FUNDAMENTALS OF SECURITIES
corporation which operate in the Philippines
KEY TERMS
CORPORATION MANAGEMENT- this is the function of
the board of directors and the officers of a corporation
INVESTMENT BANKERS- persons who effect
underwriting
PRINCIPAL- an investment banker who makes a
financial commitment to the issuer
UNDERWRITING- the purchase of a new issue from the
issuing corporation at a fixed price and reselling of such
issue to the public
FIRM COMMITMENT – when underwriters agree to
purchase the entire issue and absorb securities that are
not sold
INITIAL PUBLIC OFFERING (IPO) – the first time that the
corporation issues its securities to the public
CAPITAL – denotes long term funds of the company
Forms of Businesses
Sole Proprietorship- simplest form of business where in
only one person runs the business- proprietor/general
manager)
Partnership- binding together of 2to 4 persons to
engage in businesses; considered more permanent than
a sole proprietorship
Stock Corporation- most of the large businesses are
organized as stock corporations
 The corporation is an entity separate and
apart from its owners, who are called
stockholders or shareholders
 They are more complex to operate and are
considered more permanent than sole
proprietorships and partnerships
 Existing regulations require that a corporation
have at least five (5) incorporators or stock-
holders
 The life span of corporation is 50 years from the
date of incorporation
 In the Philippines, corporations are created
under and regulated by the Corporation Code
of the Philippines
 The Securities and Exchange Commission (SEC)
serves as the lead government agency which
registers and monitors all foreign and domestic
 Stockholders’ financial liability in the
corporation is limited to the amount of money
that they paid for their stock in the
corporation. They cannot be personally sued or
held liable for the corporation’s debts
 Capitalization - When a new corporation is
incorporated, its articles must indicate an
authorized capital
The Corporation as a Form of Business
The corporation- Most large businesses are organized
as corporation. They are more complex to operate and
are considered more permanent than sole
proprietorship and partnerships
Articles of Incorporation- to form a corporation the
owners were file an application for charter or articles of
Incorporation with the Securities and Exchange
Commission
Classification of Shares- shares of stock of corporation
may be divided into classes or series may have such
rights, privileges or restrictions as maybe stated in the
articles of incorporation
Corporation Management- this is the function of the
Board of Directors and the officers of the corporation
Shareholders vote for board of Directors who will then:
a. Determine the general policies of the
corporation
b. Elect top management (officers) of the
corporation
c. Determine dividend payments (when, how
much and what form)
d. Recommend to the shareholders changes
to the articles of Incorporation and By-laws
Shareholders’ Right- shareholders have the right to
elect, remove and replace directors and vote on certain
corporate acts in accordance with the Corporation Code
Shareholders of a corporation have the following
rights:
a. Transfer shares from themselves to
another
b. Received dividends when paid
c. Examine corporation books
d. Vote at annual meetings to elect the
Board of Directors
 e. Limited liability for losses incurred by
the corporation
f. Received the remaining assets of the
corporation after all other claims
on the property of the corporation are
satisfied
g. Receive a stock certificate
Capitalization- when a new corporation is incorporated,
its articles must indicate an authorized capital
Investment Banking
Investment Banking Function- Investment banking
function is an extremely important one as it brings the
issues and potential buyers and securities. The objective
of investment banking is to raise capital under the most
advantageous terms of the issuer
The Investment Banker- Persons who effect
underwriting are called investment bankers. One of the
most important functions of an investment bankers is to
give financial advice to help the corporation determine
how much money it needs, should money be raised.
Underwriting- underwriting is the purchase of a new
issue from the issuing corporation at a fixed price and
the reselling of such issue to the public
The Investment Bankers as a Principal or Agent
a. Principal- an investment banker acts as
principal if he makes a financial commitment
to the issuer. In other words, the investment
undertakes to purchase all the securities to be
issued by the corporation
b. Agent – an investment banker acts as an agent
if he merely participates in the marketing of
new securities, but does not purchase such
securities outright from the issuer
Types of Offerings
a. Primary - the proceeds from the sale of securities go
to the issuing corporation. This type of offering raises
fresh capital for the corporation
b. Secondary - the proceeds from the sale securities go
to previous owners. Therefore, no additional funds are
infused into the corporation
c. Initial Public offerings (IPO) – the first time that the
corporation issues its securities to the public. An IPO
can be a primary or secondary offering or combination
of both
 Types of underwriting- the underwriting
agreement or purchase contact between the
investment bankers and the issuer can take a
number of different forms. These agreements
are:
a. Firm Commitment- when underwriters agree
to purchase the entire and absorb securities that
are not sold, this would be considered a firm
commitment underwriting.
b. Best Effort- If underwriters agree to act as agents for
issuer, but state that any shares not sold will be
returned to the issuer, the underwriting agreement will
be cancelled. This type of underwriting is called best
efforts all-or-none
Forming Underwriting Syndicate Group- the issuer
appoints a syndicate manager or a group of investment
bankers as co-manager to market its securities. The
syndicate manager will then assist the corporation as
follows:
a. Filing of a Registration Statement – the SEC
requires the disclosure of relevant
information about the corporation and the
offering through the filing of a registration
statement before securities can be offered
for sale to the public
b. Prospectus- this is the document given to
prospective investors and basically a
summary of the registration
statement
c. Due Diligence Meeting- this is a meeting of
the legal counsel, accountants,
underwriters, key officers of the
corporation and other experts to ensure
that the information provided to the SEC
is as accurate as possible
d. Underwriting Agreement- an agreement
signed by the underwriters for the
following considerations:
e. Establish a public offering price based on
indications of interest and other relevant
information about the corporation’s
financial condition
f. Set the manager’s free and selling
commission
g. Permit the manager to stabilize the issue
EQUITY SECURITIES
  Capital- denotes long term funds of the
company. Equity capital consists of long-term
funds provided by the owners or stockholders,
whereas debt capital includes all long-term borrowing
incurred by the company
a. classification of shares of stock in Corporate Books-
shares of stock are classified in the books of
corporation as follows:
1. Authorized- the maximum amount of capital
stocks that the corporation has the power to issue
2. Issued- capital stock that has been sold to
shareholders
3. Treasury Stock- Issued capital stock that has
been subsequently reacquired by the corporation
4. Outstanding- Issued capital stock that is held
by shareholders. This represent the total issued capital
stock less any treasury stock
b. Valuation of shares of stock- there are four terms
relative to the valuation of shares of stock:
1. Par value- an arbitrary value given to the stock
at the time of issuance and is used to record
the value of shares on the books of the
corporation
2. Stated Value- the value at which a no-par stock
is entered on the corporation books
3. Book Value- the tangible net asset value per
share. If the corporation were to be
liquidated, this would be the approximate
amount that stockholders were receive for
each share he owns
4. Market Value- the price at which someone is
willing to pay for its share of stock
Types of Equity Securities- there are generally two
types of equity securities that the public may purchase:
common stock and preferred stock. They are mainly
differ in the following ways.
1. Voting Rights- normally common stock has voting
rights while preferred stock does not
2. Stated Rate of Return- A preferred stock has
a stated a rate of return and dividend rate,
which is a percentage of its par value
Common Stock- all stock corporation issue at least one
class of common stock in the form of shares. The
characteristics and features of common stock are as
follows:
1. Dividends- the Board of Director determines
weather a dividend will be declared.
The amount is at the discretion of the Board of Director
depending on the earnings and other business
objectives of the corporation.
2. Preemptive Right - this is the right of current
stockholders to maintain their proportionate
ownership in the company by giving them the
first option to purchase any additional shares
that the corporation may issue.
EXAMPLE: XYZ Corporation has one (1) million shares
presently outstanding and intends to issue 100,000 new
shares
1,000,000
=10 rights for 1 share
100,000
The value of right is determined by a formula:
Cum-rights means the stock is being sold “with
rights” whereas Ex-rights means it is being sold
“without the rights” attached.
CUM-RIGHTS
Market Price−Subscription Price
=Value of a Right
Number of Rights Required +1
Ex – Rights:
Market Price−Subscription Price
=Value of a Right
Number of Rights Required
3. Ex-Divided and Ex- Rights date – For listed stocks,
these dates are set as the third trading day preceding
the record date.
4. Voting Rights - Common stockholders have voting
rights. Each holder of voting stock of a corporation has
the right to attend meeting and vote on important
matters, such as the election of members of the Board
of Directors.
Stockholders, who cannot attend meetings, any vote
by proxy. These are two methods of handling the
allocations of votes.
a) Statutory Voting – in statutory voting, a
stockholder may vote, for every directorship, a
maximum number of votes equal to the number
of shares he owns. Thus, if five directors are to
be elected, a holder of 100 shares may cast a
maximum of 100 votes for each of the five
positions to be filled.
b) Cumulative voting – In cumulative voting, the
stockholder may spread his total votes among
the number of positions to be filled in any
manner. Using the previous situations
as an example, a holder with 100 shares may cast all his
500 votes (100 votes per position X5 positions to be
filled) for just one candidate. Therefore, in companies
with cumulative voting rights, minority stockholders
have a better chance of gaining representation on the
board.
5. Stock Splits – From time to time, corporations split
their stock, which increases the number of authorized
shares and decreases the par value. For this reason,
stock splits require stockholder approval and an
amendment in the Articles of Incorporation. One reason
for a stock split is to decrease the market price in order
to make the stock more appealing to buy.
6. Reverse Splits- aim to consolidate the number of
shares publicly held to smaller number of shares and
increase the market price per share. This will also
increase the par value
7. Warrants- these are similar to rights, except that the
corporation does not issue them specifically to a
stockholder but sell them to general revenue. Key
points to remember
(a) Warrants are longer term (several years to
perpetual)
(b) Warrants require delivery of the warrant and
fixed subscription to purchase a specified
number of common shares
(c) At issue, the subscription price is always
higher than the market price
8. Classification of Stock
(a) Blue Chip Stocks- High grade issues of major
companies that have long and favorable
history of earnings and dividend payment
(b) Growth Stocks- Stocks of corporations whose
sales, earnings and market share are
expanding faster than the general economy
and their industry
(c) Defensive Stocks- Characterize by their degree
of stability during the periods of
declining economy
(d) Preferred Stock- preferred stock is so called
because it is a senior to or has preference over
common stock as to dividends and claim on
the assets of the corporation in the event of
liquidation
Basic Type of Preferred Stock
1. Participating Preferred- this stock allows
the holder to participate in dividends that
may declared by the corporation to
common stockholder
2. Cumulative Preferred- This stock caries a
provision stating that no dividend may be
paid to common stockholders until all
previously unpaid dividends owed to
preferred stockholders are paid
3. Convertible Preferred- this stock are carries to
provision that allows the holder to convert
preferred stock into a common stock at a
fixed ratio
Measurement of Return on Equity Equipment
1.Dividend Yield - some investors purchase
common and preferred stock as a source
of current income
2. Capital Gains - Another way for investors to profit
from equity investments is through capital gains.
1. Risk/Reward Trade off - A basic concept in
investments is risk/reward trade off, which generally
says, “the lesser the risk in a given investment, the
lesser the opportunity for gain.”
2. Market Risk- stock prices rise and fall. Modern
investment theory tells us that the risk of a single stock
as measured by its volatility, actually consist of two
components: unsystematic risk and systematic risk.
Unsystematic risk or company specific risk is the
variability in the stock’s price due to factors associated
with the company. On the other hand, systematically
risk or market-related risk is the variability in price
related to the ups and downs of the stock market as a
whole
3. Sector Risk- Investing heavily in securities issued by
companies in a particular industry is subject to what is
known as sector risk
4. Liquidity Risk- this is the risk that an investment may
not find a ready buyer or that it may have to be
disposed at a substantial loss
5. Interest Rate Risk- this refers to a volatility of bond
prices that results from changes in interest rates
6. Credit risk- credit risk or default risk refers to the
“creditworthiness” of the bond issuer and its expected
ability to pay interest and to repay the principal upon
maturity
7. Purchasing Power Risk- this is the risk of inflation or
the risk that the value of your money in real terms will
be less than the purchasing power of your original
investment
8. Call Risk- also called pre-payment risk and is the
possibility that a bond will be called away from the
investors by the issuer before its maturity date