College of Accountancy and

Finance

FIMA 40023

SECURITY ANALYSIS
Daren D. Cortez, CFMP, CATP, MBA
Faculty, Department of Financial
Management College of Accountancy and
Finance Polytechnic University of the
Philippines
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Finance

INTRODUCTION
TO
EQUITY
MARKETS AND
SECURITIES
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Finance

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SECURITIES
-relates to a financial instrument or financial asset that can be traded in
the open market;

- stock, bond, options contract, or shares of a mutual fund, etc.

 College of Accountancy and
Finance

SECURITIES

Republic Act No. 8799 or the Securities Regulation Code

-shares, participation or interests in a corporation or in a commercial enterprise or
profit-making venture and evidenced by a certificate, contract, instruments, whether
written or electronic in character

- fungible, negotiable financial instrument that holds some type of monetary value

-represents an ownership position in a publicly-traded corporation via stock; a

creditor relationship with a governmental body or a corporation represented by
owning that entity's bond; or rights to ownership as represented by an option
 College of Accountancy and
Finance

SECURITIES
It includes:

(a)Shares of stocks, bonds, debentures, notes evidences of indebtedness,

asset-backed securities;
(b)Investment contracts, certificates of interest or participation in a profit sharing
agreement, certificates of deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e)Certificates of assignments, certificates of participation, trust certificates, voting
trust certificates or similar instruments
(f) Proprietary or nonproprietary membership certificates in corporations; and
(g) Other instruments as may in the future be determined by the Commission
 College of Accountancy and
Finance

TYPES OF SECURITIES
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Finance

TYPES OF
SECURITIES
Debt Securities – involve borrowed money and the selling of a
security.

Equity Securities – refers to stocks and a share of ownership in a

company.

Derivative Securities – instruments whose value depends on basic

variables.

Hybrid Securities – combines characteristics of both debt and equity

securities.
 College of Accountancy and
Finance

Real versus Financial Assets

Real assets are the assets that a business or investor owns, such
as land, building, and more. These are used to produce goods
and services.

A financial asset, on the other hand, are liquid assets that one
can easily or quickly convert into cash, such as stock, bonds,
and securities, etc. these are claims on real assets or claims on
asset income.
 College of Accountancy and
Finance

Markets and Market

Structure
Market - is a place where buyers and sellers can meet to
facilitate the exchange or transaction of goods and services.

Market structure - refers to how different industries are

classified and differentiated based on their degree and nature
of competition for goods and services.
 College of Accountancy and
Finance

Types of Market Structures

 College of Accountancy and
Finance

Types of Market Structures

Perfect Competition
-occurs when there is a large number of small companies
competing against each other
-sell similar products (homogeneous), lack price influence
over the commodities, and are free to enter or exit the market
- e.g. market sellers of meat, fruits, and vegetables
 College of Accountancy and
Finance

Types of Market Structures

Oligopoly
-consists of a small number of large companies that sell
differentiated or identical products
- competitive strategies are dependent on each other
- strategic planning by these types of players is a must
- e.g. Smart, Globe, Sun
 College of Accountancy and
Finance

Types of Market Structures

Monopoly
- a single company represents the whole industry
-no competitor, and it is the sole seller of products in the
entire market
-restrict other companies from entering the market; has the
power to control the market and set prices for its goods
- e.g. Meralco, Maynilad
 College of Accountancy and
Finance

Types of Market Structures

Monopolistic Competition
-refers to an imperfectly competitive market with the
traits of both the monopoly and competitive market
-sellers compete among themselves and can differentiate their
goods in terms of quality and branding to look different
- e.g. P & G, Jack & Jill, Unilever
 College of Accountancy and
Finance

FINANCIAL MARKET

-primarily refers to a marketplace where buyers and sellers

participate in the trade.

-known for transparent pricing, strict regulations, costs and fees and clear
guidelines.

-acts as an intermediary between savers and investors, or they help

savers to become investors. On the other hand, they also help businesses to
raise money to expand their business.
 College of Accountancy and
Finance

FUNCTIONS OF FINANCIAL
MARKETS
Price Determination - interaction between investors, industries and
other market forces helps to determine the price.

Mobilization of Savings - helps in connecting those with money with

those who require money.

Ensures Liquidity - investors can easily sell those assets and convert
them into cash whenever they want.

Saves time and money - serve as a platform where buyers and sellers
can easily find each other without making too much efforts or wasting
time.
 College of Accountancy and
Finance
Structures of Financial Markets
 College of Accountancy and
Finance
Structures of Financial Markets
By Nature of Claim
•Debt Market: The market is the market wherein fixed claims or debt instruments, such as
debentures or bonds, are traded between investors.
•Equity Market: A market wherein the investors buy and sell equity instruments. It is the
market for equity claims.

By Timing of Delivery
•Cash Market: This market can be defined as a market where all the transaction are settled in
real-time between buyers and sellers.
•Futures Market: Futures market is one wherein commodities are delivered at a future
specified date.

By Organizational Structure
•Exchange-Traded Market: This market has a centralized organization with the standardized
procedure.
•Over-the-Counter Market: This market is characterized by a decentralized organization,
having customized procedures.
 College of Accountancy and
Finance
Structures of Financial
Markets
By Maturity of Claim

•Money Market: The market where monetary assets such as commercial paper, certificate of
deposits, treasury bills, etc. which mature within one year or less, are traded is called money market.

•Capital Market: The capital market is defined as a market wherein medium and long term
financial assets are dealt with. It can be further divided into two types:

Primary Market: A financial market, wherein the company listed on a stock exchange, for the first
time, issues new security or already listed company brings the fresh issue. It is also known as IPO.
Secondary Market: Alternately known as the Stock market, a secondary market can be
defined as an organized marketplace, wherein already issued securities are traded between investors,
such as individuals, merchant bankers, stockbrokers and mutual funds.
 College of Accountancy and
Finance

The Money
Market
- an organized exchange market where
participants can lend and borrow short-term,
high-quality debt securities with
average
maturities of one year or
less.
 College of Accountancy and
Finance

Types of
Instruments Traded
in the
Money Market
 College of Accountancy and
Finance

Types of Instruments Traded in the Money

Market

Treasury Bills
- issued with a full guarantee by the government
-issued to refinance Treasury bills reaching maturity and to finance the
government’s deficits
-short-term in nature, usually with tenors of 91, 182 and 364 days and sold
at a discount
 College of Accountancy and
Finance

Types of Instruments Traded in the Money

Market

Certificate of Deposit (CD)

-issued directly by a commercial bank, but it can be purchased
through brokerage firms
-fixed maturity date and interest rate, and they attract a penalty for
withdrawing prior to the time of maturity
-short-term in nature, usually with maturity date ranging from three
months to five years and can be issued in any denomination
 College of Accountancy and
Finance

Types of Instruments Traded in the Money

Market

Commercial Paper
-unsecured loan issued by large institutions or corporations to finance
short-term cash flow needs
- only institutions with a high credit rating can issue commercial paper
- issued in denominations of $100,000 and above
- comes with a maturity date between one month and nine months.
 College of Accountancy and
Finance

Types of Instruments Traded in the Money

Market
Banker’s Acceptance
-a form of short-term debt that is issued by a firm but guaranteed by a bank
-created by a drawer, providing the bearer the rights to the money
indicated on its face at a specified date.
-often used in international trade because of the benefits to both the
drawer and the bearer
-maturity date usually lies between one month and six months from the
issuing date
 College of Accountancy and
Finance

Types of Instruments Traded in the Money

Market
Repurchase Agreement (Repo)
-a short-term form of borrowing that involves selling a security with an
agreement to repurchase it at a higher price at a later date
-commonly used by dealers in government securities who sell
Treasury bills to a lender
-agreements’ date of maturity ranges from overnight to 30 days or
more
-Federal Reserve buys repurchase agreements as a way of regulating the
money supply and bank reserves
 College of Accountancy and
Finance

Types of Instruments Traded in the Money

Market

Eurodollars
-dollar-denominated deposits held in foreign banks, and are thus, not
subject to Federal Reserve regulations
-very large deposits of eurodollars are held in banks in the Cayman
Islands and the Bahamas
- pay a slightly higher interest rate than U.S. government debt
 College of Accountancy and
Finance

The Bond
Market
- is where investors go to trade (buy and sell) debt
securities, prominently bonds, which may be issued by
corporations or governments. By buying a bond, credit, or debt
security, you are lending money for a set period and charging
interest—the same way a bank does to its debtors.
 College of Accountancy and
Finance

The Equity
Market
- a market in which shares of companies are issued and
traded, either through exchanges or over-the-counter
markets

- gives companies access to capital to grow their business, and

investors a piece of ownership in a company with the potential
to realize gains in their investment based on the company's
future performance
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Finance

The Derivatives Market

- refers to the financial market for financial

instruments such as futures contracts or options that
are based on the values of their underlying assets
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Finance

Types of Derivative Contracts

Options

- give the buyer the right, but not the obligation, to buy or sell an
underlying asset at a specific price (referred to as the strike price)
during a specific period of time

American Options - exercised at any time before the option’s

expiry

European Options - can only be exercised on its expiration date.

 College of Accountancy and
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Types of Derivative Contracts

Futures
-standardized contracts that allow the holder of the contract to buy or sell
the respective underlying asset at an agreed price on a specific date
-not only possess the right but also are under the obligation, to carry out
the contract as agreed
- standardized, meaning they are traded on the exchange market.
 College of Accountancy and
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Types of Derivative Contracts

Forwards
-similar to futures contracts in the sense that the holder of the contract
possesses not only the right but is also under the obligation to carry out the
contract as agreed
-over-the-counter products, which means they are not regulated and are
not bound by specific trading rules and regulations
-unstandardized, meaning customizable to suit the requirements of both
parties involved.
 College of Accountancy and
Finance

Types of Derivative Contracts

Swaps
-involve two holders, or parties to the contract, to exchange financial
obligations
-over-the-counter products, which means they are not regulated and are
not bound by specific trading rules and regulations
-unstandardized, meaning customizable to suit the requirements of both
parties involved
- Interest rate swaps are the most common swaps contracts
 College of Accountancy and
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Alternative Investments
-is a financial asset that does not fall into one of the
conventional investment categories (stocks, bonds, and cash)
-include private equity or venture capital, hedge funds,
managed futures, art and antiques, commodities, and
derivatives contracts
-real estate is also often classified as an alternative
investment