Detailed Analysis of Exchange Markets

Exchange Membership – stock exchanges have four categories of

membership
1. Specialists or exchange market makers – these people and the role
they play differ among exchanges. They are critical to the smooth
and efficient functioning of the market.
a. They serve as brokers to match buy and sell orders and to
handle special limit orders placed with member brokers.
b. They act as a dealer to maintain a fair and orderly market by
providing liquidity when the normal flow of orders is not
adequate.
c. They can enter either side of the market, depending on several
factors, including the trend of the market. They are expected
to buy or sell against the market when the prices are clearly
moving in one direction. Specifically, they are required to buy
stock for their own inventories when there is a clear excess of
sell orders and the market is definitely declining. Alternatively,
they must sell stock from their inventories or sell it short to
accommodate an excess of buy orders when the market is
rising.
2. Commission Brokers – are employees of a member firm who buy or
sell for the customers of the firm. When an investment firm receives
an order to buy or sell a stock, it transmits it to a commission
broker, who takes it to the appropriate trading post on the floor and
completes the transaction.
3. Floor Brokers – are independent members of an exchange who act
as brokers for other members.
4. Registered Traders – use their membership to buy and sell for their
own accounts. While they save commissions on their trading,
observers believe they provide the market with added liquidity, even
though regulations limit how they trade and many registered traders
can be in a trading crowd around a specialists booth at any time.

Types of Orders:
1. Market orders – an order to sell or buy a stock at the best current
price.
2. Limit order – the individual placing a limit order specifies the buy or
sell price. One must also indicate how long the limit order will be
 outstanding. A limit order can be instantaneous (fill or kill, meaning
fill the order instantly or cancel it). It can also be good for part of the
day, a full day, several days, a week or a month. It can be open-ended,
or good until cancelled.
3. Short sales – is the sale of a stock that you do not own with intent of
purchasing it back later at a lower price. Specifically, you would
borrow the stock from another investor through your broker, sell it in
the market, and subsequently replace it at a price lower than the price
at which you sold it.
4. Special orders:
a. Stop loss order – is a conditional market order whereby the
investor directs the sale of a stock if it drops to a given price.
b. Stop buy order – an investor who wants to minimize loss if the
stock begins to increase in value would enter this conditional buy
order at a price above the short-sale price. Usually used by short
sellers.
5. Margin Transactions – when investors buy stocks, they can pay for the
stock with cash or borrow part of the cost, leveraging the transaction.
Leverage is accomplished by buying on margin, which means the
investor pays for the stock with some cash and borrows the rest
through the broker, putting up the stock for collateral.

Security Market Indexes

1. Used to compute total returns and risk for an aggregate market or
some component off a market over a specified period of time and use
the computed return as a benchmark to judge the performance of
individual portfolios.
2. Used to develop an index portfolio
3. Used to measure aggregate market movements
4. Used as a proxy for the market portfolio of risky assets

Stock Market Indexes:

1. Price Weighted Index – is an arithmetic mean of the current prices.
Which means that index movements are influenced by the differential
prices of the components.
a. Dow Jones Industrial Average
b. Nikkei-Dow Jones Average
 2. Value – Weighted Index – is generated by deriving the initial total
market value of all stocks used in the index (market value = number of
shares outstanding x current market price)
3. Unweighted Index – all stocks carry equal weight regardless of their
price or market value. It is used by individuals who randomly select
stock for their portfolio and invest the same dollar amount in each
stock.
4. Global Equity Indexes
a. FT/ S&P- Actuaries World Indexes
b. Morgan Stanley Capital International Indexes
c. Dow Jones World Stock Index

The Philippine Stock Exchange (PSE) is the only stock exchange in the
Philippines. It is one of the oldest stock exchanges in Asia, having been in
continuous operation since the establishment of the Manila Stock Exchange
in 1927. It currently maintains a trading floor at the PSE Tower in Bonifacio
Global City, Taguig City. The PSE is composed of a 15-man Board of
Directors with Jose T. Pardo as Chairman.

The main index for PSE is the PSEi, which is composed of a fixed basket of
thirty (30) listed companies. The PSEi measures the relative changes in the
free float-adjusted market capitalization of the 30 largest and most active
common stocks listed at the PSE. The selection of companies in the PSEi is
based on a specific set of public float, liquidity and market capitalization
criteria. There are also six sector-based indices as well as a broader all
shares index.

Trading in the PSE is a continuous session from 9:30AM to 3:30PM daily

with a recess from 12:00PM to 1:30PM.

Why invest in the stock market?

Historical data as shown that investing in stocks over the long-term
provides superior returns. Stocks offer potentially higher yields compared
with fixed income instruments such as time deposits, government
securities and bonds. Moreover, here are the rationales behind stock
investing:
 a. Participation in the ownership of a company - An individual who invests
in the stock market automatically becomes a stockholder of a particular
listed company regardless of how many shares of stocks he/she holds.
As a stockholder, an investor is entitled to the following benefits: 1) voting
rights; 2) dividends to be declared by the company; and 3) share of the
remaining assets of the company if it is to be liquidated.

b. Liquidity of Funds - A stock market investor has an easier access to funds

given that he/she can always cash in or out his funds anytime, during
trading hours, through his/her stockbroker. Compared to banks which
require high minimum conditions or collaterals for deposits and credit,
an individual can start an investment for as low as P5,000. Note,
however, that the minimum amount of investment varies depending on
the stockbroker chosen and the stocks to be purchased.

c. Make money - The stock market is a good venue for an investor to grow
his/her money provided that he/she understands the basics of stock
investing. An investor can generate more money either through the cash
dividends declared by the listed company or through the price
appreciation of his/her shares over time - that is - assuming he/she
bought the shares at a low market price then selling it at a higher price.
An investor can also benefit from a listed company's stock dividend
declaration as the shares of stocks add up to their holdings at no
purchasing cost and can later be sold anytime he/she wishes.

What are the types of securities that can be bought in the stock market?
a. Common Stocks - These are usually purchased for participation in the
profits and control of ownership and management of the company.
Holders of common stocks have voting rights, and they are entitled to
an equal pro rata division of profits through dividends without
preference or advantage over another stockholder. However, they have
the last claim on dividends and are the last to collect in case of
corporate liquidation.

b. Preferred Stocks - As the name implies, preferred stocks carry benefits

that are above what is enjoyed by holders of common stocks. Holders
of preferred stocks, for one, receive dividends, to the extent agreed
upon, before any dividends are paid to the common stockholders.
Preferred stocks however, usually have a specified limited rate of
return or dividend and a specified limited redemption and liquidation
price.
 c. Warrants - A company can also raise additional capital by issuing
warrants. A warrant, normally issued on a detachable basis, allows its
holders the right, but not the obligation, to subscribe to new shares at
a set price during a specified period of time. It is usually provided free
of charge and traded separately in the stock market.

d. Philippine Deposit Receipts (PDRs) - A PDR is a security which grants

the holder the right to the delivery or sale of the underlying share and
to certain other rights including additional PDRs or adjustments to the
terms or upon the occurrence of certain events in respect of rights
issues, capital organizations, offers and analogous events or the
distribution of cash in the event of a cash dividend on the shares. PDRs
are not evidences or statements nor certificates of ownership of a
foreign/foreign-based company. For as long as the PDRs are not
exercised, the shares underlying the PDRs are and will continue to be
registered in the name of and owned by, and all rights pertaining to
the shares shall be exercised by the issuer.

e. Where to buy or sell shares of stocks?

In the Philippines, the only operating stock exchange is The Philippine
Stock Exchange, Inc. (PSE). Its main function is to facilitate the buying and
selling of stocks and other securities through its accredited stockbrokers or
trading participants.

The PSE’s trading floor is located at the PSE Tower in Bonifacio Global City,
Taguig City - where trading participants execute transactions daily from
9:30 AM to 12:00 NN and 1:30 PM to 3:30 PM, except Saturdays, Sundays,
legal holidays and days when the Bangko Sentral ng Pilipinas Clearing
Office is closed.

f. What is the trading system being used by PSE?

The PSE uses the PSEtrade XTS trading engine which runs on the X-stream
Trading technology of Nasdaq. PSEtrade XTS allows for multi-asset class
trading, expanded trading capacity, and enhanced risk management and
business continuity processes.

g. Do I need to have a physical evidence of my stock ownership?

The PSE through the Philippine Central Depository (PCD) uses the
computerized book-entry system to transfer ownership of securities from
one account to another, thus eliminating the need for physical exchange of
scrip between the buyer and seller. Scripless trading describes the system
where settlement is carried out via book-entries, rather than by the
 movement of physical certificates. However, you may still request for an
upliftment of your shareholdings to get a physical certificate.

h. What are the measures of market performance?

Market performance is typically measured by three indicators, namely,
market capitalization; value turnover; and index levels.

a. Market Capitalization - Market capitalization is the total market value of

all of a company's outstanding shares. It is calculated by multiplying the
company's shares outstanding by the current market price of the
company's share per piece. Market capitalization is an indicator used by
the investment community when determining a company's size. For
example, if a company has 35 million shares outstanding and each is
worth P100, then the company's market capitalization amounts to P3.50
billion.

b. Value Turnover - Value turnover is the amount of transactions in

monetary terms traded on a particular period. It tells how much money
is turned over from the trading of stocks. Value turnover is calculated by
adding up all the transaction value of all shares traded in a specified day,
month, quarter or even a year.

c. Index Level - The index level is a barometer by which the upward or

downward trend of a group of stocks is established. In the case of the
PSE, there are separate index levels for each of the six sector indices, all-
shares index and PSE index (PSEi). The index levels vary due to the listed
companies included per index and the different base years used when
each index was created.

i. Why do companies go public?

The primary purpose for the public listing of a company is to raise capital
in a cost-effective way. It provides the company another venue to tap
additional funds other than the traditional lenders like banks and other
financing institutions. In this way, the company can expand its business
without increasing debt or draining its cash reserves. Listing in the stock
exchange can also catapult the company and its products to public
awareness and interest, whether locally or abroad, and consequently
increase its customer base or attract new institutional investors for the
company.

j. How does the PSE regulate trading activities?

 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 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.

k. How can the PSE protect investors from price manipulation?

The CMIC oversees the market through a world-class and sophisticated
surveillance system called Total Market Surveillance (TMS), which was
developed by the Korea Exchange. TMS is equipped with the critical
elements of the surveillance process and provides a robust monitoring and
warning mechanism. It is designed to safeguard the integrity of the stock
market from fraud, manipulation, and breaches of marketplace rules. The
CMIC conducts investigation of unusual price and volume movements to
identify and sanction trading participants, issuers or investors who might
have committed unfair market practices.

CMIC, with the approval of the PSE President, shall have the power to
restrict, halt or suspend the trading of a listed security of an issuer or the
trading by a trading participant of a particular listed security in cases of
unusual trading activities or possible trading-related irregularities.

l. Are there other initiatives to safeguard investor interest?

• Through price fluctuation measures - The PSE enforces static and

dynamic thresholds to safeguard against unusual fluctuations in share
prices.

The Static Threshold enforces a 50% trading band within which the price
of a stock is allowed to move. When the stock price jumps 50% (price ceiling)
or falls 50% (floor price) on a particular day, to be reckoned from the last
closing price or the last adjusted closing price, the trading of the stock shall
be automatically frozen by the PSE upon reaching said limit, unless there
is an official announcement from the listed company or the proper
government agency which would justify such price fluctuations.

The Dynamic Threshold is the maximum allowable price difference between

an update in the Last Traded Price (LTP) of a given stock or group of stocks
 and its preceding LTP that is equal to a percentage set by the PSE, subject
to the classification of a stock or a group of stocks based on its trade
frequency. The Dynamic Threshold of a listed stock may vary from 10% ,
15% and 20% depending on its trade frequency.

• Through disclosures - Since timely and reliable company disclosures are

essential components of a fair and efficient market, the PSE also sees to
it that listed companies promptly disclose only factual and truthful
information. The PSE requires that material information, which may
affect a listed company's stock price positively or negatively, are disclosed
within 10 minutes after its occurrence. Disclosures must also be done
first to the PSE so that it will cascade information to every investor and
general public through its communication channels and not to a selected
group of individuals only. Non-compliance with or violations of the PSE
Disclosure Rules are heavily penalized with fines, trading suspension, or
even delisting from the PSE.

• Through the SIPF - Another tool created for the protection of investors is
the Securities Investors Protection Fund, Inc. or SIPF. The SIPF, which is
comparable to the Philippine Deposit Insurance Corporation providing
insurance for bank deposits, seeks to build and enhance investors'
confidence in the market and is envisioned to protect the investing public
from extraordinary losses, other than the ordinary market fluctuations,
arising as a result of fraud, failure of business, or judicial insolvency of
PSE-accredited stockbrokers. Protection to investors is automatic upon
the opening of an account with a PSE-accredited stockbroker and given
by way of compensation for trade-related obligations of stockbrokers to
its customers.

2. How should an investor consider the risks involved in investing?

Stock market investing does not guarantee returns every time, so investors
are best served to familiarize themselves with the risks involved. These risks
may come from company and economic developments here or abroad.
Robust economic growth, low inflation rates as well as stable interest rates
and foreign exchange rates are good news for the stock market. They
usually have a positive impact on market performance as these indicate a
sound macroeconomic environment. An opposite scenario in any of these
economic indicators could negatively affect the stock market.

Given the inevitable nature of risks in stock market investing, an investor

should then be able to limit and manage his/her risk expectations. An
investor can cope with this by setting the maximum level of gain or loss,
and calculated decisions should be made when this level is reached.
3. Do I need to keep track of my investment?
While an investment has been entrusted to a stockbroker, it is also the
investor's responsibility to spend time and effort in studying his/her
investments. An investor should keep track of the stock price and follow
closely the developments of the company through disclosures posted on the
PSE website as well as news from major newspapers, television, radio and
the Internet. The BGC office also maintains a Library which is open from
9:00 AM to 4:00 PM, Mondays to Fridays, should an investor want to do
research on his/her investments. Being informed helps an investor foresee
possible gains and losses and thus make sound and wiser investment
decisions.