Republic of the Philippines

SORSOGON STATE COLLEGE

Bulan Campus
Bulan, Sorsogon

Financial Markets

Schedule: N/A

Lesson No: 9

Learning Objective:
1) To know the basic concepts about stocks
2) To know the different functions of Stock Market
3) To know the different types of stock market securities

Key Concepts:

 STOCK MARKET DEFINED

 The Stock Market refers to the collection of markets and exchanges where regular
activities of buying, selling, and issuance of shares of publicly-held companies take
place. Such financial activities are conducted through institutionalized formal
exchanges or over-the-counter (OTC) marketplaces which operate under a
defined set of regulations. There can be multiple stock trading venues in a country
or a region which allow transactions in stocks and other forms of securities.

 Stock markets provide a secure and regulated environment where market

participants can transact in shares and other eligible financial instruments with
confidence with zero- to low-operational risk. Operating under the defined rules
as stated by the regulator, the stock markets act as primary markets and
as secondary markets.

 FUNCTIONS OF STOCK MARKET

 The following are the functions of Stock Market:

1) Fair Dealing in Securities Transactions: Depending on the standard rules of

demand and supply, the stock exchange needs to ensure that all interested
market participants have instant access to data for all buy and sell orders
thereby helping in the fair and transparent pricing of securities. Additionally,
it should also perform efficient matching of appropriate buy and sell orders.
 2) Efficient Price Discovery: Stock markets need to support an efficient
mechanism for price discovery, which refers to the act of deciding the proper
price of a security and is usually performed by assessing market supply and
demand and other factors associated with the transactions.

3) Liquidity Maintenance: While getting the number of buyers and sellers for a
particular financial security are out of control for the stock market, it needs to
ensure that whosoever is qualified and willing to trade gets instant access to
place orders which should get executed at the fair price.

4) Security and Validity of Transactions: While more participants are important

for efficient working of a market, the same market needs to ensure that all
participants are verified and remain compliant with the necessary rules and
regulations, leaving no room for default by any of the parties. Additionally, it
should ensure that all associated entities operating in the market must also
adhere to the rules, and work within the legal framework given by the
regulator.

5) Investor Protection: Along with wealthy and institutional investors, a very

large number of small investors are also served by the stock market for their
small amount of investments. These investors may have limited financial
knowledge, and may not be fully aware of the pitfalls of investing in stocks and
other listed instruments. The stock exchange must implement necessary
measures to offer the necessary protection to such investors to shield them
from financial loss and ensure customer trust.

6) Balanced Regulation: Listed companies are largely regulated and their

dealings are monitored by market regulators, like the Securities and Exchange
Commission (SEC) of the U.S. Additionally, exchanges also mandate certain
requirements – like, timely filing of quarterly financial reports and instant
reporting of any relevant developments - to ensure all market participants
become aware of corporate happenings. Failure to adhere to the regulations
can lead to suspension of trading by the exchanges and other disciplinary
measures.

 STOCK MARKET SECURITIES

 There are two major types of corporate stocks. The Common Stocks (Ordinary
Shares) and the Preferred Stocks. All corporations have common stocks but some
corporations do not issue preferred stocks.

 COMMON STOCK is the fundamental ownership claim in a public or private

corporation. Common Stocks have the following characteristics:
 1) Discretionary Dividend Payments- Since common stockholders own a part of
a company, they benefit when the company is profitable. Common
stockholders have the right to receive dividends if the Board of Directors elects
to declare them. With this, it is imperative that the dividend payment due to
stockholders mainly depend upon the decision of the Board. This discretion,
however, is regulated by law wherein corporations are required to issue a
certain part of its retained earnings as dividends.

2) Voting Privileges- As a partial owner, common stockholders have the

ability to weigh in on certain company issues. It's unlikely that many
common stockholders will get a say in day-to-day operating
decisions, but they can vote at annual general meetings.

3) Less Priority during Bankruptcy- Compared to other stakeholders,

common stockholders are unlikely to receive any compensation
when a company goes under. If a company liquidates and has any
remaining assets, it first must use them to pay off debt holders, like
lenders and bondholders. After that, it will pay back preferred
stockholders for their investment

 PREFERRED STOCK is a type of stock that typically doesn't have voting rights,
receives set dividends and trades at a different price than common stock.
Preferred stock pays preferred shareholders a fixed, periodic preferred
dividend. Preferred Stocks have the following characteristics:

1) Regular Dividend Payments- preferred stock guarantees regular

payments of a preferred dividend. Many investors invest in preferred
stock when looking for a steady cash income.

2) Creditor-Like Rights and Liabilities- Like creditors that provide debt

financing without having control over company operations, preferred
shareholders are also granted no voting rights over management issues.
Preferred stock as non-voting equity does not bear the ultimate liability
of a company's failure. In a liquidation and bankruptcy proceedings,
both creditors and preferred shareholders get preferential treatment
over holders of common stock.

3) Stock-Like Exchange Trading- Like common stock, preferred stock as part

of the owner's equity is also exchange listed and traded. Its trading can
be directly affected by corporate earnings, particularly for preferred
stock that features earnings participation. In addition to receiving fixed
 income, this kind of preferred stock may further share company profits
with common stock, a feature that pure debt securities do not have.

References: Financial Markets and Institutions by Saunders and Cornett

https://www.investopedia.com/terms/s/stockmarket.asp
https://www.sapling.com/5505668/characteristics-common-stock

Prepared by

Name: Dominic Jason F. De Jesus

Position/Rank: Instructor 1
Institution: Sorsogon State College, Bulan Campus
Institution’s Address: Bulan, Sorsogon
Personal e-mail address: dejesusdj04@gmail.com
Personal mobile phone number: 0917 153 4102