MODULE 7

The Stock Market: Chapter Overview

I. Stock Market Securities

a. Common Stock

b. Preferred Stock

II. Primary and Secondary Stock Markets

III. Stock Market Participant

IV. Other Issues Pertaining to Stock Market

V. International Aspects of Stock Markets

Group 4
Andaya, Nathalie Gayle
Agasid, Jeff
Castillo, Aerielle Mae
Cariño, Reana
Rabago, Lovely Jean
Sibayan, Joshua RJ
Umerez, Katrine Alyssah
Velasquez, Jan Lloyd
 Stock Markets
OVERVIEW
 Stock markets allow suppliers of funds to efficiently and cheaply get equity funds
to public corporations (users of funds). In exchange, the fund users (firms) give
the fund suppliers ownership rights in the firm as well as cash flows in the form
of dividends. Thus, corporate stock or equity serves as a source of financing for
firms, in addition to debt financing or retained earnings financing.

COMMON STOCK
 is primarily a form of ownership in a corporation, representing a claim on part of
the company's assets and earnings.
 can be bought and sold by investors or traders, and common stockholders are
entitled to dividends when the company's board of directors declares them.

The first-ever common stock was issued in 1602 by the Dutch East India
Company and traded on the Amsterdam Stock Exchange. Over the following four
centuries years, stock markets have been created worldwide, with major exchanges like
the London Stock Exchange and the Tokyo Stock Exchange listing tens of thousands of
companies.

ADVANTAGES DISADVANTAGES
 More frequently traded than  May not receive dividends
preferred stock
 Higher potential returns  Lower priority to receive dividends
or in the event of bankruptcy
 Voting rights  More price votality

COMMON STOCK IN TERMS OF;

1. VOTING RIGHTSLIQUID PREFERENCE

o Holders have voting rights in the company and can participate in decisions about
corporate policies and the election of the board of directors.
2. DIVIDENDS
 o Not guaranteed and are paid out at the board of directors' discretion.
3. LIQUID PREFERENCE

o Holders are last in line to claim any remaining assets, following bondholders and
preferred stockholders.
4. CONVERTIBILITY
o Cannot be converted into other forms of security.
5. VOLATILABILITY
o Generally, more since it is more alert to company performance and market
conditions.
6. MARKET PARTICIPATION
o Holders benefit directly from increases in the company's value.

PREFERRED STOCK
 Is a highbred security that has characteristics of both a bond and a common
stock.
 is senior to common stock but junior to bonds.
 often have no maturity date, but they can be redeemed or called by their issuer
after a certain date.
 Preferred stockholders generally do not have voting rights in the firm. An
exception to this rule may exist if the issuing firm has missed a promised
dividend payment.
TYPES OF PREFERRED STOCK
1. Nonparticipating preferred stocks
o preferred stock dividend is fixed regardless of any increase or decrease in the
issuing firm’s profits.
2. Cumulative preferred stocks
o any missed dividend payments go into arrears and must be made up before any
common stocks’ dividends can be paid.
3. Participating preferred stock
o actual dividends pain in any year may be greater than the promised dividends.

PRIMARY STOCK MARKET

 o are markets in which corporations raise funds through new issues of stocks. The
new stock securities are sold to initial investors (suppliers of funds) in exchange
for funds (money) that the issuer (user of funds) needs.
IPO (Initial Public Offering)
- The first public issue of financial instruments by a firm.

GROSS PROCEEDS
- The price at which the investment bank resells the stock to investors.

UNDERWRITER’S SPREAD
- The difference between the gross proceeds and the net proceeds.

SYNDICATE
- Often an investment bank will bring in a number of other investment banks to help
sell and distribute a new issue.

ORIGINATING HOUSES
-The lead banks in the syndicate, which negotiate with the issuing company on behalf
of the syndicate.

SECONDARY STOCK MARKET

 Is where investors buy and sell securities, they already own.
 A market where the exchange of securities between an investor and another
investor takes place.
 Provides an avenue for the securities to be liquid.

DIFFERENT INSTRUMENTS IN THE SECONDARY MARKET

1. FIXED INCOME
o Secondary market fixed-income instruments are debt securities that are traded
on the open market. Buyers and sellers exchange these instruments, and their
 prices might fluctuate based on demand. Fixed income instruments vary from
conventional securities in that an underlying asset does not back them.
2. VARIABLE INCOME INSTRUMENTS
o Variable income instruments generate an effective rate of return to investors,
and various market factors determine the quantum of such return.
3. HYBRID INCOME INSTRUMENTS
o Two or more different financial instruments are combined to form hybrid
instruments.
TYPES OF SECONDARY MARKET
1. STOCK MARKET
o The stock market, sometimes known as the equity market, is a regulated
marketplace for purchasing and selling publicly listed business stocks and
derivatives. It is based on the idea that investors can swap stock shares to
optimize their returns.
2. OVER THE COUNTER MARKET
o Is decentralized comprising participants engaging in trading among themselves.

EXAMPLES OF SECONDARY MARKET

The NASDAQ is a stock exchange in New York City, New York, USA. It is the world’s
second-biggest exchange by market capitalization and the world’s largest electronic
screen-based stock exchange. It includes almost 3,000 organizations from a variety of
industries, including technology, biotechnology, retail, financial services, transportation,
and others.

The New York Stock Exchange (NYSE) is a stock exchange in New York City, New
York, United States. It is the largest stock exchange in the world in terms of market
value and the most varied in terms of listed firms. It contains nearly 2,400 listed firms
from a variety of industries including banking, technology, retail, energy, and others.
The NYSE also supports trading in stocks, stock options, and fixed-income instruments.

STOCK MARKET PARTICIPANTS

The stock exchange is an organised market for buying and selling corporate and
other securities. In a stock exchange, securities are purchased and sold out as per
some well-defined rules and regulations. It provides a convenient and secured
mechanism or platform for transactions in different securities. Such securities include
shares and debentures issued by public companies duly listed on the stock exchange,
and bonds and debentures issued by governments, public corporations, and municipal &
port trust bodies.
Investors, also referred to as stockholders or shareholders are those who own shares
of stock of a publicly listed company. They are accorded certain privileges like the right
to fair and equal treatment, the right to vote and exercise-related rights, and the right
to receive dividends and other benefits due to stockholders. They are classified as
either retail or institutional, and local or foreign.
STOCK MARKET PARTICIPANTS
1. STOCK BROKER
 A stock broker or trading participant is licensed by the Securities and Exchange
Commission (SEC) and is entitled to trade at the exchange. They act as an agent
between a buyer and seller of stocks in the market . They execute orders in the
market to the most significant possible advantage of their customers, by buying
at the lowest reasonable price or by selling at the highest available price.
 For their services as stock brokers, they receive from their clients either a buying
or a selling commission.

Traditional: Those who assign a licensed salesperson to handle your account and
take your orders via a written instruction or a phone call.
Online: Those whose primary interface is the internet where clients execute their
orders and access market information online.
2. LISTED COMPANIES
 Listed companies, also called "issuers", are traded on the exchange . These
companies have gone through initial public offering (IPO) or listing by way of
introduction.
3. DEPOSITORY
 A depository is an organization which holds securities (like shares, debentures,
bonds, government securities, mutual fund units etc.) of investors in an
electronic form at the request of the investors through a registered Depository
Participant (DP). A DP is an agent of the depository through which it interfaces
with the investor and provides depository services. It also provides services
related to transactions in securities
4. TRANSFER AGENTS
  The stock transfer agent is considered the "official keeper" of the corporate
shareholder records. The stock transfer agents provide the issuer or the listed
company with a list of holders of its securities. They affect the transfer of
beneficial ownership and process corporate actions like stock or cash dividends,
stock rights, stock splits, and collation of proxy forms.
5. INVESTMENT ADVISERS
 Investment advisers are people or firms that are in the business of providing
investment advice to investors or issuing reports or analyses regarding securities.
They do these activities for compensation.

OTHER ISSUES PERTAINING TO STOCK MARKET

RISKS IN STOCK MARKET
Although the stock market has the potential for quick success and huge rewards,
hazards are involved. It might be challenging to succeed quickly because of price
swings and recessions. Nonetheless, one may regularly generate long-term returns
and meet investing objectives by controlling expectations and risk. Achieving financial
objectives and long-term success can be facilitated by effective risk management.

1. COMMODITY PRICE RISK

o affects businesses, benefiting those selling commodities and negatively impacting
those using them. Consumer spending is influenced by rising prices, impacting
the entire economy, including the service economy.
2. HEADLINE RISK
o refers to the potential harm a company's business can be caused by media
stories. No company is immune to headline risk, as seen in the 2011 Fukushima
nuclear crisis, which affected stocks and related businesses. Smaller-scale bad
news, like the debt crisis in eurozone nations, can severely impact entire
economies and stocks, causing a significant impact on the global economy.
Overall, headline risk is a significant risk that can affect any company's business.
3. RATING RISK
o when a business is given a number to achieve or maintain, with credit rating
being a crucial factor affecting financing costs. However, publicly traded
companies also have a significant number, the analysts' ratings, which can
significantly impact the market. Changes in analyst ratings on stock can cause
swings larger than justified by the events leading to the adjustment.
4. OBSOLESCENCE RISK
o refers to the possibility of a company's business declining, and the biggest risk is
that someone may create a similar product at a cheaper price. With global
competition becoming more technologically advanced and the knowledge gap
shrinking, obsolescence risk is expected to increase over time.
5. DETECTION RISK
o refers to the possibility that authorities may not uncover financial irregularities
within a company until it is too late. This risk can result from management
skimming money, improper earnings, or other financial mishaps. The market
reckoning will emerge when such news surfaces, making it difficult to repair a
company's reputation and potentially impossible to recover if widespread
financial fraud occurs. Examples include Enron, Bre-X Minerals, ZZZZ Best, and
Crazy Eddie's.
6. LEGISLATIVE RISK
o refers to the potential constraint imposed by government actions on corporations
or industries, potentially affecting investor holdings. This risk can manifest
through antitrust suits, new regulations, or specific taxes. The actual risk varies
depending on the industry, but it is generally a result of government actions that
over-legislate, enhancing the public image and providing publicity to
congressmen, leading to more legislative risk than necessary.
7. INFLATION AND RISING INTERETS RATES RISK
o pose significant risks to businesses, as they can lead to increased costs and
difficulty in staying in business. Rising rates can be a common way to combat
inflation, but they can also dampen consumer spending, resulting in a weaker
economy and potentially stagflation. This double trap is less of an issue for
companies that can pass higher costs forward. Inflation can also dampen
consumer spending, making it difficult for businesses to stay in business during
times of inflation.
8. MODEL RISK
o refers to the potential for incorrect assumptions in economic and business
models, causing businesses reliant on these models to suffer. This can lead to a
domino effect, with companies struggling or failing, affecting those dependent on
them. The 2008-2009 mortgage crisis serves as an example of how models,
particularly risk exposure models, can misrepresent their intended purpose.
THE BOTTOM LINE
 There is no risk-free stock or business, and each faces universal and specific
risks. However, the rewards of investing can outweigh these risks. To be a
successful investor, it's essential to understand the risks before buying in and
to have a stress ball nearby during market turmoil.

OTHER ISSUES PERTAINING TO STOCK MARKET

Market efficiency
- the speed with which financial security prices adjust to unexpected news of
interest rates or stock-specific characteristics, etc.

 Forms of market efficiency

 Weak Form Market Efficiency
 Semi strong Form Market Efficiency
 Strong Form Market Efficiency

INTERNATIONAL ASPECTS OF STOCK MARKETS

 The U.S. stock markets are the world's largest.
 Implementation of the common currency—the euro—in 2002 boosted European
markets.
 Economic growth in Pacific Basin countries, China, and emerging markets led to
significant stock market growth globally.

HISTORICAL TRENDS (1990-2010)

 Figure 8–15 illustrates the changing proportions of stock market capitalization
among various countries.
 U.S. dominance in 2000, followed by a decline in 2010 due to mortgage market
problems and the financial crisis.
 Recovery in European, Pacific Basin, and emerging market countries after
economic challenges.

FACTORS BEHIND U.S. DOMINANCE

 Shifts in U.S. economic growth and slowdown in mid-2000s.
 Global financial crisis impact on U.S. and worldwide markets.
 Impact of the U.S. subprime housing market downturn.
INTERNATIONAL DIVERSIFICATION
 Investors seek international diversification to offset risks.
 Correlations in stock returns between U.S., euro area, and Japanese stocks.
 Risks introduced: incomplete information, foreign exchange risk, and politic

AMERICAN DEPOSITORY RECEIPTS

 ADRs represent ownership of foreign stocks and are traded in the U.S. in dollars.
 Types: Level 1, Level 2, and Level 3 ADRs.
 ADRs provide opportunities for U.S. investors to invest in foreign companies.

ADR LEVELS IN U.S. MARKETS

 Level 1 ADRs
 Most common and basic type of ADRs
 Traded over-the-counter (OTC) market
 Few regulatory requirements by SEC
 No need to follow U.S. accounting standards (GAAP)
 Companies can upgrade to Level 2 or Level 3 for better exposure
 Level 2 ADRs
 Listed on major stock exchanges (NYSE and NASDAQ)
 More regulatory requirements than Level 1
 Issuers must register with SEC, file form 20-F, and comply with GAAP
 Higher trading volumes due to exchange listing
 Risks delisting if not meeting exchange requirements
 Level 3 ADRs
 Most respected level in U.S. markets
 Companies required to register, file form 20-F, and comply with GAAP
 Can issue shares directly in U.S. markets to raise capital
  Must share news distributed in home country with U.S. investors
 Easiest for investors to find information

Regulation and Market Structures: (Differences in Stock Market Structures

Globally)

1. Continuous Trading:
o Occurs throughout trading hours.
o Promotes liquidity and price discovery.
2. Call-Based Trading:
o Occurs at specific intervals (calls) during the trading day.
o Trades executed based on matching bid and ask prices.
3. Specialist Systems:
o Involves market makers or specialists.
o Maintain market for specific stocks, ensuring smooth operations.
4. Government Regulation:
o Ensures fairness, transparency, and investor protection.
o Regulatory bodies (e.g., SEC, FCA) oversee market activities and enforce
regulations.
5. Self-Regulation by Exchanges:
o Exchanges establish rules and codes of conduct.
o Monitor trading activities, set listing requirements, and enforce compliance
standards.

CONCLUSION

 International stock markets offer diversification but come with unique risks.
 ADRs provide avenues for U.S. investors to access foreign markets.
 Understanding global market structures and regulations is crucial for
international investments.