LECURE 4

SECONDARY MARKET

SECURITIES AND EXCHANGE COMMISSION: an independent government agency which supervises the securities
market, oversees the operation of the PSE and its members, and ensures compliance with the provisions of the
securities act. Also issues the rules and regulations subject to the approval by the Monetary Board.

HISTORY

The SEC was created by Congress of the Philippines in 1936 as part of the Securities Act (Commonwealth Act No.
83). This occurred just after the United States Congress created the United States Securities and Exchange
Commission. The first commissioner of the SEC was Ricardo Nepomuceno. The SEC was not in operation during
the Japanese occupation of the Philippines, but was restored in 1947.

FUNCTIONS

Major Function include: Registration of securities, analysis of every registered security, evaluation of the financial
condition and operations of applicants for security issue.

FUNCTIONS OF SEC DEFINED IN Section 5 of the Securities Regulation Code

Supervision of over all registered business entities in the country, including suspensions and revocations of their
registration.

Policymaking with regard to the market insecurities.

Control over and approval of security registration statements

Power to investigate violations of securities laws and to impose sanctions for such violations.

Power to issue subpoenas, punish for contempt, and issue cease and desist orders in furtherance of its law
enforcement mission.

PHILIPPINE STOCK EXCHANGE

A self-regulatory organization with the authority to police its ranks through the Compliance and Surveillance Group
(CSG)

The PSE is a private non-profit and non-stock organization created to provide and maintain a fair, efficient,
transparent and orderly market for the purchase and sale of securities such as stocks, warrants, bonds, options and
others.

THE ROLE OF THE PSE

-The PSE bring together companies which aim to raise capital through the issue of new securities

-Companies have an easier access to their funds through the listing of their share in the stock exchange. It is easier
to raise new capital through initial public offering if listed in Exchange.

-PSE plays a vital role in the financing of productive companies that uses the funds for further expansion that is
essential for the economic growth.

-The PSE facilitates the selling and buying of the issued stocks and warrants.

-It provide suitable market for trading securities to individuals and organization who want to invest their savings and
excess funds.

-The PSE is committed to protect the interest of the investing public. Develop and maintain an efficient, fair, orderly
and transparent market.

EFFICIENT MARKET – Orders are executed and transactions are settled in the fastest possible way.
-Fully automated machine is installed. Installation of trading terminal outside metro manila to encourage provincial
investors

FAIR MARKET – PSE assures that no investor will have undue advantage over another market player in manipulating
prices and engaging into insider trading.

-Insider trading is the act of buying and selling a particular stock based on certain privileged information which is not
available to the public, this is illegal and prohibited by the PSE.

MARKET TRANSPARENCY – I is an assumption that investor can only make informed and intelligent stock
information about the particular stocks he wants to buy.

The PSE required the listed companies to disclose timely, complete and accurate material information to the
exchange and the public regularly.

UNIT TRADING

For the convenience in making and executing orders, the exchanges establishes a unit of trading called board or
round lot. Board lot means buying or selling the securities in an established amount. The PSE establishes board lots
on the basis of respective price ranges, for example, with an offering price for shares from P0.01 to P0.024 centavos
the board lot is 20,000 shares; for the P50 to P100 price range per share, the board lot is 10 shares. That is, orders
for stocks prices from one centavo to .025 centavos should always be in terms of 20,000 shares, and for the P50 to
P100 price, in terms of ten shares.

BUYING AND SELLING ORDERS - The order to buy or sell may either be at the market price basis or a limit order.
The market price order is easier to execute because the broker will buy or sell at whatever price the security is being
traded at the order is made. The limit order specifies a maximum order price to buy at not more P10, it means that
that the broker is instructed to buy at P10 or less. A broker ordered to sell at no less than P10 could sell the security
only at any price at over P10.

Trading in the exchange is a continuing auction sale. (The PSE is open Monday through Friday from 9:30 am to 12:45
pm Philippine Standard Time. The PSE does not close for lunch, there is typically less liquidity during the middle of
the day. Most trading happens near the beginning and the end of the day. Market resumes 1:30 PM and Pre close
3:17 PM)

Brokers with buy orders compete with each other in purchasing the stocks at the lowest bid price. Bid price is the
price the buyer is willing to pay for a certain security. Brokers compete with each other in selling the stocks at the
highest asked price. Asked price is the price at which the security is offered for sale.

It is evident that exchanges do not fix price of securities on their floors. The market price is dictated by supply and
demand conditions and the continuous bargaining between buyers and sellers. There are many factors that influence
stock price; discovery of oil, world price of copper, available reports on a company etc.

However, the PSE controls price behavior imposing minimum fluctuations for each security in accordance with its
respective range. Quotations mat not fail below nor rise beyond 20% of the last sales price. To illustrate; minimum
fluctuations allowed for securities within the price range of P50 to P100 per share is P1. Shares for P100 may not be
quoted above P101 nor below P99. Or if the last sales price is P100 the subsequent quoted price may not rise above
P120.
JOLLIBEE FOOD CORPORATION

Feb 10, 1021 12:52 pm PHST

Market Open P185.50

Previous Close: P184.90

Open : P185.00

Day Range: P184.90 – P187.00

52 Wk Range P91.10 - P211.00

Market Value P202.7B

MARGIN TRADING – An investor may pay in full for the security he buys or he may just put up a portion of the
purchase price. Margin trading refers to the purchase of securities where the buyer only pays a part of the purchase
price with the balance usually advance by the broker, payable at specified future time. Thus an investor Mr. X may
buy P5,000 worth of stock and pays only P2,500 to the broker. The balance is payable at a later date. The margin
payment is commonly expressed in percentage. In our example, the buyer Mr. X puts up 50% of the purchasing price.
The broker advances the money for the unpaid balance P2,500 to the seller of the security. Mr. X then owes the his
broker the amount advanced on which the broker may charge interest. The broker keeps the security purchased as a
collateral.

STOP LOSS ORDER – The authority of the broker to sell the purchased security at a target price is contained in a
stop loss order. However the broker is no obliged to wait until the specified price is reached since the order is usually
issued by the investor to protect himself against loss in a highly fluctuating market. The broker is given the discretion
in determining the best price at which to sell even if the target price is not reached.

Government and Financial Institution

Government financial assistance in the past has been mostly for the acquisition and maintenance of fixed assets.
This shift in the government’s financial policy could partly be attributed to the growing awareness of the government
to the importance of working capital in the operation of a firm and the partially of the World Bank in Financing SME’s.

Sources of Government Financing

Government advances for working capital needs are mostly to provide for fixed or permanent working capital needs
are mostly to provide for fixed or permanent working capital and to extent working capital financing to small and
medium scale businesses. Landbank of the Philippines and Rural Banks are the primary source of financing.

Secondary market simply represent trading in already existing financial claims. If you buy your brother’s Meralco
common stock, you have made a secondary market transaction. Secondary market reduce the risk of investing in
financial claims. Should you need cash, you can liquidate your claims in the secondary market.

Financial intermediaries are financial institutions which include commercial banks, savings and loan association,
credit unions, life insurance companies, and mutual funds. Financial institutions has common characteristics: they
offer their own financial claims of other economic unit. These latter claims can be called indirect securities, to
economic units with excess savings. The proceeds from selling their indirect securities are then use to purchase the
financial claims of other economic units. These latter claims can be called as direct securities.

Examples:

A mutual fund might sell a mutual fund shares (their indirect security) and purchase the common stock (direct
securities) of some major corporations.

A life insurance companies sell life insurance policies and purchases huge quantities of corporate bonds. Financial
intermediaries thereby involve many small savers in the process of capital formation.

Another financial intermediary are private pension fund. In comparison to insurance companies, first, private pension
funds have grown at a much faster rate than insurance company, second, a greater proportion of the financial asset
mix of the pension funds is devoted to corporate stocks and bonds. Third, the pension funds invest more heavily in
corporate stocks than they do in corporate bonds.

Movement of Savings

1. The direct transfer of funds – Here the firm seeking cash sells its securities directly to savers (investors) who
are willing to purchase them in hopes of earning a reasonable rate of return. New business formation is a good
example as the new business ay go directly to a saver or group of savers called venture capitalists. The venture
capitalist will lead funds to the firm or take an equity position in the firm if they feel the product or service the new firm
hopes to market will be successful.

2. Indirect transfer using the investment banker – The managing investment-banking house will form a
syndicate of several investment bankers. The syndicate will buy the entire issue of securities from the firm that is in
need of financial capital. The syndicate will then sell the securities at a higher price than it paid for them of the
investing public (the savers). Note that second method of transferring savings, the securities being issued just pass
through the investment-banking firm. They are not transformed into a different type of security.

3. Indirect transfer using the financial intermediary. This system operates in life insurance and pension funds.
The financial intermediary collect the savings of individuals and issues its own (indirect) securities in exchange of the
savings. The intermediary then uses the funds collected from the individual savers to acquire the business firm
(direct) securities, such as stocks and bonds.

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