Reviewer-finmar.docx

Capital Market Participants Stock Exchange- stock exchange is an organized marketplace or facility that brings buyers and sellers together and facilitates the sale and purchase of stocks. (PSE) Investors- also referred to as stockholders or shareholders, are those who own shares of stock of a publicly listed company. Stock Brokers- They act as an agent between a buyer and seller of stocks in the market. Receives a commission Types of Brokers 1. Traditional- take your orders via a written instruction or a phone call 2. Online- interface is the internet where clients execute their orders and access market information online Listed Companies- issuers, shares of stock are traded on the Exchange Clearing House- ensure the orderly settlement of equity Depository- custodian Settlement Banks- accept deposits of funds for payment of securities bought etc. Transfer Agents- official keeper

Capital Market- This refers to activities that gather funds from some entities and make them available to other entities needing funds. Core Function of Capital Markets-To improve the efficiency of transaction so that each individual entity does not need to do search and analysis, create legal agreements, and complete funds transfer.

Importance and Other Functions of Capital Market  

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The capital market helps in capital formation and economic growth of the country. The capital market prides incentives to savers in the form of interest or dividend and transfers funds to investors. The capital market provides a market mechanism for those who have savings and to those who need funds for productive investments. The capital market encourages economic growth.

Types of Capital Market •

Primary Market-Where new equity stock and bond issues are sold to investors

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Secondary Market-Which trade existing securities

4 ways of Raising Capital Market 1. Public Issue- selling securities at public at large, most vital method to sell financial securities 2. Right Issue- pro-rata basis 3. Private Placement- about selling securities to a restricted number of classy investors 4. Preferential Allotment- When a listed company issues equity shares to a selected number of investors at a price that may or may not be pertaining to the market price Auction Market- bid and ask prices Dealer Market- participants in the market are joined through electronic networks Purpose of Capital Market

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They bring together investors holding capital and companies seeking capital through equity and debt instruments They provide a secondary market where holders of these securities can exchange them with one another at market prices. Without the liquidity created by a secondary market, investors would be less inclined to purchase equity and debt instruments for fear of being unable to unload them in the future.

Bond- A bond is a debt financing contract that allows investors to lend money to a borrower. The borrowers are typically the government or corporations who need additional capital or financing. The amount issued by the investors are paid with interest at a given term, usually at a fixed interest rate. FACE VALUE The price of a bond when first issued. COUPON RATE The periodic interest payments promised to bondholders are a fixed percentage of bonds face value. MATURITY The time until the principal is scheduled to be repaid. 2 Types of Bonds according to Maturity •

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Treasury Bills (T-Bills). Debt investments with short term maturity of less than a year. 91, 182, 364-day Treasury Bonds (T-Bonds). Debt investments with long term maturity of more than one year. 2, 5, 7, 10-20 years

4 Types of Bonds according to Issuer 1. Treasury Securities 2. Government BondsIssued by government agencies 3. Municipal Bonds- issued by state and local governments

4. Corporate Bondsissued by corporations, partnerships, limited liability companies, and other commercial enterprises Treasury Bonds Interest Rate- are medium to long-term investments issued by the Philippine government. They form part of the Government’s program to make securities available to small investors.

MORTGAGE- A mortgage is a debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Also known as claims on property

MORTGAGE LOANS Types of Mortgage Loans 1. Fixed Rate Mortgage- Interest rate and monthly payment remains fixed for the entire term of the loan 2. Adjustable Rate Mortgage- Rate of interest remains fixed for an initial period of time. Once that initial period is over, rate varies with some benchmark index 3. Hybrid Mortgage- It combines the features of both fixed rate mortgage and adjustable rate mortgages 4. Interest Only Mortgage- Here for a specified period of time, only interest is repaid. No payment is made towards principal. Once that period is over, principal amount has to be repaid

MORTGAGE LENDING INSTITUTIONS Lending Institution- these are organizations such as banks, credit unions or finance companies that make loans. Mortgagor – borrower Mortgagee- lender There must be mortgage document Where do we get Mortgage Loans? 1. Banks 2. Mortgage Brokers 3. Local Government INITIAL PUBLIC OFFERING IPO- it is the first time a company’s stocks are offered to the public for purchase How does initial public offering happen? 1. Find an investment bank 2. PSE screens the companies and makes sure that they comply with all of the requirements 3. When everything is set and ready, on the initial public offering day the shares will be publicly traded in the stock market CORPORATE MONITORING ROLE Stock Purchases- Use excess cash to purchase shares in the market at a low price Market for Corporate Control- A firm may engage in acquisitions to increase the value of a target firm Barriers to Corporate Control 1. Antitakeover amendment- designed to protect shareholders against an acquisition that will ultimately reduce the value of their investment in the firm

2. Poison Pills- special rights awarded to shareholders or specific managers upon specified events 3. Golden Parachutespecifies compensation to managers in the event that they lose their jobs RISK OF STOCKS 2 Key Investment Risks 1. Returns are not guaranteed- While stocks have historically performed well over the long term, there’s no guarantee you’ll make money on a stock at any given point in time 2. You may lose money- you might lose all of your money when you buy and sell stocks, especially if you’re not planning to invest for the long term Volatility is measure in very precise ways  

Standard deviation- measures how widely a stock’s price has gone up and down in the past from its average price Beta- measures how the stock is doing compared to a given benchmark

Stock Exchange- Organized and regulated financial market where securities (bonds, notes, shares) are bought and sold at prices governed by the forces of demand and supply. Only the members can deal in i.e., buy & sell securities. Function of Stock Exchange •

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Provide central and convenient meeting places for sellers and buyer of securities. Increase the marketability and liquidity of securities. Contribute to stability of prices of securities. Equalization of price of securities. Smoothen price movement.

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Help the investors to know the worth of their holdings. Promote the habit of saving and investment. Help capital formation. Help companies and government to raise funds from the investors. Provide forecasting service.

Types of Members/ Brokers • Floor brokers- execute orders for members • Commission brokers- execute orders of their customers • Jobbers- professional independent brokers • Tarawaniwalas- can act both as a broker and jobber • Odd lot dealers- in buying and selling of securities in odd lots • Badliwalas - carry over business • Arbitrageurs- keep a close watch on the prices of shares • Sub-Brokers or Remisiers-agents of stock brokers

INVESTOR PARTICIPATION IN THE SECONDARY MARKET Investor - is any person who commits capital with the expectation of financial returns Secondary Market- market wherein the trading of securities is done