Financial Markets: Equity Markets, Hybrids, Derivatives, and Valuation

Comprehensive vocabulary flashcards covering Equity Markets, Hybrid Securities, Derivatives, and Stock Valuation principles based on MAS 2 lecture notes.

The market in which shares of ownership (stock) in corporations are issued and traded, linking firms needing long-term funding with investors who supply it.

Equity Market

Private Equity

Shares held by founders, family, or a small group of private investors that cannot be sold or traded to the general public.

Corporate shares registered with the SEC and traded on an organized securities exchange, such as the Philippine Stock Exchange (PSE).

Public Equity

Investment funds that pool money from wealthy individuals and institutions to fund young, high-growth firms not yet ready for a public offering, typically locking up funds for $5\text{--}10$ years with an exit planned in $4\text{--}7$ years.

Venture Capital (VC) Funds

Investment funds that pool institutional capital and utilize substantial debt leverage to acquire, restructure, and improve established or undervalued companies before exiting through a sale or IPO.

Private Equity (PE) Funds

The initial sale of common shares by a private company to the general investing public, converting private equity into publicly traded equity.

Initial Public Offering (IPO)

An issuance of additional new shares by an already-listed company to raise more capital, which dilutes existing shareholders' percentage ownership unless they exercise pre-emptive rights.

Secondary (Follow-on) Stock Offering

A corporate action wherein a company buys back its own outstanding shares from the open market, reducing share count, supporting EPS, and returning cash to shareholders.

Stock Repurchase (Buyback)

The primary capital market regulator in the Philippines under RA 8799 that approves securities registrations (including IPOs), licenses broker-dealers, and oversees market conduct.

Securities and Exchange Commission (SEC)

The independent market-surveillance and compliance arm of the PSE that monitors trading participants for irregular or manipulative market activity.

Capital Markets Integrity Corporation (CMIC)

The central securities depository responsible for the custody, clearing, and settlement of PSE trades, holding equity shares in scripless (electronic) form.

Philippine Depository & Trust Corp. (PDTC)

The central monetary authority of the Philippines; while not a direct equity regulator, its monetary policy decisions heavily influence equity valuations and investor risk appetite.

Bangko Sentral ng Pilipinas (BSP)

The benchmark stock index of the Philippines, comprising the 30 most representative listed companies selected on the basis of market capitalization and liquidity.

PSE Composite Index (PSEi)

Equity securities representing the basic, residual ownership claim on a corporation's earnings and liquidation assets, carrying voting rights and limited liability.

Ordinary (Common) Shares

The statutory right granted to existing shareholders under the Revised Corporation Code (RA 11232) to subscribe to newly issued shares in proportion to their current holdings to prevent ownership dilution.

Pre-emptive Right

A hybrid equity instrument with a prior, fixed dividend claim and liquidation priority ahead of common shares, typically carrying limited or no voting rights.

Preference (Preferred) Shares

Preferred shares on which unpaid or omitted dividends accumulate as dividends in arrears, all of which must be settled before common shareholders can receive dividends.

Cumulative Preference Shares

Preferred shares where any omitted or skipped dividend is permanently forfeited and does not carry over to future periods.

Non-cumulative Preference Shares

Preferred shares that entitle the holder to receive extra distributions beyond the stated dividend rate if company profits exceed specified thresholds.

Participating Preference Shares

Preferred shares that grant the shareholder the option to exchange their shares for a predetermined number of common shares.

Convertible Preference Shares

Preferred shares that grant the issuing firm the right to buy back and retire the shares at a predetermined call price after a set date.

Redeemable / Callable Preference Shares

A specialized corporation regulated under RA 9856 that owns income-generating real estate and is legally required to distribute at least $90\%$ of its distributable income as dividends.

Real Estate Investment Trust (REIT)

A transaction cost representing the difference between the ask price and bid price, computed as $\text{Spread} = \frac{\text{Ask price} - \text{Bid price}}{\text{Ask price}}$.

Bid-Ask Spread

The standardized minimum number of shares and price tick increments designated by the PSE Board Lot Table required to execute a round-lot trade in a specific price range.

Board Lot

An order to buy or sell a security immediately at the best prevailing market price, guaranteeing transaction execution but not price.

Market Order

An order that specifies the maximum price to pay on a buy order or the minimum price to accept on a sell order, guaranteeing the price but not execution.

Limit Order

A sell order set below the current market price that converts into a market order once reached, used to protect profits or cap losses on an existing long position.

Stop-Loss Order

A buy order placed above the current market price that triggers a market order once breached, used to capitalize on upward momentum or limit losses on a short position.

Stop-Buy Order

The practice of purchasing stock using an investor's own cash combined with credit extended by a broker, using the acquired shares as collateral.

Margin Trading

A broker's formal requirement demanding an investor deposit additional cash or collateral when account equity falls below the mandatory maintenance margin level.

Margin Call

An investment strategy where an investor borrows shares through Securities Borrowing and Lending (SBL) to sell them immediately, intending to repurchase (cover) them at a lower price.

Short Selling

The regulated mechanism on the PSE that permits market participants to borrow and lend shares, serving as the necessary infrastructure for short selling.

Securities Borrowing and Lending (SBL)

The theoretical premise that security prices fully, rapidly, and unbiasedly incorporate all available information, preventing investors from consistently generating abnormal returns.

Efficient-Market Hypothesis (EMH)

A state of market efficiency where security prices reflect all historical price and trading volume data, rendering technical analysis incapable of generating abnormal returns.

Weak-Form Efficiency

A state of market efficiency where stock prices absorb all publicly available information, implying that fundamental analysis cannot generate abnormal returns net of costs.

Semistrong-Form Efficiency

A theoretical market condition where prices reflect all public and private (insider) information, meaning no market participant can earn abnormal profits.

Strong-Form Efficiency

A top-down valuation methodology examining macroeconomic indicators, industry trends, and financial statement ratios to determine a security's intrinsic (fair) value.

Fundamental Analysis

A trading discipline focusing on historical charts, price patterns, trend lines, and volume metrics to time market entry and exit points.

Technical Analysis

A relative valuation approach that estimates equity value per share by multiplying forecasted earnings per share (EPS) by a benchmark or industry mean P/E multiple.

Price–Earnings (P/E) Valuation Method

A valuation model established by John B. Williams stating that the intrinsic value of a common share equals the sum of all its expected future cash dividends discounted to present value.

Dividend Discount Model (DDM)

A specialized version of the DDM for constant dividend growth where the stock's present value is calculated as $\text{PV} = \frac{D_1}{k - g}$, requiring $k > g$.

Gordon Growth Model

An absolute valuation model that discounts projected free cash flows to determine enterprise value, subtracts outstanding debt liabilities to isolate equity value, and divides by total shares outstanding.

Free Cash Flow (FCF) Valuation Model

A financial model that calculates an asset's required rate of return ($R_j$) based on systematic risk: $R_j = R_f + \beta_j (R_m - R_f)$.

Capital Asset Pricing Model (CAPM)

A financial instrument combining debt-like characteristics (contractual cash flows, priority in bankruptcy) and equity-like characteristics (conversion rights, perpetual maturity).

Hybrid Security

A corporate debt instrument that grants the investor the right, but not the obligation, to exchange the bond for a specified number of common shares of the issuing firm.

Convertible Bond

The number of common shares an investor receives upon converting a single convertible bond, calculated as $\frac{\text{Par Value}}{\text{Conversion Price}}$.

Conversion Ratio

The stated nominal price per share at which a convertible bond can be exchanged for common equity, defined as $\frac{\text{Par Value}}{\text{Conversion Ratio}}$.

Conversion Price

The aggregate market value of the common equity obtained if a convertible bond were converted immediately, calculated as $\text{Conversion Ratio} \times \text{Share Price}$.

Market Conversion Value

The dollar amount or percentage by which the market trading price of a convertible bond exceeds its market conversion value.

Conversion Premium

The theoretical value of a convertible bond assessed solely as a non-convertible debt security, equal to the present value of coupon and principal cash flows discounted at the yield of comparable straight debt.

Straight Bond Value

A company-issued call certificate granting the holder the right to purchase common shares at a predetermined exercise price; exercise creates new shares (dilution) and injects cash into the company.

Warrant

Subordinated financing that ranks junior to senior bank debt but senior to common equity, often featuring equity kickers such as warrants or profit participation rights.

Mezzanine Financing

A bilateral financial contract whose value and cash flows are derived from the price movement of an underlying asset, rate, index, or commodity.

Derivative

A customized over-the-counter (OTC) agreement between two parties to buy or sell an underlying asset at an agreed-upon delivery price on a designated future date.

Forward Contract

A cash-settled forward contract often used in restricted currency markets (such as USD/PHP) where parties settle only the net difference between the agreed forward rate and the spot rate at maturity.

Non-Deliverable Forward (NDF)

A standardized derivative contract traded on an organized exchange, novated and guaranteed by a clearinghouse, requiring initial margin and daily mark-to-market settlements.

Futures Contract

The daily exchange process of settling gains and losses on futures positions based on end-of-day settlement prices, directly adjusting trader margin balances.

Marking-to-Market

A derivative contract giving the buyer the right, but not the obligation, to buy (call) or sell (put) an underlying asset at a specified strike price on or before a set expiration date.

Option

The upfront market price paid by the option buyer to the option writer, representing the buyer's maximum possible loss and equal to intrinsic value plus time value.

Option Premium

An option granting the holder the right to buy the underlying asset at the strike price, generating a positive payoff when market price exceeds the strike price.

Call Option

An option granting the holder the right to sell the underlying asset at the strike price, generating a positive payoff when the market price falls below the strike price.

Put Option

The immediate exercise payoff of an option, expressed as $\max(0, S - X)$ for a call option and $\max(0, X - S)$ for a put option.

Intrinsic Value (Option)

The component of an option's premium exceeding its intrinsic value, reflecting the likelihood and volatility benefits of price moves prior to expiration.

Time Value (Option)

An over-the-counter derivative contract wherein two counterparties agree to exchange a series of future cash flows according to a specified formula based on a notional principal.

Swap

The reference dollar or peso amount on which interest rate or derivative cash flows are calculated, which is not itself exchanged in a standard plain-vanilla interest rate swap.

Notional Principal

The fundamental no-arbitrage equilibrium relationship governing European options on non-dividend-paying assets: $\text{Call} + \text{PV}(\text{Strike}) = \text{Put} + \text{Stock Price}$.

Put-Call Parity

A risk-management strategy involving owning a long position in a stock and buying a put option on that stock, capping downside risk while preserving upside.

Protective Put

An investment strategy where an investor holds a long asset position and writes a call option against it, collecting premium income while capping future upside gains.

Covered Call

A debt instrument representing claims on the interest and principal cash flows generated by a securitized pool of residential or commercial mortgage loans.

Mortgage-Backed Security (MBS)

The risk that mortgage borrowers repay loan principal ahead of contractual maturity dates—typically when interest rates fall—forcing investors to reinvest proceeds at lower yields.

Prepayment Risk