Equity Market

Equity Market
Definition
Equity Market is where financial institutions and companies interact to trade
financial instruments and raise capital for companies.
Equity capital is raised by selling a part of a claim/right to a company’s

assets in exchange for money.
An equity market (also known as stock market) is a market in which shares

are issued and traded, either through exchanges or over-the-counter
markets.
https://corporatefinanceinstitute.com/resources/knowledge/finance/equity-capital-market-ecm/
https://www.investopedia.com/terms/e/equitymarket.asp
Equity Market
Structure
Equity Market
Structure
Primary Equity Market Secondary Equity Market
Private Placement Market Stock Exchange
➢ companies raise private equity through unquoted shares ➢ is a central trading location where the shares of companies
➢ securities are sold directly to investors listed on the stock exchange are traded
➢ companies do not need to register securities with the ➢ has its own criteria for listing a company on its exchange
Securities and Exchange Commission (SEC) I. Minimum earnings
➢ investors in this market demand a premium as II. Market capitalization
III. Net Tangible Assets
compensation for their risk-taking and the lack of liquidity in IV. Number of shares held publicly
the market
Primary Public Market Over-the-Counter Market
1. Initial Public Offering (IPO) ➢ is a network of dealers who facilitate the trading of stocks
➢ company issues equity publicly for the first time and bilaterally between two parties without a stock exchange
becomes listed on the stock exchange acting as an intermediary
2. Seasoned Equity/ Secondary Offering ➢ a brokerage acts as a broker or agent when it executes
➢ a listed company issues new/additional equity orders on behalf of its clients
https://www.investopedia.com/terms/e/equitymarket.asp
Equity Instruments
1. Common Shares
▪ represent ownership capital
▪ holders of common shares/stock are paid dividends out of the company’s profits
but pay-out is discretionary with the company’s management
▪ have a residual claim to the company’s income and assets
▪ are entitled to a claim in the company’s profits only after the preferred
shareholders and bondholders have been paid
▪ owners of common stock are permitted to vote on certain key matters
concerning the firm, such as the election of the board of directors, authorization
to issue new shares of common stock, approval of amendments to the corporate
charter, and adoption of by laws
▪ common shareholders face a higher degree of risk than other creditors of the
company but also have the prospect of higher returns
Equity Instruments
2. Preferred Shares
▪ are hybrid securities because they combine some features of debentures and common equity
stock
▪ have a fixed/stated rate of dividend
▪ have a claim to the company’s income and assets before equity
▪ do not have a claim in the company’s residual income/assets
▪ do not confer voting rights to shareholders
Types:
I. Cumulative- pays a fixed dividend at regular intervals; if a dividend is not paid, the sum of the unpaid
dividends accumulates and must be paid prior to common stockholders being issued a dividend
II. Participating- may be issued a special dividend if certain financial goals are achieved by the company; is
mainly issued by newer companies that are in need of a cash infusion
III. Convertible- may convert their shares of convertible preferred stock to shares of common stock of the
same company
IV. Callable- callable at a given date in the future at the issuer’s discretion at the redemption price which
may be the original issue price or higher
V. Adjustable-rate- dividends vary with a specified benchmark typically the T-bill rate
Equity Instruments
3. Private Equity
▪ made through private placements to institutional investors and/or wealthy individuals,
family members and friends
▪ raised by private limited enterprises, partnerships and start-up companies as they cannot
trade their shares publicly because of limited access to bank capital, limited access to
public equity
4. American Depository Receipts (ADR)

▪ is a certificate of ownership issued in the name of a foreign company by an
American bank
▪ certificates are tradeable and represent ownership of shares in a foreign company
▪ ADRs and their associated dividends are denominated in US dollars
5. Global Depository Receipts (GDRs)

▪ are negotiable receipts that are issued against the shares of foreign companies by
financial institutions situated in developed countries
Equity Instruments
6. Futures Contract
▪ is a legal agreement to buy or sell a particular commodity asset, or security at a
predetermined price at a specified time in the future
▪ allows an investor to speculate on the direction of a security, commodity, or a
financial instrument, either long or short, using leverage
▪ often used to hedge the price movement of the underlying asset to help prevent
losses from unfavorable price change
7. Stock Option
▪ gives an investor the right, but not the obligation, to buy or sell a stock at an
agreed upon price and date
I. Call Option- gives the holder the right to buy a stock
II. Put Option- gives the holder the right to sell a stock
8. Swaps
▪ is an agreement between two counterparties to exchange financial instruments
or cashflows or payments for a certain time
▪ can be used to hedge certain risks such as interest rate risk or to speculate on
changes in the expected direction of underlying prices
Phil. Stock Market Participants
1. Philippine Stock Exchange
▪ Trading on the PSE pre-opens at 9:00 A.M.; opens at 9:30 A.M.; is in recess between
12:00 and 1:30 P.M.; pre-closes at 3:15 P.M.; in run- off from 3:20 P.M.; and closes at
3:30 P.M.
▪ PSEi- is a stock market index consisting of 30 companies
Stock Exchanges in the US:

I. New York Stock Exchange- world’s largest stock exchange “The Big Board”; auction
market
II. NASDAQ- dealer market; where technology and speculative stocks are mostly
traded
III. American Stock Exchange- specialized in trading stocks of emerging companies
▪ Dow Jones Industrial Average- oldest, most well known and most frequently used indexes in the
world; it includes the stocks of 30 of the largest and most influential companies in the United
States
▪ S&P 500- market-capitalization-weighted index of the 500 largest U.S. publicly traded companies;
widely regarded as the best gauge of large-cap U.S. equities
▪ NASDAQ Composite- is a market-capitalization-weighted index of all the stocks traded on the
Nasdaq stock exchange
https://www.pseacademy.com.ph/global
Investopedia.com
Phil. Stock Market Participants
2. Publicly Listed Companies
▪ 261 listed companies
3. Trading Participants/ Stockbrokers

Examples: Abacus Securities Corp., COL Financial Group, Inc., BPI Securities
Corp., First Metro Securities Brokerage Corp. , BDO Nomura Securities, Inc.
Types of Transactions:
a) Limit order- order to buy or sell at a specified price of a shares of stock
b) Market order- order to buy or sell at the current market price
c) Good-til-cancelled order- order to buy or sell which remains outstanding for 7 calendar days
until cancelled by the investor or trader
d) Day order- order to buy or sell that is only valid for one trading day
4. Investors
Costs of Stock Trading
Stock Trading Terminologies
Bid Price- is the highest price that a buyer is willing and able to Ask/Offer Price- is the lowest price that a seller is willing and
purchase for a share of stock able to offer for sale for a share of stock
Closing Price- is the last traded price of the stock at 12 noon of High Price- is the highest price the stock traded for the trading
the trading day day
Low Price- is the lowest price the stock traded for the trading day Board Lot- is the minimum number of shares one can purchase
or sell a stock at a specific price range
Market Value- is the price at which buyers and sellers are willing Opening Price- is the first price the stock traded for the trading
to purchase or sell the stock based on information or perceived day
value
PSE Composite Index (PSEi)- is the benchmark index measuring Stock Price- is the currency value of a listed company per share
the performance of the Phil. Stock market in the stock market (market capitalization/total number of
shares outstanding)
Market Capitalization- is the currency value of a company’s Value Turnover- amount of transactions in peso terms traded on
outstanding shares based on its current stock price a particular period
Volume- is the number of shares traded in the stock market Ticker- a computerized listing of information showing stock
during a given period of time market activity and stock price movements (stock symbol, last
traded price and volume of shares traded)
Key Risks in Stock
Market Investing
• Market Risk- the risk of investments declining in value because of economic

developments or other events that affect the entire market
• Inflation Risk- the risk of a loss in your purchasing power because the value of your
investments does not keep up with inflation
• Liquidity Risk- the risk of being unable to sell your investment at a fair price and get
your money out when you want to
https://www.getsmarteraboutmoney.ca/invest/investing-basics/understanding-risk/types-of-investment-risk/
https://marketrealist.com/2014/09/must-know-three-key-risks-stock-market-investing/
Stock Valuation Methods-
Stock Price
1. Absolute Valuation
➢ Absolute stock valuation relies on the company’s fundamental information. The method
generally involves the analysis of various financial information that can be found in or
derived from a company’s financial statements. Many techniques of absolute stock
valuation primarily investigate the company’s cash flows, dividends, and growth rates.
A. Dividend Discount Model (DDM)
B. Discounted Cash Flow Model (DCF)
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/stock-valuation/
Stock Price
Dividend Discount Model (DDM)
✓ is a valuation model where the dividend to be distributed related to a stock for a company is discounted
back to the cumulative net present value and calculated accordingly
✓ relies on the concept of the time value of money
✓ is a quantitative method to determine or predict the price of a stock pertaining to a company
✓ majorly excludes all the external market conditions and only considers the fair value of the stock
✓ takes into consideration only 2 factors- dividend pay-out and expected market returns
✓ if the value obtained from the calculation of DDM is higher than the current trading price of the stock in the
market we term the stock as undervalued
✓ if the value obtained from the calculation of DDM for a particular stock is lower than the current trading
price of the stock in the market we term the stock as overvalued
https://www.educba.com/required-rate-of-return-formula/
Stock Price
Dividend Discount Model
https://businessfinanceessentials.pressbooks.com/chapter/chapter-5-stocks-and-stock-valuation/
Stock Price
❖ Dividend Discount Model- No Growth
Sample Problem:
Consider the following example with a preferred stock. Assuming that a preferred stock has a par value of $75,
pays a 10% dividend and you have an 8% required return, what is this stock worth to you?
Stock Price
❖ Dividend Discount Model- No Growth
Sample Problem:
Consider the following example with a preferred stock. Assuming that a preferred stock has a par value of $75,
pays a 10% dividend and you have an 8% required return, what is this stock worth to you?
Stock Price
❖ Dividend Discount Model- Constant Growth
Sample Problem:
Consider a stock that just paid a dividend (D0) of $5.00 per share
with dividends growing at a constant 4% per year. If my required
return is 13%, what is the stock worth to me?
Stock Price
❖ Dividend Discount Model- Constant Growth
Sample Problem:
Consider a stock that just paid a dividend (D0) of $5.00 per share
with dividends growing at a constant 4% per year. If my required
return is 13%, what is the stock worth to me?
Stock Price
❖ Dividend Discount Model- Non-Constant Growth
Stock Price
Stock Price
Stock Price
Stock Price
https://www.calculatestuff.com/financial/npv-calculator
Stock Price
2. Relative Valuation
➢ concerns the comparison of the investment with similar companies
➢ deals with the calculation of the key financial ratios of similar companies and derivation of the same
ratio for the target company
A. Price to Earnings Ratio
B. Return on Equity
C. Enterprise Value
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/stock-valuation/
Stock Price
2. Relative Valuation
✓ A company with a high P/E ratio is trading at a higher price per dollar of earnings than its peers
and is considered overvalued.
✓ A company with a low P/E ratio is trading at a lower price per dollar of EPS and is considered
undervalued.
https://www.investopedia.com/
Stock Price
❖ Relative Valuation: Price-Earnings Method
▪ This method implicitly assumes that the growth in earnings in future years will be similar to
that of the industry.
▪ This method may result in an inaccurate valuation of a firm if errors are made in forecasting
the firm’s future earnings or in choosing the industry composite used to derive the PE ratio.
Valuation per share= Expected earnings of firm per share x Mean industry PE ratio
*
[Jeff_Madura]_Financial_Markets_and_Institutions
Stock Price
❖ Relative Valuation: Price-Earnings Method
Example:
Consider a firm that is expected to generate earnings of $4 per share next year. How much is the
value per share if the mean ratio of share price to expected earnings of competitors in the same
industry is 10.
Solution:
Valuation per share= Expected earnings of firm per share x Mean industry PE ratio
[Jeff_Madura]_Financial_Markets_and_Institutions
Required Rate of Return (RRR)
❖ Required Rate of Return (RRR)
✓ is the minimum return an investor will accept for owning a company's stock, as compensation for a given
level of risk associated with holding the stock (also known as “hurdle rate”)
✓ is the net gain or loss of an investment over a specified time period expressed as a percentage of the
investment’s initial cost
✓ The required rate is commonly used as a threshold that separates feasible and unfeasible investment
opportunities.
✓ The general rule is that if an investment’s return is less than the required rate, the investment should be
rejected.
Valuation Methods:
1. CAPM
2. DDM
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/required-rate-of-return/
Capital Asset Pricing Model (CAPM)
✓ typical for stocks that don’t pay dividends
✓ concept of risk (volatility of returns) and reward (rate of returns)
✓ CAPM framework adjusts the required rate of return for an investment’s level of risk (measured by the beta) and inflation
(assuming that the risk-free rate is adjusted for the inflation level)
✓ The beta (β) of an investment security (i.e. a stock) is a measurement of its volatility of returns relative to the entire market. It
takes into consideration “systematic risk” which is common if we maintain a portfolio of investment.
The beta coefficient can be interpreted as follows:
β =1 exactly as volatile as the market
β >1 more volatile than the market
β <1>0 less volatile than the market
β =0 uncorrelated to the market
β <0 negatively correlated to the market
Systematic Risk is the underlying risk that affects the entire market. Large changes in macroeconomic variables such as interest rates, inflation,
GDP or foreign exchange exchange are changes that impact the broader market and that cannot be avoided through diversification.

✓ Rate of Return is the gain or loss of an investment over a certain period of time. In other words, the rate of
return is the gain (or loss) compared to the cost of an initial investment, typically expressed in the form of a
percentage
✓ Risk Free Rate of Return- refers to the theoretical rate of return of an investment with zero risk (ex. T-bills/ T-
Bonds)
Real Risk of Return = Risk Free Rate of Return – Inflation Rate
CAPM RRR Formula:
https://www.studocu.com/
Dividend Discount Model
Solution:
For this model consider XY
Limited is paying dividends of
Rs.140 per stock. The dividend
growth rate is 7%. The current
stock price is RS.200.
https://www.educba.com/required-rate-of-return-formula/
How Does Money Grow in the Stock Market?
Capital Appreciation Dividends

• Increase in the market price of • Cash dividend- earnings for
the stock every share of stock declared
by the company
• Buy low, sell high
• Stock dividend- additional

shares given to shareholders at
no cost
4 Golden Rules In
Stock Investing
✓ Invest EARLY- to take advantage of compounding over a greater period of time
✓ Invest REGULARLY- enables you to apply a disciplined savings approach to help successfully build
wealth over time and reduce long-term portfolio volatility
✓ Invest LONG TERM- solves the problem of short-term volatility (choppiness in price)
✓ Invest using DIVERSIFICATION- to allocate your capital evenly to a number of stocks in different

industries or sectors so as not to put too much risk in one area
https://www.colfinancial.com/ape/final2/home/new_to_investing.asp

Equity Market

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Equity Market

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Equity Market

Equity capital is raised by selling a part of a claim/right to a company’s

An equity market (also known as stock market) is a market in which shares

4. American Depository Receipts (ADR)

5. Global Depository Receipts (GDRs)

Stock Exchanges in the US:

3. Trading Participants/ Stockbrokers

• Market Risk- the risk of investments declining in value because of economic

A. Dividend Discount Model (DDM)

B. Discounted Cash Flow Model (DCF)

❖ Dividend Discount Model- No Growth

❖ Dividend Discount Model- No Growth

A. Price to Earnings Ratio

Capital Asset Pricing Model (CAPM)

Real Risk of Return = Risk Free Rate of Return – Inflation Rate

CAPM RRR Formula:

Capital Asset Pricing Model (CAPM)

Dividend Discount Model

Capital Appreciation Dividends

• Stock dividend- additional

✓ Invest LONG TERM- solves the problem of short-term volatility (choppiness in price)

✓ Invest using DIVERSIFICATION- to allocate your capital evenly to a number of stocks in different

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