What are Financial Markets? 1.

Stock market

Financial markets, from the name itself, The stock market trades shares of
are a type of marketplace that provides ownership of public companies. Each
an avenue for the sale and purchase of share comes with a price, and investors
assets such as bonds, stocks, foreign make money with the stocks when they
exchange, and derivatives. Often, they perform well in the market. It is easy to
are called by different names, including buy stocks. The real challenge is in
“Wall Street” and “capital market,” but all choosing the right stocks that will earn
of them still mean one and the same money for the investor.
thing. Simply put, businesses and There are various indices that investors
investors can go to financial markets to can use to monitor how the stock market
raise money to grow their business and is doing, such as the Dow Jones
to make more money, respectively. Industrial Average (DJIA) and the S&P
To state it more clearly, let us imagine a 500. When stocks are bought at a
bank where an individual maintains a cheaper price and are sold at a higher
savings account. The bank can use their price, the investor earns from the sale.
money and the money of other
depositors to loan to other individuals
and organizations and charge an 2. Bond market
interest fee.
The bond market offers opportunities for
The depositors themselves also earn companies and the government to
and see their money grow through the secure money to finance a project or
interest that is paid to it. Therefore, the investment. In a bond market, investors
bank serves as a financial market that buy bonds from a company, and the
benefits both the depositors and the company returns the amount of the
debtors. bonds within an agreed period, plus
interest.

 Types of Financial Markets

3. Commodities market
There are so many financial markets,
The commodities market is where
and every country is home to at least
traders and investors buy and sell
one, although they vary in size. Some
natural resources or commodities such
are small while some others are
as corn, oil, meat, and gold. A specific
internationally known, such as the New
market is created for such resources
York Stock Exchange (NYSE) that
because their price is unpredictable.
trades trillions of dollars on a daily basis.
There is a commodities futures market
Here are some types of financial
wherein the price of items that are to be
markets.
delivered at a given future time is
already identified and sealed today.
4. Derivatives market financial markets to sell their securities
or make investments as they desire.
Such a market involves derivatives or
contracts whose value is based on the
market value of the asset being traded.
4. Lowers the cost of transactions
The futures mentioned above in the
commodities market is an example of a In financial markets, various types of
derivative. information regarding securities can be
acquired without the need to spend.

 Functions of the Markets

 Importance of Financial
The role of financial markets in the
success and strength of an economy Markets
cannot be underestimated. Here are There are many things that financial
four important functions of financial markets make possible, including the
markets: following:

1. Puts savings into more productive  Financial markets provide a place

use where participants like investors
As mentioned in the example above, a and debtors, regardless of their
savings account that has money in it size, will receive fair and proper
should not just let that money sit in the treatment.
vault. Thus, financial markets like banks  They provide individuals,
open it up to individuals and companies companies, and government
that need a home loan, student loan, or organizations with access to
business loan. capital.
 Financial markets help lower the
unemployment rate because of
2. Determines the price of securities the many job opportunities it
offers
Investors aim to make profits from their
securities. However, unlike goods and
services whose price is determined by
the law of supply and demand, prices of
securities are determined by financial
markets.

3. Makes financial assets liquid

Buyers and sellers can decide to trade
their securities anytime. They can use
Stock are the foundation of nearly
every portfolio.
A stock (also known as equity) is a  Historically, they have
security that represents the ownership outperformed most other
of a fraction of a corporation. This investments over the long run.
entitles the owner of the stock to a
proportion of the corporation's assets
and profits equal to how much stock
they own. Units of stock are called
 Understanding Stocks
"shares." Corporations issue (sell) stock to raise
Stocks are bought and sold funds to operate their businesses. The
predominantly on stock exchanges, holder of stock (a shareholder) has now
though there can be private sales as bought a piece of the corporation and,
well, and are the foundation of many depending on the type of shares held,
individual investors' portfolios. These may have a claim to a part of its assets
transactions have to conform to and earnings. In other words, a
government regulations which are shareholder is now an owner of the
meant to protect investors from issuing company. Ownership is
fraudulent practices. Historically, they determined by the number of shares a
have outperformed most other person owns relative to the number of
investments over the long run. These outstanding shares. For example, if a
investments can be purchased from company has 1,000 shares of stock
most online stock brokers. Stock outstanding and one person owns 100
investment differs greatly from real shares, that person would own and have
estate investment. claim to 10% of the company's assets
and earnings.2
Stock holders do not own corporations;
 KEY TAKEAWAYS they own shares issued by corporations.
But corporations are a special type of
organization because the law treats
 A stock is a form of security that
them as legal persons. In other words,
indicates the holder has
corporations file taxes, can borrow, can
proportionate ownership in the
own property, can be sued, etc. The
issuing corporation.
idea that a corporation is a “person”
 Corporations issue (sell) stock to
means that the corporation owns its own
raise funds to operate their
assets. A corporate office full of chairs
businesses. There are two main
and tables belongs to the corporation,
types of stock: common and
and not to the shareholders.3
preferred.
 Stocks are bought and sold This distinction is important because
predominantly on stock corporate property is legally separated
exchanges, though there can be from the property of shareholders, which
private sales as well, and they limits the liability of both the corporation
and the shareholder. If the corporation acquiring company doesn’t go around
goes bankrupt, a judge may order all of buying up the building, the chairs, the
its assets sold – but your personal employees; it buys up all the shares.
assets are not at risk. The court cannot The board of directors is responsible for
even force you to sell your shares, increasing the value of the corporation,
although the value of your shares will and often does so by hiring professional
have fallen drastically. Likewise, if a managers, or officers, such as the Chief
major shareholder goes bankrupt, she Executive Officer, or CEO.
cannot sell the company’s assets to pay
For most ordinary shareholders, not
off her creditors.
being able to manage the company isn't
such a big deal. The importance of
being a shareholder is that you are
 Stockholders and Equity entitled to a portion of the company's
Ownership profits, which, as we will see, is the
foundation of a stock’s value. The more
What shareholders actually own are
shares you own, the larger the portion of
shares issued by the corporation; and
the profits you get. Many stocks,
the corporation owns the assets held by
however, do not pay out dividends, and
a firm. So if you own 33% of the shares
instead reinvest profits back into
of a company, it is incorrect to assert
growing the company. These retained
that you own one-third of that company;
earnings, however, are still reflected in
it is instead correct to state that you own
the value of a stock.
100% of one-third of the company’s
shares. Shareholders cannot do as they
please with a corporation or its assets. A
shareholder can’t walk out with a chair Common vs. Preferred Stock
because the corporation owns that
chair, not the shareholder. This is known
as the “separation of ownership and There are two main types of stock:
control.” common and preferred. Common stock
usually entitles the owner to vote at
Owning stock gives you the right to vote
shareholders' meetings and to receive
in shareholder meetings, receive
any dividends paid out by the
dividends (which are the company’s
corporation. Preferred stockholders
profits) if and when they are distributed,
generally do not have voting rights,
and it gives you the right to sell your
though they have a higher claim on
shares to somebody else.
assets and earnings than the common
If you own a majority of shares, your stockholders. For example, owners of
voting power increases so that you can preferred stock (such as Larry Page)
indirectly control the direction of a receive dividends before common
company by appointing its board of shareholders and have priority in the
directors. This becomes most apparent event that a company goes bankrupt
when one company buys another: the and is liquidated.
The first common stock ever issued when it issues them (in the primary
was by the Dutch East India market) or from another shareholder (on
Company in 1602 the secondary market). When the
corporation issues shares, it does so in
Companies can issue new shares
return for money.
whenever there is a need to raise
additional cash. This process dilutes the Bonds are fundamentally different from
ownership and rights of existing stocks in a number of ways. First,
shareholders (provided they do not buy bondholders are creditors to the
any of the new offerings). Corporations corporation, and are entitled to interest
can also engage in stock buy-backs as well as repayment of principal.
which would benefit existing Creditors are given legal priority over
shareholders as it would cause their other stakeholders in the event of a
shares to appreciate in value. bankruptcy and will be made whole first
if a company is forced to sell assets in
order to repay them. Shareholders, on
 Stocks vs. Bonds the other hand, are last in line and often
receive nothing, or mere pennies on the
Stocks are issued by companies to raise dollar, in the event of bankruptcy. This
capital, paid-up or share, in order to implies that stocks are inherently riskier
grow the business or undertake new investments that bonds.
projects. There are important
distinctions between whether somebody
buys shares directly from the company
 INVESTING PROCEDURES:

1. Choose a stockbroker. The PSE has a complete list of information about all its
trading participants who are authorized and qualified to trade securities for you. This
list is also available on the PSE's website and the telephone directory's Government
and Business listings yellow pages under the category of stock and bond brokers.
Aside from representing you in the stock market, a stockbroker can also offer you
services such as access to market reports/studies, on-time delivery of important
documents, and advise on your investments. It is then important that you trust your
stockbroker and that you are satisfied with its services.

2. You shall be required to open an account and fill out a Customer Account
Information Form and to submit identification papers for verification. The stockbroker
will then assign a trader or agent to assist you in either buying or selling any listed
security. There are also stockbrokers who have an online trading facility that allows
you to post orders by yourself, but sufficient understanding of how the stock market
works is key. If you choose to be assisted by a trader or agent, you can discuss with
him/her what stocks you want to buy or sell.

3. Give the order to your trader, and then ask for the confirmation receipt. Your buy
or sell orders are relayed to the stockbroker's dealer for execution. In an automated
system as in PSE, the order is keyed in through a trading terminal and automatically
matched. Confirmation of done trades - via phone, email or online - is made as soon
as possible and subsequently, an official confirmation or invoice should be delivered
to you.

4. Pay before settlement date. The delivery or payment should be made before the
settlement date of T+3. For traditional stockbrokers, settlement of transactions is
usually done after three (3) working days from the transaction date. This means that
for transactions done on Monday, as an illustration, payment should be received by
Thursday. Meanwhile for online stockbrokers, settlement of all transactions is done
on the transaction date. Settlement of accounts is performed by the clearing house.

5. You shall receive from your broker either the proceeds of sale of your stocks
(after 3 business days) or proofs of ownership of stocks you bought (confirmation
receipt and invoice). If you wish to have a physical certificate of the stocks you
bought, you can give instructions to your broker and pay the required upliftment fee.

You can purchase shares of stocks either through an initial public offering (IPO) or
through the open market (also referred to as the secondary market). Shares sold
through IPOs are offered for the first time to the public by the company (primary
market) whereby proceeds of the sale go directly to the company. Shares of listed or
publicly traded companies are only bought during trading hours. These shares have
since been transferred from one owner to another and proceeds of the sales do not
go directly to the company but to the owners of the shares.
 The Trading Cycle

All equity transactions, whether buying or selling, have a settlement period of T+3
(trading day + 3 working days). This means that a seller should be able to deliver the
stock certificate, if any, to his broker and the buyer must have paid the cost of
transaction to his broker within 3 working days after the trade was done. Historically,
settlement was done manually (27-day cycle). With scripless trading, wherein
settlement is done via the book-entry-system (thru Philippine Central Depository or
PCD), transactions are settled on the third day after trade date. Under this system, the
investor has the option to hold on to his certificate (uplift) or deposit (lodge) this
certificate in PCD through his broker-participant account.
Board Lot System
Equity trading is done by board lot or round lot system. The Board Lot Table determines
the minimum number of shares an investor can buy or sell at a specific price range.
Therefore, the minimum amount of initial investment varies and will depend on the
market price of the stock as well as its corresponding board lot. Prices of stocks move
through a scale of minimum price fluctuations.

Market Price (in Php) Tick Size Lot Size

0.0001 to 0.0099 0.0001 1,000,000

PSE Trading Hours/ Market
Phases
0.0100 to 0.0490 0.0010 100,000
8:45 am National Anthem
0.0500 to 0.2490 0.0010 10,000
9:00 am Pre-Open Auction Period
0.2500 to 0.4950 0.0050 10,000
9:15 am Pre-Open No-Cancel
Period
0.5000 to 4.9900 0.0100 1,000

9:30 am Opening Period -

5.0000 to 9.9900 0.0100
Continuous Trading 100

10.0000 to 19.9800 12:00 nn 0.0200

Market Recess 100

20.0000 to 49.9500 1:30 pm 0.0500

Continuous Trading 100

50.0000 to 99.9500 3:15 pm 0.0500

Pre-Close Auction Period 10

3:18 pm
100.0000 to 199.9000 Pre-Close
0.1000 No-Cancel 10
Period

200.0000 to 499.8000 0.2000 10

3:20 pm Closing Period - Run-
off/Trading-at-Last
500.0000 to 999.5000 0.5000 10
3:30 pm Market Close
1000.000 to 1999.000 1.0000 5

2000.000 to 4998.000 2.0000 5

5000.000 and UP 5.0000 5

Buying Transaction:
Mr. X wishes to buy a stock whose market price is P10.00. Based on the Board Lot Table, the number of
shares he can buy at a regular transaction should be in multiples of 100 shares. In this case, if Mr. X
wants to buy 1,000 shares (which is a multiple of 100 shares) his required cash outflow will be as follows:

Market price/share P 10.00

Number of shares to be bought   x 1,000

  P 10,000.00

Broker's Commission* (0.25% + 12% VAT)   + 28.00

SEC Fee (Transaction Value x 0.005%)   + 0.50

PSE Transaction Fee (Transaction Value x 0.005%)   + 0.56**

SCCP Fee (Transaction Value x 0.01%)   + 1.00

Total Cash Outlay P 10,030.06

Selling Transaction:
Ms. Y wishes to sell a stock that is trading at P10.00. Based on the Board Lot Table, the number of
shares she can sell at a regular transaction should be in multiples of 100 shares. In this case, if Ms. Y
wants to sell 1,000 shares (which is a multiple of 100 shares), her cash inflow will be as follows:

Market price/share P 10.00

Number of shares to be sold   x 1,000

  P 10,000.00

Broker's Commission* (0.25% + 12% VAT)   - 28.00

Stock Transaction Tax** (Transaction Value x 0.6%)   - 60.00

SEC Fee (Transaction Value x 0.005%)   - 0.50

PSE Transaction Fee (Transaction Value x 0.005%)   - 0.56***

SCCP Fee (Transaction Value x 0.01%)   - 1.00

Net Cash Receivable P 9,909.94