EQUITY

SECURITY
MARKET
PRESENTED BY: GROUP 1
EQUITY SECURITY
MARKET
 EQUITY

01 02 03
Same with debt,
Refers to the investors can put
difference Represent out cash to
ownership purchase equity and
between the trade these in
assets and of a firm financial markets
liabilities of a through equity
instruments.
company.
 EQUITY INSTRUMENT

Type of financial instrument Most common example is

wherein the issuer “shares”
(company) agrees to pay
an amount to the investor in
the future based on the
SHARE – represents ownership of a company
future earnings of the
SHAREHOLDER OR STOCKHOLDER –
company.
individual or party who owns a share
STOCK CERTIFICATE – legal document which
certifies the ownership of specific number of
shares of a corporation, it is given to
stockholders.
 AUTHORIZED CAPITAL STOCK

01 02 03

Refers to the total PAR VALUE If NO PAR VALUE,

maximum amount stated is the nominal value of It does not have
in the Articles of share indicated in the authorized capital stock
Incorporation that can be face of stock certificate but it has an authorize
subscribed to or paid by number of shares it may
investors of a corporation issue.
if the shares have par
value
 OUTSTANDING SHARES
refers to the total shares of stock issued under binding subscription agreements to subscribers or
stockholders, whether partial or fully paid.

TREASURY SHARES
shares that are repurchased or brought back by the company from its stockholders

ISSUED SHARES
all shares issued by the company.
 MAJOR FORMS
OF BUSINESS
ORGANIZATIONS
SOLE PROPRIETORSHIP
• PARTNERSHIP
• CORPORATION
 MAJOR FORMS OF BUSINESS ORGANIZATION
– SOLE PROPRIETORSHIP

01 02
Individual personally No distinct personality
owns the business. from owner.

04 STEP 03
Full control on decision Unlimited liability.
making.
 MAJOR FORMS OF BUSINESS ORGANIZATION
– PARTNERSHIP

01 02
Formed when two or Separate legal entity
more person bind from partners
themselves to
contribute money
property or industry to STEP 03
a common fund with
the intention of dividing Unlimited Liability.
profits and ownership
among themselves.
 MAJOR FORMS OF BUSINESS ORGANIZATION
– CORPORATION

01 02
Legal entity has a Limited liability only up
personality separate to the extent of capital
and distinct from the contribution
owners/shareholders.
STEP 03
Ownership evidenced
through shares.
 CAPITAL APPRECIATION
Rise in value of asset in relation to the increase in its
market price

Since shares can be traded in secondary market,

WHY investors may sell shares they originally bought to the
other investors who are interested to buy. As long as

INVESTIN they agree on price, trade can occur.

Market prices of shares can be very versatile and may

EQUITY change from time to time.

INSTRUMENTS?
 DIVIDENDS
Payments made by corporations to shareholders
representing excess earnings by company.

Usually paid out quarterly, semi-annually or annually.

WHY Can be in form of cash, property, own shares of
company.
INVESTIN
May be restricted by covenants in loan agreement.

EQUITY Based on current performance of business.

INSTRUMENTS?
 COMPARISON
BETWEEN DEBT VS.
EQUITY.
 DEBT VS. EQUITY

DEBT EQUITY

Creditors or lenders Shareholders only have

possess the legal right to an expectation being
receive payment on the repaid in the future.
amount they invested or
lent out
 DEBT VS. EQUITY

DEBT EQUITY
Voice in Management No Yes

Claim on asset and

Prioritized over equity Subordinate to Debt
income

Type of financing Temporary Permanent

Risk Profile Lower at risk relative to equity High risk relative to debt
 DEBT VS. EQUITY

DEBT EQUITY
Return Expectation Lowered compared to equity Higher compared to equity

Dividends payment to shareholder cannot be

Can be used as a tax deductible expense
Tax Implication used as a tax deductible expense by the issuing
by the issuing company
company.
 TYPES OF SHARE
1. Preference Share.

Gives its holder distinct right

that enable them to be
prioritized over ordinary shares.
Dividends on preference
share are fixed, its share
price is usually stable.
Normally do not have voting
rights
Other features that may be included with preference share:

CUMULATIVE CALLABLE CONVERTIBLE

Allow the issuing

All dividends on arrears Allow shareholders to
corporation to retire or
together with the convert preference
repurchase outstanding
current dividend should share to a stated
share within a
be paid prior to paying number of ordinary
predetermined period
dividends to ordinary shares after a certain
of time at a specified
shareholders. date.
price.
 TYPES OF SHARE
2. Ordinary Share

Represents the true owners of

corporation
If upon liquidation, the
corporation has no leftover
asset, ordinary shareholders also
et nothing.
 Ordinary shares can be:

Privately Owned Closely Window Publicly Owned Widely Owned

or Publicly
Traded

Presumptive rights permits ordinary shareholder to retain their proportionate

ownership in the firm in case of new share issuance.
 Other types of ordinary shares

SUPERVOTING SHARES NON VOTING ORDINARY

SHARES
Shares that have multiple Shares that do not have
votes associated with one voting rights.
share.
PHILIPPINE STOCK
EXCHANGE
 PHILIPPINE STOCK EXCHANGE

• National and Sole Stock Exchange of

the Philippines.

• One of the oldest stock exchanges in

Asia starting in 1927.

• Currently situated in the PSE Tower

in Bonifacio Global City.

• It is composed of 15-man Board of

Directors, chaired by Jose T. Pardo
 PHILIPPINE STOCK EXCHANGE

• It was created in 1992 from the merger of Manila Stock Exchange established on
1927 and Makati Stock Exchange established on 1963.

• In June 1998, the Securities and Exchange Commission granted the PSE a “Self-
Regulatory Organization” (SRO) status

• In 2001, the PSE was transformed into a shareholder-based, revenue-earning

corporation headed by a President and a Board of Directors and eventually listed its
own shares in the exchange under the ticker PSE.
 PHILIPPINE STOCK EXCHANGE

● The PSE through the Philippine Central Depository (PCD) uses the
computerized book-entry system to transfer ownership of securities from one
person to another.

● Scripless Trading is a trading system where settlement is carried out via Book-
Entry System.
 PHILIPPINE STOCK EXCHANGE

● The PSE regulates trading activities through the Capital Markets Integrity
Corporation (CMIC) to monitor and penalize trading participants that violate the
Securities Regulation Code and its implementing rules and regulation

● 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
 PHILIPPINE STOCK EXCHANGE

● Other initiatives to safeguard interests of the investors include

• Enforcement of Static and Dynamic thresholds to protect against

unusual share price fluctuations.

• Disclosure requirement for publicly listed companies

• Securities Investors Protection Fund Inc. or SIPF

 General Criteria for Admission to Listing in the PSE

Track Record of Profitable

01 Operations
02
Exception to the 3 Year Track
Record Requirement
the company must have cumulative
consolidated earnings before • The company has been
interest, taxes, depreciation, and operating for at least 10 yrs
amortization (EBITDA) excluding prior to the filing and has a
nonrecurring items, of at least P50 cumulative EBITDA of at
Million for three full fiscal years. least P50 Million of at least 2
of the 3 fiscal years.
• The company is newly
formed holding company
which uses the operational
track record of its subsidiary
General Criteria for Admission to Listing in
the PSE
POSITIVE STOCKHOLDERS
03 EQUITY

MARKET CAPITALIZATION
04 Must be at least P500 Million

OPERATING HISTORY
05 Atleast 3 years

MINIMUM CAPITAL
06 REQUIREMENT
must have a minimum authorized
capital stock of P500 Million
 General Criteria for Admission to Listing in the PSE
MINIMUM OFFERING TO THE
07 PUBLIC
08
MINIMUM NUMBER OF
STOCKHOLDERS
MARKET
at least 1000 stockholders, each
PUBLIC OFFER
CAPITALIZATION owning stocks equivalent to at least one
board lot
33% or P50M whichever is
Not exceeding P500 M higher
09 MARKET CAPITALIZATION
Full Payment of Issued and
Over P500 M to P1B 25% or P100M whichever is
higher
10 Outstanding Shares
Investor Relation Program
Over P1B to P5B
20% or P250M whichever is
higher
11 A company that incurs negative stockholders’
equity for (3) three consecutive years shall be
15% or P750M whichever is
Over P5B to P10B
higher
subject to delisting. The delisting of the
company’s securities shall take effect thirty
10% or P1B whichever is (30) days from approval by the PSE Board of
Over P10B
higher
Directors of the said delisting.
PSE – Disclosure Rules

Structured Continuing
Disclosures
reportorial requirements submitted within
specific time frames

Unstructured Continuing Disclosures

communications of corporate
developments as they happen
STOCK MARKET
 STOCK MARKET
is a type of security that signifies
proportionate ownership in the issuing
corporation. This entitles the
stockholder to that proportion of the
corporation's assets and earnings.
 STOCK MARKET
• Is composed of exchanges and
over the counters where shares are
issued and traded publicly.
• Can be both primary and
secondary market.
STOCK MARKET
are representatives of
is the physical site different brokerage firms,
facilitates stock STOCK FLOOR meet at the trading post on
brokers to trade EXCHAN TRADE the exchange and gather the
current bid and ask prices.
company stocks and GE
other securities.
RS The quoted prices are called
out loud.

refers to the market wherein OVER- operates the OTC

shares can be traded by THE- market and
DEALERS
dealers that are connected COUNTER responsible to set bid
electronically by computers.
MARKET and ask prices.
Exchange-Trade Funds (ETF)
Are listed and can be traded as
individuals shares in the
exchange.
Often indexed instead of being
actively managed.
ETFs valued based on the
underlying net asset value of the
shares inside the index portfolio.
Stock market index measure the overall
performance of a stock market represents
the average of stock prices currently being
traded.
Bull market or Bullish is if stock prices
increase more than 20%.
Bear market or Bearish is if stock prices
decline more the 20%.
36
 London Stock Stock
Exchange Exchange
NYSE
Hong Kong
Euronext
Exchanges
(Europe)
NASDAQ STX Group
OMX (Canada)

BME
Tokyo SE
Spanish
Group
Exchanges

New York
BM &
Stock
Exchange FBOVESPA
10 largest stock markets in the world
37
 PLATFORM OF
CAPITAL MARKET
 PLATFORM OF CAPITAL
MARKET
Conventional Brokerage
Where investors buy or sell shares by opening an account with a
stockbroker. The broker will buy and sell shares in behalf of investor
in exchange for payment called commission.

Online Trading
Digital platforms to trade shares. Online broker typically change lower
commission compared to conventional brokers.

Mutual Funds
- Are an investment company that pools money from various investors
and invests them to different securities based on the investment
objective of the fund.
- It allow inventors to diversify their portfolio.
 MARKET CAPITALIZATION,
SHARE VALUATION,
ONE-PERIOD OR MULTIPLE
PERIOD VALUATION MODEL,
ZERO-GROWTH MODEL
 MARKET CAPITALIZATION

• Refers to the total market value of all

outstanding shares of company,
• Important indicator used by investors to
determine a size of the company,
• Allows investors to benchmark the relative
size of a company against another.
 SHARE VALUATION

• How much cash flow can be received in

the future if the investor purchases the
share now,
• Present value of the future cash flows that
can be received from an investment.
 ONE-PERIOD OR MULTIPLE PERIOD
VALUATION MODEL

• If the investor intends to sell the share after a fixed number

of years, he/she only needs to consider the dividend he/she
expects to receive during the time he/she holds the shares.

𝐶𝐹1 𝐶𝐹2 𝐶𝐹∞

• 𝑃𝑜 = + +…
(1+𝑟𝑠)^1 (1+𝑟𝑠)^1 (1+𝑟∞)^∞
 DIVIDEND-BASED VALUATION TECHNIQUE

Can be further interpreted by anticipating how much

dividend will grow in the future.

𝐷1 𝐷2 𝐷∞
𝑃𝑜 = + +…
(1+𝑟𝑠)^1 (1+𝑟𝑠)^2 (1+𝑟∞)^∞
 ZERO-GROWTH MODEL

• Assumes that dividend will be fixed and not change

anymore in the future
• Simplest approach in valuation model
• Useful in valuing preferred shares since the dividend
is already fixed upon issuance
 CONSTANT GROWTH MODEL,
VARIABLE GROWTH MODEL,
FREE CASH FLOW APPROACH
AND BOOK VALUE PER SHARE
APPROACH
CONSTANT
GROWTH
MODEL
The constant growth model or
the Gordon model (named after
Myron Gordon) is the most
widely known model used in
share valuation
 𝐷1
𝑃𝑜 =
𝑟𝑠 − 𝑔
Where
Po = value of stock today
Dt = expected dividend per share at end
of year 1
rs = required return on ordinary share
g = expected dividend growth rate
ILLUSTRATION
Juan, an investor, is looking at YEAR DIVIDEND PER
investing and buying shares SHARE
from Maroon Company, a
publicly listed company. 2018 2.80
Based on publicly available 2017 2.58
information, Juan was able to 2016 2.40
compile the following dividend
data for the last 6 years. 2015 2.24
2014 2.10
2013 2.00
Based on the available historical information, Juan believed that the historical
annual growth rate of dividends is a good indicator of the future constant
growth rate of the dividends. This can be computed through the use of the
compounded annual growth rate (CAGR) formula. CAGR measures the
compounded average growth for several periods covered by the analysis.

𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑, 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑 1

𝐶𝐴𝐺𝑅 = ( )𝑛−1 −1
𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑓𝑖𝑟𝑠𝑡 𝑝𝑒𝑟𝑖𝑜𝑑 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒

where n = number of years considered in the analysis.

VALUATION
GROWTH
MODEL
An inherent limitation associated with the zero-
growth and constant growth model is does not
allow flexibility in terms of growth rate
expectations. Since future growth rates may go
up or down as a result of changes in economic
conditions, a variable growth model was
developed to incorporate changes in growth rate
in the valuation
There are four steps involved in the variable growth model

STEP 1 STEP 2 STEP 3 STEP 4

Determine value of Compute for the At the end of the Lastly, add the
expected cash present value of the initial growth period, computed present
expected dividends determine the value value of the expected
dividends at the end of
during the initial of he stock (from that dividends during the
each year using the
growth period. point to infinity) using initial growth period
initial growth rate the constant growth and the computed
assumption. To model. The value of the stock at
compute for this, apply assumption here is the end of the initial
the GRA on the current that from this point growth period.
dividend and do this on onwards, dividend will
grow at a constant
year on year
pace.
ILLUSTRATION
Arya Company is contemplating whether to buy shares in Stark Company.
Stark Company recently paid dividends of P3 per share. After carefully
studying the business of Stark Company, Arya came up with the estimate
that dividends may grow at 5% annual rate in the next three years. At the end
of the next three years, Arya expected that the market will mature, and
organic growth will only lead to a constant 3% dividend growth in the
foreseeable future, Arya uses 12% required return in evaluating his
investments.
FREE CASH
FLOW
It is an alternative of using dividend-based share
valuation techniques. Free cash flow refers to the
cash flow that are available for debt creditors and
shareholders after satisfying all other operating
obligations. It is useful when computing the value
of start up companies, companies without any
dividend history or the operating division of a
large company.
FREE CASH
FLOW

𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑛𝑡𝑖𝑟𝑒 𝑐𝑜𝑚𝑝𝑎𝑛𝑦

− 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡
− 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒𝑠
𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠
BOOK
VALUE PER
SHARE
Book value per share refers to the amount per
share that will be received if all the company’s
asset are sold based on its exact book or
accounting values and whose proceeds will go
to ordinary shareholders after satisfying claims
from creditors and preference shareholders
BOOK
VALUE PER
SHARE
𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠
−𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
−𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒𝑠 𝑠ℎ𝑎𝑟𝑒𝑠
𝑏𝑣 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 =
𝑡𝑜𝑡𝑎𝑙 𝑛𝑜. 𝑜𝑓 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠
ILLUSTRATION
At the end of 2018, the balance sheet of Selena Company showed total
assets of P3 million, total liabilities of P2 million pesos, preference shares of
P500 thousand and 100,000 outstanding shares.
LIQUIDATION VALUE
PER SHARE
LIQUIDATION VALUE PER SHARE

Liquidation Value per share pertains to

the actual amount per share that will be
received if all assets are sold based on
their current market value and all
liabilities (including preferred shares)
are fully paid and the proceeds are
divided between remaining
shareholder.
LIQUIDATION VALUE PER SHARE

Liquidating Value is more realistic

approach compared to book value since
this approximates that assets will be
sold based on its market value.
However, this approach still lacks any
consideration on the future earning
potential of the company.
 ILLUSTRATION

Upon further evaluation, Manash Company found out that the assets can be realized
for $2,700,000, lower that its book value of $3,000,000. Based on this data, liquidation
value per share will be at

2,700,000−2,000,000−500,000
Liquidation value per share =
100,000

200,000
Book Value per share =
100,000

Book value per share = $2 per share

PRICE EARNINGS (P/E) MULTIPLES

 The P/E multiple method uses the price-

earnings ratio to compute for the share
price. The P/E ratio shows the amount
that the investors are willing to pay for
each peso of earnings.

 The P/E multiples is a very popular

approach in estimating how much
shares of a firm through the same
methodology assuming the average
firmin the industry is valued.
PRICE EARNINGS (P/E) MULTIPLES

 The P/E multiple is computed by

multiplying the expected EPS of the
company by the average P/E ratio for
the industry where the company is
similar.

 One advantage of the P/E multiples

approach is its simplicity. Share value
can be easily computed using this
method once companies announce how
much they earn for the historical year.
PRICE EARNINGS (P/E) MULTIPLES

 P/E multiples is very helpful in valuing

non-publicly traded companies since
not much relevant information is
available. Still, P/E multiple can still be
used in valuing publicly traded
companies. The P/E multiples approach
is treated as a better methodology
compared to book value per share and
liquidating value share since it
considers expected earnings of the
firm. Firms in the same industry are
expected to have similar PE ratios in the
long run.
PRICE EARNINGS (P/E) MULTIPLES

A higher than P/E ratio may mean two

things:

 Market is expecting company earnings

to increase in the future which will pull
down P/E to the normal level or

 Market feels that company earnings

has low risk and investors are willing to
pay premium for them.
LIMITATIONS OF VALUATION SHARES

Valuation models often measure share

value at a specific point in time
according to the projected return and
risk at the moment. Any decision that
investors or the issuing company may
take can change the variable and
ultimately, the value per shares.
LIMITATIONS OF SHARE VALUATION

CHANGES IN RISK/REQUIRED RETURN

Actions taken by management that will increase risk
CHANGES IN EXPECTED DIVIDENDS will cause share value to decline. Changes in risk is
inversely proportional to share value.
Increase in expected dividends brought upon by
positive management actions will increase the firm’s
value under the assumptions that associated risk is
unchanged. This means that changes in expected
dividends has direct relationship with share value.
 LIMITATIONS OF SHARE VALUATION

PROBLEMS WITH RISK ESTIMATION

Since share price is highly dependent on required
PROBLEMS WITH GROWTH ESTIMATION return, any minute error in risk estimations may
result in a different share price.
Estimating future growth using historical data may
fail to account for present changes in the company
or economy that might influence the growth rate.
LIMITATIONS OF SHARE VALUATION

PROBLEMS WITH DIVIDEND FORECASTING

Many factors can influence dividend payout such as future
growth opportunities and management’s concern regarding
future cash flow. Investors may find it difficult to accurately
forecast dividends as declaration in highly dependent on the
decision of board of directors
RELEVANCE OF SHARE VALUATION TO
INVESTORS

In the stock market, share prices are usually set by the

buyer who are willing to pay the highest price. Market
prices are set by buyers who can take advantage of the
asset. If buyers think that they can do more with the
investment, they are willing to pay for it even if they
push the price higher.
RELEVANCE OF SHARE VALUATION TO
INVESTORS

Distinctively, prices computed in our share valuation

techniques may or may not approximate the price that
us set for the share in the stock market. Nevertheless,
share valuation techniques are very important to
investors since it gives them a sense whether being
offered for a share is reasonable or not.
RELEVANCE OF SHARE VALUATION TO
INVESTORS

If the market price is lower than price computed through

the models, the share is considered cheap or
undervalued. Otherwise, if market price is higher than
the computed price, it is considered costly or
overvalued. A share that is traded at a price close to its
computed price is considered as fairly valued. Investors
tend to buy shares when they are undervalued(to profit
off when price becomes higher) and sell shares they
feel overvalued (to cut off loss in case of decline
towards the fair price.
 MARKET
EFFICIENCY
MARKET
EFFICIENCY OF
SHARES

Phenomena wherein the As new information MARKET PRICE OF

flow of information is comes available, a new SHARES – the
constant which leads to equilibrium price is set collective actions that
flunctuations in share and becomes the new sellers and buyers
prices to reflect impact market price of shares undertake based on
of the new information currently available
received information
 • Developed by John Muth
• Describes the behavior of a perfect market
The EMH Theory says that:
1. Securities are typically in equilibrium
2. At any point in time, security prices fully reflect all
information available about firm
3. Because stocks are fully and fairly priced, investors need
not waste their time to find mispriced securities
• Other securities that can be traded in the
capital markets with the intention of migitating
potential risks
• Helps investors to diversify their portfolios to
maximize returns
• Helps issuing companies choose what
securities to offer to achieve business
objectives
Financial instruments that carry that carry characteristics of both debts (i.e
fixed contractual payment) and equity (ownership features)
1. Stock purchase warrants – instruments that grant the holder a chance
to buy or sell a specific number of shares of the issuer at a specified price
for a given period
• Warrants
• Stock Right
2. Convertible Securities – bonds that can be converted into a specified
number of ordinary shares
Securities that are not debt nor equity but
derives its value on an underlying asset which is
another security.

Most popular type of derivative Securities:

Options – financial instruments that grant the
holder a chance to buy or sell a specific asset
at a set price or before an expiration date