STOCK MARKET

What is 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.
Common Stock vs Preferred Stock
• A common stock is a representation of partial ownership in a company,
and is the type of stock most people invest in. Common stock comes with
voting rights, as well as the possibility of dividends and capital
appreciation. In accounting, you can find information about a company's
common stock in its balance sheet.
• Some companies choose to distribute some of their profits to common
stockholders in the form of dividends, and each common stockholder is
entitled to a proportional share.
• For example, if a company declares a dividend of Php10 million and there
are 20 million shareholders, investors will receive Php0.50 for each
common share they own.
Common Stock vs Preferred Stock

• Preferred stock often works more like a bond than common stock does.
Preferred stock dividends are often much higher than dividends on
common stock and fixed at a certain rate, while common dividends can
change or even get cut entirely. Preferred stock also has a set redemption
price that a company will eventually pay to redeem it. This redemption
value, like a bond at maturity, limits how much investors are willing to pay
for preferred shares.
Preffered Stock
The label "preferred" comes from three advantages of preferred stock:

• Preferred stockholders are paid before before common stockholders receive

dividends.
• Preferred shares have a higher dividend yield than common stockholders or
bondholders usually receive (very compelling with low interest rates).
• Preferred shares have a greater claim on being repaid than shares of common stock
if a company goes bankrupt.
Preffered Stock
In other words, they're really "preferred" by investors looking for a
more secure dividend and lower risk of losses.

The two main disadvantages with preferred stock are that they often
have no voting rights and that they have limited potential for capital
gains. A company may issue more than one class of preferred
share. Each class can have a different dividend payment, a different
redemption value, and a different redemption date.
Primary Market vs Secondary Markets
• Primary Markets
 issues new securities on an exchange for companies, governments, and
other groups to obtain financing through debt-based or equity-based
securities
 facilitated by underwriting groups consisting of investment banks that set a
beginning price range for a given security and oversee its sale to
investors.
underwriting groups is a temporary association of investment bankers
and broker-dealers who wish to purchase a new issue of securities
from an issuer in order to distribute the issue to investors at a profit.
Primary Markets
In the primary market, new shares are issued and sold to the investing public for the first
time. It is where capital is actually raised by the company selling stock directly to investors
typically through an initial public offering. For instance, if San Miguel Corporation decides to sell
a new stock to raise equity funds, it will be a primary market transaction. Since it is the first time
the company has sold stock to the public, it is called an initial public offering (IPO). The
proceeds of the sale go to San Miguel Corporation, the issuing company. Investors who have
subscribed to the IPO have provided the company with the necessary funds to continue its
operation and expansion, and become part owners of the company.
An underwriter or investment banker assists the issuer of a new security in setting the
offering price and in marketing the securities to the public. The investment bankers serves as a
middleman in the transfer of funds between the company in need of capital and the public, and
facilitates the issuance of shares.
There is occasionally a secondary offering in the primary market. This means that the
shares of stock being offered were previously issued but is being offered to the public for the
first time by a large or controlling shareholder. As such, the selling stockholder gets the
proceeds of the sale.
Primary Market vs Secondary Markets
• Secondary Markets
 is a platform wherein the shares of companies are traded among investors. It means
that investors can freely buy and sell shares without the intervention of the issuing
company. In these transactions among investors, the issuing company does not
participate in income generation, and share valuation is rather based on its
performance in the market. Income in this market is thus generated via the sale of
the shares from one investor to another.
 Some of the entities that are functional in a secondary market include –
1. Retail investors.
2. Advisory service providers and brokers comprising commission brokers and
security dealers, among others.
3. Financial intermediaries including non-banking financial companies,
insurance companies, banks and mutual funds.
Secondary Markets
The secondary market is where securities can be bought and sold after they have been
issued to the public in the primary market. Thus, if you decide to buy existing shares of San
Miguel Corporation, you cannot buy them directly from the issuing company anymore since they
have all been sold to the investing public during the initial public offering.
So, how can you avail of San Miguel shares when the IPO has been completed? Investors
can only buy these shares from existing shareholders who are willing to sell their shares. When
they do so, it is a secondary market transaction. The proceeds from this transaction don not go
to the issuing corporation; instead they go to the investor who sold his shares.
The secondary market is where the original shareholders sell their shares to other
investors. An investor can only make a profit when he can sell his shares at a price higher that
the purchase price. This market gives a continuous reflection of the value of securities (prices)
at some point in time according to the best available information.
Secondary markets include the stock exchange and the over-the-counter (OTC) market.
Functions of a Stock Market
• 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.
• 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.
• 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.
Functions of a Stock Market
• 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.
• Support All Eligible Types of Participants: A marketplace is made by a variety of participants,
which include market makers, investors, traders, speculators, and hedgers. All these
participants operate in the stock market with different roles and functions.
• 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.
Functions of a Stock Market
• Balanced Regulation: Listed companies are largely
regulated and their dealings are monitored by market
regulators, like the Securities and Exchange Commission
(SEC) of the Philippnes,
Stock Market Participants
• Stockbrokers, also known as registered representatives in the U.S., are the licensed
professionals who buy and sell securities on behalf of investors. The brokers act as
intermediaries between the stock exchanges and the investors by buying and selling stocks
on the investors' behalf. An account with a retail broker is needed to gain access to the
markets.
• Portfolio managers are professionals who invest portfolios, or collections of securities, for
clients. These managers get recommendations from analysts and make the buy or sell
decisions for the portfolio. Mutual fund companies, hedge funds, and pension plans use
portfolio managers to make decisions and set the investment strategies for the money they
hold.
• Investment bankers represent companies in various capacities, such as private companies
that want to go public via an IPO or companies that are involved in pending mergers and
acquisitions. They take care of the listing process in compliance with the regulatory
requirements of the stock market
Stock Market Participants
• Custodian and depot service providers, which are institution holding
customers' securities for safekeeping so as to minimize the risk of their
theft or loss, also operate in sync with the exchange to transfer shares
to/from the respective accounts of transacting parties based on trading on
the stock market
• Market maker: A market maker is a broker-dealer who facilitates the
trading of shares by posting bid and ask prices along with maintaining an
inventory of shares. He ensures sufficient liquidity in the market for a
particular (set of) share(s), and profits from the difference between the bid
and the ask price he quotes
Significance of the Stock Market
The stock market is one of the most vital components of a free-market economy.

It allows companies to raise money by offering stock shares and corporate bonds. It
lets common investors participate in the financial achievements of the companies,
make profits through capital gains, and earn money through dividends, although losses
are also possible. While institutional investors and professional money managers do
enjoy some privileges owing to their deep pockets, better knowledge and higher risk
taking abilities, the stock market attempts to offer a level playing field to common
individuals.

The stock market works as a platform through which savings and investments of
individuals are channelized into the productive investment proposals. In the long term,
it helps in capital formation & economic growth for the country.