FINANCIAL MARKET

THE CAPITAL MARKET

Financial Market

 Are structures through which funds flow. They are the institutions and systems
that facilitate transactions in all types of financial claims.
 A financial claims entitles a creditor to receive payment from a debtor in
circumstances specified in a contract between them, oral or written.
 It is classified as either: (1) Primary or Secondary Market or (2) Money or
Capital Market
Primary Market

 Are markets in which users of funds raise funds, through new issues of
financial instruments such as stocks and bonds. They consist of underwriters,
issuers, and instruments involved in buying and selling original or new issues
of securities referred to as primary securities.
 Market for primary securities.
 Raise cash for issuing company
 The government also acts as a borrower when it issues bonds or treasury bills.
 Involves either equity or debt security.
 Initial suppliers of funds or investors.
 Most of the transactions are done through investment banks.
Investment Banks Provide the Following
Services:
 Provide funds in advance
 Give advice to issuing corporations as to the price and number of securities to
issue
 Attract the initial public purchasers of the securities.
 Act as market analyst and advisor to the issuing company.
 Absorb the risk and cost of creating a market for the securities.
Secondary Markets

 Market for currently outstanding securities

 Provide liquidity for investors as they sell their financial securities when they
need cash.
 They do not increase the capital stock of the original issuing company or its
outstanding liabilities unlike in primary market.
 Transfer ownership, but do not affect the total outstanding shares or
securities in the market.
 Transfer shares, but do not raise funds for companies which issued the
securities.
 Exist for the purpose of marketability or easy selling/transfer of ownership
and liquidity or easy convertibility to cash of securities.
 Assure that a holder can sell and convert to cash his security at any time.
 Major player in the secondary market are the trust department and treasury
department of a commercial banks.
Who are the Market Participants:

 STOCK EXCHANGE


A stock exchange is an organized marketplace or facility that brings
buyers and sellers together and facilitates the sale and purchase of
stocks.

The only stock exchange operating in the country is the Philippine

Stock Exchange, Inc. (PSE). It makes sure that trading transactions
are done in an efficient, orderly, fair, and transparent manner. It
enforces rules and regulations that its publicly listed companies and
trading participants must strictly abide by. In this way, the PSE fulfills
its function as the “guardian” of the Philippine stock market.
 INVESTORS

Investors, also referred to as stockholders or shareholders, are those

who own shares of stock of a publicly listed company. They are
accorded certain privileges like the right to fair and equal treatment, the
right to vote and exercise related rights, and the right to receive
dividends and other benefits due to stockholders. They are classified as
either retail or institutional, and local or foreign.
 STOCKBROKERS
A stockbroker or trading participant is licensed by the Securities and Exchange
Commission (SEC) and is entitled to trade at the Exchange. They act as an agent
between a buyer and seller of stocks in the market. For their services as
stockbrokers, they receive from their clients either a buying or a selling
commission.
The PSE originally issued 184 trading rights. To date, the PSE has 133 active
stockbrokerage houses.


The representatives (licensed salesmen) of these accredited stockbrokers convene

daily, at certain specified hours, on the “trading floor” of the exchange, where they
sell and buy shares of stocks for the account of their clients. They execute orders in
the market to the greatest possible advantage of their customers, by buying at the
lowest possible price or by selling at the highest possible price.

 There are two (2) types of stockbrokers:

• Traditional – those who assign a licensed salesman to handle your

account and to take your orders via a written instruction or a phone call

• Online – those whose main interface is the internet where

clients execute their orders and access market information online
 LISTED COMPANIES

Listed companies, also called “issuers”, are those whose shares of stock
are traded on the Exchange. These companies qualified with the
stringent listing and reportorial requirements of the PSE, and have gone
through initial public offering (IPO) or listing by way of introduction.

As of August 2011, the PSE there are 249 listed companies in the PSE.
These are classified into six different sectors: Financials, Industrial,
Holding Firms, Property, Services, and Mining and Oil.
 CLEARING HOUSE

Securities Clearing Corporation of the Philippines (SCCP)

The SCCP is a wholly owned subsidiary of the Exchange. It was established

to ensure the orderly settlement of equity trades executed at the PSE. The
SCCP uses the Central Clearing and Central Settlement (CCCS) system
purchased from the Capital Markets Co. (CAPCO) of Belgium.

SCCP is responsible for establishing the cash and securities liabilities and
entitlements of its clearing members, synchronizing the settlement of funds
and the transfer of securities based on the delivery-versus-payment model
or multilateral net settlement; guaranteeing the settlement of trades in the
event of a trading participant’s trade default in order to ensure the finality
and irrevocability of all Exchange trades through its fails management
procedures; implementing appropriate risk management measures in order
to mitigate risks inherent in the clearing and settlement of Exchange trades
and the maintenance and administration of the Clearing and Trade
Guarantee Fund (CTGF).
 DEPOSITORY
Philippines Deposit Trust Company (PDTC)

The PDTC acts as securities depository or “custodian” of listed shares of

stock that are traded at the PSE. It was organized to establish a central
depository
in the Philippines and to implement scripless trading.

The PDTC performs book-entry transfer of securities:

1. From seller’s to buyer’s accounts during settlement of Exchange

trades;
2. From one PDTC participant to another per client instruction, and;
3. From lender’s to borrower’s account for loan transactions.
 SETTLEMENT BANKS

The PSE has three (3) accredited banking institutions where trading
participants make and receive payments for stock transactions.

The settlement banks accept deposits of funds for payment of securities

bought, confirm payments of due clearing obligations to SCCP, debit
buyer’s cash account and credit seller’s cash account during settlement,
and receive and/or return cash collateral put up by clearing members to
cover their daily trade negative exposures.
 TRANSFER AGENT

The stock transfer agent is considered the “official keeper” of the

corporate shareholder records. The stock transfer agents provide the
issuer or the listed company with a list of holders of its securities. They
effect transfer of beneficial ownership and process corporate actions like
stock or cash dividends, stock rights, stock splits, and collation of proxy
forms.
How to Read Stock Quotes

 The stock market is very volatile, which can be very intimidating to a novice
investor. That is why investors must always monitor or keep track of their
investments, which means being able to read or interpret the daily stock
quotes—a list of prices of stocks at one point within the trading day.
 In the past, stocks were quoted in fractions, but now, most exchanges use
decimals. Stock quotes are updated regularly during the trading day. Based on
these numbers, investors can make decisions on whether to buy or sell, or hold
the stocks.

Stock quotes and charts are often found in the financial section of a newspaper,
financial magazine or online. These charts provide details on the trends and
stock prices of companies that trade stocks in the public trading markets, and
the chart is organized in a standardized format of ten (10) columns for easy
reading. Here is how to read the basic stock quotes.
 NAME

The name of the listed company.

 SYMBOL

A unique alphabetic name which identifies the stocks of a listed company

 BID

The highest price that a buyer is willing and able to purchase for a share of
stock at a particular time, also called the “buyer’s price”.

 ASK

The lowest price that a seller is willing and able to offer for sale for a share of
stock, also called the “seller’s price".
 OPEN

The opening price of the stock for the day.

 HIGH

The highest traded price of a stock during a specific trading period.

 LOW

The lowest traded price of a stock during a specific trading period.

 CLOSE

The closing price of the trading day

 Market Price (in Php) Tick Size Lot Size

0.0001 to 0.0099 0.0001 1,000,000

Board Lot 0.0100 to 0.0490 0.0010 100,000

0.0500 to 0.2490 0.0010 10,000

0.2500 to 0.4950 0.0050 10,000

0.5000 to 4.9900 0.0100 1,000

5.0000 to 9.9900 0.0100 100

10.0000 to 19.9800 0.0200 100

20.0000 to 49.9500 0.0500 100

50.0000 to 99.9500 0.0500 10

100.0000 to 199.9000 0.1000 10

200.0000 to 499.8000 0.2000 10

500.0000 to 999.5000 0.5000 10

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:

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 foll

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:
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

TRADING/ TRANSACTION FEES AND TAXES

Transaction Fee

The Exchange collects 1/200 of 1% (0.5 basis points) on gross value for every buy and sell transaction executed. The fee is
exclusive of 12% value added tax (VAT).

Clearing and Settlement Fee

The Securities Clearing Corporation of the Philippines collects 1 basis point on gross value for every buy and sell transaction
executed. The fee is inclusive of 12% VAT.

Brokerage Commission

A stockbroker is compensated for his services in executing orders on the Exchange through commission charges, which are
paid by both the buyer and seller to their respective brokers.

For trade transactions covering equity and equity-related products, the maximum commission rate is 1.5% of the total
transaction cost plus 12% VAT. The minimum commission rates depend on the amount of the transaction. (See Table 2)

Upliftment/Withdrawal Fee

If a buying client opts for a stock certificate to be issued in his name, he must make the request through his broker who will then
issue the upliftment request through the PDTC system. Upon receipt, PDTC will then submit the request to the transfer agent for
the issuance of the certificate. PDTC will charge the broker an upliftment/withdrawal fee of Php50 per certificate issuance
request. The transfer agent will charge their usual issuance fee per certificate on top of PDTC's upliftment/withdrawal fee.
 TRADING/ TRANSACTION FEES AND TAXES

 Cancellation Fee

If a selling client has physical certificates, he must have the certificates converted into
book-entry form in the PDTC system by requesting, through his broker, for a direct
transfer (DT) with the transfer agent, which costs Php100 (plus 12% VAT) per
certificate for the transfer of ownership of shares to PDTC Nominee Corporation
(PCNC).

In addition to the DT fee, a client must pay cancellation fee of Php20 (plus 12% VAT)
to the transfer agent for cancellation of the certificates to be lodged in PDTC (for
lodgment of shares). This is applicable only to listed equities.

Stock Transaction Tax

• Sales of equities listed and traded on the Exchange are subject to a stock transaction
tax of 3/5 of 1% (60 basis points) of the value of transaction charged to the seller, in
lieu of the capital gains tax. The sale, barter or exchange of shares of stock listed and
traded at the PSE are exempt from documentary stamp tax.

Withholding Tax

• Under the National Internal Revenue Code of 1997, and except in cases where tax
treaties are in force, dividends received from domestic corporations are subject to a
withholding tax of 10% if the recipient is a citizen or resident alien, 20% if the recipient
is a non-resident individual engaged in trade or business in the Philippines, 25% if the
recipient is a non-resident individual not engaged in trade or business in the
Philippines, and 30% if the recipient is a non-resident foreign corporation. Dividends
received by domestic and resident foreign corporations are not subject to tax. The rate
of income tax withheld on dividends paid to a non-resident foreign corporation may be
reduced to 15% if the country in which the non-resident foreign corporation is domiciled
(a) imposes no taxes on foreign-source dividends or (b) allows a credit against the tax
due from the foreign non-resident corporation for taxes deemed to have been paid in
the Philippines equivalent to 15% of such dividends.
The Exchange Composite Index

 The PSE composite index is a weighted aggregative index based on a basket of

the common stocks of 30 listed corporations. It serves as a measure of the
exchange performance and is used as a tool in analyzing trends in the market.
It is often referred to as a barometer of a nation’s economic progress.
 Price volatility – refers to the speed at which prices go up and down. The
more volatile a market, the bigger are the potential profits and losses on the
short-term. An aggressive stock trader would buy on “lows” and sell on
“highs” while a conservative investor would prefer to hold on to his shares as
long-term investment.
Bullish and Bearish Markets

 The term bullish is derived from the coarse and forceful characteristics of a
bull. A market is said to bullish when prices increasingly move upwards. In
other words, despite some technical corrections arising from profit taking,
technical rallies result in higher price resistance. It is associated with
investors’ optimism, economic recovery, government stimuli and political
stability.
 The term bearish is based on the rude and surely characteristics of a bear.
 In a bearish market, prices are dropping continuously. There may be
technical rallies from time to time but both price resistance and support
continuously decline. It is associated with pessimism, economic downtrend,
government restraints and political instability.
Effects of Stock Dividend on Market
Price
 When stock dividend is declared by a corporation, there are four dates
involved. These are the dates of declaration, record, ex-dividend and
issuance of the corresponding stock certificates.
 Date of Declaration. This is relevant in the analysis of financial statements
because it is as of this date that the corporation has to recognize the transfer
from retained earnings to an account that will ultimately be an addition to
capital stock. The account may be “Stock Dividends Distributable” which
should appear also in the stockholders’ equity section of the balance sheet.
 Date of Record. This refers to the cut-off date in determining whose names
appear in the stock and transfer book of the corporation and are therefore
entitled to the stock dividend.
 Date of Ex-dividend Trading. This refers to the date on which the stock is to
traded ex-dividend or as separated from the stock dividend. This is usually
two to four days before the official date of record. Due to the voluminous
transactions affecting the stocks of a listed corporation, a number of days is
allowed for the bookkeeping lag. The price of the stock on this date is
expected to go down to reflect the decrease in the book value per share.

 Date of Issuance. This is relevant for a stock investor because of the

additional shares he is receiving and the effect of the additional shares on the
market price of the stock
Bases in Investing in Stocks
 Investing in stocks may be based either on technical analysis or on
fundamental analysis.
 Based on Technical Analysis. Trading is based on price trends and the attitude
of investors toward a specific stock. The investor keeps track of price
changes and may even go to the extent of using graphs. He buys at the
“lows” and sells at the “high”
 Based on Fundamental Analysis. This is also called value investing because it
is based on the value of the underlying corporation which is measured in
terms of book value, net asset value, earnings per share and price-earnings
per ratio.
Nature of Instructions to Stockbrokers
 When an investors places his “buy” or “sell” order with his stockbroker, he
may give the exact price at which to buy or to sell. However, the order might
not be carried out because actual price may be one or two fluctuations higher
or lower. It is therefore advisable to give the stockbroker some leeway in
carrying out clients’ orders by giving him a price range instead of just a
definite price at which to buy or sells. Sometimes, an investor’s order is
“good till cancelled” or in the form of “stop loss” order
 Good Till Canceled (GTC) Order. It is to be observed from day to day until it
is carried out or until the investor cancels it. Stockbrokers consider a GTC
order as valid for a period of one week only.
 Stop Loss Order. Refers to an investor’s order to sell his shares if prices go
below a certain level in order in minimize his loss. This is done when prices
are going own at a very fast rate and are therefore expected to go down
further.
 Buying on Margin. Means that an investor buys stocks but does not fully pay
for them. The amount of liability he incurs is called the margin. This
practice is undertaken to earn more is case the market price of the particular
stocks bought goes up. It is very risky because in case the market price goes
down, the investor’s capital can easily be wiped out. In an extreme case, he
may even become insolvent.
Minimizing Risk in Stocks Investments
 In order minimizing risk in stocks investments, an investor should do his:
- do his homework
- diversify stock investments
- beating the market
- avoid trading on margin
- know when it is advisable to cut losses
- remain focused on long-term objectives
Stocks Classified based on Risk and
Earning Potential
 Blue Chips – these belong to large companies which have a long record of
earnings and dividend payments. Ex. SMC, PLDT, MERALCO & AYALA CORP.
 Growth Stocks – these belong to corporations with growth rate faster than
that of the general economy. The growth may be in terms of revenue, net
income and productive assets. Ex. GLOBE TELECOM, FILINVEST LAND INC.,
BANKS
 Cyclical Stocks – their earnings and prices move with the changes in the
national economy. Ex. AYALA LAND, recreation and amusement
 Defensive Stocks – their earnings are not affected so much by changes in the
economy. Ex. SMC, JOLLIBEE CORP., MERALCO, PLDT, & GLOBE TELECOM
 Speculative Stocks – these belong to companies that are not yet operating
profitably but are expected to do so in the future. Ex. Island Mining Corp.
Stocks Classified Based on the Nature of
Business
 Banks and Financial Services
 Industrial and Commercial
- Communication
- Power and Energy
- Transportation Services
- Holding Firms
- Hotel and Recreation
- and other services
 Mining and Oil
Overview of the Financial System

 Financial System – is a network of various institutions

which create, generate, circulate and control money and
credit.
 The financial system consist of 5 elements:
❖ Financial Institution
❖ Financial Market
❖ Financial Claim
❖ Laws and Policy
❖ Government
The Functions of the Financial System:

 To channel the funds from the savings units

(lenders) to the deficit units (borrowers).
 To provide a medium of exchange
 To provide a mechanism for risk sharing
 To provide a channel through which the central
bank can influence the economy, in general and
the financial system, in particular.
 Financial Institutions – consist of the public and
private institutions which creates and generates
money and credit.
 Banking – are institutions which generates money in the
form of deposits and loans.
 Non-banking institution – circulates money through
form of loans and other form of investments.
The Banking Institutions:

 Commercial Bank

 Universal Bank or the Expanded Commercial Bank

 Ordinary Commercial Bank
Thrift Bank
Rural Bank
Cooperative Bank
Digital Bank
Organizational Structure
 By organization, the basic structure of the Bangko
Sentral ng Pilipinas includes:
 The Monetary Board – exercises the powers and functions of
BSP, such as the conduct of monetary policy and supervision of
the financial system. Its chairman is the BSP Governor, with
five full-time members from the private sector and one
member from the Cabinet. The Governor is the Chief Executive
Officer of BSP and is required to direct and supervise the
operations and internal administration of BSP. A deputy
governor heads each of the BSP’s operating sectors.
 Executive Management Services – the functional grouping of
all units directly reporting to the monetary board or to the
governor;
Functional Sectors:

 Monetary Stability sector takes charge of the formulation

and implementation of the BSP’s monetary policy,
including serving the banking needs of all banks through
accepting deposits, servicing withdrawals, and extending
credit through the rediscounting facility.
 Supervision and Examination Sector enforces and monitors
compliance to banking laws to promote a sound and
healthy banking system.
 Resources Management Sector serves the human,
financial, and physics resource needs of BSP.
 BANGKO SENTRAL NG PILIPINAS

NON-BANK FINANCIAL
BANKING INSTITUTIONS
INSTITUTION

PRIVATE BANING
INSTITUTION
Major Functions of the Monetary Board:

 Issue rules and regulations it considers necessary for the effective

discharge of the responsibilities and exercise of the powers vested
in it.
 Direct the management, operations, and administration of the
Bangko Sentral, organize its personnel, and issue such rules and
regulations as it may deem necessary or desirable for this purpose.
 Establish a human resource management system which governs the
selection, hiring, appointment, transfer, promotion, or dismissal of
all personnel. Such system shall aim to establish professionalism
and excellence at all levels of the Bangko Sentral in accordance
with applicable laws and regulations.
 Indemnify its members and other officials of Bangko
Sentral, including personnel of the departments
performing supervision and examination functions,
against all costs and expenses reasonably incurred by
such persons in connection with any civil or criminal
action, suit, or proceeding, to which any of them may
be made a party by reason of the performance of his
functions or duties, unless such members or other
officials are found to liable for negligence or
misconduct.
FUNCTIONS OF BSP:

 Bank of Issue
 Government’s banker, agent, and adviser
 Custodian of the cash reserves of banks
 Custodian of the nation’s reserves of international
currency
 Bank of rediscount and lender of last resort
 Bank of central clearance and settlement
 Controller of credit
BSP monopolize printing and minting
money:
 Ensure the uniformity of design and content of
money
 Effect government supervision over money supply
 Give prestige and honor to the central bank; and
 Become a good source of income for the
government
How BSP Controls Credit:
 Increasing or decreasing interest rate
 Increasing or decreasing the legal reserve requirement of banks
 Regulating the margin requirements of stock exchange securities
 Open market operations (buying or selling government securities)
 Imposing ceilings on total amounts bank can lend
 Rationing central bank credit
 Restricting imports
 Selecting projects for funding
 Moral suasion (encouraging people and businesses to support and
cooperate with central bank policies and regulation)
Objectives of the BSP

 Maintaining the monetary policies conducive to a balanced and

sustainable growth of the country
 Maintaining price stability in the country
 Promoting and maintaining monetary stability and convertibility
of peso
 Maintaining stability of the financial system
 Providing payment and other financial service to the
government, the public, financial institutions, and foreign
official institution
 Supervising and regulating depository institution.
CAPITAL MARKET

 Itis a market for long-term securities that

includes both debt and equity. Companies
and governments can raise long term funds
(more than a year) through this market.
Capital market channels the funds from
those who have excess capital to those who
need it.
 CAPITAL
MARKET

PRIMARY MARKET SECONDARY MARKET

NEWLY NEWLY OLD

ISSUED OLD BONDS
ISSUED EQUITIES
BONDS EQUITIES
FUNCTIONS OF CAPITAL MARKET

 Links Savers and Investors

 Capital formation
 Regulate security prices
 Provision of investment avenues
 Economic growth and development
 Minimizes transaction cost and time
 Continuous availability of funds
Characteristic of Capital Market

 Long term investment

 Link between borrowers and lender
 Capital formation
 Accurate timely information
 Includes primary market and secondary market
 Government regulations
 Provides liquidity
 Variety of instrument
Importance of Capital Market

 Help firms and governments raise cash by selling securities.

 Allow investors with excess funds to invest and earn a return
 Channel funds from savers to borrows
 Allocate resources optimally (i.e., provide funds to those who
can make the best use of them)
 Help allocate cash to where it is most productive
 Help lower the cost of exchange
 Secondary markets where investors trade existing securities,
assures investors that they can quickly sell their securities if
the need arises
The different types of financial instrument
that are traded in the capital markets are:

 Equity instruments
 Credit market instruments
 Insurance instruments
 Foreign exchange instruments
 Hybrid instrument
 Derivative instruments
Primary Market

 It is that market in which shares, debentures and other

securities are sold for the first time for collecting long-term
capital.
 This market is concerned with new issues. Therefore, the
primary market is also called NEW ISSUE MARKET
 In this market, the flow of funds is from saver to borrowers
(industries), hence, it helps directly in the capital formation of
the country.
 The money collected from this market is generally used by the
companies to modernize the plant, machinery and buildings, for
extending business and for setting up new business units
Features of Primary Market

 It is related with new issues

 It has no particular place
 It has various methods of float capital: Following are the
methods of raising capital in the primary market:
 Public issue
 Offer for sale
 Private placement
 Right issue
 Electronic-Initial Public Offer
 It comes before Secondary Market
 Initial Public Offering (IPO) - the first sale of a
company’s stock to the general public
 Investment Bankers – financial specialists who
handle the sales of most corporate and municipal
securities
 Underwriting – process of purchasing an issue
from a firm or government and then reselling the
issue to investors.
Factors to be considered by Investors

 Promoters Credibility
 Project Details
 Product
 Financial data
 Risk factor
 Auditors report
Secondary Market

 Marketin which the buying and selling of

the previously issued securities is done
 Thetransactions of the secondary market
are generally done through the medium of
stock exchange
 The chief purpose of the secondary market
is to create liquidity in securities
CAPITAL MARKET INSTRUMENTS

 EQUITY INSTRUMENTS (common stocks)

 DEBT INSTRUMENTS
 INSURANCE INSTRUMENTS
 HYBRID INSTRUMENTS
 DERIVATIVES (future contract, forward
contract, options, swaps)
Equity Instrument
 Equity is used in accounting in several ways. Often the word equity is used when
referring to an ownership interest in a business. Examples include stockholders’
equity or owner’s equity
 In the capital market equity is used as source of finance (capital)
 When the company wants to raise funds it can issue common stock of preference
shares.
 The main types of equity are:
 Common stock: a security that represents ownership in a corporation.
 When the company issue common stock they gives shareholder to own some part of
company ownership.
 Holders of common stock exercise control by electing a board of director and voting
on corporate policy.
 In the event of liquidation, common stockholder have rights to a company’s assets
only after bondholder, preferred shareholders and other debtholders have been paid
in full.
Common Stocks

 If the company goes bankrupt, the common

stockholders will not receive their money until
the creditors and preferred shareholders have
received their respective share of the leftover
assets.
 This makes common stock riskier than debt or
preferred shares. The upside to common shares is
that they usually outperform bonds and preferred
share in the long run.
Preference Shares

 The holder of preference share also own some percentage

of the company but cannot participate in anything to the
company.
 Holder of preference share has the claim of the company
asset and earning of the company.
 Normally has the first priority if there is any dividend
payment than common stock holder.
 The main benefits to owning preference shares are that
the investor has a greater claim on the company’s asset
than common stockholders.
Preference Share (Preferred Shares)

 Preferred shareholders always receive their dividends

first and, in the event the company goes bankrupt,
preferred shareholders are paid off before common
stockholders
 In general, there are four different types of preferred
stock:
 Cumulative preferred stock
 Non-cumulative preferred stock
 Participating preferred stock
 Convertible preferred stock
Cumulative Preferred Stocks

 A preferred stock will typically have a fixed dividend

yield based on the par value of the stock. The
dividend usually is paid out at set of interval, usually
quarterly to preferred stock.
 If a company runs into some financial problems and is
unable to meet all of its obligations, it will likely
suspend its dividend payments and focus on paying
the business-specific expenses. If the company gets
through the trouble and starts paying out dividends
again, it will first have to pay back all of the
dividends that are preferred shareholders.
Non-Cumulative Preferred Stocks

 A type of preferred stock that does not pay the holder any
unpaid or omitted dividends
 If the corporation chooses to not pay dividends in a given year,
the investors does not have the right to claim any of those
forgone dividends in the future.
 Example XYZ Company chooses to not pay its P1.10 annual
dividend to its cumulative preferred stockholders. In this case,
these shareholders do not receive the dividend this year, but
they are entitled to collect this dividend at some point in the
future. If the preferred shares mentioned above were
noncumulative, the above illustrates why a cumulative
preferred share is worth more than a noncumulative preferred
share.
Participating Preferred Stocks

 A type preferred stock that gives the holder the right to receive
dividends equal to the normally specified rate that preferred
dividend receive as well as an additional dividend based on
some predetermined condition.
 The additional dividend paid to preferred shareholders is
commonly structured to be paid only if the amount of dividends
that common shareholders received exceeds a specified per-
share amount.
 Furthermore, in the event of liquidation, participating
preferred share holders can also have the right to receive the
stock’s purchasing price as well as a pro-rata share of any
remaining proceeds that the common shareholders receive.
Convertible Preferred Stocks

 Preferred stock that includes an option for the holder

to convert the preferred stock into a fixed number of
common shares, usually any time after a
predetermined date.
 Most convertible preferred stock is exchanged at the
request of the shareholder, but sometimes there is a
provision that allows the company (or issuer) to force
conversion.
 The value of convertible common stock is ultimately
based on the performance of the common stock.
Debt Instruments

 A paper or electronic obligation that enables the

issuing party to raise funds by promising to repay
a lender in accordance with terms of a contract.
Types of debt instruments include notes, bonds,
certificates, mortgages, leases or other
agreements between a lender and a borrower.
 Debt instruments are a way for markets and
participant to easily transfer the ownership of
debt obligations from one party to another
 A debt instrument is used by a government or organization to
generate funds for longer duration
 The relation between person who invest in debt instrument is
of lender and borrower.
 This gives no ownership right
 A person receives fixed rate of interest on debt instrument.
 A debt instrument is used by either companies or governments
to generate funds for capital-intensive projects. It can obtained
through the primary or secondary market.
Types of Debt Instruments

 Debenture
 Bond
 Government bond
 Corporate bond
 Convertible bond
 Loan
 Mortgages
 Debt instrument or debt financing allows you to pay for new
buildings, equipment and other assets used to grow your
business before you earn the necessary funds.
 This can be a great way to pursue an aggressive growth
strategy, especially if you have access to low interest rates.
 Relative to equity financing, you also benefit by not hand over
any ownership or control of the business.
 On the other hand of debt financing is that you have to repay
the loan, plus interest. Failure to do so expenses your property
and assets to repossession by the bank.
 Debt financing is also borrowing against future earnings. This
means that instead of using all future profits to grow the
business or to pay owners, you have to allocate a portion to
debt payments. By misappropriation of debt can severely limit
future cash flow and growth.