FINANCIAL MARKET (2ND EXAM)

BIG PICTURE B (ULO A)

1. Stock Market is where public corporations efficiently and cheaply get their needed
funds by selling to the supplier of funds (investors) their equity securities.
2. Firm commitment underwriting refers to underwriting agreement wherein the
investment bank guarantees the corporation price for newly issued securities by buying
the whole issue at a fixed price from the corporate issuer.
3. Best efforts underwriting refers to the underwriting agreement wherein the
underwriter does not guarantee a price to the issuer and acts more as a placing or
distribution agent for a fee.
4. Philippine Stock Exchange - the only stock exchange in the Philippines.
5. Stockbrokers act as an agent between a buyer and seller of stocks in the market.
6. Listed Companies are companies whose shares of stock are traded.
7. Clearing House is responsible for ensuring that executed trades are appropriately
settled.
8. Depository acts as securities depository or “custodian” of listed shares of stock that
are traded at the stock exchange.
9. Transfer Agents are considered the “official keeper” of the corporate shareholder
records.
ESSENTIAL KNOWLEDGE
1. The Stock Markets. Stock market is where public corporations efficiently and
cheaply get their needed funds by selling to the supplier of funds (investors) their equity
securities. 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.
2. Primary stock markets are markets in which users of funds raise funds through new
issues of stocks. The new share securities are sold to initial investors in exchange for
funds that the issuer needs. Most of the primary market transactions go through
investment banks. Investment banks can either conduct a primary market sale using a
firm commitment underwriting or best efforts underwriting basis. In a firm
commitment underwriting, the investment bank purchases the stock from the issuer for
a guaranteed price (net proceeds) and resells it to investors at a higher price (gross
proceeds). The difference between the gross proceeds and the net proceeds is referred
to as the underwriter’s spread which is the compensation for the expenses and risks
incurred by the investment bank with the issue. Usually, the investment bank will tap
other investment banks to help sell and distribute the new issues referred as a
syndicate.
Usually, primary markets are applicable to initial public offering (IPO) shares wherein
share are publicly traded in the stock markets for the first time. However, primary
markets are also applicable to seasoned offering wherein the firm whose shares are
already traded in the secondary markets wishes to sell additional new issue shares. In
this case, existing shareholders can exercise their preemptive rights. Preemptive right
is the right of the existing shareholders in which new shares must be offered to existing
shareholders first in such a way that they can maintain their proportional ownership in
the corporation.
3. Secondary stock markets are markets in which the stocks will be traded (bought
and sold by investors) after they have been issued in the primary markets. When a
transaction occurs in a secondary market, funds are exchanged, usually with the help of
a securities broker or firm acting an intermediary between the buyer and the seller of the
stock. The original issuer of the stock is not involved in this transfer of stocks or funds.
Examples of stock exchange are the New York Stock Exchange (NYSE), the National
Association of Securities Dealers Automated Quotation (NASDAQ) and our very own
the Philippine Stock Exchange (PSE).
4. Stock Market as an Investment Opportunity. Investing in stock market is among
the options one can consider as an investment opportunity. With proper knowledge and
risk management, one can grow its money through stocks. An investor can make his
money grow in the stock market in two ways:
• • By receiving dividends – This happens when the company where the investor
invested his money declares dividends to its shareholders.

• • By capital appreciation or increase in stock price. – This happens when the

investor sells the shares, he is holding at a price higher than his purchase price,
therefore realizing a profit.

5. The stock market participants. A stock market is usually composed of the following
market participants:
5.1 Investors also referred to as stockholders or shareholders, are those who own
shares of stock of a publicly listed company. As owners, they are given 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 applicable to stockholders.
They are classified as either retail or institutional, and local or foreign.
5.2 Stockbrokers. A stockbroker 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. For their services as
stockbrokers, they receive from their clients either a buying or a selling commission.
There are two (2) types of stockbrokers:
• Traditional – those who assign a licensed salesman to handle the investor’s account
and take orders via a written instruction or a phone call.
 • Online – those whose main interface is the internet where clients execute their orders
and access market information online.
5.3 Listed Companies, also called “issuers”, are those whose shares of stock are
traded on the Exchange. These companies have gone through initial public offering
(IPO) or listing by way of introduction after qualifying with the stringent listing and
reportorial requirements of the PSE. Listed companies are classified into six different
sectors: Financials, Industrial, Holding Firms, Property, Services, and Mining and Oil.
5.4 Clearing House is responsible for ensuring that executed trades are appropriately
settled. In the Philippines, this role is played by the Securities Clearing Corporation of
the Philippines (SCCP).
The SCCP is a wholly owned subsidiary of the Exchange. It was established to ensure
the orderly settlement of equity trades executed at the PSE. The SCCP uses the Central
Clearing and Central Settlement (CCCS) system purchased from the Capital Markets
Co. (CAPCO) of Belgium.
5.5 Depository acts as securities depository or “custodian” of listed shares of stock that
are traded at the stock exchange. This role is played by the Philippine Depository and
Trust Corp. (PDTC). It was organized to establish a central depository in the Philippines
and to implement scrip less trading.
5.6 Settlement Banks accept deposits of funds for payment of securities bought,
confirm payments of due clearing obligations to the clearing house, debit buyer’s cash
account and credit seller’s cash account during settlement, and receive and/or return
cash collateral put up by clearing members to cover their daily trade negative
exposures.
5.7 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 effect transfer of beneficial
ownership and process corporate actions like stock or cash dividends, stock rights,
stock splits, and collation of proxy forms.
6. Types of Stocks. One’s ability to understand the attributes of stocks is crucial to
become successful in stock investing. Stocks are classified according to types and
classes, depending on the characteristics and earnings potential. Generally, stocks are
classified as follows:
6.1 According to Rights
▪ Common Stock or Ordinary Shares
▪ Preferred Stock or Preference Shares

6.2 According to Ownership

▪ Class A – shares that only Filipino investors can trade
▪ Class B – shares that can be traded by both Filipino and foreign investors

6.3 According to Sectors

▪ Financials Sector – includes companies engaged in banking, investments, and
finance.
▪ Industrial Sector – includes companies involved in the following: Electricity, Energy,
Power, and Water, Food, Beverage, and Tobacco, Construction, Infrastructure, and
Allied Services, Chemicals and Diversified Industrials
▪ Holding Firms Sector – includes companies or firms that control or manage partial or
complete interest in another company or other companies. Usually, these companies do
not produce goods or services itself; rather, its purpose is to own shares of other
companies.

▪ Property Sector – includes companies involved in land and property development

▪ Services Sector – includes companies involved in the following: Media,
Telecommunications, Information Technology, Transportation Services, Hotel and
Leisure, Education, and Diversified Services
▪ Mining and Oil Sector – includes companies engaged in mineral extraction, oil
exploration, extraction, and production
6.4 According to Characteristics
▪ Blue Chip stocks – are shares of well-established and financially sound companies
that have demonstrated their ability to pay dividends in both good and bad times. They
also exhibit more modest but dependable returns and are relatively of lower risk.
▪ Income stocks – are shares of those companies with good dividend payment history
due to steady profits. Since they are stable, income stocks generally have a lower level
of volatility.
▪ Growth stocks – also called “glamour stocks”, are shares of corporations whose
earnings are expected to grow at an above-average rate relative to the market. A
growth stock does not usually issue dividends as earnings are reinvested in capital
projects.
▪ Defensive stocks – are shares that provide regular dividends and stable earnings,
regardless of the overall condition of the stock market. Defensive stocks remain stable
under difficult economic conditions. Generally, these are stocks of food, oil, and utilities
companies, which are characterized by steady demand amidst hard times.
▪ Cyclical stocks – are those sensitive to business conditions or cycles strongly tied
with the economy’s performance. These companies produce or offer services that are
low in demand during slowdown and increase when business peaks.
▪ Speculative stocks – are those that rise quickly when economic growth is strong and
falls rapidly when growth is slowing down. A speculative stock is considered very risky
because of its volatility. It increases or decreases rapidly depending on the economic
conditions.

7. The Philippine Stock Exchange (PSE) is the only stock exchange in the Philippines
and considered as one of the oldest stock exchanges in Asia, operating since 1927 as
the Manila Stock Exchange. Its trading floor is currently located at the PSE Tower in
Bonifacio Global City, Taguig City. It is composed of a 15-man Board of Directors with
Jose T. Pardo as the Chairman.
PSEi is the main index for PSE. It is composed of a fixed basket of thirty (30) listed
companies usually referred as blue chips 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. Blue chip companies are selected based on a specific
set of public float, liquidity, and market capitalization criteria. Trading starts at 9:30AM
with a recess at 12:00NN-1:30PM and continues until the close at 3:30 PM.
History of PSE. The Philippine Stock Exchange was formed in December 23, 1992
from the country’s two former stock exchanges, the Manila Stock Exchange (MSE),
established on August 8, 1927, and the Makati Stock Exchange (MkSE), which was
established on May 27, 1963. It was transformed from a non-profit, non-stock, member-
governed organization into a shareholder-based, revenue-earning corporation headed
by a president and a board of directors in 2001, one year after the enactment of the
Securities Regulation Code.
8. How to invest in the stock market. The following are the steps on how to invest in
the Philippine stock market:
Step 1 - Choose a stockbroker. It is important for an investor to choose a stockbroker
whom he trusts because stockbrokers would act as the investor’s representative in the
stock market. Stockbroker also offers services such as access to market
reports/studies, on-time delivery of important documents, and advise on investments.
Stockbrokers can be traditional or online (those with trading online facility). The PSE
has a complete list of information about all its trading participants who are authorized
and qualified to trade securities for investors.
Step 2 - Open an account. After choosing a stockbroker, the investor will then be
required to fill out a Customer Account Information Form and submit identification
papers for verification. Most stockbrokers will require minimum deposit to activate the
account. For traditional stockbroker, a trader or agent will be assigned each investor to
assist in either buying or selling any listed security. However, for stockbrokers with
online trading facility, investor can post orders by himself.
Step 3 - Place an order. After opening an account, the investor is now ready to trade in
the stock market. In a traditional stockbroker, the investor will give his order (whether
buy or sell) to the trader. The trader will issue a confirmation receipt. The buy or sell
orders are relayed to the stockbroker's dealer for execution. Meanwhile, in an online
system as in PSE, the order is keyed in through a trading terminal and automatically
matched. Confirmation of done trades - via phone, email or online - is made as soon as
possible and subsequently, an official confirmation or invoice should be delivered to the
investor.
Step 4 - Payment. For traditional stockbroker, the delivery or payment should be made
before the settlement date of T+3 (transaction date + 3 days). Example, for transactions
done on Monday, payment should be received by Thursday. Meanwhile, for online
stockbrokers, settlement of all transactions is done on the transaction date. Most often,
you cannot execute a trade if you do not have buying power. Buying power is the
investor’s total money in his account that is available for trading. Settlement of accounts
is performed by the clearing house.
Step 5 - Receipt of proceeds of sale of stocks or proofs of ownership of stocks
bought. In traditional trading, investor will receive the proceeds of sale after three days
from the transaction date. However, for online stockbrokers, it shall be credited to the
investor’s account as soon as the transaction has been executed. If the investor wishes
to have a physical certificate of the stocks purchased, he can give instructions to the
broker and pay the required upliftment fee.
ULOB
1. Fundamental analysis is a method of measuring a real value of a company’s stocks
taking into consideration the relevant economic and financial factors.
2. Technical analysis is a method that uses charts of historical price and market
statistics to examine and ultimately to predict price movements in the financial markets.
3. Stock ticker is a real time report of the price of the stocks being traded that is
updated continuously throughout the trading session.
4. Board Lot is a minimum number of shares that can be traded as designated by the
stock exchange.
5. Tick size is the minimum price movement of the share.
6. Order refers to a trade transaction which can be buy order or sell order.
7. Stock Symbol refers to the symbol or code designated to a listed company which will
be used for trading transactions.
ESSENTIAL KNOWLEDGE
1. The Basics of stock investing. Investing in stock market provides an opportunity to
make money. However, it should be noted that investment in stocks is risky because of
market volatility. Hence, one should be equipped with proper knowledge and risk
management before diving into the market. There are also different types of investors in
the stock market based on their investment motive and risk appetite: long-term investors
or short-term traders (those who usually take advantage of the fluctuations in prices). It
is also worth to mention that in the Philippines, we do not have short selling yet. Hence,
we can also earn from fluctuations in prices by buying at a lower price and selling it at a
high price.

2. Understanding the Trading Interface. Before we can trade, it is important to

familiarize features that can be commonly observed in most of the trading platforms
offered by stockbroker.
Stock Ticker. When you open the website of Philippine Stock Exchange (PSE) and
click ticker, the encircled portion will appear in your screen – this is a stock ticker. A
ticker is a real time report of the price of the stocks being traded that is updated
continuously throughout the trading session.
3. Selecting the company to invest in. This is a crucial decision to make because
your potential earnings and losses will depend on it. Hence, it is important to carefully
evaluate companies to increase the chance of earning in the stock market. In evaluating
companies, one may use of the following evaluation tools: fundamental analysis and
technical analysis.
▪ Fundamental analysis – is a method of measuring a real value of a company’s
stocks taking into consideration the relevant economic and financial factors. If one
performs fundamental analysis, he will look at the financial statements of the company
or look for news that would have impact to the company being evaluated.

▪ Technical analysis - is a method that uses charts of historical price and market
statistics to examine and ultimately to predict price movements in the financial markets.
The three type of charts are:

a. Line chart
b. Bar chart
c. Candlesticks chart – commonly used chart in doing technical analysis
Technical analysis considers the following prices:
O– open – the price of the first trade of the day
H– high – the highest price at which the stock was traded during the day
L– low – the lowest price at which the stock was traded during the day
C– close – the price of the last trade of the day