resources of Government
o Manage public debt;
o Review and coordinate policies, plans and programs of GOCCs;
o Monitor and support the implementation of policies and measures on local
revenue administration;
o Coordinate with other government agencies on matters concerning fiscal,
monetary, trade and other economic policies; and
o Investigate and arrest illegal activities such as smuggling, dumping, illegal
logging, etc. affecting national economic interest.
F. Bureau of Treasury
➢ The Bureau of the Treasury (BTr) acts as principal custodian of the financial assets of
the national government. It makes funds available for various government programs
and projects. It assists in the formulation of policies on borrowing, investment, and
capital market development; in managing cash resources; in collecting taxes; and in
controlling and servicing public debt.

20
 Mandate:
Under EO No. 499:
o Assist in the formulation of policies in borrowing, investment and capital
market development;
o Formulate adequate operations guidelines for fiscal and financial policies;
o Assist in the preparation by government agencies concerned of an annual
program for revenue and expenditure targets, borrowing levels and cash
balances of National Government;
o Maintain books of accounts of the cash transactions;
o Manage the cash resources, collect taxes made by the National
Government (NG) and guarantee forward cover fees due NG, control and
service its public debt, both foreign or domestic;
o Issue, service, redeems government securities for the account of the
National Government as may be authorized by the President pursuant to
law;
o Administer the Securities Stabilization Fund by purchase and sale in the
open market of government bills and bonds to increase the liquidity and
stabilize the value of said securities in order to promote private investment
in government securities;
o Act as principal custodians of financial assets of the National Government,
its agencies and instrumentalities;
o Bond all accountable public officials and employees pursuant to the
provisions of the Public Bonding Law and issue appropriate guidelines
therefore; and
o Perform such related functions as may be assigned to it by competent
authorities.
Under Other Laws and orders and decrees:
o Certify allowable debt and guarantee;
o Manage contributions to the Bond Sinking Fund and the fund itself;
o Manage the Assurance Fund for the redemption of Land Reform Bonds;
o Manage the Agrarian Reform Fund;
o Offset the budgetary support to Government-Owned and Controlled
Corporations (GOCCs) their corporate cash dividend under R.A. 7656,
guarantee fees, advances for loans relent to GOCCs as well as for
obligations which are guaranteed by the NG and other valid receivables of
NG; and
o Initiate legal proceedings for escheat of unclaimed balances in favor of the
government.
G. Philippine Stock Exchange
➢ The Philippine Stock Exchange (PSE) facilitates efficient trading by providing a
regulated platform for buying and selling securities. It implements rules to ensure fair
and orderly trading (PSE Listing Rules).
➢ The PSE incorporated the Capital Markets Integrity Corporation (CMIC), a spinoff of
the Market Regulation Division, to monitor and penalize trading participants that
violate the Securities Regulation Code and its implementing rules and regulations;
the Anti-Money Laundering Law and its implementing rules and regulations; the Code

21
 of Conduct and Professional Ethics for Traders and Salesmen; CMIC Rules; and
other relevant laws and regulations. The CMIC shall also have the jurisdiction to
investigate and resolve trading-related irregularities and unusual trading activities
involving issuers based on complaints received, findings and reports. The CMIC
became operational in March 2012.
6. Investors
● An investor is any person or other entity (such as a firm or mutual fund) who commits
capital with the expectation of receiving financial returns. Investors utilize
investments in order to grow their money and/or provide an income during retirement,
such as with an annuity.

Figure 1.4. Investors vs Traders

Types of Investors
A. Personal Investors
o Most business owners usually depend on their close acquaintances, friends
or family to help them by investing in their business, normally during the initial
stages. These types of investors are called personal investors, and even
though they can assist with funding, there is a limit to how much they can
invest in a company.
o It is often easier to convince a loved one to help you out, but there is heavy
documentation that is required for which they can be taxed for helping as well.
So, if one will take a personal investor’s help, ensure to consult a lawyer to
help avoid any complications.
B. Angel Investors
o Angel investors are those who put their money in small startups or new
entrepreneurs. This is the most famous type of investors that most people
may have heard about before. An angel investor might even be close to the
startup owner, like friends or family.
o Angel investment is normally either a one-time off funding for the business to
propel, or an on-going investment to support and take the company ahead in
the initial stages. Angel investors usually offer much more favorable terms as
compared to the other type of investors. The reason is that angel investors
invest in the entrepreneur opening a business, and not the viability of the
company.
22
 o In short, angel investors are always focused on helping the startups to grow in
the initial stages instead of obtaining a profit from it. As a matter of fact, angel
investors are also referred to as business angels, seed investors, private
investors, angel funders, or information investors.
C. Venture Capitalists
o A venture capitalist (VC) is an investor who offers capital to the startups that
are believed to have long-term growth potential. Venture capitalists are
normally investment banks, well-off investors, and any other financial
institutions. Even though this is a risky way for investors to put in their funds,
a successful payoff is worth it.
o A VC would put their resources into a company that they feel has the
possibility to grow, and in return, they would demand equity in the company
and get an overall say in the company’s decisions. Since entrepreneurs get
both open funding as well as the advice of an experienced and
knowledgeable person, many tend to choose these type of investors.
o In a VC deal, large chunks of the ownership of the business are produced and
sold to some investors via independent limited partnerships which have been
built by venture capital firms. At times, these partnerships are made up of a
pool of various similar enterprises.
o An essential difference between the other equity deals and the venture capital
deals is that VC deals normally focus more on growing companies that are
looking for an abundance of funds for the first time. So, if you want a lot of
money for your startup, along with some long term experience and
knowledge, this option is a good one.
D. Others (Peer-to-Peer Lenders)
o Peer-to-peer lenders are groups or individuals who provide capital to small
business owners. But to obtain this capital from these type of investors, the
owners would need to apply with companies that are experts in peer-to-peer
lending, like the Lending Club or Prosper. As soon as the owner’s application
gets approved by the company, the lenders would then determine if the
company is right for their investment or not.

The overview of the roles of investors in the Philippine financial markets:

a) Capital Allocation
Investors supply capital to businesses and governments by purchasing stocks,
bonds, and other financial instruments. They direct funds to companies and projects with the
highest potential returns. This process helps optimize resource use and
supports economic growth. The funding supports corporate expansion, infrastructure
development, and public projects.

b) Portfolio Diversification
Investors diversify their portfolios across various asset classes and sectors to
manage risk and optimize returns. This diversification helps stabilize financial markets by
spreading risk across different investments.

23
c) Economic Stabilization:
Institutional investors, such as pension funds and insurance companies, contribute to
economic stability by maintaining long-term investment horizons and managing large pools
of capital in a way that supports market stability. Their confidence and market performance
can provide insights into broader economic health and business cycle phases.

Other resources:
"Financial Markets and Institutions" by Frederic S. Mishkin and Stanley G. Eakins
book provides an in-depth understanding of how investors influence financial markets and
the broader economy.
"The Philippine Financial System: An Overview" by the Bangko Sentral ng Pilipinas
(BSP) offers comprehensive information on the roles of investors within the Philippine
financial system.
"Introduction to Investments" by William F. Sharpe, Gordon J. Alexander, and Jeffrey
V. Bailey covers various investment roles and their impact on financial markets, including
those applicable to the Philippine context.

24
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