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Written Report Case Studies On Fundamentals of Financial Markets
Written Report Case Studies On Fundamentals of Financial Markets
Written Report Case Studies On Fundamentals of Financial Markets
Written Report
CASE STUDIES ON FUNDAMENTALS OF FINANCIAL MARKETS
________________________________
Submitted to:
________________________________
Submitted by:
Domingo, Mary Shane P.
Evalarosa, Jereme O.
Garcia, Ma. Regine G.
Gigante, Kris Marielle
BSA 2-14
September 2019
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
CHAPTER 1 CASES
CASE 1
BACKGROUND:
Hybrid Rice Corporation is a manufacturing company that produced rice and other
agricultural products, this corporation is under the industrial sector. The directors of the
company wants to improve their production by modernizing their plant and machinery, so the
corporation is on need of fund that will mature beyond one year. To weigh which approach
will be better, to approach directly the stock exchange or to approach first the consultant, the
advantages and disadvantages of the approaches should be considered.
ANALYSIS:
•Approaching the Stock Exchange
STOCK EXCHANGE
The stock exchange is key financial institution in any free-market economy. It lets individual
investors and investment firms exchange capital and move resources to places where there
are most needed. Stock exchanges can also serve as a savings tool.
ADVANTAGES
1. Economies of Scales.
2. Investor Protection
3. Secure Clearing
DISADVANTAGES
1. Brokerage Commissions Kill Profit Margin
2. Volatile Investments
3. Time Consuming
•Approaching the Consultant
ADVANTAGES
1. Act as quarterback of the financial team.
2. Helps in long-term planning.
3. Researches, examines and recommends investments and products.
DISADVANTAGES
1. Generates an additional expense.
2. May not be biased in recommendations.
3. May recommend more expensive products.
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For the Hybrid Rice Corporation, it will be better and advantageous if they will
approach the consultant first. The financial or investment consultant can help them by
providing advices to formulate financial strategies to fund the modernization of plant and
machinery. This type of consultant also provides information about taxes, investments and
insurance decisions. They may also direct the buying and selling of stocks and bonds for their
clients.
Financial Intermediary
Financial intermediary is a special type of financial entity that acts as a third party to
facilitate the borrowing activity between lenders and borrowers. Since the Hybrid Rice
Corporation will be approaching a consultant, the intermediary will be the Investment Bank.
It will serve as the third party in transactions between the corporation and the investors
thorough IPO or Initial Public Offering. The investment bank will sell shares to the public in
exchange of the fee that will be paid by Hybrid Rice Corporation.
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
CASE 2
BACKGROUND:
Specialty Paper Corporation is a large and creditworthy company operating in a
Philippine Valley. It is an export-oriented unit, dealing in exclusive embroidered paper.
PROBLEM:
1.The firm is unable to get an uninterrupted supply of raw materials.
2. The duration of production cycle has also increased.
3. The supplier of raw materials ask the company for advance payment.
4. The company is facing a liquidity crisis.
The lender will review your application and financial information to make their lending
decision. If your application is declined, they may recommend steps you can take in order to
obtain financing.
5. Pre-closing
In this phase, sometimes referred to as “loan settlement,” your home mortgage
consultant will work with you to secure any required title insurance and real estate
documents to protect against other parties claiming ownership of the property.
6. Closing
The day and time when all final mortgage documents are signed and all necessary
payments are transferred to complete the purchase of a house. Also known as the settlement
date.
7. Loan servicing
The steps taken to maintain a loan from the time it’s closed until it’s paid off, for
example billing the borrower, collecting payments, and making contract changes. It’s not
uncommon to have loan servicing transferred between many companies during the life of a
loan.
ADVANTAGES:
1. Keep control of the company. (Do not take any ownership position in businesses.)
2. Bank loan is temporary. (Once you has paid off the loan, there is no obligation anymore.)
3. Flexibility - you only worry about making your regular installments payment on time.
4. Tax benefits - what you have paid for your yearly interest will be deducted to your tax if
you use the bank loan for business reasons.
DISADVANTAGES:
1. Tough to qualify. (Very difficult to obtain unless a small business has a substantial track
record or valuable collateral such as real estate.)
2. Repayment Burden - must pay the periodic payments when they fall due. Those who fail to
do so, their assets will be seized. (Even if you have paid on later date, the bank can still
report you to the bureaus that can negatively affect your credit score.
3. Irregular Payment Amounts - variable interest rate, the rate changes with market
conditions. Thus, determining future payments will be difficult.
WHAT IS CREDITWORTHINESS?
Creditworthiness reflects a person's, company's, or entity's ability to pay back a debt. In
other words, how likely they are to repay a loan. High creditworthiness/rate tends to be more
likely to get a low interest rate on the loan.
Philippine Rating Services Corporation is the only domestic credit rating agency that is
accredited by the Securities and Exchange Commission and recognized by the Bangko
Sentral ng Pilipinas. It is also a founding member of the Association of Credit Rating
Agencies in Asia (ACRAA), which now counts thirty (30) domestic credit rating agencies in
the Asian region as its members. PhilRatings actively participates in the development of the
Philippine capital market by implementing a national credit rating system.
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
THE RATING
PROCESS:
PHILRATINGS' METHODOLOGY
BUSINESS RISK
1. Economic risk
PhilRatings reviews the risks arising from the over-all economy in which the company
operates and gauges how the dynamics of the economy affect the operations of the particular
company. Accordingly, the economy's strength, diversity, and volatility, as well as the
government's ability to manage the economy through boom and recessionary periods, are
evaluated. The analysis particularly focuses on the size, structure and growth prospects of the
economy, the extent to which it is open to external markets, and potential vulnerabilities.
2. Industry Risk
Industry risk covers many elements, and for any industry, there will be both positive and
negative factors. While it is difficult to say which factors will prevail, PhilRatings gauges the
dynamics of the industry and the extent to which those dynamics lead to more or less risk
from the investor's point of view. Accordingly, the analysis covers the structure of the
industry, the dynamics of competition, the regulatory and legislative framework, and the
government's philosophy with respect to the industry - i.e., market-oriented or interventionist.
3. Market Position
Market position analysis involves an assessment of the benefits or weaknesses
stemming from a company's market position (e.g., pricing power, quality of business, etc.).
This involves an evaluation of the company's market share in key business lines, and the real
advantages stemming from that market position, together with a review of the extent of
competition in, and vulnerability of, the market position.
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4. Business Diversification
Business diversification addresses the diversity of a company's products, business lines
and customer base, and the benefits or weaknesses (such as geographic or business
concentrations) that flow from them.
5. Management and Strategy
Managerial effectiveness and credibility are assessed through an evaluation of the
company's past performance and of the appropriateness of management's strategies within a
changing environment. Consideration is also given to the organizational structure and the
extent to which it enhances managerial efficiency, the quality and depth of both management
and the planning process (both financial and strategic). The analysis normally involves a
comparison of past performance to budget or plan.
FINANCIAL RISK
1. Earnings Generation
Key considerations are earnings levels, trends, and stability, as well as the fundamental,
core, long-term earnings power of the company. The analysis covers operating margins,
diversity and sustainability of income sources, cost structure, and the earnings outlook. The
company's ability to cover interest and other fixed charges is also considered.
3. Capital Structure/Leverage
Key considerations are the debt and equity mix, as well as the maturity profile of
existing indebtedness. The types of equity capital utilized are assessed, such as preferred
shares that may be redeemable and thus may constitute a future need for refinancing, and
appraisal increment in property which may be dissipated if asset values decline. In assessing
leverage, off-balance sheet items are also considered, such as operating leases, guarantees to
other companies, and contingent liabilities.
4. Financial Flexibility
Financial flexibility is a summation of all the preceding factors, since it is an evaluation
of a company's ability to meet unexpected demands on funds. Factors considered include:
● the company's ability to access various funding markets and raise capital from the public or
private sources, generally, and in a difficult environment
● the extent of internal reserves available to cover unexpected losses
● the franchise value of specific businesses
● assets where the market value is significantly greater then the book value
ability to sell; and
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5. Asset Quality
Credit risk across the entire spectrum of the institution's activities is evaluated
(including receivables, marketable securities, equity investments, on- and off-balance sheet
counterparty exposures, etc.) This involves an analysis of the structure of the balance sheet
and the maturity profile of the asset portfolio. Concentrations of credit and investment risk
also are considered, along with problem loans and provisioning policy.
QUESTIONS:
A. As a finance manager of the company, name and explain the alternative to bank
borrowing that the company can use to resolve the crisis.
2. Traditional factoring: In factoring, different than reverse factoring, a business sells its
accounts receivable to a funder – but the initial payment is for less than the full amount of the
receivable. For example, a company may receive early payment for 80 percent of the invoice
amount minus processing fees. Compared to asset-based lending, companies have more
flexibility in choosing which receivables to trade, but funder fees can be high and credit lines
may be smaller. As with ABL, any factored receivables are recorded on the company’s
balance sheet as outstanding debt.
Qualification Criteria:
This type of financing is available to companies of all sizes, including start-ups. For
your business to qualify for accounts receivable financing:
ADVANTAGES
1. Fast cash
With receivables financing, the application process is quick and less stringent than
traditional business loans. This is suitable if you need capital to meet your business’ short-
term needs, such as paying employees’ salaries, fulfilling deliveries, and purchasing
inventory.
With this type of financing, you receive the loan right away, immediately improving
cash flow. With the cash advance, you have additional capital to answer your business’
needs, be it buying more inventories, purchasing supplies, or what have you.
Disadvantages
Unlike traditional business loans which base the interest rate on your and your business’
credit history, with receivables financing, the interest is determined by the quality of your
clients. This is understandable since you’re putting up the receivables – the money owed to
you by clients – as collateral. In an ideal setting, all your clients are reliable. If this were the
case, then this type of financing would be more advantageous than disadvantageous.
However, not all your clients will have deep pockets; others may be slow-paying and
unreliable. This, in turn, will affect the interest rate given to you.
2. Increased costs
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Aside from the interest rate on the cash advance, there are additional costs to consider
with receivables financing. You’ll have to pay additional fees, which is usually a set
percentage (between 1 to 4%) of your receivables. This will bring down your profit margins;
however, if you need the cash immediately, decreased profit margins would be better than
lost sales due to insufficient capital.
Requirements
1. Sworn registration requirements in the prescribed form.
2. Board resolution.
3. Latest audited financial statements.
4. Committed credit line agreement with a bank.
Process of Issuance
1. Every company issuing the CP should appoint a scheduled bank as the issuing and paying
agent.
2. The authorized authority is required to satisfy itself about the satisfactory credit rating.
3. A resolution is required to be passed by the Board of Directors approving the issue and
authorizing the official to execute the relevant documents, as per RBI norms.
4. It should also verify the documents submitted by the issuing company and issue a
certificate that the documents are in order.
5. The issuer should disclose to its potential investors its financial position.
6. The issue has to be completed within two weeks of opening.
4. No collateral.
ADDITIONAL INFORMATION:
Standard & Poor's credit rating for Philippines stands at BBB+ with stable outlook.
China - A+
Germany - AAA
Hongkong - AA+
Indonesia - BBB
Peru - BBB+
AAA - Extremely strong capacity to meet financial commitments.
AA - Very strong capacity to meet financial commitments.
A - Strong capacity to meet financial commitments but susceptible to adverse economic
conditions and changes in circumstances.
BBB - Adequate capacity to meet financial commitments, but more subject to adverse
economic conditions.
CASE 3
BACKGROUND:
The corporation requires funds for its inventory, payment of salaries and wages,
payment of utilities, and other monthly operating expenses.
PROBLEM:
The company is experiencing a liquidity crisis.
ANALYSIS:
Property Corporation is having a liquidity crisis for its Operating Activities. Since the
case provides limited data, let us assume that it is a large and creditworthy corporation.
Credit ratings provide potential investors with information regarding the ability of the issuing
firm to repay the borrowed funds. On the other hand, even though the company is having a
liquidity crisis, it does not mean that it is going bankrupt. It is normal in corporations to have
this kind of problem since the patterns of their receipt from sales do not necessarily coincide
with their daily expenses. This kind of problem is the reason why there is a need for money
markets. In simple term, the need for money markets arises because the immediate cash
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
needs of individuals, corporations, and government do not necessarily coincide with their
receipts of cash, and at the same time, some individuals, corporations, and government have
temporary idle cash that they wish to invest in a safe and interest-bearing asset. Thus, in this
case we are suggesting that the corporation should approach the money market.
Meanwhile, since money market instruments have an active secondary market, this
instrument could also be raised in this case:
1. Treasury Bills
If the corporation have an investment in government securities like treasury bills, the
corporation could trade this in the secondary market. It is backed by the Philippine
government, that is why treasury bills are virtually default risk free. In fact, treasury bills are
often referred to as the risk-free asset and usually the basis for interest rates. Further, because
of their short-term nature and active secondary market, it have little interest rate risk and
liquidity risk.
CASE 4
BACKGROUND
Incorporated in 2000, Dairy Corporation is one of the leading manufacturers and
marketers of dairy-based branded foods in India. In the initial years, its operation was
restricted only to collection and distribution of milk. But, over the years it has gained a
reasonable market share by offering a diverse range of cheese, ghee, milk powders, etc. In
order to raise capital to finance its expansion plans. Dairy Corporation has decided to
approach capital market through a mix of Offer for sale and a public issue of shares.
A. Name and explain the types of financial market being approached by the
company.
Types of Financial Markets
Based on Instruments Traded
•Money Market - is defined as dealing in debt of less than one year. It is a means for
governments and corporations to keep their cash flow steady, and for investors to
make a modest profit. Money market investments are characterized by safety and
liquidity.
•Secondary Market - is where existing shares, debentures, bonds, etc. are traded
among investors. Securities that are offered first in the primary market are thereafter
traded on the secondary market. The trade is carried out between a buyer and a seller,
with the stock exchange facilitating the transaction. In this process, the issuing
company is not involved in the sale of their securities.
•External Market – refers to financial market where securities are offered to investors
in different country and are issued outside the regulatory jurisdiction of any single
country.
ANALYSIS
Since the company intends to raise capital to finance its expansion plans, based on
instruments traded, they are using the capital market approach which relates to financial
instruments that will mature beyond one year from the issuance date for the purpose of
allocating funds to its most productive use. In comparison, Capital markets offer higher-risk
investments, while money markets offer safer assets; money market returns are often low but
steady, while capital markets offer higher returns, thus, it’s more efficient in allocating
resources for expansion plans. Based on market type, on the other hand, they are using
Primary Market since it is aforementioned in the preceding situation that they will be using a
mixture of Offer for sale and a public issue of share. Since these underlie to the Public
Offering, the company must first, undergo an initial public offering or IPO. Upon applying in
an IPO, the company must, first, comply with the requirements provided by the Securities
and Exchange Commission. Since Dairy Corporation is overtaking in India, they need to
comply with the necessary requirements provided by SEC India. Lastly, Based on Country’s
Perspective, Dairy Corporation is evidently inclined in Internal Market since they are
operating within the vicinity of India only.
CASE 5
BACKGROUND
Juana Dela Cruz’ grandmother who was unwell, called her and gave her a gift packet. Juana
opened the packet and saw many crumpled share certificates inside. Her grandmother told
her that they had been left behind by her late grandfather. As no trading is now done in
physical form, Juana wants to know the process by adopting which she is in a position to deal
with these certificates.
B. Give at least two reasons why dealing with shares in physical form had been
stopped.
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Dealing with shares in physical form has been stopped due to Fraud and Manipulation Risk.
Since signatures can be forged by unscrupulous persons and it is easily manipulated due to
lack of transparency.
CHAPTER 2 CASES
CASE 1
BACKGROUND
Gabriel won a cash prize of Php 20,000 in the National level Robotics Competition.
On the advice of his father, he visits a nearby bank to open a Fixed deposit account in his
name with the prize money. His sister Heart accompanied him to the bank. On reaching the
bank, he notices big banners which are placed within the premises containing information
about the various arrangements through which corporates may raise their capital through the
bank. Being a finance graduate, Heart explains to Gabriel that banks play the role of the
financial intermediary by helping in the process of channelizing the savings of the
households into the most profitable business ventures.
ANALYSIS
Aside from the bank , suggest other financial intermediaries that help in the process of
channelizing the savings of the households into the most productive to use.
Aside from banks, mutual fund and Insurance Companies may help Gabriel in the
process of channelizing his savings. Mutual Funds is a type of financial vehicle made up of
a pool of money collected from many investors to invest in securities such as stocks, bonds,
money market instruments, and other assets. Insurance Companies are business that
provides coverage, in the form of compensation resulting from loss, damages, injury,
treatment or hardship in exchange for premium payments. These two are possible alternatives
for banks but to know which is more advantageous, the pros and cons should be considered.
your money, based on a good deal of research and an overall strategy for making
money.
1. No Control Over Portfolio. Giving up the control to the portfolio and let the money
managers manage it.
2. Fees and Expenses. Some mutual funds may assess a sales charge on all purchases,
also known as a “load” – this is what it costs to get into the fund. Plus, all mutual
funds charge annual expenses, which are conveniently expressed as an annual
expense ratio – this is basically the cost of doing business.
3. Cash Drag. Mutual funds need to maintain assets in cash to satisfy investor
redemptions and to maintain liquidity for purchases. However, investors still pay to
have funds sitting in cash because annual expenses are assessed on all fund assets,
regardless of whether they’re invested or not.
Advantages of Insurance Banks
1. Guarantees. When you buy a segregated fund through a life insurance company,
there are typically guarantees of capital under two circumstances. The first is when
you die and the second is when you reach a 10-year maturity period.
Creditor Protection. Safeguarding assets from seizure by creditors is an important and
often overlooked aspect of asset management.
2. Probate Protection. When you have to probate an estate at death, there is the
potential for significant fees and time delays depending on the complexity and size of
the estate.
3. Covers Business Property. The insurance serves as the protection of the property of
someone who invest in an insurance bank.
After weighing the advantages and disadvantages of the two intermediaries, we are
suggesting that it will be better if Gabriel would invest in Mutual Fund since in mutual
fund, he can make money in three possible ways- income earned, increase in price of
securities and the increase in fund share price.
Financial Instrument
Gabriel is planning to open a fixed deposit account. A fixed deposit (FD) is
a financial instrument provided by banks which provides investors a higher rate
of interest than a regular savings account, until the given maturity date. This instrument is
preferred by many because of its return in form of interest.
Helps in liability crunch: Sometimes liabilities arise due to uncertainty and you may
have an urgency of having cash at that point in time. In those conditions, you can take
a loan against your fixed deposits.
Disadvantages of Fixed Deposit
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Reducing interest rates: Even though fixed deposits have a lot of advantages, the
interest rates do not move in line with inflation. This means in some cases, they may
actually earn less than the inflation rate. The interest rates for fixed deposits have
been falling in recent times which has reduced the attractiveness of this investment.
Locked in funds: Fixed deposits lock in your funds for a fixed duration. These funds
are not available for you to use unless you withdraw the funds prematurely. Fixed
deposits are not at all liquid and cannot be converted into cash easily.
Penalties on withdrawal: Banks charge penalty to the depositors who withdraw their
fixed deposits prematurely. This penalty is in the form of a reduced rate of interest.
No tax benefit: The interest earned on fixed deposit is added to the taxable income of
the deposit holder. There is no deduction on any interest earned.
Fixed interest rate: The rate of interest on a fixed deposit remains the same for the
entire duration of the fixed deposit. Even if the rates increase, the bank does not pay
additional interest to the deposit holder.
Financial Intermediaries
A mutual fund is a type of financial vehicle made up of a pool of money
collected from many investors to invest in securities such as stocks, bonds, money
market instruments, and other assets. Mutual funds are operated by professional
money managers, who allocate the fund's assets and attempt to produce capital gains
or income for the fund's investors. A mutual fund's portfolio is structured and
maintained to match the investment objectives stated in its prospectus.
very difficult for a fund even to match the performance of its benchmark, let alone
surpass it on a consistent basis. With index funds offering expense ratios of less than
0.1%, you don't have to pay a lot for mutual funds.
Step 3: Pick a diversified portfolio of funds
In buying mutual funds, it's important to look beyond the mere number of funds you
own and make sure that those funds actually own different investments. If you have
five mutual funds but they're all index-tracking funds that follow the S&P 500, then
you actually have no more diversification than you'd have owning a single fund.
Instead, look to buy mutual funds with different investments, such as stocks, bonds,
real estate investments, and other alternatives.
Step 4: Find a family
With mutual funds, the cheapest way to set up accounts is directly with the fund
company that offers shares. Therefore, if you can find a company that offers a family
of funds that you like, then it makes things a lot easier, because you can make a single
deposit that gets divided into different funds on a regular basis
Step 5: Don't stop watching
Finally, even once you've selected and invested in a mutual fund, your job's not over.
You also need to monitor your mutual funds to make sure that everything continues to
run smoothly. If there's a change in investment management, you'll want to watch
closely to see if the new manager continues to do things as well as the old manager
did, especially for actively managed funds. With index funds, a change to a new
benchmark index could signal a shift in the performance of the fund, and you'll have
to decide whether that's consistent with your investment strategy going forward. Most
importantly, a rise in fees can signal a change in fund philosophy that you won't like.
Financial Market:
The financial market can be identified using either the instrument or country’s
perspective. The instrument used was fixed deposit account which can be a short-term or
long-term, this means the capital market could capital market or money market. And
assuming that Gabriel is a Filpino and lives in the Philippines, we considered also the
domestic market. This is a market where issuers who are considered residents in the country
issue the securities and where these securities are traded afterwards.
Regulatory Environment
The mutual fund is regulated by (SEC) Securities and Exchange Commission,
Information about the rules and governance of mutual funds can be found in a document
called prospectus. It is required by the SEC and should fully explain the fees, the objective,
the operations, and the market risks of each mutual fund. Mutual funds must also file regular
shareholder reports with the SEC. The following are some of the regulations used to govern
the mutual fund:
The Investment Company Act of 1940. This act regulates mutual funds, as well as
other companies. It focuses on disclosures and information about investment
objectives, investment company structure, and operations.
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
The Securities Act of 1933. This act requires that investors receive certain
significant information pertaining to securities that are offered for sale in the public
markets. It also prohibits fraud and misrepresentations in the sale of securities.
The Securities Exchange Act of 1934. The Act of 1934 created the SEC. It
empowers the SEC with authority over the securities industry.
CASE 2
PROBLEM
Michael works as a waiter in a five-star hotel in Philippines. While serving the customer
he overhears him at the table saying that he has made profits higher than expected by
investing in securities market. So, Michael also decides to make a nominal investment from
his savings in the stock market in pursuit of higher gains.
Question 1:
A. As a financial consultant, discuss with him the steps involved in investing in the
securities market.
3. Many consultants are licensed to buy and sell financial products such as insurance policies,
stocks and bonds.
4. Consultants may also offer financial planning classes or seminars to reach out to potential
clients.
Requirements
1. Financial consultants have a bachelor's or graduate degree in finance. Prospective financial
consultants earn degrees in finance, math, business or economics as preparation for the field.
2. Certifications, such as the Certified Financial Planner (CFP) credential help consultants
improve their professional standing and are looked on favorably by employers. The Certified
Financial Planner Board of Standards issues the certification, which requires applicants to
have three years of relevant experience and a bachelor's degree.
3. In addition, applicants must pass a comprehensive exam that covers key aspects of the
financial planning process.
4. Candidates for certification must adhere to a code of ethics and complete 30 hours of
continuing education every two years in order to remain current in the ever-changing field of
financial planning.
5. Consultants must be licensed and registered with their particular state and the Securities
Exchange Commission if they sell securities. The variety of licenses needed by financial
consultants depends on the products they wish to offer their clients. Those who sell insurance
products must also be licensed by a state board.
Security Markets
The securities market is an economic institute where sale and purchase transactions of
securities between subjects of economy take place according to demand and supply. These
can be broken down into different types based on what is being traded.
The primary function of the securities markets is to enable to flow of capital from those
that have it to those that need it. Securities market help in transfer of resources from those
with idle resources to others who have a productive need for them. Securities markets
provide channels for allocation of savings to investments and thereby decouple these two
activities. As a result, the savers and investors are not constrained by their individual
abilities, but by the economy’s abilities to invest and save respectively, which inevitably
enhances savings and investment in the economy.
financial information. In the second case, the offering takes places through intermediaries
with published financial indicators.
2. Secondary Market
The secondary market is a market, where the already issued stocks are being resold.
The main participants of the market are speculators, who make money on the difference
between the buying and selling prices of stocks.
3. Government securities market
It is a market of circulation of government debt securities issued mainly for the
repayment of the deficit of the state budget or government projects.
4. Derivatives Market
A market of derivative securities with delayed execution of transactions.
What is a Security?
A security is a financial instrument, typically any financial asset that can be traded. The
nature of what can and can’t be called a security generally depends on the jurisdiction in
which the assets are being traded.
Types of Securities
1. Equity securities
Equity almost always refers to stocks and a share of ownership in a company (which is
possessed by the shareholder). Equity securities usually generate regular earnings for
shareholders in the form of dividends. An equity security does, however, rise and fall in
value in accord with the financial markets and the company’s fortunes.
2. Debt securities
Debt securities differ from equity securities in an important way; they involve borrowed
money and the selling of a security. They are issued by an individual or company and sold to
another party for a certain amount, with a promise of repayment plus interest. They include a
fixed amount (that must be repaid), a specified rate of interest, and a maturity date (the date
when the total amount of the security must be paid by).
Bonds, bank notes (or promissory notes), and Treasury notes are all examples of debt
securities. They all are agreements made between two parties for an amount to be borrowed
and paid back – with interest – at a previously-established time.
3. Derivatives
Derivatives are a slightly different type of security because their value is based on an
underlying asset that is then purchased and repaid, with the price, interest, and maturity date
all specified at the time of the initial transaction.
The individual selling the derivative doesn’t need to own the underlying asset outright.
The seller can simply pay the buyer back with enough cash to purchase the underlying asset
or by offering another derivative that satisfies the debt owed on the first.
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
A derivative often derives its value from commodities such as gas or precious metals
such as gold and silver. Currencies are another underlying asset a derivative can be structured
on, as well as interest rates, Treasury notes, bonds, and stocks.
Derivatives are most often traded by hedge funds to offset risk from other investments.
As mentioned above, they require the seller to own the underlying asset and may only require
a relatively small down payment, which makes them favorable because they are easier to
trade.
Steps involved in investing in Securities Market
STEPS IN INVESTING IN SECURITIES MARKET:
(WITH THE HELP OF FINANCIAL CONSULTANT)
1. Decide how you want to invest in stocks.
2. Open an investing account.
3. Know the difference between stocks and stocks mutual funds.
4. Start investing.
5. Keep in mind that investing is risky and the money that he will invest is something he is
willing to give up.
Process
● Investors must first open an account in brokerage firms (BDO Nomura, BPI Trade) which
are the intermediary companies between the stock exchange and the investors.
● Once the account is opened, investors fund the account so they can buy stocks.
● Stock exchange efficiently executes multiple orders from different brokerage companies in
accordance with the fixed rule.
●The transaction is executed safely and investors settle their trades through the brokerage
companies.
How much money you will need to buy stocks?
For the newbies and starters, some online brokers offer easy investment and trading
options for as low as P5000.
The 4 Golden Rules
Discipline and the right methodology is the key to a successful stock investment program.
Understand and adopt these four essential rules of thumb to keep you on track.
1. Invest EARLY
2. Invest REGULARLY
3. Invest LONG TERM
4. Invest using DIVERSIFICATION
Question 2:
B. Discuss also with him, other alternatives where he can invest his savings, the process
and which financial intermediaries they can go to.
Answer: Aside from securities market, Michael can also invest in an investment bank.
An investment bank is a financial intermediary that specializes primarily in selling
securities and underwriting the issuance of new equity shares to raise capital funds.
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
How it works:
Investment banks mediate between companies that issue securities and the individuals
or entities wishing to purchase them. In this respect, investment banks operate along two
main lines: a "buy" side and a "sell" side. "Buy" side operations include services such as
securities trading and portfolio management. "Sell" side activities include underwriting new
lines of stock, marketing financial products, and publishing financial research. The
investment bank can earn from this service through commissions when they act as a broker
or dealer for a transaction.
CASE 3
BACKGROUND:
He finalizes a deal to buy a new house. So, he visits a nearby branch of a commercial
bank and withdraw from his account in order to pay the token money to the seller. A large
number of customers are present to make cash withdrawals.
PROBLEM:
The bank is likely to fall short of cash for that day.
ANALYSIS:
The option given in the case can be considered since bank to bank borrowing is not
uncommon in the financial system. Usually, retail banks approach the central bank, Bangko
Sentral ng Pilipinas, to make amends on their cash shortage. Since retail banks are
maintaining cash reserves in the central bank, issuance of financial instruments like
repurchase agreement is one of the best option that a commercial bank could avail.
2. The repo is collateralized with treasury bond. In most repurchase agreements, the repo
buyer acquires title to the securities for the term of the agreement.
3. Once the transaction is agreed upon, the repo buyer, instructs its district Reserve Bank to
transfer cash in excess reserves, to the repo seller’s reserve account. The repo seller,
instructs its district Reserve Bank to transfer cash from its treasury bomd account to the repo
buyer’s treasury bond account.
4. Upon maturity of the repo, these transactions are reversed. In addition, the repo seller
transfers additional funds (representing one day’s interest) from its reserve account to the
reserve account of the repo buyer.
2. In case of a counterparty default, the loss is uncertain. It can be determined only after
the proceeds generated after the sale of the underlying security along with its accrued
interest falls below the amount specified in the repurchase agreement.
3. If the counterparty becomes bankrupt or insolvent, the lender may suffer a loss of
principal and interest.