FINANCIAL MARKET

Stock markets

allow suppliers of funds to efficiently and cheaply get equity funds to public corporations (users of funds).

Stock markets

 In exchange, the fund users (firms) give the fund suppliers ownership rights in the firm as well as cash flows in the form of dividends. Thus, corporate stock or equity serves as a source of financing for firms, in addition to debt financing or retained earnings financing.

common stock and preferred stock

Two types of corporate stock exist

TRUE

 While all public corporations issue common stock, many do not offer preferred stock. The market value of preferred stock outstanding is only about 1 percent of the value of common stock outstanding.

Common Stock

the fundamental ownership claim in a public or private corporation.

Common Stock

 (1) discretionary dividend payments

          (2) residual claim status

          (3) limited liability

          (4) voting rights.

Preferred stock

a hybrid security that has characteristics of both a bond and a common stock. similar to common stock in that it represents an ownership interest in the issuing firm, but like a bond it pays a fixed periodic (dividend) payment.

Preferred stock

senior to common stock but junior to bonds. Therefore, preferred stockholders are paid only when profits have been generated and all debt holders have been paid (but before common stockholders are paid).

TRUE

 common stockholders have no legal recourse if dividends are not received, even if a company is highly profitable and chooses to use these profits to reinvest in new projects and firm growth.

TRUE

 unlike interest payments on debt, a corporation does not default if it misses a dividend payment to common stockholders.

DIVIDENDS

While common stockholders can potentially receive unlimited dividend payments if the firm is highly profitable, they have no special or guaranteed dividend rights. Rather, the payment and size of dividends are determined by the board of directors of the issuing firm (who are elected by the common stockholders).

Residual Claim

Common stockholders have the lowest priority claim on a corporation’s assets in the event of bankruptcy—they have a residual claim. Only after all senior claims are paid are common stockholders entitled to what assets of the firm are left.

Limited Liability

One of the most important characteristics of common stock. It implies that 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.

 Voting Rights

A fundamental privilege assigned to common stock.

 Voting Rights

While common stockholders do not exercise control over the firm’s daily activities they do exercise control over the firm’s activities indirectly through the election of the board of directors.

 Proxy Votes

Most shareholders do not attend annual meetings. Most corporations anticipate this and routinely mail proxies to their stockholders prior to the annual meeting.

TRUE

A completed proxy returned to the issuing firm allows stockholders to vote by absentee ballot or authorize representatives of the stockholders to vote on their behalf. It is estimated that, on average, less than 40 percent of the total possible votes are cast at corporate meetings.

TRUE

Corporations find preferred stock beneficial as a source of funds because, unlike coupon interest on a bond issue, dividends on preferred stock can be missed without fear of bankruptcy proceedings.

TRUE

if a preferred dividend payment is missed, new investors may be reluctant to make investments in the firm. Thus, firms are generally unable to raise any new capital until all missed dividend payments are paid on preferred stock.

TRUE

unlike coupon interest paid on corporate bonds, dividends paid on preferred stock are not a tax deductible expense—preferred dividends are paid out of after-tax earnings. This raises the cost of preferred stock relative to bonds for a firm’s shareholders.

Primary Stock Market

Before common stock can be issued by a corporation, shares must be authorized by a majority vote of both the board of directors and the firm’s existing common stockholders. Once authorized, new shares of stock are distributed to existing and new investors through a primary market sale with the help of investment banks. Once issued, the stocks are traded in secondary stock markets

Primary stock markets

markets in which corporations raise funds through new issues of stocks.

Primary stock markets

most _____transactions go through investment banks which serve as the intermediary between the issuing corporations (fund users) and ultimate investors (fund suppliers) in securities.

 

commitment underwriting

where the investment bank guarantees the corporation a price for newly issued securities by buying the whole issue at a fixed price from the corporate issuer

best efforts underwriting basis

where the underwriter does not guarantee a price to the issuer and acts more as a placing or distribution agent for a fee

underwriter’s spread

the difference between the gross proceeds and the net proceeds

net proceeds

the investment bank purchases the stock from the issuer for a guaranteed price

gross proceeds

resells it to investors at a higher price

underwriter’s spread 

 compensation for the expenses and risks incurred by the investment bank with the issue.

 syndicate

investment bank will bring in a number of other investment banks to help sell and distribute a new issue

Stock Market

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one of the best places to earn money

Stock Market

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Ecosystem which has a lot of people and institution involved, doing investments, exchange and developing products that involves stocks.

STOCK

Primary and Smallest measurable unit of ownership of a company

STOCK

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investment in general can be no.1 asset class over a long period of time.

Stock Exchange

Where stocks are traded. Organized venue where brokers buy and sell shares of companies.

Stock Exchange

A systematic & centralized market place where common stocks of listed businesses are traded

IPO level

proceeds of shares go to company. Happens only once

UNDERWRITER

Assess correct valuation of shares & establishes public market.

UNDERWRITER

• “Market maker”, creates a way for a company to able to list its shares in the market.

• Earns money through fees

• Role is to assess a company if qualified to be listed in SEC/ market

UNDERWRITER

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* making sure that they come up with the right valuation for the market to be fair 

Broker

• Person who buys or sells stocks, bonds, commodities and such in exchange for a fee or what is called a "commission."

• bridging of buyers and sellers investors and divesters

Friction cost

if trade is in and out, you can be loosing the yield called_____

ASK

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* Lowest price that a seller will accept when selling a stock. 

BID

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* Highest price that a buyer is willing to pay for a stock. 

BEARISH

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* Declining market condition

BULLISH 

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* Market valuation believed to be increasing

PSEI

• Philippine Stock Exchange Composite Index.

• 30 different listed companies leading in each sector.

INITIAL PUBLIC OFFERING (IPO)

The first sale or offering of a company to the public, rather than owned by private or inside investors.

ORDER

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An investor's bid to buy or sell a certain amount of stock or option contracts. You have to put an order in to buy or sell shares of stock.

THE PHILIPPINE STOCK EXCHANGE

• Established in 1927

• One of Asia's Oldest

1927

Manila Stock Exchange

1963

Makati Stock Exchange

1995

Manila & Makati Stock Exchange Merged

1994

Manila & Makati Stock Exchange Electronically linked

**Technical Analysis**

When to invest. The forecasting of future financial price movements based on an examination of past price movements. Can help investors anticipate what is "likely" to happen to prices over time.

Fundamental Analysis

where to invest

Chart formation

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a prelude to a potential or probable price movement either upward or downward.

Board Lot Rule

Each stock depending on its price is traded at different lot sizes which would control the minimum amount that can be traded into the regular or main board

Commission

Normally 1/4 of 1% or 0.25% of the gross trade amount or a minimum charge of P20.00 pesos per transaction

VAT

12 % of commission

PSE Trans Fee

0\.0005% of Gross trade amount

Securities Clearing Corporation of the Philippines Fee

0\.01% of gross trade amount

Sales Tax

No. of shares x price x 0.006 (only on the selling side)

Foreign exchange markets

the markets in which traders of foreign currencies transact most efficiently and at the lowest cost.

FOREIGN EXCHANGE MARKETS

Markets in which cash flows from the sale of products or assets denominated in a foreign currency are transacted.

foreign exchange rate

the price at which one currency can be exchanged for another currency in the foreign exchange markets

 forex market

the largest, most __liquid market__ in the world, with __trillions of dollars__ changing hands every day. 

 forex market

no centralized location, rather the ____ is an electronic network of banks, brokers, institutions, and individual traders (mostly trading through brokers or banks).

__exchange rate__,

The market determines the value, also known as an __-----__, of the majority of currencies

Currency depreciation

when a country’s currency falls in value relative to other currencies, meaning the country’s goods become cheaper for foreign buyers and foreign goods become more expensive for foreign sellers.

Currency appreciation

when a country’s currency rises in value relative to other currencies, meaning that the country’s goods are more expensive for foreign buyers and foreign goods are cheaper for foreign sellers.

spot and forward

There are two types of foreign exchange rates and foreign exchange transactions

Spot foreign exchange transactions

 the immediate exchange of currencies at the current (or spot) exchange rate. can be conducted through the foreign exchange division of commercial banks or a nonbank foreign currency dealer

Spot

The price is established on the trade date, but money is exchanged on the __value date__

 forward trade

any trade that settles further in the future than spot.

__forward price__ 

 a combination of the spot rate plus or minus forward points that represent the __interest rate differential__ between the two currencies.

Forward

Most have a maturity less than a year in the future but longer is possible. The price is set on the transaction date, but money is exchanged on the maturity date.

__forward contract__ 

tailor-made to the requirements of the counterparties. They can be for any amount and settle on any date that is not a weekend or holiday in one of the countries.

__futures__ 

 similar to a forward in that it settles later than a spot deal, but is for standard size and settlement date and is traded on a commodities market. The exchange acts as the __counterparty__.

derivative security

a financial security whose payoff is linked to another, previously issued security.

derivative securities

 generally involve an agreement between two parties to exchange a standard quantity of an asset or cash flow at a predetermined price and at a specified date in the future.

TRUE

 As the value of the underlying security to be exchanged changes, the value of the derivative security changes.

Derivatives

 involve the buying and selling, or transference, of risk.

TRUE

Under normal circumstances, trading in derivatives should not adversely affect the economic system because it allows individuals who want to bear risk to take more risk, while allowing individuals who want to avoid risk to transfer that risk elsewhere.

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Derivative securities markets

 the markets in which derivative securities trade.

 foreign currency futures contracts.

The first of the modern wave of derivatives to trade were

interest rate derivative securities

The second wave of derivative security growth was with

 credit derivatives

A third wave of derivative security innovations occurred in the 1990s with

Spot contract 

agreement made between a buyer and a seller at time 0 for the seller to deliver the asset immediately and the buyer to pay for the asset immediately.

 *delivery versus payment*

 the unique feature of a spot market is the immediate and simultaneous exchange of cash for securities

Forward contract

agreement between a buyer and a seller at time 0 to exchange a nonstandardized asset for cash at some future date.

TRUE

The details of the asset and the price to be paid at the forward contract expiration date are set at time 0.

TRUE

The price of the forward contract is fixed over the life of the contract.

 

TRUE

Market participants take a position in forward contracts because the future (spot) price or interest rate on an asset is uncertain.

Futures contract 

Agreement between a buyer and a seller at time 0 to exchange a standardized asset for cash at some future date.

TRUE

The price of the futures contract changes daily as the market value of the asset underlying the futures fluctuates.

Marked to market

 Describes the prices on outstanding futures contracts that are adjusted each day to reflect current futures market conditions.

Marked to market

This means that the contract’s price is adjusted each day as the price of the asset underlying the futures contract changes and as the contract approaches expiration. Therefore, actual daily cash settlements occur between the buyer and seller in response to these price changes