Chap 2 - Basfin1 - 2t - Updated

Three Players in the Financial
Markets
There are three principal sets of players that
interact within the financial markets:
1. Borrowers
2. Savers (lenders & investors)
3. Financial Institutions (or sometimes called
Financial Intermediaries)
Copyright 2011 Pearson Prentice Hall. All rights reserved.
2-1
SAVERS
Financial
Intermediaries
BORROWERS
2-2
Three Players in the Financial

Markets
1. Borrowers: Individuals and businesses that need
money to finance their purchases or
investments.
2. Savers (Lenders & Savers): Those who have
money to invest. These are principally individuals
although firms also save when they have excess
cash.
3. Financial Institutions (Intermediaries): The
financial institutions and markets help bring
borrowers and savers together.
2-3
Financial Intermediaries
Financial institutions like commercial
banks, finance companies, insurance
companies, investment banks, and
investment companies are called financial
intermediaries as they help bring
together those who have money (savers)
and those who need money (borrowers).
2-4
Importance of Financial
Intermediaries
-The importance of owning financial
institutions, especially banks, have long been
recognized by a number of societies,
especially the Japanese
-The Japanese have the Keiretsu ( ), the
successor of the pre-war zaibatsu ( ),
which means monopoly in English
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Intermediaries
-Zaibatsu were large family-controlled vertical

monopolies composed of a holding company
on top, with a wholly owned banking
subsidiary providing finance, and several
industrial subsidiaries dominating specific
sectors of a market, either solely, or through
a number of subsubsidiary companies.
-Banks and trading companies controlled all
financial operations and the distribution of
goods.
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Intermediaries
-The general structure of the keiretsu is an
association of companies formed around a
bank. They cooperate with each other and
own shares of each others stock
-Traditionally, there have been both
horizontal and vertical keiretsu.
-Horizontal keiretsu center on a main bank
and their companies span various industries.
2-7
Intermediaries
-Vertical keiretsu center on a major
manufacturer, like Toyota, and include its
various suppliers and wholesalers
-Banks regularly owned a small percentage of
their keiretsu members' stock and members
owned a portion of the bank's stock
2-8
Intermediaries
-This formed an interlocking relationship,
especially if the member company borrowed
from the horizontal member bank
-Interlocking relationships allowed the bank
to monitor borrowings, strengthen
relationships, monitor customers and help
with problems such as supplier networks.
2-9
Intermediaries
-This arrangement limited competition within
the keiretsu and prevented company
takeovers by outsiders of the keiretsu
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Intermediaries
2-11
Money versus Capital Market

The money market refers to debt
instruments with maturity of one year or
less.
Examples: Treasury bills (T-bills), Commercial
paper (CP).
The capital market refers to long-term

debt and equity instruments.
Examples: Common stock, Preferred stock,
Corporate bond, Treasury bond, Municipal
bond.
2-12
Financial Markets
Money
Markets
Financial Markets
Capital
Markets
2-13
Commercial Banks Everyones

Financial Marketplace
Commercial banks collect the savings of
individuals and businesses and then lend those
pooled savings to other individuals and
businesses.
They make money by charging a rate of interest to
borrowers that exceeds the rate they pay to
savers.
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Non-Bank Financial Intermediaries

These include:
Financial services corporations, like GE Capital
Division;
Insurance companies, like Prudential;
Investment banks, like Goldman Sachs;
Investment companies including mutual funds,
hedge funds and private equity firms.
2-15
Financial Services Corporations

Financial services corporation are in the
lending or financing business, but they are not
commercial banks.
Two well known financial service corporations are
GE capital, the finance unit of the General Electric
Corporation & Toyota Financial Services, the
finance unit of Toyota Motor Corporation.
2-16

GE capital provides commercial loans, financing
programs, commercial insurance, equipment
leasing, and other services in over 35 countries
around the world.
GE capital also provides credit services to more
than 130 million customers that range from
retailers, auto dealers, consumers offering
products and services from credit cards to debt
consolidation to home equity loans.
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2-20
Insurance Companies
Insurance companies sell insurance to individuals
and businesses to protect their investments.
They collect premium and hold the premium in
reserves until there is an insured loss and then pay
out claims to the holders of the insurance contracts.
Later, these reserves are deployed in various types
of investments including loans to individuals,
businesses and the government.
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Investment Banks
Investment banks are specialized
financial intermediaries that:
help corporations, governments,&
municipalities sell new securitiesequity or
debt to finance capital needs (underwriting) &
advising firms with regard to major financial
transactions
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Investment Banks
Underwriting
Process or act of purchasing the security issue
from the issuing corporation at an agreed-on
price and bearing the risk of reselling it to the
public at a profit
2-23
Investment Banks
Glass-Steagall Act (1933) prohibited
commercial banks from underwriting the
securities of corporations & thus made the
distinction between commercial &
investment banks
Commercial banks-Fed
Investment banks-Securities & Exchange
Commission (SEC)
2-24
Investment Banks
Gramm-Leach-Bliley Act was passed in 1999
effectively repealing the Glass-Steagall Act
of 1933 and instituted the universal banking
set-up
2-25
Investment Banks
2-26
The Demise of Stand-alone

Investment Banks
2-27
Dodd-Frank Wallstreet Reform &

Consumer Protection Act & the
Volcker Rule
Volcker Rule is a part of Dodd-Frank that
prohibits banking entities in the US from
engaging in proprietary trading
Act of trading stocks, bonds, currencies, &
other financial instruments with the firms
own money as opposed to its customers
money
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Philippine Banking System

Banks in the Philippine are classified as
follows:
1.Universal banks (UB)
2.Commercial banks (KB)
3.Thrift banks (TB)
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Banks in the Philippine are classified as
follows:
4.Rural banks (RB)
5.Cooperative banks (Coop Banks)
6.Islamic banks (IB)
2-30

Universal banks & Commercial banks
represent the largest single group, resource
wise, of financial institutions in the country
They offer the widest variety of banking
services among financial institutions
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Universal banks & Commercial banks
universal banks are also authorized to
engage in underwriting and other functions
of investment houses, and to invest in
equities of non-allied undertakings
An ordinary commercial bank does not have
that authority
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Commercial banks
In addition to having the powers of a thrift
bank, a commercial bank has the power to
accept drafts and issue letters of credit ;
discount and negotiate promissory notes,
drafts, bills of exchange, and other
evidences of debt;
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Commercial banks
accept or create demand deposits; receive
other types of deposits and deposit
substitutes; buy and sell foreign exchange
and gold and silver bullion; acquire
marketable bonds and other debt
securities; and extend credit.
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Thrift banks
have the power to accept savings and time
deposits, act as a correspondent with other
financial institutions and as a collection
agent for government entities, issue
mortgages, engage in real estate
transactions and extend credit
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Thrift banks
In addition, thrift banks may also maintain
checking accounts, act as a depository for
government entities and local government
units and engage in quasi-banking and
money market operations subject to the
approval of the Bangko Sentral
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Rural & Cooperative Banks
promote and expand the rural economy in
an orderly and effective manner by
providing the people in the rural
communities with basic financial services
Rural banks and cooperative banks are
differentiated from each other by ownership
2-37

Rural & Cooperative Banks
Rural banks are privately owned and
managed, cooperative banks are
organized/owned by cooperatives or
federation of cooperatives.
2-38

Islamic Banks
banks whose activities are consistent with the
principles of Sharia & its practical application
through the development of Islamic economics
The first & only Islamic bank in the Phils is the
Al-Amanah Islamic Bank
2-39
Investment Companies
Investment companies are financial
institutions that pool the savings of
individual savers and invest the money in
the securities issued by other companies
purely for investment purposes
Mutual funds
Exchange Traded Funds
Hedge Funds
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Mutual Funds
A mutual fund is an investment company
(corporation) that pools together the funds
of various investors---both individuals and
corporations
The pool of funds is managed by a
professional fund manager who uses the
funds to create a diversified investment
portfolio consisting of various investment
instruments such as stocks and bonds.
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Mutual Funds
Mutual fund shares are valued & sold using
Net Asset Value Per Share (NAVPS)
It is calculated by dividing the total Net
Asset Value (NAV) of the fund by the
number of shares outstanding
NAV is the total market value of all the
assets held by a mutual fund less the
market value of all its liabilities
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Mutual Funds
Assets consist mainly of cash and fund
investments in stocks or bonds. Liabilities
include fees and other payables of the fund
In the Philippines, mutual funds are
regulated by the SEC & the NAVPS for the
day is normally released after 4 pm of the
said date
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Mutual Funds
Mutual funds can either be load or no-load
funds. The term load refers to the sales
commission that you pay when acquiring
ownership shares in the fund.
Mutual funds can either be open-end or
closed-end fund.
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Mutual Funds
Open end fund is a mutual fund that issues
new shares whenever investors make
investments and buys back shares from
investors wishing to leave the fund
Closed end fund is a type of mutual fund
that issues only a limited number of
shares. Shares in this type of mutual fund
are typically traded among investors
2-45
4 Basic Types of Mutual Funds in the

Philippines
1. Equity fund
invests primarily in stocks
2. Bond fund
invests primarily in bonds and other debt
instruments
3. Balanced fund
invests both in equities & bonds
2-46
Types of Mutual Funds

4. Money market fund
invests in short-term securities
representing high-quality, liquid debt and
monetary instruments
2-47
Types of Mutual Funds

For purposes of liquidity, Philippine
regulations require that mutual funds invest
a minimum of 10% of the Funds net assets
in liquid or semi-liquid assets, such as but
not limited to savings or time deposits with
government- owned banks or commercial
banks
2-48
Unit Investment Trust Fund (UITF)

UITF is an open-end pooled trust fund
denominated in pesos or any acceptable
currency
Primarily issued & operated by the Trust
Departments of banks and regulated by
the Bangko Sentral ng Pilipinas (BSP) but
not covered by the Philippine Deposit
Insurance Corporation (PDIC)
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Investors in UITFs are not considered
stockholders
While investors in mutual funds are
considered stockholders and as such have
the same rights as shareholders of ordinary
companies except preemptive rights
2-50

A pre-emptive right means that a company
that wishes to sell additional stocks must
first offer it to the existing stockholders
before offering it to the general public
This right gives the existing stockholders
the opportunity to protect his/her
proportionate ownership in the corporation
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2-52
2-53

The original (old) stockholders would thus
lose $ 25 a share & while the additional
stockholders would instantly make $ 25 a
share
2-54
Index funds
Index fund is an open-end mutual fund
with a portfolio constructed to
match/track/mimic the components & the
performance of a market index, such as
the Philippine Stock Exchange Index
(PSEi), among others
An index fund that tracks the PSEi would
own the same stocks as those within the
PSEi
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Philippine Stock Exchange Index

(PSEi)
2-56
Philippine Stock Exchange Index

(PSEi)
2-57
Exchange Traded Funds (ETFs)

An Exchange-Traded Fund (ETF) is a
closed-end mutual fund thats being traded
in the stock exchange
Because it trades like a stock, an ETF does
not have its (NAV) calculated every day like
a mutual fund does
Instead they trade at a price that is updated
throughout the day
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Most ETFs track an index, such as the Dow
Jones Industrial Average or the S&P 500,
and generally have relatively low expenses
2-59

iShares MSCI Philippines Investable
Market Index Fund (EPHE)
First Philippine ETF listed on the New York
Stock Exchange (NYSE)
Tracks the MSCI Philippines Investable
Market Index
Launched in 2010
2-60

First Metro Philippine Equity Exchange
Traded Fund (FMETF)
First ETF listed on the Philippine Stock
Exchange (PSE)
Tracks the Philippine Stock Exchange Index
(PSEi)
Launched in 2013
2-61

Mutual funds, UITFs, Index funds and ETFs
provide a cost-effective way to diversify and
reduce risk
If you had only Php 5,000 to invest, it would be
difficult to diversify since you will have to pay
commission for each individual stock. However, by
buying an equity mutual fund/equity UITF/index
fund/ETF, you can indirectly purchase a portfolio
of stocks that tracks a lot of different companies
2-62
Hedge Funds
Hedge funds are similar to mutual funds but they
tend to take more risks and are generally open only to
high net worth investors.
mutual fund for the super rich
Investors in a hedge fund must earn a minimum
amount of money annually and have a net worth of
more than $1 million
No Hedge funds in the Philippines

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Hedge Funds
Aggressive in nature as they use advanced
investment strategies such as long & short
No hedge funds in the Philippines
2-64
Hedge Funds
Going long
- if an investor thinks the price of a stock will
go up, he buys low and sells once the stock
price has gone up.
Buy ABC stocks @ Php 10/share.
Then sell @Php 20/share.
Profit= Php 10/share
2-65
Hedge Funds
Lump sum vs Cost averaging
You have Php 300 of investible funds &
youre deciding if youre going to invest that
amount lump sum or spreading it out
equally over 3 months
Cost averaging is the technique of buying a
fixed peso amount of a particular investment
on a regular schedule, regardless of the
share price
2-66
Hedge Funds
Cost averaging
More shares are purchased when prices are
low, and fewer shares are bought when
prices are high
Eventually, the average cost per share of
the stock will become smaller and smaller
Dumb way to go about investing
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Hedge Funds
2-68
Hedge Funds
Averaging down
Averaging down is the process of buying
additional shares in a company at lower
prices than you originally purchased. This
brings the average price you've paid for all
your shares down
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Hedge Funds
2-70
Hedge Funds
Going short
- if an investor thinks the price of a stock will
go down, he borrows shares from his
broker & sells these at the going price.
- He then buys back the borrowed shares
once the stock price has gone down,
pocketing the difference.
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Hedge Funds
Going short
- Riskier than going long since stock price
cannot go below zero but price appreciation
(stock price going up) is limitless
2-72
Hedge Funds
Going short
Borrow & sell ABC stocks @ Php 20/share.
Buy ABC stocks @ Php 10/share & return the
borrowed shares to his broker
Profit=Php 10/share
2-73
Private Equity Firms

Invest in equities that are not traded on
the public capital markets
Private equity firms include two major
groups: Venture capital (VC) firms and
Leveraged buyout firms (LBOs).
2-74

Venture capital firms raise money from
investors (wealthy individuals and other
financial institutions) that they then use to
provide financing for private start-up
companies when they are first founded.
2-75

Leveraged buyout firms acquire established
firms that typically have not been performing very
well with the objective of making them profitable
again and selling them. An LBO typically uses debt
to fund the purchase of a firm. LBO transactions
grew from $7.5 billion in 1991 to $500 billion in
2006.
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Security
A security is a negotiable instrument that
represents a financial claim and can take
the form of ownership (such as stocks) or
debt agreement (such as bonds).
The securities market allow businesses and
individual investors to trade the securities
issued by public corporations.
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Primary versus Secondary Market

When a private corporation wants to list on
the stock exchange (going public), they do
an Initial Public Offering (IPO) and sell
their shares in the primary market.
In this market, the firm selling securities
actually receives the money raised.
2-78

A secondary market is where all
subsequent trading of previously issued
securities takes place. In this market, the
issuing firm does not receive any new
financing. The securities are simply
transferred from one investor to another.
Thus secondary markets provide liquidity
to the investor.
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Process of Raising Money in the

Securities Market
1. The firms sells securities (debt or equity)
to investors in the primary market.
2. The firm invests the funds it raises in its
business.
3. The firm distributes the cash earned from
its investments.
4. Security continues to trade in the
secondary market.
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Listing in the Philippine Stock

Exchange
2-81

California-based investment analyst Ken
Fisher had a chapter in his book, The Wall
Street Waltz (1987), titled IPO Means Its
Probably Overpriced.
2-82
Bonds
Commonly referred to as fixed-income
securities
Not as sexy as stocks
Generally, much safer than stocks.
Generally, rate of return is lower than
stocks
Debt Financing: A = L + O
2-83
Bonds
A debt investment in which an investor
loans money to an entity (corporate or
governmental) that borrows the funds
for a defined period of time at a fixed
interest rate.
Used or issued by companies &
governments to finance a variety of
projects and activities
Bonds issued by stable governments are
considered risk-free assets.
2-84
Bonds
Bond Issuer=Borrower
Investor=Lender
Coupon/Coupon rate= Interest Rate
Term= the time it takes for all payments to
be made by the issuer & received by the
lender
Face Value/Principal/Par Value=the borrowed
2-85
amount
Bonds
Bills= short-term debt security (<1 year)
Bonds= long-term debt security (>1 year)
2-86
Bonds
Bond prices do change just like stock
prices
A bond trading/selling above the face
value is said to be trading at a premium
A bond trading/selling below the face
value is said to be trading at a discount
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Bonds
Example:
Face Value/Par Value= $1,000
Coupon rate= 9%
Term: 10 years
Years 1- Years 9: $1,000 X 9% = $90/year
Year 10: $ 90 + $ 1,000 = $ 1,090
2-88
Bonds
Current Yield =Coupon amount Price
-the return an investor would expect if he
purchased the bond & held it for a year
If the bond is selling at par value, then
Current Yield = $ 90 $ 1,000
Current Yield = 9%
2-89
Bonds
What if price goes down to $ 800?
Current Yield = $ 90 $ 800
Current Yield = 11.25%
If price goes up, yield goes down & vice versa
What if price goes up to $ 1,500?
Current Yield = $ 90 $ 1,500
Current Yield = 6%
2-90
Bonds
How can high yields and high prices both be
good when they can't happen at the same
time?
Its a matter of perspective
Buyer wants high yields so that he pays a
lower price.
Seller wants low yields so that he sells at a
at higher price.
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Bonds
The prevailing interest rate in the economy
has the greatest influence on bond prices.
When interest rates go up, bond prices go
down, yield goes up.
When interest rates go down, bond prices
go up, yield goes down.
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Bonds
Making Money off Bonds
1.Hold the bond until maturity
-the traditional way
-done mostly by individual investors and large
insurance companies
2.Trade bonds
-most banks do this & attribute their trading
income to this
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Bonds
Trading Story
1.Bought a bond with the following features:
Coupon:
Benchmark Interest Rate:
Term:
Par Value:
Purchase Price:
15%
15%
10 years
Php 100
Php 100
2-94
Bonds
Trading Story
2. After a day, BSP lowered its benchmark
interest rates by 0.5%. As a result, your
banker told you that the yield is now 14.5%.
3. You can then sell your bond at Php 103.45
for a profit of Php 3.45 per Php 100 even if
you just bought it the day before.
(Note: Using price per hundred quotes is
the trading practice worldwide)
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Bonds
Trading Story
Yield = Coupon amount Price
14.5% = Php 15 Price
Price = Php 15 0.145
Price = Php 103.45
4. Your annualized 1-day return would be 1,242%.
(3.45/100)x (360/1) x 100 =1,242%
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Bonds
This is how banks or government securities
dealers make money. They buy the bonds
and bills when interest rates are high. They
will hold on to their government securities
for days or months then sell them to their
individual and corporate clients when
interest rates go down.
2-97
Bonds
In the Philippines:
Philippine Government bonds & bills come in
denominations of Php 100,000 and above.
Phil govt issues Retail Treasury Bonds (RTB)
which come in denominations of Php 5,000.
2-98
Types of Securities
Common stock is a security that
represents equity ownership in a
corporation, provides voting rights, and
entitles the holder to a share of the
companys success in the form of dividends
and any capital appreciation in the value of
the security
2-99
Types of Securities
Equity securities represent ownership of
the corporation.
There are two major types of equity
securities: common stock and preferred
stock.
2-100
Types of Securities
Common stockholders are residual owners
of the firm i.e. they earn a return only
after all other security holder claims (debt
and preferred equity) have been satisfied
in full
Nowadays, stock ownership is kept or
recorded in street name as opposed to
recording ownership in stock certificates
2-101
Types of Securities
In street name means the customer's
securities and assets are held under the
name of the brokerage firm, rather than
the name of the individual who purchased
the security or asset.
Although the name on the certificate is not
that of the individual, they are still listed
as the real and beneficial owner and have
the rights associated with the security
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Types of Securities
Dividend on common stock are neither
fixed nor guaranteed. Thus a company can
choose to reinvest all of the profits in a
new project and pay no dividends.
Declaration date is the date the dividend is
declared
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Types of Securities
Record date is the cut-off date the
corporation uses to determine if a particular
stockholder is eligible to receive the dividend.
This when the company looks at its records
or books to see who are the shareholders
entitled to receive the dividend
Payment date is the date the dividends are
paid out to the stockholders as of record date
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Types of Securities
However, it takes time for a stock purchase
to be recorded on the company books or
record, so stock exchanges set a date
known as the ex-dividend date to allow time
for this processing
Thus the key or crucial date for stockholders
is the ex-dividend date, which in the PSE is 3
business days
2-105
Types of Securities
Ex-date is the starting date where the
stock is no longer entitled to dividends. It
means that if you bought a stock during
this date or onwards, the stock will not be
entitled to receive dividends anymore. So
if you bought the stock before this date,
that stock is entitled to receive dividends
After the ex-date, a stock is said to trade
ex-dividend
2-106
Types of Securities
2-107
Stock Dividends & Stock Splits

Stock dividend is a dividend paid in the form
of additional shares of stock rather than in
cash
It is commonly expressed in percentage
A 20% stock dividend means that a
shareholder receives one new share for every
five currently owned (a 20% increase)
2-108

Because every shareholder receives 20%
more stock, the total number of shares
outstanding rises by 20%
The result is that each share of stock is worth
about 20% less
2-109

Stock split is an action taken by a firm to
increase the number of shares outstanding &
reducing the per share price
It is expressed as a ratio instead of a
percentage
In a three-for-one stock split, each old share
is split into three new shares
2-110

Although both stock dividends and stock splits
increase the number of shares outstanding
and reduce the price per share, the accounting
treatment is not the same
Stock dividends & stock splits are employed to
(1) keep the stocks trading at a desired price
range, (2) increase liquidity
2-111

It should be pointed out that since few large,
publicly owned stocks sell at prices above
several hundred dollars, we simply wont know
what the effect would be if Chevron, Microsoft,
Xerox, Hewlett-Packard, & other successful
companies had never split their stocks &
consequently sold at prices in the thousands
or even millions of dollars a share
2-112

Reverse splits reduce the shares outstanding &
raise the per share price
A less frequently encountered case
A company whose stock sells for USD 5 might
employ a one for five reverse split, exchanging
one new share for five old ones & raising the
price per share to USD 25
2-113

Security Bank declared a 20% stock dividend on
November 25th 2013
Outstanding shares (before): 502,358,513
Outstanding shares (after):
602,831,109
2-114

Security Bank declared a 20% stock dividend on
November 25th 2013
Original holding:
Per Share Price:
Total value:
900 shs
Php 128
Php 115,200
2-115
New holding:
New Per Share Price:
Total Value:
1,080 shs (900+180)

Php 106.66 (128/1.2)
Php 115,192
2-116

Berkshire Hathaway did a 50:1 stock split on its
B shares on January 21st 2010 (Thursday)
Pre-split (Jan 20th): Closing price: USD 3,476
Split-adjusted (Jan 21st) Open price: USD 71.13
2-117

Apple Inc. did a 7:1 stock split on
June 9th, 2014 ( Monday)
Pre-split (Jun 6th): Closing price: USD 645.54
Split-adjusted (Jun 9th) Open price: USD 92.70
2-118
Types of Securities
Preferred stock/share generally has a
dividend that must be paid out before
dividends to common stockholders and the
shares usually do not have voting rights
Furthermore, preferred stock is sometimes
convertible into common stock, and are
often callable/redeemable
2-119
Types of Securities
The precise details as to the structure of
preferred stock is specific to each
corporation
However, the best way to think of
preferred stock is as a financial instrument
that has characteristics of both debt (fixed
dividends) and equity (potential
appreciation)
2-120
Types of Securities
Investing Food Chain
2-121
Types of Securities
Similarities & Differences of Preferreds &
Bonds
1.Seniority to common stocks
Like bonds, preferreds are senior to common
stock. However, bonds have more seniority
than preferreds. The seniority of preferreds
applies to both the distribution of corporate
earnings (as dividends) and the liquidation of
proceeds in case of bankruptcy
2-122
Types of Securities
2. Ratings
Like bonds, preferred stocks are rated by the
major credit rating agencies. The rating for
preferreds is generally one or two tiers
below that of the same company's bonds
because preferred dividends do not carry the
same guarantees as interest payments from
bonds and they are junior to all creditors
2-123
Types of Securities
3. Dividend payment
Preferreds pay dividends. These are fixed
dividends, normally for the life of the stock,
but they must be declared by the company's
BOD. As such, there is not the same array of
guarantees that are afforded to bondholders. If
a company has a cash problem, the board of
directors can decide to withhold preferred
dividends.
2-124
Types of Securities
Similarities & Differences of Preferreds &
Common stock
1.Price appreciation
Preferred share price appreciation is
limited. This is where preferreds lose their
luster for many investors
2-125
Types of Securities
Preferreds & Common stock
2.Voting
Whereas common stock is often called
voting equity, preferred stocks usually
have no voting rights
2-126
Types of Securities
2-127
Stock Markets
A stock market is a public market in which
the stocks of companies is traded.
Stock markets are classified as either
organized security exchanges or over-thecounter (OTC) market.
2-128
Stock Markets
Organized security exchanges are
tangible entities; that is, they physically
occupy space and financial instruments are
traded on their premises. For example, the
New York Stock Exchange (NYSE) is
located at 11 Wall Street in Manhattan, NY.
The total value of stocks listed on the
NYSE fell from $18 trillion in 2007 to just
over $10 trillion at the beginning of 2009.
2-129
Stock Markets
The over-the-counter markets include
all security market except the organized
exchanges.
NASDAQ (National Association of Securities
Dealers Automated Quotations) is an overthe-counter market and describes itself as
a screen-based, floorless market. In
2009, nearly 3,900 companies were listed
on NASDAQ, including Starbucks, Google,
Intel.
2-130
Stock Markets
At USD 206,850 a share, Berkshire
Hathaway A shares is the highest priced
stock in the world
2-131
Stock Market Indexes

tool for tracking the performance of the
stock market as a whole.
It can be based on all stocks listed on an
exchange or only a sample of stocks. It is
also a statistic reflecting the composite
value of its components.
Specific criteria are used in determining
which stocks are included in an index and
the index itself is calculated based on a
standardized methodology
2-132
Stock Market Indexes

Classified in a lot of different ways
National stock market indexes are
usually referred to as the market
Anyone can create an index but it is the
reputation of the creating company that
matters
2-133
Some popular stock indexes

US- S&P 500
US- Dow Jones Industrial Average (DJIA)
Japan- Nikkei 225
UK- FTSE 100
Korea- KOSPI
2-134
Some popular stock indexes

China- SSE Composite Index
China-SZSE Component Index
Singapore- Strait Times Index
Hong Kong- Hang Seng Index
Philippines- Philippine Stock Exchange Index
(PSEi)
2-135
The Farm Animals

Bulls- optimistic
Strategy: going long
Bears- pessimistic
Strategy: going short
Chickens- risk-averse
Strategy: invest in money markets or dont invest at
all
2-136
The Farm Animals

Pigs- risk-takers, impatient & greedy
Strategy: invest on hot tips & invest in suspicious
companies
Bulls make money, bears make money, but

pigs just get slaughtered!
2-137
Authorized, Outstanding, Issued

Shares & Float
Authorized shares are the number of
shares of common stock that a firms
corporate charter or articles of
incorporation allows it to issue
To avoid later having to amend the charter,
firms generally attempt to authorize more
shares than they initially plan to issue
2-138

Shares & Float
A company may not issue more stock than
authorized. If the company wants to issue
more stock, it must petition for an increase
in the number of authorized shares
A stock split or a stock dividend may
require such a petition if the split or
dividend will add more shares to the
number of outstanding shares than are in
the total number of authorized shares
2-139

Shares & Float
Restricted shares are shares that are
usually given to employees by the
company and are not readily available to
the public
Public float is the total number of shares
available for trading. Float is calculated by
subtracting closely-held shares from the
total number of outstanding shares
2-140

Shares & Float
Usually measured as a proportion of
outstanding shares
Outstanding shares is the number of

stocks that a company actually has issued
This number represents all the shares that
can be bought and sold by the public, as
well as all the restricted shares that
require special permission before being
transacted
2-141

Shares & Float
Treasury stock is the number of shares of
outstanding stock that have been
repurchased by the firm & no longer
considered outstanding shares
Issued shares are the number of shares of
common stock that have been put into
circulation & is calculated as the sum of
the outstanding shares & treasury shares
2-142

Shares & Float
When a company decides to split its stock,
it can pull shares from its treasury stock
account.
If it does not have enough shares to cover
the split, it must obtain permission from
the board to increase the number of
authorized shares to complete the split.
Once the split is complete, the number of
shares outstanding increases and the price
per share decreases
2-143

Shares & Float
2-144

Shares & Float
2-145

Shares & Float
In the Philippine Stock Exchange (PSE)
Minimum public float: 10%
The minimum public float rule was lifted at
the height of the 2008 financial crisis so that
listed companies can buy back their shares
to prevent a share price freefall
2-146

Shares & Float
2-147

Shares & Float
When a firm buys back its shares its telling
investors that it believes that their stocks
are currently undervalued
Stock price increase generally follow a share
repurchase
To increase public float, companies can issue
more shares to the public or sell treasury
stocks
2-148

Shares & Float
2-149

Shares & Float
Public Float Level at the time of delisting
First Metro Investment Corporation:
1.94%
Metro Pacific Tollways Corporation:
0.15%
2-150

Shares & Float
2-151

Shares & Float
2-152

Shares & Float
2-153
Market capitalization
Market capitalization or market cap is the
market value of a companys outstanding
shares
Product of current per share price &
outstanding shares
2-154
Market capitalization
Apple Inc became the worlds most valuable
company by market cap on August 2012 &
again on August 2013.
2012 market cap: USD 620 Billion
2013 market cap: USD 414 Billion
2-155
Percentage & Basis Points

1 basis point (bp) = 0.01 percentage point (pp)
1 percentage point = 100 basis points
5% to 5.5%
Increased by 50 basis points
Increased by 0.5 percentage points
2-156

12% to 10%
Decreased by 200 basis points
Decreased by 2 percentage points
2-157

Percentage point is used to measure the
difference of two percentages & used to
show the changes in an indicator with
respect to its previous standings
Different from percentage change
2-158

Basis point is commonly used as a
convenient unit of measurement in
contexts where percentage differences of
less than 1% are discussed.
The most common example is interest
rates, where differences in interest rates of
less than 1% per year are usually
meaningful to talk about.
2-159

It is also used for calculating changes in
equity indexes and the yield of a fixedincome security
2-160
The Rule of 72
A rule stating that in order to find the
number of years required to double your
money at a given interest rate, you divide
the compound return into 72. The result is
the approximate number of years that it
will take for your investment to double.
2-161
The Rule of 72
@ 5% interest rate: 72/5 = 14.4 years
You double your money in more or less 14 yrs
@ 10% interest rate: 72/10 = 7.2 years

@ 12% interest rate: 72/12 = 6 years

2-162
How to Read stock price quotes
2-163
How to Read stock price quotes
2-164

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Three Players in the Financial

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