FM201

Financial Market#

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STUDENT
Name:
Student Number:
Program:
Section:
Home Address:
Email Address:
Contact Number:

PROFESSOR
Name: Maria Mylin S. Miranda
Academic Department: Department of Business and Accountancy
Consultation Schedule:
Email Address: msmiranda@ccc.edu.ph
Contact Number: 09985463470

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 LEARNING MODULE INFORMATION
I. Course Code FM201
II. Course Title Financial Market
III. Module Number 03
IV. Module Title Mortgage, Derivatives and Stock Market
V. Overview of the Module This module will discuss the mortgage markets, derivatives and stock markets.
A basic guide to start in trading the stock market is also included.

VI. Module Outcomes After the study of all the lessons, you are expected to:
• Understand key concepts under mortgage markets
• Describe the uses of derivatives for hedging and speculation
• Recognize what hedging and speculation are
• Describe how do the primary stock market and secondary stock markets
work
• Differentiate and apply technical and fundamental analysis in stock
trading

Lesson 1: The Mortgage Market and Derivatives

Lesson Objectives:
At the end of this lesson, you should be able to:
1. Describe what are mortgages
2. Explain how mortgage markets differ from stock and bond markets
3. Enumerate and explain the characteristics of a mortgage
4. Enumerate and explain the important factors that affect the interest rate on the loan
5. Distinguish between:

• conventional mortgages and insured mortgage

• fixed-rate mortgages and adjustable-rate mortgages

• graduated payment mortgages and growing equity mortgages

6. Describe what derivative financial instruments are

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 7. Distinguish between derivatives for hedging and derivatives for speculation
8. Briefly explain the nature of the most frequently used derivatives such as:

• futures contracts

• forward contracts

• options

• foreign currency futures

• interest rate swaps

Getting Started:
Here are some useful resources about the 2008 financial crisis.

1. YouTube video title: The Causes and Effects of the Financial Crisis 2008
By Vivien Yeow https://www.youtube.com/watch?v=N9YLta5Tr2A

2. Article title: Causes of the 2008 Global Financial Crisis

By: Kimberly Amadeo (The Balance)
Posted: May 29, 2020 https://www.thebalance.com/what-caused-2008-global-
financial-crisis-3306176

Discussion:
Introduction

For one perspective, the mortgage markets form a subcategory of the capital markets because mortgages involve long-
term funds. But the mortgage markets differ from the stock and bond markets in several ways.

First, the usual borrowers in the capital markets are businesses and government entities, Whereas the usual borrowers
in the mortgage markets are individuals.

Second, mortgage loans are made for varying amounts and maturities, depending on the borrowers’ needs, features
that cause problems for developing a secondary market.

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What are Mortgages?

Mortgages are long-term loans secured by real estate. Both individuals and businesses obtain loans to finance real
estate purchases.

• In another definition, mortgages are loans to individuals or businesses to purchase a home, land or other real
property. The property purchased with a loan serves as collateral backing the loan.

A developer may obtain a mortgage loan to finance the construction of an office building, or a family may obtain a
mortgage loan to finance the purchase of a home. In both cases, the loan is amortized. The borrower pays it off overtime
in some combination of principle and interest payments that result in full payment of the debt by maturity.

Amortized – A mortgage is amortized when the fixed principal and interest payments fully pay off the
mortgage by the maturity date.

Characteristics of the Residential Mortgage

1. Mortgage Interest Rates

One of the most important factors in the decision of the borrower of how much and from whom to borrow is the
interest rate on the loan.
There are three important factors that affect the interest on the loan. These are:

• Current long-term market rates

Long-term market rates are determined by the supply of and demand for long term funds, which are in turn
affected by a number of global, national, and regional factors. mortgage rates then to stay above the less
risky Treasury bonds most of the time but tend the track along with them.

• Term or life of the mortgage

Generally, longer term mortgages have higher interest rates than short-term mortgages. The usual mortgage
lifetime is 15 or 30 years. Because interest rate risk falls as the term to maturity decreases, the interest rate on
a 15-year loan will be substantially less than on the 30-year loan.

Going back to our earlier lesson on interest rates and risk, the longer term the duration of the loan, the higher
the interest rates will be. This is because there is a likelihood that a borrower’s ability to pay might deteriorate
and market conditions may not be unfavorable.

• Number of discount points paid

Discount points (or simply points) are interest payments made at the beginning of a loan. a loan with one discount
point means that the borrower pays 1% of the loan amount at closing, the moment when the borrower signs the loan
paper and receives the proceeds of the loan. In exchange for the points, the lender reduces the interest rate on the loan.
In considering whether to pay points, borrowers must determine whether the reduced interest rate over life of the loan
Fully compensates for the increased upfront expense. To make this determination, borrowers must

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 take into account how long they will hold onto the loan. Typically, discount point should not be paid if
the borrower will pay off the loan in five years or less.
2. Loan terms
Mortgage loan contracts contain many legal and financial terms, most of which protect the lender from
financial loss.
3. Collateral
All mortgage loans are backed by specific piece of property that serves as collateral to the mortgage loan. As
part of the mortgage agreement, the financial institution will place a lien against a property that remains in place
until the loan is fully paid off. A lien is a public record attached to the title of the property that gives the financial
institution the right to sell the property if the mortgage borrower defaults or falls into arrears on his or her
payments. the mortgage is secured by the lien – that is, until the loan is paid off, no one can buy the property and
obtained clear title to it.
4. Down Payment
To obtain a mortgage loan, the lender also requires the borrower to make a down payment on the property, that is,
to pay a portion of the purchase price. The balance of the purchase price is made by the loan proceeds. Down
payments are intended to make the borrower less likely to default on the loan. A borrower who does not make a
down payment could walk away from the house and alone and lose nothing. Furthermore, if real estate prices
drop even a small amount, the balance due on the loan will exceed the value of the collateral. The down payment
reduces moral hazard for the borrower. The amount of the down payment depends on the type of the mortgage
loan. Many lenders require that the borrower pay 5% of the purchase price; in other situations, up to 20% may be
required.
5. Private Mortgage Insurance
Private Mortgage Insurance (PMI) is an insurance policy that guarantees to make up any discrepancy between
the value of the property and the loan amount, should a default occur. For example, if the balance on your loan
was PhP 120,000 at the time of default and the property was worth only PhP100,000. PMI would pay the lending
institution PhP20,000. The default still appears on the credit of the borrower, but the lender avoids sustaining the
loss.
6. Borrower Qualifications
Before granting a mortgage loan the lender will determine whether the borrower qualifies for it. Qualifying for a
mortgage loan is different from qualifying for a bank loan because most lenders sell their mortgage loans to one
of a few government agencies in the secondary mortgage market. these agencies establish very precise guidelines
that must be followed before they will accept the loan. If the lender gives a mortgage loan to a borrower who
does not fit these guidelines, the lender may not be able to resell the loan. That ties up the lender’s funds. Banks
can be more flexible with loans that are kept on the bank’s own book

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Types of Mortgage Loans
Conventional Mortgages

These are originated by banks or other mortgage lenders but are not guaranteed by government or government-
controlled entities. Most lenders though now insure many conventional loans against default, or they require the
borrower to obtain private mortgage insurance on loans.
Insured Mortgages

These mortgages are originated by banks for other mortgage lenders but are guaranteed by either the governments or
government-controlled entities.
Fixed-rate Mortgages

• In fixed-rate mortgages, the interest rate in the monthly payment did not vary over the life of the mortgage.

• A mortgage that locks in the borrower’s interest rate and thus the required monthly payment over the life of the
mortgage, regardless of how market rates change.

Adjustable-rate Mortgages (ARMs)

The interest rate on adjustable rate mortgage is tied to some market interest rate, (e.g., Treasury bill rate) and therefore
changes over time. ARMs usually have limits, called caps, on how high (or low) the interest rate can move in one year and
during the term of the loan.

Graduated-Payment Mortgages (GPMs)

These mortgages are useful for home buyers who expect their incomes to rise. The GPM has lower payments in the first
few years, then the payments rise. The early payment may not even be sufficient to cover the interest due, in which case
the principal balance increases. As time passes, the borrower expects income to increase so that higher payment will not
be too much of a burden.

Growing Equity Mortgage

With a GEM, the payments will initially be the same as on a conventional mortgage. Over time, however, the payment will
increase. This increase will reduce the principal more quickly than the conventional payment stream would.

Shares Appreciation Mortgages (SAMs)

In a SAM, the lender lowers the interest rate in the mortgage in exchange for a share of any appreciation in the real
estate (if the property sells for more than a stated amount, the lender is entitled to a portion of the gain).

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Equity Participating Mortgage (EPM)

In EPM, an outside investor shares in the appreciation of the property. This investor will either provide a portion of the
purchase price of the property or supplement the monthly payment. In return, the investor receives a portion of any
appreciation of the property. As with the SAM, the borrower benefits by being able to qualify for a larger loan than
without such help.

Second Mortgages

These are launched that are secured by the same real estate that is used first mortgage. The second mortgage is junior to
the original loan which means That you know default occurs the second mortgage Holder will be paid only after the
original loan has been paid off if sufficient funds remain.

Reverse Annuity Mortgages (RAMs)

In a RAM, the bank advances funds to the owner on a monthly schedule to enable him to meet living expenses thereby
increasing the balance of the loan which is secured by real estate. The borrower does not make payments against the
loan and continues to live in his home. When the borrower dies, the estate sells the property to pay the debt.

What are Derivatives?

In addition to primary instruments such as receivables, payables and equity instruments, financial instruments also include
derivatives such as financial options, futures and forwards, interest rate swaps and currency swaps. Derivatives are useful
for managing risks. They can effectively transfer the risk inherent in an underlying primary instrument between the
contracting parties without any need to transfer the underlying instruments themselves (either at inception of the contract
or even, where cash settled, or termination).

the development of powerful computing and communication technology has aided the growth of derivative use. The
technology provides new ways to analyze information about markets as well as the power to process high volumes
of payments.

Derivative Financial Instruments

• Derivatives are financial instruments that “derive” their value on contractually required cash flows from some
other security or index. For instance, a contract allowing a company to purchase a particular asset (say gold,
flour, or coffee bean) at a designated future date, at a predetermined price is a financial instrument that derives its
value from expected and actual changes in the price of the underlying asset.

• Any security whose value is determined by, or derived from, the value of another asset.

• Underlying asset – the asset from which the derivative gets its value.

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 o Can take in many form (stocks, bonds, commodities, currencies, interest rates and market indexes)

• The value of the instrument depends upon the value of something else.

Characteristics of Derivatives:
A derivative is a financial instrument:

• whose value changes in response to the change in specified interest rate, security price, commodity price, foreign
exchange rate, index of prices or rates, credit rating or credit index, or similar variable

• that requires no initial net investment or little net investment relative to other types of contracts that have a
similar response to changes in market conditions; and

• that is settled at a future date.

The Two Main Uses of Derivatives:

1. For Hedging
Companies use derivatives to protect against cost fluctuations by fixing a price for a future deal in advance. By
settling costs in this way, buyers gain protection – known as hedge – against unexpected rises or falls in, for
example, the foreign exchange market, interest rates, or the value of the commodity or product they are buying.

Example: A tomato sauce company may require 10 tons of tomato in six months’ time. To protect itself from
potential future price increase, it can buy tomatoes at today’s prices for delivery and payment at a future date.
Prices of tomato fluctuates depending on market conditions, so the tomato dealer and the tomato sauce company
may agree to set the price of the tomato using a futures contract, regardless of how much it may cost in the
future during the delivery date.

Note that hedging in this case will only be favorable to one party (either the seller or the buyer). A rise in the
price of tomato will be unfavorable to the seller and favorable only to the buyer because the agreed price on the
futures contract has already been locked in. On the other hand, a drop in prices becomes favorable to the seller
because they are protected from the loss by locking in the price on the contract.

2. For Speculation

Speculation – n. investment in stocks, property, or other ventures in the hope of gain but with the risk of loss

Investors may buy or sell an asset in the hope of generating a profit from the asset’s price fluctuations. usually this
is done on a short-term basis in assets but are liquid or easily traded.

Example: an investor notices a company’s share prices going up and buy some option on the share. an option
gives a right to the Holder to buy shares at a future date. If share prices do rise, the investor can profit by buying
at a fixed option price and selling at the current higher price. If share prices fall, the investor can sell the option
or let it lapse, losing a fraction of the value of the asset itself.

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Types of Derivatives:

Futures Contracts

A futures contract is an agreement between a seller and a buyer that requires that seller to deliver a particular commodity
(say corn, gold or soya beans) at a designated future date, at a predetermined price. These contracts are actively treated on
regulated future exchanges and are generally referred to as “commodity Futures contract”. When the “commodity” is a
financial instrument such as a Treasury bill or commercial paper, the agreement is referred to as a financial futures
contract. Futures contracts are purchased either as an investment or as a hedge against the risks of future price changes.

Forward Contracts
A forward contract is similar to a futures contract but differs in three ways:

1. A forward contract calls for delivery on a specific date whereas a futures contract permits the seller to decide later
which specific day within the specified but it will be the delivery date (if it gets as far as actual delivery before it
is closed out).
2. Unlike a futures contract, a forward usually is not traded on a market exchange.

3. unlike a futures contract, a forward contract does not call for a daily cash settlement for price changes in
the underlying contract. Gains and losses on forward contracts are paid only when they are closed out.
Example:
Please refer to this YouTube video: Understanding Forward contracts. What are forward contracts used for?
Link: https://www.youtube.com/watch?v=t5XWCy21lyo

Options
Options give its holder the right either to buy or sell an instrument, say a treasury bill, at a specified price and within a given
time period. Options frequently are purchased to hedge exposure to the effects of changing interest rates. options
serve the same purpose as futures in that respect but are fundamentally different. Importantly, though, the option
holder has no obligation to exercise the option. on the other hand, the holder of a futures contract must buy or sell
within a specified. Unless the contract is closed out before delivery comes due.
Example:

Please refer to this YouTube video: Bill Poulos Presents: Call Options & Put Options Explained In 8 Minutes
(Options For Beginners)
Link: https://www.youtube.com/watch?v=EfmTWu2yn5Q

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Foreign Currency Futures

Foreign loans are frequently denominated in the currency of the lender. when loans must be repaid in foreign currencies,
a new element of risk is introduced. this is because if exchange rates change, the peso equivalent of the foreign currency
that must be repaid differs from the peso equivalent of the foreign currency borrowed.

To hedge against “foreign exchange risk” exposure, some firms buy or sell foreign currency futures contracts. These are
similar to financial futures except specific foreign currencies are specified in the futures contracts rather than specific
debt instruments. They work the same way to protect against foreign exchange risk as financial futures protect against fair
value or cash flow risk.
Example:
Please refer to this YouTube video: Fundamentals and FX Futures by CME Group
Link: https://www.youtube.com/watch?v=8XVPdXiroB0
Interest Rate Swaps

There are contracts to exchange cashflows as of a specified date or a series of specified dates based on a notional
amount and fixed and floating rates.

These contracts exchanged fixed interest payments for floating rate payments or vice versa, without exchanging the
underlying principal amounts. For example, suppose you owe PhP 100,000 on a 10% fixed-rate home loan. You envy
your neighbor who is also paying 10% on her PhP 100,000 mortgage, but hers is a floating rate loan, so if the market
rates fall, so will her loan rate. To the contrary, she is envious of your fixed rate, fearful that rates will rise, increasing her
payments. A solution would be for the two of you to effectively swap interest payments using an interest rate swap
agreement.

The way a swap works you both would continue to make your own interest payments but would exchange the net cash
difference between payments at specified intervals. So, in this case, if market rates (and thus floating payments) increase, you
will pay your neighbor; if rates fall, she pays you. The net effect is to exchange the consequences of rate exchanges.

In other words, you have effectively converted your fixed-rate debt to floating rate debt; your neighbor has done the
opposite.
For more resources about interest rate swap, please refer to this YouTube video: Interest Rate Swap Explained
Link: https://www.youtube.com/watch?v=JIdcips9vPU

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Application:

Pretend that you are going to buy a house and lot worth PhP 2M. What will you choose – a 15-year loan with a 3%
interest or a 30-year loan with 8% interest? There are no right or wrong answers. Please state your choice and do your
best to explain why.

Summary of the Lesson:

• Mortgages are long-term loans secured by real estate.

• Derivative is any security whose value is determined by, or derived from, the value of another asset.

References:
1. Financial Markets and Institutions by Ma. Elenita Balatbat Cabrera, 2020 Edition

2. Vivien Yeow. (2012, July 23). The Causes and Effects of the Financial Crisis 2008 [Video].
YouTube. https://www.youtube.com/watch?v=N9YLta5Tr2A

3. Amadeo, K. (2020, May 29). Causes of the 2008 Global Financial Crisis. Investopedia.
https://www.thebalance.com/what-caused-2008-global-financial-crisis-3306176

4. FINMAESTRO. (2017, November 20). Understanding Forward contracts. What are forward contracts used
for? [Video]. YouTube. https://www.youtube.com/watch?v=t5XWCy21lyo

5. Profits Run. (2013, December 10). Bill Poulos Presents: Call Options & Put Options Explained In 8
Minutes (Options For Beginners) [Video]. YouTube. https://www.youtube.com/watch?v=EfmTWu2yn5Q

6. CME Group. (2018, April 6). Fundamentals and FX Futures [Video]. YouTube.
https://www.youtube.com/watch?v=8XVPdXiroB0

7. Xpono VF. (2012, June 25). Interest Rate Swap Explained [Video]. YouTube.
https://www.youtube.com/watch?v=JIdcips9vPU

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Lesson 2: The Stock Market

Lesson Objectives:
At the end of this lesson, you should be able to:
1. Understand what the stock market is
2. Differentiate the primary stock market from the secondary stock market

3. Explain the process of buying shares in the stock market

4. Differentiate technical analysis and fundamental analysis
5. Understand the concepts behind:
a. Candlestick charts and its use
b. Bid and ask board
c. Bull and bear market
6. Identify the ways to profit from trading in the stock market

Getting Started:
Why Do We Need A Stock Market
By: John Mangun (Business Mirror)

Let's be honest, very few people like the stock market.

Governments view the stock market as a crazy attack dog on a leash. When the market is going up, it is used at tool again
political opponents to show how well things are going. went down and the dog is chewing on government’s legs, they
want to ignore it

Publicly listed companies view the market as a great method to raise cash, but would prefer that shareholders simply give
them the money and not ask too many questions. Dig deep enough, and most shareholders think the market is a casino
and are often convinced the companies want their money without offering much in return.

Politically left-leaning elites use the market to bash both government and business as increasing stock prices
supposedly do not benefit the poor. Business would really prefer you buy their products and services rather than invest.
Banks think you should keep your money in deposits instead of investing.

The stock market is generally viewed like your balikbayan uncle who has bad breath, but who sometimes sends nice
cash gift at Christmas time. We like the benefits but ultimately do not want to get too close.
So why do we even bother with the stock market?

The stock market is the most important institution in a capital driven economic system. Oh, I know that “capitalism” is
a dirty word today. The trend is that ideas and innovation belong to everyone free of charge. To put up those ideas and
innovations into a useful and practical application to benefit the people should be the obligation and duty of the
government. And because individual creative ideas really belong to the people, no one person should profit from the
innovation.

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This trend is so strong that there are those that call for government to steal (and it is stealing) companies that private
individuals have created, finance, and operated and give ownership over to the government. The world would be a better
place if government just could take ownership and control.

However, the interesting thing is that government, including here in the Philippines, already controls a great amount of
the national wealth. Who owns the most amount of land in the Philippines? National and local government units. Who is
the largest employer in virtually all countries? The governments. Who has unlimited money available to spend as it
wishes? Governments.
That is not to say that government does not have an important role in supporting private enterprise. But it should support.
not replace.

So where does the stock market figure into the great scheme of things? Even the most rabid anti-American, anti-capitalist
must accept that everything from the paper clip to the automobile was a product of capitalism particularly American
capitalism.

American historian Ron Chernow wrote, “there is no country in the world where it’s as easy to find venture capital in the
stock market as the United States”. it is the private capital that allows research, development, and production. And the
great thing about private capital is that it helps the winners to succeed and almost guarantees the bad ideas will disappear.
Government money sometimes works the opposite way.

Companies use the stock market to raise money from investors. Investors benefit from participating in the hopefully
bright corporate future. In 1976 Ronald Wayne sold his 10% shareholding in Apple Corporation for US$ 801. Today he
shares would be worth nearly US$ 50 billion.

I am never going to own a bank, property company, Department store or a snack food factory. But I can be a partial owner
of those companies operated by knowledgeable and successful people that are owners. And here is the best part. If those
companies do not make money, I can sell out instantly.

While governments cannot claim any direct credit for what happens both good and bad in the stock market, it is an
important clue as to local financial sentiment. If 10,000,000 Filipinos suddenly show up to get their money from the
banks you probably have a crisis in confidence of the banking system. The same applies to the stock market.

As far as the stock market not helping the economy and the people, that is total nonsense and is an ignorant thought.
The local property companies have raised billions in the last two years to build projects. Apparently those developments
are going to be constructed with robots and not real employed workers.

the Stock Exchange is a marketplace for a business capital; nothing more and nothing less in the same way the wet
market saves you from the trouble of buying directly from the piggery. It is a business where people come together to
make business.

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Discussion:

Ordinary equity shares/common shares and preferred shares were discussed in Lesson 6. For this lesson, more details
will be discussed t
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.

• This is market where stocks or equities are traded between investors.

Primary Stock Market

• This is a market 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.

Initial Public Offering (IPO)

A primary market sale may be a first time issue by a private firm going public. This means that the company is allowing
its equity, some of which was held privately by managers and venture capital investors, to be publicly traded in stock
markets for the first time.

• This involves selling equities to the general public.

• Public offerings must be registered and approved by the Securities and Exchange Commission
Registration requires the firm to disclose a great deal of information before selling any securities.

• An important financial institution that assists in the initial sale of securities in the primary market is the
investment bank. It does this by underwriting securities. It guarantees a price for a corporations securities and then
sells them to the public.
Examples of famous/biggest IPOs:
1. Facebook
Funds raised: US$ 16 Billion
2. Saudi Aramco
Funds raised: US$ 29.4 Billion
Examples of Philippine IPOs in 2020:

1. Merry Mart Consumer Corporation

Listing Date: June 15, 2020

2. Converge
Listing Date: Oct 12, 2020

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Prospectus - A company’s prospectus is a formal legal document designed to provide information and full details
about an investment offering for sale to the public.

For the two local IPOs mentioned above, both Merry Mart and Converge published their prospectuses so the investing
public may discern if the investing in their IPOs would be worthwhile.

Once the company’s shares are listed on a stock exchange and trading in it commences, the price of these shares will
fluctuate as investors and traders assess and reassess their intrinsic value

Secondary Stock Markets

• These are the markets in which stocks, once issued – that is, bought and sold by investors. In the Philippines, the
Philippine Stock Exchange is an example.

• Once shares are issued to investors (through the primary market), they can now be traded at the secondary
market through stock brokers.
A stock is a portion of ownership in a company.

Two Ways to Earn Money in the Stock Market

1. Price Appreciation – buy low, sell high

2. Cash Dividends – a common way for companies to return capital to their shareholders in the form of periodic
cash payments (can be quarterly, annual or semiannual basis).

Stock Broker

Stockbroker or broker is a professional individual who executes the buy and sell orders on behalf of clients for stocks
and other securities in a listed market or over the counter, usually for a fee or commission.

Examples of Stock Brokers in the Philippines:

• COL Financial
• AB Capital Securities
• AAA Equities
• Philstocks
• BPI Trade
• Alpha Securities
• BDO Nomura
• Eagle Equities

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How the Stock Exchange Works

Stock exchanges are secondary markets, where existing owners of shares can transact with potential buyers. It is important
to understand that the corporations listed on stock markets do not buy and sell their own shares on a regular basis
(companies may engage in stock buybacks or issue new shares, but these are not day-to-day operations and often occur
outside of the framework of an exchange). So when you buy a share of stock on the stock market, you are not buying it
from the company, you are buying it from some other existing shareholder. Likewise, when you sell your shares, you do
not sell them back to the company—rather you sell them to some other investor.

Philippine Stock Exchange

PSE is the only stock exchange in the Philippines and one of the oldest in Asia. It currently maintains a trading floor at the
PSE Tower in Bonifacio Global City, Taguig City.

Philippine Stock Exchange Index (PSEi)

The PSEi is different from the PSE. This is a fixed basket of thirty (30) common stocks of listed companies, carefully
selected to represent the general movement of the stock market. In other words, it is the benchmark measuring the
performance of the Philippine stock market.

How to buy shares in the stock market

• First, it is important to know what is the minimum number of shares that you can buy.

• Lot size/Board lot – this is the minimum number of shares that you may purchase, and it is also the number
of increments in which you are allowed to buy

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 Price
Board Lot
From To
0.0001 0.0099 1,000,000
0.01 0.0495 100,000
0.05 0.495 10,000
0.5 4.99 1,000
5 49.95 100
50 999 10
1000 above 5

For example: The last traded price of NOW Corporation is 2.95. From the board lot table, this means that you can
only purchase the stock in increments of 1000 shares.

• Place your orders through your stock broker (for online platforms you can do this yourself).

How A Trade is Made

The prices of shares on a stock market can be set in a number of ways, but most the most common way is through
an auction process where buyers and sellers place bids and offers to buy or sell.

A bid is the price at which somebody wishes to buy, and

an offer (or ask) is the price at which somebody wishes to sell. When
the bid and ask coincide, a trade is made.
This is the bid and ask board which shows the current buyers (bid size) and sellers (ask side) of the stock.

To give an example, we’ll read the first order: There are 8 people/entities who are willing to buy a total number of
151,000 shares at PhP 3.90 per share. (First row at the top, left side)

For a second example, we’ll read the third ask order: There are 3 people/entities who wish to buy 9,000 shares at PhP 3.93
per share.

The bid and ask board provides a good way to strategize on trading because you can identify at which prices got the
amount of volume. Here, you can identify the support and resistance on a given stock. Secondly, you can also see how
much shares you can buy or sell at a certain time. From the example above: If you are planning to buy 500,000 shares
of this stock, you can immediately get filled by posting a buy order at PhP 3.91.
The stock market works in the best interest of the aggressive buyer and seller.

Referring again to the image above, let’s say you placed a buy order at PhP4.00, but your order got filled at PhP 3.92.
This means that if you can buy shares lower than PhP4.00, then the broker automatically executes your order. This
works on your best interest because you were able to buy shares lower than what you bid for.

The same way also happens when you try to sell your shares. If you posted a sell order at PhP 3.60, your order here may
get filled for something higher than that, given that there are bids who are willing to buy shares higher than your asking
price. The broker executes this trade in your favor. This can be more profitable for you because you were able to sell
your stocks higher than your expected price.

Learning Module on FM201

How to Choose Stocks to Buy
There are two approaches in studying companies/stocks to buy:
1. Technical Analysis
• Analysis of a stock, or company, through the use of price movement, data and chart patterns.

• It tells you when to buy a stock.

• Mostly utilize charts and technical indicators.

For detailed information on technical analysis, please check this link:
https://www.investagrams.com/daily/2017/10/the-complete-beginners-guide-to-technical-analysis/

2. Fundamental Analysis

• Analysis of a stock or company through the use of economic factors, company growth, financial ratios
and other different factors that can a business.

• It tells you what stock to buy.

• The most common framework for fundamental analysis utilizes the following approach:

This is called a top-down approach:

• First you study about the general economic conditions/indicators (GDP, foreign exchange rate, inflation,
interest rates).

• Next you study the thriving or flourishing industries within the economy (mining, property, services,
holdings, etc)

• Finally, look deeper into the companies in those industries

• This explains why the diagram above is an inverted triangle – as an investor you narrow down your
stock/company picks as you go along in studying them fundamentally.
Here is a video on fundamental analysis: https://www.youtube.com/watch?v=UQm5gTyWnQI&t=2s
Video: InvestaUniversity: Fundamental Analysis vs. Technical Analysis (FOR BEGINNERS)
By: InvestaTV

Learning Module on FM201

Bull Market vs. Bear Market

You may have heard of the phrase “we have a bullish market” or “we are in a bear market cycle”. The
term bullish signifies a strong upward market where prices are continuously rising. It opposite,
bearish, is a term for a market going down or prices are gradually declining.

Application:
Do the following activity. Answer these on a separate sheet:
Find about the Philippine Stock Exchange market crash during the pandemic which started in March.

• How low the PSEi was?

• By what percentage was the drop of the index from the previous trading day?

• What was the reason?

Summary of the Lesson:

• The stock market is a market where shares of publicly-held companies take place.

• The primary stock market issues shares to investors through Initial Public Offering.

• The secondary stock market provides an avenue for buying and selling shares of stock. Trades
are made between shareholders of the company.

• The two ways to earn money in the stock market are price appreciation and through cash
dividends.

• The two approaches to studying companies prior to buying stocks are fundamental analysis and
technical analysis.

References:

1. Mangun, J. (Ed.). (2013). Why Do We Need A Stock Market. In Outside The Box (pp.
169–171). Business Mirror.

2. Investagrams. (2017, October 29). The Complete Beginner’s Guide to Technical

Analysis. https://www.investagrams.com/daily/2017/10/the-complete-beginners-
guide-to-technical-analysis/

Learning
Module on
FM201
 3. InvestaTV. (2020, August 19). InvestaUniversity: Fundamental Analysis vs.
Technical Analysis (FOR BEGINNERS) [Video]. YouTube.
https://www.youtube.com/watch?v=UQm5gTyWnQI&t=2s

4. Winck, B. (2020, July 7). Here are the 11 largest IPOs of all time. Business Insider.
https://markets.businessinsider.com/news/stocks/ipos-top-largest-initial-public-offerings-all-
time-ranked-cash-2020-7-1029373999
5. Murphy, C. (2020, April 10). Prospectus. Investopedia.
https://www.investopedia.com/terms/p/prospectus.asp

6. Hayes, A. (2020b, July 13). How Does the Stock Market Work?
Investopedia.
https://www.investopedia.com/articles/investing/082614/how-stock-
market-works.asp

7. PSE Academy. (2011, October 7). The PSE Composite

Index (PSEi).
https://www.pseacademy.com.ph/LM/investors~details/i
d-1317988210702/
The_PSE_Composite_Index_PSEi.html

Learning
Module on
FM201