This chapter covers what financial markets do, how they are classified (money vs capital, primary vs secondary, exchange vs OTC, order-driven vs quote-driven), how the foreign exchange, derivatives, commodity and bond markets work, the basics of bid, ask and order types, Singapore's market infrastructure, and the theory of market efficiency. Examiners test classification by scenario (who receives the money, which market a trade is in), FX and spread calculations, and, above all, which form of efficiency a given observation supports or contradicts. Get the nesting of the three forms right and most efficiency questions become mechanical.
10 sections·~5 min read
✓Checked against the SCI M8 syllabus (exam details page, Contents and Objectives), Fama (1970) Journal of Finance, Securities and Futures Act 2001, SGX clearing information and Catalist Rules chapter 4, MoneySense guide to shares, MAS SGS pages, checked 13 Sep 2026. Unofficial prep, not endorsed by MAS or SCI.
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Must-know for the exam
✓Money market: original maturity of one year or less (T-bills, commercial paper, CDs, repos, interbank loans). Capital market: more than one year (bonds) or no maturity (shares).
✓Primary market: new issues (IPO, placement, rights issue); the issuer receives the money. Secondary market: existing securities change hands; the issuer receives nothing.
✓Direct finance: savers hold the borrower's own securities, even if bought through a broker. Indirect finance: an intermediary such as a bank stands in between.
✓Exchange: centralised, standardised, transparent, cleared by a clearing house. OTC: bilateral, customised, dealer network, counterparty risk. Most bonds and FX trade OTC.
✓Broker = agent, paid commission. Dealer = principal, trades from inventory, earns the bid-ask spread and bears inventory risk.
✓Order-driven market: investors' orders matched in a central book. Quote-driven market: dealers or market makers quote bid and ask.
✓FX quote BASE/QUOTE: USD/SGD 1.3450 means US$1 = S$1.3450. If USD/SGD rises, USD appreciates and SGD depreciates, by different percentages.
✓Dealer quote 1.3440 / 1.3460: client sells the base currency at the bid (1.3440) and buys it at the ask (1.3460).
✓Buyer pays the ask; seller receives the bid. Spread % of midpoint = (ask - bid) / ((ask + bid) / 2).
✓Singapore, as at 13 Sep 2026: SGX standard settlement T+2 with book-entry delivery through CDP; standard board lot 100 units; Catalist is sponsor-supervised with no minimum track record, profit or share capital requirement; MAS regulates capital markets under the Securities and Futures Act 2001.
✓Efficient market: prices fully reflect available information and adjust quickly and without bias to new information (Fama, 1970).
✓Weak form: past prices and volume (technical analysis fails). Semi-strong: all public information (fundamental analysis of public data fails). Strong: all information including private (even insiders fail).
✓Forms are nested: strong implies semi-strong implies weak. A weak-form violation is also a semi-strong and strong-form violation; an insider-profit finding violates the strong form only.
✓Anomalies: January effect, small-firm effect, momentum, post-earnings-announcement drift. Any test is a joint test of efficiency and the expected-return model.
✓Efficiency favours low-cost passive investing and predicts active managers on average trail the market after fees; it does not mean prices are right in hindsight or that nobody beats the market by luck.
What financial markets do
•Financial markets move money from those with surplus savings to those who need funds, and they do several other jobs along the way. Exam questions describe an activity and ask which function it shows.
•Channel savings to investment: households' savings fund companies and governments.
•Price discovery: the orders of many buyers and sellers set a price that reflects their collective view of value.
•Liquidity: investors can sell holdings and get cash.
•Risk transfer: hedgers pass risks (currency, commodity price, interest rate) to others willing to bear them.
•Lower search and transaction costs: buyers, sellers and information meet in one place.
•Direct finance: the borrower sells its own securities to savers, who hold a claim on the borrower. Buying newly issued bonds through a broker is still direct, because the broker is only an agent. Indirect finance: an intermediary such as a bank, insurer or fund manager issues its own claims (deposits, policies, units) and invests the money itself. Intermediaries pool small sums, diversify across many borrowers and transform maturities. They do not remove risk.
•Trap: calling any transaction with a middleman indirect finance. Ask whose claim the saver ends up holding.
•Takeaway: Saver holds the issuer's security, direct finance. Saver holds a bank deposit or policy, indirect finance.
Money and capital markets, primary and secondary markets
Two classifications appear in almost every paper: by term, and by whether the security is new.
•Money market: original maturity of one year or less. SGS T-bills (six-month and one-year, issued at a discount, no coupon), commercial paper (short-term unsecured company debt), negotiable certificates of deposit, repos (secured short-term borrowing) and interbank loans. High liquidity, low price sensitivity to rates, still some credit risk depending on the issuer.
•Capital market: more than one year (bonds, including SGS bonds with semi-annual coupons) or no maturity (shares). Debt markets deal in contractual claims; equity markets in ownership claims.
•Primary market: new securities sold by the issuer, which receives the money. IPO (first public offer), placement (new shares to selected investors), rights issue (new shares offered to existing holders pro rata).
•Secondary market: existing securities trade between investors; the issuer receives nothing. It provides liquidity and prices, which make investors willing to buy new issues and help set issue prices.
•A listed company's rights issue is still a primary market issue. A 30% fall in a company's share price does not reduce the cash it raised at IPO; it only makes future equity raising more expensive.
•Trap: thinking government issuers belong only to the money market, or that buying a company's shares on SGX puts money into the company.
•Takeaway: Money market up to one year. Primary market pays the issuer; secondary market pays the selling investor.
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