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STOCK MARKETS

Lee Uy, Caitlene Gayle S.


Paulino, Luis Miguel Y.
CONTENTS
8.1 Overview of Stock Markets
8.2 Philippine Stock Markets
8.3 Stock Market Securities
8.4 Primary Stock Markets
8.5 Secondary Stock Markets
8.6 Other Issues in Stock Markets
8.7 International Aspects of Stock Markets
8.8 1929 and 2008 Stock Market Crises
8.9 Fundamental and Technical Analysis
8.10 Margin Trading
OVERVIEW OF STOCK MARKETS
Stock Markets
● Allow suppliers of funds to efficiently and cheaply get equity
funds to public corporations.
● In exchange, the fund users give the fund suppliers ownership
rights in the firm as well as cash flows in the form of dividends.
EQUITY FUNDS

OWNERSHIP & DIVIDENDS

Users of Funds Suppliers of Funds


(Firms)
8.1 Overview of Stock Markets
OVERVIEW OF STOCK MARKETS
Stock Markets
● Allow suppliers of funds to efficiently and cheaply get equity
funds to public corporations.
● In exchange, the fund users give the fund suppliers ownership
rights in the firm as well as cash flows in the form of dividends.
EQUITY FUNDS

SOURCES OF FINANCING FOR FIRMS


1. Corporate Stock or Equity
2. Debt Financing
3. Retained Earnings Financing

8.1 Overview of Stock Markets


PHILIPPINE STOCK MARKETS
The Philippine Stock Exchange
● National market for the purchase and sale of
securities
● The only stock exchange in the Philippines
● Private, non profit, and non stock organization
created to provide and maintain a fair,
efficient, transparent, and orderly market for
the purchase and sale of securities such as
stocks, warrants, bonds, options and others.

8.2 Philippine Stock Markets


PHILIPPINE STOCK MARKETS
The Philippine Stock Exchange
● President: Ramon S. Monzon
● Located at:
The PSE Tower, BGC
● Opening Hours:
9:30 am to 3:30 pm with a lunch break
from 12:00-1:30

8.2 Philippine Stock Markets


BRIEF HISTORY

Makati Stock Exchange Manila Stock Exchange The Philippine Stock


(1963) (1927) Exchange (1992)

8.2 Philippine Stock Markets


ROLES
● Measures and controls the growth of the country
● Raises capital for businesses and facilitates company growth
● Facilitates the selling and buying of issued stocks
● Provides a market for individuals and organizations
to trade and invest their excess funds
- Earn through: Price Appreciation
Dividend Declaration

8.2 Philippine Stock Markets


SIGNIFICANCE
● Speedy access to information on the securities market
● Transparency of listed companies
● Full, fair, timely, and accurate disclosures of information from
listed companies
● Comprehensive market data, stock quotations,
dividend declarations, trading activities, and other
pertinent information
● Critical in increasing market liquidity

8.2 Philippine Stock Markets


PHILIPPINE STOCK EXCHANGE INDICES
● PSE All Shares Index (ALL)
● PSE Composite Index (PSEi) Main Index
● PSE Financials Index (FIN)
● PSE Holding Firms Index (HDG)
● PSE Industrial Index (IND)
● PSE Mining and Oil Index (M-O)
● PSE Property Index (PRO)
● PSE Services Index (SVC)
8.2 Philippine Stock Markets
INVESTING IN THE PHILIPPINE STOCK EXCHANGE
1. Choose a stock broker
- AB Capital Securities Inc., BPI
Securities Corporation, COL
Financial Group Inc., HDI Securities
Inc., Philstocks Financial Inc., etc…
2. Open an account
3. Fund your account
4. Start investing

8.2 Philippine Stock Markets


INVESTING IN THE PHILIPPINE STOCK EXCHANGE

8.2 Philippine Stock Markets


STOCK MARKET SECURITIES

CORPORATE STOCK

Common Stock Preferred Stock

8.3 Stock Market Securities


COMMON STOCK
● Fundamental ownership claim in a corporation
● Characteristics:
1. Discretionary Dividend Payments
2. Residual Claim Status
3. Limited Liability
4. Voting Rights

8.3 Stock Market Securities


COMMON STOCK
DIVIDENDS
● No special or guaranteed dividend rights
● Amount declared is dependent upon the decision of the Board of
Directors
● No legal recourse for non-receipt of dividends when these are
reinvested in the firm

8.3 Stock Market Securities


COMMON STOCK
DIVIDENDS
● Return to a Stockholder over a period can be divided into two:
○ Capital Gain
○ Dividend Returns

Rt= Pt - Pt-1 + Dt Where: Pt = stock price at time t


Dt = dividends paid over time t – 1 to t
Pt-1 Pt-1 (Pt – Pt–1) / Pt–1 = capital gain over time t – 1
to t
Dt / Pt – 1 = return from dividends paid over
time t – 1 to t
8.3 Stock Market Securities
COMMON STOCK
An investor purchases shares of Albatross Flight Systems for $15.00
per share. One year later, the market value of the shares is $17.00,
and the investor has received several dividends totaling $1.50. Based
on this information, the total shareholder return is:

Rt= Pt - Pt-1 + Dt
Pt-1 Pt-1

8.3 Stock Market Securities


COMMON STOCK
RESIDUAL CLAIM
● Lowest priority claim on a corporation’s assets in the event of a
bankruptcy
LIMITED LIABILITY
● Common stockholder losses are limited to the amount of their
original investment in the firm if the company’s asset value falls
to less than the value of the debt it owes
● Personal wealth are not affected

8.3 Stock Market Securities


COMMON STOCK
VOTING RIGHTS
● Do not exercise control over the firm’s daily activities
● Do exercise control over the firm’s activities indirectly through
the election of the board of directors
● DUAL-CLASS FIRMS
○ Two classes of common stock are outstanding, with
differential voting rights assigned to each class.

8.3 Stock Market Securities


COMMON STOCK
VOTING RIGHTS
● 2 Methods of electing the Board of Directors
○ Cumulative Voting
■ Number of Votes = Number of Shares x Number of
Directors to be Elected
○ Straight Voting
■ Number of Votes for Each Director = Number of Shares
Outstanding

8.3 Stock Market Securities


COMMON STOCK
Cumulative Voting
● All directors are voted on at the same time. The number of votes assigned to
each stockholder equals the number of shares held multiplied by the number of
directors to be elected
● Stockholders an assign all votes to one person or spread them out
● Allows minority stakeholders to have a say
The number of shares needed to elect p directors, Np

Np = (p x # of shares outstanding) + 1
(# of directors to be elected +1)

8.3 Stock Market Securities


COMMON STOCK
Straight Voting
● The vote on the board of directors occurs one director at a time
● The number of votes eligible for each director is the number of
shares outstanding
Proxy Votes
● Allows voters to vote by absentee ballot or through authorized
representatives

8.3 Stock Market Securities


PREFERRED STOCK
● Has the characteristics of both bonds and common stocks
○ Bonds: Fixed Periodic Dividend Payment
○ Common Stocks: Represents Ownership Interests
● Paid only when profits have been generated and all debt holders
have been paid
● Senior to Common Stocks but Junior to Bonds

8.3 Stock Market Securities


PREFERRED STOCK
● Beneficial for the corporation as a source of funds
○ Can be missed without fear of bankruptcy proceedings
● Funds raised can be invested to purchase assets to produce more
income

8.3 Stock Market Securities


PREFERRED STOCK
● Drawbacks of Preferred Stock
○ Missed Dividend Payments = Reluctance of Investors to
Invest in the Firm
○ Dividends paid are Not Tax-Deductible
○ No Voting Rights

8.3 Stock Market Securities


PREFERRED STOCK
PREFERRED STOCK

Cumulative Noncumulative Participating Non-Participating


MISSING DIVIDEND DIVIDEND PAYMENTS ACTUAL DIVIDENDS FIXED STOCK
PAYMENTS GO INTO DO NOT GO INTO PAID MAY BE DIVIDEND
ARREARS ARREARS GREATER THAN REGARDLESS OF
PROMISED INCREASE OR
DIVIDENDS DECREASE IN PROFIT

8.3 Stock Market Securities


PRIMARY STOCK MARKETS
● Markets where corporations raise funds through the issuance of
new stock
● Investment Banks can conduct a primary market sale using firm
commitment underwriting or best efforts underwriting

8.4 Primary Stock Markets


FIRM COMMITMENT UNDERWRITING
● Investment banks purchase stock from the issuer at a guaranteed
price (net proceeds) and resells it to the investors at a higher
price (gross proceeds)
● Underwriter’s Spread = Gross Proceeds - Net Proceeds
○ Compensates for expenses and risks incurred by the
investment bank

8.4 Primary Stock Markets


PRIMARY STOCK MARKETS
● Syndicate
○ Process of bringing in other investment banks to distribute
other securities
● Originating Houses
○ Lead banks in the syndicate that negotiate with the issuing
company in behalf of the syndicate
● Once the issue is arranged & terms are set, each member in the
syndicate are given shares to sell
● Advantages: Spreads Risk and Larger Pool of Potential Buyers
8.4 Primary Stock Markets
PRIMARY STOCK MARKETS
● Offerings of Primary Stock Markets
○ Initial Public Offering
■ First time issue to go public
○ Seasoned Offering
■ Already have shares of stock trading in the secondary
market
● Pre-emptive Rights
○ Right of stockholders to be offered new shares before these
are issued to maintain their level of ownership
8.4 Primary Stock Markets
REGISTRATION
● Once there is an agreement between the issuing firm and
investment bank, the investment bank must seek the approval of
the SEC

8.4 Primary Stock Markets


SHELF REGISTRATION
● Allows firms that plan to offer multiple issues of stock over a
two-year period to submit one registration statement
summarizing the firm’s financing plans for the period

8.4 Primary Stock Markets


SECONDARY STOCK MARKETS
● are the markets in which stocks, once issued, are
traded—that is, bought and sold by investors

U.S. Philippines
NASDAQ PSE
NYSE
SECONDARY MARKETS
SECONDARY MARKETS
THE NEW YORK STOCK EXCHANGE
● Most well-known of all exchanges
● Allows trading of equity-securities,
Fixed income products, and structured funds
(Electronically Traded Funds)
Trading Post
Trading Post
Specialist
- Assigned to each stock
- whose role is to facilitate trading in certain stocks. Specialists
must make a market in the stock they trade by displaying their
best bid and ask prices to the market during trading hours.
- If there is a large shift in demand on the buy or sell side, the
specialist steps in and sells off his own inventory as a way to
manage large movements and to meet the demand until the gap
between supply and demand narrows.
Specialist

Stocks Being Traded His Personal Stash


3 Types of Transactions
1. Market Order
2. Limit Order
3. Specialist Transacts with Himself
Market Order Limit Order
-Transaction between the broker -Transaction at a SPECIFIED PRICE
and the specialist at the BEST -Specialist waits until the current
PRICE price is close to the specified price

Order book - a specialist’s record


of unexecuted limit orders
The Trading Process

Settlement must be made T+3 (3 days to pay and 3 days to deliver)


The Philippine Stock Exchange
A similar T+3 settlement
scheme is followed in the
PSE
Program Trading
- the purchase or sale of a group of 15 or more stocks that have a total
market value of $1 million or more and are part of a coordinated
trading strategy.
- It is essentially the use of an algorithm to buy and sell stocks online
- The algorithm takes advantage of market inefficiencies
Controversial Trading Practices
Flash Trading - For a fee, traders are allowed to see incoming buy or
sell orders milliseconds earlier than general market traders

Naked Access - Allows some traders to rapidly buy and sell stocks
directly on exchanges using a broker’s computer code without
exchanges or regulators always knowing who is making the trades.

Dark Pools of Liquidity - Trading networks that provide liquidity but


that do not display trades on order books.
Over the Counter Market

- Stocks are traded directly among


investors
- Done electronically instead of
physically
National Association of Securities Dealers
Automated Quotation (NASDAQ)
- transactions are completed through an electronic market
- the world’s first electronic market
- provides continuous trading of active stocks
- have dealers instead of specialists
- approximately 1:20 instead of 1:1 for NYSE
Penny Stocks
- Stocks that trade for less than $5
per share.
NYSE NASDAQ
- Requirements need to be met - Those that don’t meet
- Improves marketability and the requirements are
publicity when traded here traded here
- More stocks are traded
here
- Less established stocks
are traded here
Electronic Communications Network and Online
Trading
● Allows for an automatic matching of buyers and sellers; a modern
alternative to floor trading
Stock Market Indices
- Measures a specific area in the stock market
- Uses specific stocks to describe the overall state of the
market
Price Weighted Value Weighted

- uses an equal - uses varying


amount of shares amounts of shares
per stock - Price and
- price is the prime outstanding shares
determinant of its are equally
value important
Stock Market Indices
1. Dow Jones Industrial Average - most widely used price index;
uses price weighted averages
2. NYSE Composite Index- is a value weighted index
3. Standard and Poor’s 500 Index - value weighted; uses the top
500 listed companies
4. NASDAQ Composite Index - value weighted
5. Wilshire 500 Index - broadest and most accurate
Stock Market Indices
PSEi - 30 carefully selected companies are used to measure
the overall performance of the Philippine Stock Market
- Is a value weighted index
Compute for the Price weighted index and the Value weighted index
Compute for the Price weighted index and the Value weighted index

Did the overall stock market condition improve?


Stock Market Participants
OTHER ISSUES IN STOCK MARKETS
● Economic Indicators
- Stock prices are used as a predictive element of economic growth
- Stock Market Indices are used for a broader approach
OTHER ISSUES IN STOCK MARKETS
Market Efficiency - The speed with which financial security prices
adjust to unexpected news pertaining to interest rates or a stock
specific characteristic.
● Weak - Stock prices reflect historic data
● Semi-Strong - Stock prices reflect public information
● Strong - Stock prices reflect private information
OTHER ISSUES IN STOCK MARKETS
Stock Market Regulations
● Regulations by the SEC - full and fair disclosure
● Sarbanes Oxley Act
● Other Overseeing Authorities (FINRA)
INTERNATIONAL ASPECTS OF STOCK MARKETS
INTERNATIONAL ASPECTS OF STOCK MARKETS
- Risk of Timeliness
- FOREX Risks
- Political Risks
INTERNATIONAL ASPECTS OF STOCK MARKETS
American Depository Receipts (ADRs)
● Level 1 - Most common and basic; traded in the OTC market
● Level 2 - Stricter requirements; traded in the major stock
exchanges (NYSE or NASDAQ)
● Level 3 - Strictest; traded in major stock exchanges; easy to find
information about them
PHILIPPINE ADRS
Level 2
The Stock Market Crash of 1929
1. Drastic Increases in Profits
2. People started heavily investing in
the stock market
3. Stock prices increased further
(despite increasing unemployment
and decreasing production) and
people started margin buying
The Stock Market Crash of 1929
4. The economy started to contract which
caused confusion among investors

5. In the midst of panic, a whopping


12,894,650 were traded in one day

6. Stock Prices continued to fall; 10-15


billion dollars were lost
Possible Causes

● Market and Investor overconfidence - stocks were wildly


overpriced
● Credit for stock purchases were readily available - people
were unafraid of debt
● Sudden increase in interest rate - from 5% to 6%
The 2008 Financial Crisis
- Housing prices were high; credit was accessible
- Banks engaged in subprime loans
- Gramm Rudman Act - Allowed banks to trade profitable
derivatives that required home loans as collateral
- Guaranteed by credit default swaps
- Interest was raised; and house prices dropped and the derivatives
lost value
The 2008 Financial Crisis

- Insurance companies didn’t have enough cash flow to honor all


the swaps
- Bank Failures led to a decrease in stock prices and countries
halted trading temporarily
- The DOW index had been continuously falling while companies
declared bankruptcy
Fundamental and Technical Analysis
Fundamental Analysis Technical Analysis
DEFINITION Evaluating stock to find Statistical method to
intrinsic value and find a pattern and
analyzing factors that predict future
affect price in the future movements based on past
market data
IT EXAMINES Financial Data Price Movements
Industry Trends Market Psychology
Competitor’s Performance,
Economic Outlook
Fundamental and Technical Analysis
Fundamental Analysis Technical Analysis
TIME HORIZON Long term Short Term

FUNCTION Investing Trading

SOURCE OF Financial Statements Charts


DATA
CONCEPTS ROE DOW Theory
USED ROA Price Data
Fundamental and Technical Analysis
Fundamental Analysis Technical Analysis
GOAL Find the intrinsic value of Find the right time to
stock enter and exit the market
EVENTS Looks both backward and Looks backward
CONSIDERED forward
DOW Theory
● Approach to trading developed by Charles Dow
● States that a market is in an upward trend if one of its averages
advances above a previous important high and is accompanied or
followed by a similar advance in the other average
DOW Theory - 6 Components
● Market Discounts Everything
○ Earnings potential, competitive advantage, management
competence - all of these factors and more are priced into the
market
● 3 Kinds of Market Trends
○ 1 Year or More - bull or bear
○ 3 Weeks to 3 Months - pullback
○ Less than 3 Weeks - noise
DOW Theory - 6 Components
● Primary Trends have 3 Phases
○ Accumulation Phase/Distribution
○ Public Participation Phase
○ Excess Phase/Panic
● Indices or Market Averages must confirm each other
● Volume must confirm the trend
● Trends persist unless a clear reversal occurs
Margin Trading
- The borrowing of funds from a broker to trade a financial asset
- The financial asset serves a collateral for the broker
- The margin is the amount actually paid by the investor
- Risk is very high; heavily regulated