STOCKS and BONDS

At the end of the lesson, you should be able to:

K: Illustrate problems related to stocks and bonds;
S: Distinguish between stocks and bonds;
A: Appreciate the importance of illustrating and distinguishing between stocks and bonds to real life scenario.
History of Stocks and Bonds The trading of goods began
in the earliest civilizations. Early merchants combined
their money to outfit ships and caravans to take goods
to faraway countries. Some of these merchants
organized into trading groups. For thousand of years,
trade was conducted either by these groups or by
individual traders.
During the Middle Ages, merchants began to
gather at annual town fairs where goods from
many countries were displayed and traded. Some
of these fairs became permanent, year-round
events. With merchants from many countries
trading at thee fairs, it became necessary to
establish a money exchange, or bourse, to handle
financial transactions.
One important annual fair took place in the city of Antwerp,
in present day Belgium. By the end of the 1400’s, this city
had become a center of international trade. A variety of
financial activities took place there. Many merchants
speculated—that is, they bought goods for certain prices and
hoped that the prices would rise later so they could make
profits when they sold the goods. Wealthy merchants or
moneylenders also lent money at high rates of interest to
people who needed to borrow it. They then sold bonds
backed by these loans and paid interest to the people who
bought it.
DEFINITION OF TERMS
Stocks are shares in the ownership of the company.
Dividend is a share in the company’s profit.
Dividend per share is a ratio of the dividends to the number
of shares.
Stock Market is a place where stocks can be bought or sold.
The stock market in the Philippines is governed by the
Philippine Stock Exchange (PSE)
Market Value is the current price of a stock at which it can be
sold.
Stock Yield Ratio (current stock yield) is the ratio of the
annual dividend per share and the market value per share.
Par Value is the per share amount as stated on the
company’s certificate that is determined by the company
and remains stable over time.
Bond is the interest-bearing security which promises
to pay:
1. a stated amount of money on the maturity date;
and
2. regular interest payments called coupon.
Coupon is periodic interest payment that the
bondholder receives during the time between
purchase date and maturity date that is usually
received semi-annually.
Coupon Rate (r) is the rate per coupon payment
period.
Price of a bond (P) is the price of the bond at
purchase time.
Fair Price of a bond is the present value of all
cash inflows to the bond holder.
Types of Stocks
1. Common Stock
This entitles shareholders to share in the company’s
profits through dividends and/or capital appreciation.
Common stockholders are given the voting rights,
with the number of votes directly related to the
number of shares owned.
2. Preferred Stock
This is considered less volatile than common stock but typically less potential for profit.
Preferred stockholders do not have voting rights but have a greater claim to the company’s
assets.
BONDS: Making a loan to a corporation
- Bonds represent loans made by investors to
companies and other entities, such as branches of the
government, that have issued the bonds to attract
capital without giving up managing control. It is an
interest-bearing security which promises to pay
amount of money on a certain maturity date as stated
in the bond certificate
Bondholders do not share in a company’s profits, rather,
they receive a fixed return on the investment called the
“coupon rate” and is a percentage of the bond’s original
offering price. On the maturity date, the bondholders will
receive the fix amount of the bond.
Types of Bonds
1. Government Bonds
-Bills: debt securities maturing in less than
one year Notes: debt securities maturing
in one to 10 years Bonds: debt securities
maturing in more than 10 year
2. Municipal Bonds
-Municipal Bonds are the next progression in
terms of risk. Cities don’t go bankrupt that often,
but it can happen. Often, the return is not
taxable.
3. Corporate Bonds
-Corporate bonds are characterized by higher yields because there is a
higher risk of a company defaulting than a government.
4. Zero-Coupon Bonds
-This a type of bond that makes no coupon payments
but instead is paid at the maturity of the bond.
Comparison of Stocks and Bonds
Stocks and Bonds are two of the most traded types of assets—each
available for sale on several different platforms or through a variety of
markets or brokers.
MARKETS FOR STOCKS AND BONDS
 1. The Stock Market
▪ A place where investors go to trade equity securities (i.e. share) issued by corporations. Stocks are traded on stock exchanges.
▪ It brings buyers and sellers together into a fair, regulated, and controlled environment where they can execute their trades. This gives those involved the
confidence that trading is done with transparency, and that pricing is fair and honest. This regulation not only helps investors, but also the corporations
whose securities are being traded. The economy thrives when the stock market maintains its robustness and overall health.
Two Components of Stock Market
1. Primary market which is reserved for first-run equities so
initial public offerings (IPOs) will be issued on this market and
facilitated by underwriters, who set the initial price for securities.
2. Secondary market which is where the most trading activity
takes place after equities are opened up by the underwriters.
Online trading refers to buying and selling financial instruments via internet.
There are available online brokers accredited by the Philippine Stock
Exchange, Inc. such as COL Financial, BDO Nomura, BPI Trade, First Metro,
ABCSI and many others available online.
2. The Bond Market (Debt or Credit Market)
▪ A place where investors go to trade (buy and sell) debt
securities issued by corporations or governments. It is
also known as the debt or the credit market.
▪ Securities sold on the bond market are all various forms
of debt.
▪ 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
Two Segments of Bond Market
1. Primary Market is referred to as the “new issues”
market in which transactions strictly occur directly
between the bond issuers and the bond buyers. It creates
brand new debt securities that have not previously been
offered to the public.
2. Secondary Market is where securities that have already
been sold in the primary market are then bought and sold
at later dates. These secondary market issues may be
packaged in the form of pension funds, mutual funds, and
life insurance policies
Types of Bond Market
1. Municipal Bonds (muni bonds) are locally issued states, cities, special purpose districts, publicly owned airports and seaports, and other government
owned entities who seek to raise cash to fund various projects.
2. Mortgage-Backed Bonds consist of pooled mortgages on real estate properties that are locked in by the pledge of particular collateralized assets and
pay monthly, quarterly, or semi annual interest.
3. Emerging Market Bonds are issued by governments and coompanies located in emerging market economies. These bonds provide much greater
growth opportunities but greater risk than developed bond markets
The bond market does not have a centralized location
to trade, meaning bonds mainly sell over the counter
(OTC). As such, individual investors do not typically
participate in the bond market. Those who do, include
large institutional investors like pension funds
foundations, and endowments, as well as investment
banks, hedge funds, and asset management firms.
Individual investors who wish to invest in bonds do so
through a bond fund managed by an asset manager.
New securities are put up for sale on the primary
market, and any subsequent trading takes place
on the secondary market, where investors buy and
sell securities, they already own. These fixed-
income securities range from bonds to bills to
notes. By providing these securities on the bond
market, issuers can get the funding they need for
projects or other expenses needed.
Three Main Groups involved
in the Bond Market
▪ Issuers
These are the entities that develop, register, and sell instruments on the
bond market, whether they're corporations or different levels of
government.

▪ Underwriters
Underwriters usually evaluate risks in the financial world. In the bond
market, an underwriter buys securities from the issuers and resells them
for a profit.

▪ Participants
These entities buy and sell bonds and other related securities. By buying
bonds, the participant issues a loan for the length of the security and
receives interest in return. Once it matures, the face value of the bond is
paid back to the participant.
What is a Market Index?
Market index refers to a portfolio of securities that represent a particular
section of the stock market The stock market index is a measure of a
portion of the stock market. One example is the PSE Composite Index or
PSEi. It is composed of 30 companies carefully selected to represent the
general movement of market prices. The up or down movement in percent
change over time can indicate how the index is performing. Other indices
are sector indices, each representing a particular sector ( e.g., financial
institutions, industrial corporations, holding firms, service corporations,
mining/oil, property). The stock index can be a standard by which
investors can compare the performance of their stocks. A financial
institution may want to compare its performance with those of others. This
can be done by comparing with the “financials” index.
Bond Market Indices
The main platform for bonds or fixed income securities in the
Philippines Dealing and Exchange Corporation (or PDEx).
Unlike stocks indices which are associated with virtually every
stock market in the world, bond market indices are far less
common. IN fact, other than certain regional bond indices
which have sub-indices covering the Philippines , our bond
market does not typically compute a bond market index.
Instead, the market rates produced from the bond market are
interest rates which may be used as benchmarks for other
financial instruments.
The Bond Market and Government Bonds
Government bonds are auctioned out to banks and other
brokers and dealers every Monday by the Bureau of the
Treasury. Depending on their tenors, these bonds are also
called treasury bills (-t-bonds), treasury notes (tnotes), or
treasury bonds (t-bonds). The resulting coupon rates and the
total amount sold for these bonds are usually reported by news
agencies on the day right after the auction. Since these bond
transactions involve large amounts, these bonds are usually
limited to banks, insurance firms, and other major financial
institutions. The banks may then re-sell these bonds to its
clients.
Although the coupon rate for bonds is fixed, bond prices
fluctuate because they are traded among investors in
what is called the secondary market. These prices are
determined by supply and demand, the prevailing interest
rates, as well as other market forces. As the price of the
bond may increase or decrease, some investors may
choose to sell back to banks the bonds they acquired
before their maturity to cash in their gains even before
maturity.
Even though investing in bonds is a relatively safer
investment that investing in stocks, it is important to
note that there are still risks involved when investing in
bonds. While unlikely, the most extreme scenario is that
of a default by the issuer. In this case, the investor stands
to lose not only the coupons, but even the money invested
in the bond. As such, before investing in bonds, one must
be aware not only of the financial condition of the issuer
of the bond, but also the prevailing market conditions.