CAPITAL MARKET

 The market where investment instruments like bonds,

equities and mortgages are traded.
 The primal role of this market is to make investment from
investors who have surplus funds to the ones who are
running a deficit.
 The capital market, as it is known, is that segment of the
financial market that deals with the effective channeling of
medium to long-term funds from the surplus to the deficit
unit. The process of transfer of funds is done through
instruments, which are documents (or certificates), showing
evidence of investments.

Bonds – is an instrument of indebtedness of the bond issuer to

the holders. The most common types of bonds
include municipal bonds and corporate bonds.
bonds can be in mutual funds or can be in private investing
where a person would give a loan to a company or the
government.
Equities – are the same as stocks, which are shares in a
company. That means if you buy stocks, you're
buying equities.
Mortgages - a legal agreement by which a bank or other creditor
lends money at interest in exchange for taking title of the
debtor's property, with the condition that the conveyance of
title becomes void upon the payment of the debt.

The instruments traded (media of exchange) in the capital market

are:

1. Debt Instruments

A debt instrument is used by either companies or governments to

generate funds for capital-intensive projects. It can obtain either
through the primary or secondary market. The relationship in this
form of instrument ownership is that of a borrower – creditor and
thus, does not necessarily imply ownership in the business of the
borrower. The contract is for a specific duration and interest is
paid at specified periods as stated in the trust deed* (contract
agreement). The principal sum invested, is therefore repaid at the
expiration of the contract period with interest either paid quarterly,
semi-annually or annually. The interest stated in the trust deed
may be either fixed or flexible. The tenure of this category ranges
from 3 to 25 years. Investment in this instrument is, most times,
risk-free and therefore yields lower returns when compared to
other instruments traded in the capital market. Investors in this
category get top priority in the event of liquidation of a company.

When the instrument is issued by:

 The Federal Government, it is called a Sovereign Bond;

 A state government it is called a State Bond;

 A local government, it is called a Municipal Bond; and

 A corporate body (Company), it is called a Debenture,

Industrial Loan or Corporate Bond

2. Equities

This instrument is issued by companies only and can also be

obtained either in the primary market or the secondary
market. Investment in this form of business translates to
ownership of the business as the contract stands in perpetuity
unless sold to another investor in the secondary market. The
investor therefore possesses certain rights and privileges (such
as to vote and hold position) in the company. Whereas the
investor in debts may be entitled to interest which must be paid,
the equity holder receives dividends which may or may not be
declared.

The risk factor in this instrument is high and thus yields a higher
return (when successful). Holders of this instrument however rank
bottom on the scale of preference in the event of liquidation of a
company as they are considered owners of the company.

3. Preference Share

This instrument is issued by corporate bodies and the investors

rank second (after bond holders) on the scale of preference when
a company goes under. The instrument possesses the
characteristics of equity in the sense that when the authorized
share capital and paid up capital are being calculated, they are
added to equity capital to arrive at the total. Preference shares
can also be treated as a debt instrument as they do not confer
voting rights on its holders and have a dividend payment that is
structured like interest (coupon) paid for bonds issues.

Preference shares may be:

 Irredeemable, convertible: in this case, upon maturity of the

instrument, the principal sum being returned to the investor
is converted to equities even though dividends (interest) had
earlier been paid.

 Irredeemable, non-convertible: here, the holder can only sell

his holding in the secondary market as the contract will
always be rolled over upon maturity. The instrument will also
not be converted to equities.

 Redeemable: here the principal sum is repaid at the end of a

specified period. In this case it is treated strictly as a debt
instrument.
Note: interest may be cumulative, flexible or fixed depending on
the agreement in the Trust Deed.

4. Derivatives (a financial security with a value that is reliant

upon or derived from underlying assets – a benchmark. The
derivatives itself is a contract between two or more parties, and
the derivative derive its price from fluctuations in the underlying
asset.

These are instruments that derive from other securities, which are
referred to as underlying assets (as the derivative is derived from
them). The price, riskiness and function of the derivative depend
on the underlying assets since whatever affects the underlying
asset must affect the derivative. The derivative might be an asset,
index or even situation. Derivatives are mostly common in
developed economies.

 Nature of capital market

The nature of capital market is brought out by the following facts:

 It Has Two Segments
 It Deals in Long-Term Securities
 It Performs Trade-off Function
 It Creates Dispersion in Business Ownership
 It Helps in Capital Formation
 It Helps in Creating Liquidity

MAJOR SUPPLIERS OF FUNDS IN THE CAPITAL MARKET

1. COMMERCIAL BANKS.
2. INSURANCE COMPANIES.
3. BUSINESS CORPORATIONS.
4. RETREMENT FUNDS.
 MAJOR BORROWERS IN THE CAPITAL MARKET
1. TREASURY DEPARTMENTS.
2. CORPORATIONS.
3. SECURITIES DEALERS.

 Types of capital market

There are two types of capital market:

 Primary market,
 Secondary market

 Primary Market
- It is that market in which shares, debentures and other
securities are sold for the first time for collecting long-term
capital.
- This market is concerned with new issues. Therefore, the
primary market is also called NEW ISSUE MARKET.
- In this market, the flow of funds is from savers to borrowers
(industries), hence, it helps directly in the capital formation of
the country.
- The money collected from this market is generally used by
the companies to modernize the plant, machinery and
buildings, for extending business, and for setting up new
business unit.

Features of Primary Market

- It Is Related with New Issues
- It Has No Particular Place
- It Has Various Methods of Float Capital:
Following are the methods of raising capital in the primary
market:
i) Public Issue
ii) Offer for Sale
 iii) Private Placement
iv) Right Issue
iv) Electronic-Initial Public Offer
- It comes before Secondary Market

 Secondary Market
- The secondary market is that market in which the buying and
selling of the previously issued securities is done.
- The transactions of the secondary market are generally done
through the medium of stock exchange.
- The chief purpose of the secondary market is to create
liquidity in securities.
- If an individual has bought some security and he now wants
to sell it, he can do so through the medium of stock
exchange to sell or purchase through. the medium of stock
exchange requires the services of the broker presently.

Features of Secondary Market

It Creates Liquidity
It Comes After Primary Market
It Has a Particular Place
It Encourages New Investments
SEC is an independent federal government regulatory agency
responsible for protecting investors, maintaining fair and orderly
functioning of the securities markets, and facilitating capital
formation.

How the Securities and Exchange Commission (SEC) Works

The SEC's primary function is to oversee organizations and
individuals in the securities markets, including securities
exchanges, brokerage firms, dealers, investment advisors, and
investment funds. Through established securities rules and
regulations, the SEC promotes disclosure and sharing of market-
related information, fair dealing, and protection against fraud. It
provides investors with access to registration statements, periodic
financial reports, and other securities forms through its electronic
data-gathering, analysis, and retrieval database, known
as EDGAR.

STOCK EXCHANGE COMPANIES

• If an individual has some financial security and he wills to sell it,
he can approach the Stock Exchange Companies which will help
him to sell or purchase his security by the means of a Broker.
Philippine Stock Exchange Composite Index
Philippine Stock Exchange Composite Index (PSEi) is the main
stock index of the Philippine Stock Exchange (PSE).
PSEi is computed using a weighted mean of the top 30 publicly
traded companies in the Philippines, called component stocks.
 Aboitiz Equity Ventures, Inc. – sector: Holding Firms
 Aboitiz Power Corp. – sector: Energy & Utilities
 Alliance Global Group, Inc. – sector: Holding Firms
 Ayala Corporation – sector: Holding Firms
 Ayala Land, Inc. – sector: Real Estate
 Bank of The Philippine Islands – sector: Finance
 BDO Unibank, Inc. – sector: Finance
 DMCI Holdings, Inc. – sector: Holding Firms
 First Gen Corporation – sector: Energy & Utilities
 Globe Telecom, Inc. – sector: Telecommunications
 GT Capital Holdings, Inc. – sector: Holding Firms
 International Container Terminal Services, Inc. – sector:
Transportation & Logistics
 JG Summit Holdings, Inc. – sector: Holding Firms
 Jollibee Foods Corporation – sector: Food & Beverages
 LT Group, Inc. – sector: Holding Firms
 Manila Electric Company – sector: Energy & Utilities
 Megaworld Corporation – sector: Real Estate
 Metro Pacific Investments Corporation – sector: Holding Firms
 Metropolitan Bank & Trust Company – sector: Finance
 Petron Corporation – sector: Energy & Utilities
 Philippine Long Distance Telephone Company – sector:
Telecommunications
 Puregold Price Club, Inc. – sector: Commerce
 Robinsons Land Corporation – sector: Real Estate
 Robinsons Retail Holdings, Inc. – sector: Commerce
 San Miguel Corporation – sector: Food & Beverages
 Security Bank Corporation – sector: Finance
 SM Investments Corporation – sector: Holding Firms
 SM Prime Holdings, Inc. – sector: Real Estate
 Semirara Mining And Power Corporation – sector: Mining /
Energy & Utilities
 Universal Robina Corporation – sector: Food & Beverages