Basic Finance

MODULE MATERIALS

List of Modules

No. MODULE
MODULE TITLE
CODE

1 The Philippine Financial System BFin 313-1

2 Banking Key Concepts BFin 313-2

3 The Principles of Stock Market BFin 313-3

4 The Concept and Development of Money BFin 313-4

5 Introduction to Finance BFin 313-5

6 Introduction to Managerial Finance BFin 313-6

7 Finance and Accounting BFin 313-7

8 Understanding Financial Statements BFin 313-8

9 Financial Statement Tools for Decision Making BFin 313-9

10 The Financial Environment BFin 313-10

11 Financial Intermediation BFin 313-11

12 Interest Rate and Its Role in Finance BFin 313-12

13 Financial Assets BFin 313-13

14 Basic Capital Market BFin 313-14

 MODULE #3-BFin 313-3
The Principles of Stock Market

MODULE MATERIALS

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Basic Finance Document No. Developed by:

Eugene A. Ruano Revision # 02
BFIN 313 40-BFIN 313
THE PRINCIPLES
OF
STOCK MARKET

(BFIN 313-3)

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BFIN 313 40-BFIN 313
 MODULE CONTENT

COURSE TITLE: Basic Finance

MODULE TITLE The Principles of Stock Market

NOMINAL DURATION: 3 Hours

SPECIFIC LEARNING OBJECTIVES:

At the end of this module you MUST be able to:
1. Familiarize with the concept of Philippine stock markets.
2. Have an understanding of the basics of capital markets
3. Identify the stock market rules and conventions.
4. Apply stock analysis in real life situation.
5. Understand and solve stock simulations and applications.
TOPICS: (Sub-Topics)
1. Definition and Nature of Stock Market
2. Definition of Stocks
3. How Does Stock Market Trading Work?
4. The Rise and Fall of Stock Prices: Is it risky?
5. Basics of Capital Markets
6. Stock Market Rules and Conventions
7. Stock Analysis
8. Simulations and Applications
ASSESSMENT METHOD/S:
Quiz-Multiple Choice
REFERENCE/S:
1. Leuterio, M.M. & Estepa, C.B.
Banking Theory & Practice (Revised Edition), 2018
Pasig City: Anvil Publishing, Inc.
2. Fajardo, Feliciano R. & Manansala, Manuel M.
Money, Credit and Banking 4th Edition, 2018
Mandaluyong City: National Book Store
3. A) Mejorada, N.D.
Introduction to Management Accounting, 2018 Edition
Makati City: Goodwill Trading Co., Inc.
B) Edlagan and Mercado
Management Advisory Services (Concepts, Methods and
Applications) Volume 1, 2017 Edition
Makati City: Goodwill Trading Co., Inc.
4. Shapiro, A.C.
Foundations of Multinational Financial Management, 2008
Edition
New York: John Wiley & Sons
5. A) Sollenberger and Schneider

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BFIN 313 40-BFIN 313
Managerial Accounting, 9th Edition 2016
Hoboken, New Jersey, USA: John Wiley and Sons
B) Homgren, Sundem and Stratton
Introduction to Management Accounting 10th Edition, 2017
Upper Saddle River, New Jersey, USA: Pearson Prentice Hall

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 Information Sheet BFIN 313-3
The Principles of Stock Market

Learning Objectives:
After reading this INFORMATION SHEET, YOU MUST be able to:
1. Discuss the principles and nature of stock market.
2. Have thorough knowledge on how to invest in stock market.
3. Apply the simple applications in making decision in the investment of
stock.

INTRODUCTION
Due to financial literacy programs and campaigns in the country, Pinoys
are now getting more interested and curious about stock market. You may
have heard about it from your friends, your boss, or your classmates. It is not
unusual for a person in his or her 20s to have a background in the stock
market. For those who feel that they are late in jumping on the bandwagon,
this module makes you easy to understand guide on the basics of the
Philippine Stock Market.

DEFINITION OF STOCK MARKET

➢ A place where stocks are bought and sold.
➢ The goal of trading in the stock market is to buy a stock, hold it for a
desired time, and then sell the stock for more than what you initially
paid for it
WHAT ARE STOCKS?
➢ Units of ownership in a company
➢ Companies sell stocks to the public for more funding to create new
products, expand their business, and improve current products.

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BFIN 313 40-BFIN 313
HOW DOES STOCK MARKET TRADING WORK?
➢ When you buy a stock, you own a share in the company. For example,
when you buy a stock of Jollibee, you have a claim on the company’s
earnings. This makes you a shareholder of Jollibee. It Jollibee’s profits
go up, so does your stock price. If it falls, then the price of your stock
also falls.

THE RISE AND FALL OF STOCK PRICES: IS IT RISKY?

➢ Every investment has a risk. In the stock market, the prices of stock rise
and fall every day. For example, Jollibee’s stocks could rise today and
fall tomorrow. Remember #ChickenSad? That may have caused a fall in
Jollibee’s profits, hence a fall in their stock price. But what if Jollibee
releases a series of marketing campaigns that will tug the heartstrings
and cause you to buy more Yum burgers? They already did that with
#Kwentong Jollibee. If the campaign is effective, then Jollibee’s profits
will rise and so does the price of your stock.
➢ If you sell your stock on the day when the price of that stock is less than
what you paid for it, then you lose money. The goal of investing in the
stock market is buying a stock with the hopes that over the years you
can sell your stock for a profit.

CAN YOU PREDICT WHEN THE STOCK PRICES GO UP OR DOWN?

➢ No, unless you have superpowers. That is why most financial advisers
recommend investing in the stock market for long term-that is 10 years
or more.
➢ It is also important to make sure that you buy stocks from good and
stable companies. You will be sharing in the profit or loss of those
companies.
➢ If you’re ready to invest in the stock market, buy and sell in the
Philippine Stock Market, we need to have a broker. There are already
certified online brokers in the Philippines such as COL Financial, BPI
Trade and First Metro.
➢ Signing up for an account in one of these brokers is just a first step.
Learning which stocks to buy is the challenging part. Educate yourself by
reading books or articles on investing online, so you can be a SMART
investor. With numerous financial tools at your disposal, you can make
wiser decisions with finances.

THE BASICS OF CAPITAL MARKETS

FINANCIAL MARKETS
➢ Awareness of the environment where the business operate provides a
better perspective to the one making decisions relating to the finance
function. An important concern refers to financial markets which
perform a vital role in the operation of the overall financial system
including business finance.
WHAT ARE FINANCIAL MARKETS?
 Firms who need for funds are greater than their current incomes.
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  Individuals and firms who want to borrow money are brought
together with those who want to lend in the financial markets.
Diagram of Financial Markets

Primary Market
• A financial market in which newly issued primary and secondary
securities are traded for the first time.
Secondary Market
• A Financial market through which existing financial securities are
traded.

Capital Market
• A portion of the financial market where trading is undertaken for
securities with maturity of more than one year. Banks that bid for two-
year Treasury bonds are considered part of the capital market.
The capital market is subdivided into three parts:
1. Bond market;
2. Stock market; and
3. Mortgage market.
Bond Market
• The market for debt instruments of any kind is called the bond market
• It operates through a system of dealers using a telecommunications
network, rather than in a single physical location for trading.

Stock Market

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 • The financial market where the common and preferred stocks issued by
corporations are traded.
• It has two components:
1. Organized exchange;
2. Less formal Over-the-Counter Markets.

• There are many organized exchanges throughout the world like the New
York and the London Stock Exchanges. The companies whose stocks are
traded in the Philippine Stock Exchange are classified into the following
categories;
1. Banks
2. Financial service
3. Communication
4. Power and energy
5. Transportation services
6. Constructions and other related products
7. Food, beverages, and tobacco
8. Holding firms
9. Manufacturing, distribution, and trading
10. Hotels, recreations, and other services
11. Bonds, preferred stocks, and warrants
12. Others

STOCK MARKET RULES AND CONVENTIONS

What you need to know about the Philippine Stock Market?

Rule No.1: Stock investment is not just an abstract idea with prices go up
and down. Buying stocks is buying a part of the company.
Rule No.2: The price of the stocks goes up and down whether you like it or
not.
Rule No. 3: The price of the stocks is independent of the profitability of the
company.
Rule No. 4: There are 3 major players in the Philippine stock market. There
are winners, middle men and losers.
Rule No. 5: Philippine stock market is risky but risk can be managed when
you know what you are doing.
Rule No. 6: You only win (or lost) when you participate in the market.

STOCK ANALYSIS
STOCK
❖ a share of the value of a company which can be bought, sold, or
traded as an investment.
STOCK ANALYSIS
❖ is a term that refers to the evaluation of a particular trading instrument,
an investment sector or the market as a whole.
❖ Stock analysis attempt to determine the future activity of an instrument,
sector or market.

Two Basic Types of Stock Analysis

1. Fundamental Analysis

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 ❖ Concentrates on data from sources including financial records,
economic reports, company assets and market share.
❖ Study the cause
❖ Supply-demand
❖ Government interventions
2. Technical Analysis
❖ Focuses on the study of past market action to predict future price
movement
❖ Study the effect of movement
❖ Charts, price, volume, trend

SIMULATION AND APPLICATION

Simulation
❖ the imitation of the operation of a real-world process or system over time.
❖ can be used to show the eventual real effects of alternative conditions
and courses of action, or it is being designed but not yet built, or it may
simply not exist
❖ key issues in simulation include acquisition of valid source information
about the relevant selection of key characteristics and behaviors, the use
of simplifying approximations and assumptions within the simulation,
and fidelity and validity of the simulation outcomes.

Simulations in Finance
❖ In finance simulations are often used for scenario planning. Risk-
adjusted net present value, for example, is computed from well-defined
but not always known (or fixed) inputs. By imitating the performance of
the project under evaluation,
❖ Simulations are frequently used in financial training to engage
participants in experiencing various historical as well as fictional
situations. There are stock market simulations, portfolio simulations,
risk management simulations or models and forex simulations. Such
simulations are typically based on stochastic asset models. Using these
simulations in a training program allows for the application of theory into
a something akin to real life. As with other industries, the use of
simulations can be technology or case-study driven.

Stock Market Simulation

❖ Among numerous investment strategies in the stock market, this stock
market simulation focused on the conservative strategy of John Bogle,
which states that stock trading is a losing game and investment in index
funds is a more profitable strategy
❖ A stock market simulator is a program or application that attempts to
reproduce or duplicate some or all features of a live stock market on a
computer so that a player may practice trading stocks without financial
risk.

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Basic Finance Document No. Developed by:

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BFIN 313 40-BFIN 313
APPLICATIONS
❖ action of putting something into operation

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Diagram of What Stock Market Simulation Is and How It Works
Simulation imitation of the real world
operation process obtained/acquire relevant,
valid, approximate source of information.

Application

Stock Market Simulator an

apps/application of a real world livestock.

Bachelor of Science in Date Developed:

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College Date Revised:
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Basic Finance Document No. Developed by:

Eugene A. Ruano Revision # 02
BFIN 313 40-BFIN 313