What are Financial Markets?
Stock market
Financial markets, from the name itself,
are a type of marketplace that provides
an avenue for the sale and purchase of
assets such as bonds, stocks, foreign
exchange, and derivatives. Often, they
are called by different names, including
“Wall Street” and “capital market,” but all
of them still mean one and the same
thing. Simply put, businesses and
investors can go to financial markets to
raise money to grow their business and
to make more money, respectively.
To state it more clearly, let us imagine a
bank where an individual maintains a
savings account. The bank can use their
money and the money of other
depositors to loan to other individuals
and organizations and charge an
interest fee.
The depositors themselves also earn
and see their money grow through the
interest that is paid to it. Therefore, the
bank serves as a financial market that
benefits both the depositors and the
debtors.
 Types of Financial Markets
There are so many financial markets,
and every country is home to at least
one, although they vary in size. Some
are small while some others are
internationally known, such as the New
York Stock Exchange (NYSE) that
trades trillions of dollars on a daily basis.
Here are some types of financial
markets.
1.
The stock market trades shares of
ownership of public companies. Each
share comes with a price, and investors
make money with the stocks when they
perform well in the market. It is easy to
buy stocks. The real challenge is in
choosing the right stocks that will earn
money for the investor.
There are various indices that investors
can use to monitor how the stock market
is doing, such as the Dow Jones
Industrial Average (DJIA) and the S&P
500. When stocks are bought at a
cheaper price and are sold at a higher
price, the investor earns from the sale.
2. Bond market
The bond market offers opportunities for
companies and the government to
secure money to finance a project or
investment. In a bond market, investors
buy bonds from a company, and the
company returns the amount of the
bonds within an agreed period, plus
interest.
3. Commodities market
The commodities market is where
traders and investors buy and sell
natural resources or commodities such
as corn, oil, meat, and gold. A specific
market is created for such resources
because their price is unpredictable.
There is a commodities futures market
wherein the price of items that are to be
delivered at a given future time is
already identified and sealed today.
4. Derivatives market
Such a market involves derivatives or
contracts whose value is based on the
market value of the asset being traded.
The futures mentioned above in the
commodities market is an example of a
derivative.
 Functions of the Markets
The role of financial markets in the
success and strength of an economy
cannot be underestimated. Here are
four important functions of financial
markets:
1. Puts savings into more productive
use
As mentioned in the example above, a
savings account that has money in it
should not just let that money sit in the
vault. Thus, financial markets like banks
open it up to individuals and companies
that need a home loan, student loan, or
business loan.
2. Determines the price of securities
Investors aim to make profits from their
securities. However, unlike goods and
services whose price is determined by
the law of supply and demand, prices of
securities are determined by financial
markets.
3. Makes financial assets liquid
Buyers and sellers can decide to trade
their securities anytime. They can use
financial markets to sell their securities
or make investments as they desire.
4. Lowers the cost of transactions
In financial markets, various types of
information regarding securities can be
acquired without the need to spend.
 Importance of Financial
Markets
There are many things that financial
markets make possible, including the
following:
 Financial markets provide a place
where participants like investors
and debtors, regardless of their
size, will receive fair and proper
treatment.
 They provide individuals,
companies, and government
organizations with access to
capital.
 Financial markets help lower the
unemployment rate because of
the many job opportunities it
offers
Stock
A stock (also known as equity) is a
security that represents the ownership
of a fraction of a corporation. This
entitles the owner of the stock to a
proportion of the corporation's assets
and profits equal to how much stock
they own. Units of stock are called
"shares."
Stocks are bought and sold
predominantly on stock exchanges,
though there can be private sales as
well, and are the foundation of many
individual investors' portfolios. These
transactions have to conform to
government regulations which are
meant to protect investors from
fraudulent practices. Historically, they
have outperformed most other
investments over the long run. These
investments can be purchased from
most online stock brokers. Stock
investment differs greatly from real
estate investment.
 KEY TAKEAWAYS
 A stock is a form of security that
indicates the holder has
proportionate ownership in the
issuing corporation.
 Corporations issue (sell) stock to
raise funds to operate their
businesses. There are two main
types of stock: common and
preferred.
 Stocks are bought and sold
predominantly on stock
exchanges, though there can be
private sales as well, and they
are the foundation of nearly
every portfolio.
 Historically, they have
outperformed most other
investments over the long run.
 Understanding Stocks
Corporations issue (sell) stock to raise
funds to operate their businesses. The
holder of stock (a shareholder) has now
bought a piece of the corporation and,
depending on the type of shares held,
may have a claim to a part of its assets
and earnings. In other words, a
shareholder is now an owner of the
issuing company. Ownership is
determined by the number of shares a
person owns relative to the number of
outstanding shares. For example, if a
company has 1,000 shares of stock
outstanding and one person owns 100
shares, that person would own and have
claim to 10% of the company's assets
and earnings.2
Stock holders do not own corporations;
they own shares issued by corporations.
But corporations are a special type of
organization because the law treats
them as legal persons. In other words,
corporations file taxes, can borrow, can
own property, can be sued, etc. The
idea that a corporation is a “person”
means that the corporation owns its own
assets. A corporate office full of chairs
and tables belongs to the corporation,
and not to the shareholders.3
This distinction is important because
corporate property is legally separated
from the property of shareholders, which
limits the liability of both the corporation
and the shareholder. If the corporation
goes bankrupt, a judge may order all of
its assets sold – but your personal
assets are not at risk. The court cannot
even force you to sell your shares,
although the value of your shares will
have fallen drastically. Likewise, if a
major shareholder goes bankrupt, she
cannot sell the company’s assets to pay
off her creditors.
 Stockholders and Equity
Ownership
What shareholders actually own are
shares issued by the corporation; and
the corporation owns the assets held by
a firm. So if you own 33% of the shares
of a company, it is incorrect to assert
that you own one-third of that company;
it is instead correct to state that you own
100% of one-third of the company’s
shares. Shareholders cannot do as they
please with a corporation or its assets. A
shareholder can’t walk out with a chair
because the corporation owns that
chair, not the shareholder. This is known
as the “separation of ownership and
control.”
Owning stock gives you the right to vote
in shareholder meetings, receive
dividends (which are the company’s
profits) if and when they are distributed,
and it gives you the right to sell your
shares to somebody else.
If you own a majority of shares, your
voting power increases so that you can
indirectly control the direction of a
company by appointing its board of
directors. This becomes most apparent
when one company buys another: the
acquiring company doesn’t go around
buying up the building, the chairs, the
employees; it buys up all the shares.
The board of directors is responsible for
increasing the value of the corporation,
and often does so by hiring professional
managers, or officers, such as the Chief
Executive Officer, or CEO.
For most ordinary shareholders, not
being able to manage the company isn't
such a big deal. The importance of
being a shareholder is that you are
entitled to a portion of the company's
profits, which, as we will see, is the
foundation of a stock’s value. The more
shares you own, the larger the portion of
the profits you get. Many stocks,
however, do not pay out dividends, and
instead reinvest profits back into
growing the company. These retained
earnings, however, are still reflected in
the value of a stock.
Common vs. Preferred Stock
There are two main types of stock:
common and preferred. Common stock
usually entitles the owner to vote at
shareholders' meetings and to receive
any dividends paid out by the
corporation. Preferred stockholders
generally do not have voting rights,
though they have a higher claim on
assets and earnings than the common
stockholders. For example, owners of
preferred stock (such as Larry Page)
receive dividends before common
shareholders and have priority in the
event that a company goes bankrupt
and is liquidated.
The first common stock ever issued
was by the Dutch East India
Company in 1602
Companies can issue new shares
whenever there is a need to raise
additional cash. This process dilutes the
ownership and rights of existing
shareholders (provided they do not buy
any of the new offerings). Corporations
can also engage in stock buy-backs
which would benefit existing
shareholders as it would cause their
shares to appreciate in value.
 Stocks vs. Bonds
Stocks are issued by companies to raise
capital, paid-up or share, in order to
grow the business or undertake new
projects. There are important
distinctions between whether somebody
buys shares directly from the company
when it issues them (in the primary
market) or from another shareholder (on
the secondary market). When the
corporation issues shares, it does so in
return for money.
Bonds are fundamentally different from
stocks in a number of ways. First,
bondholders are creditors to the
corporation, and are entitled to interest
as well as repayment of principal.
Creditors are given legal priority over
other stakeholders in the event of a
bankruptcy and will be made whole first
if a company is forced to sell assets in
order to repay them. Shareholders, on
the other hand, are last in line and often
receive nothing, or mere pennies on the
dollar, in the event of bankruptcy. This
implies that stocks are inherently riskier
investments that bonds.
 INVESTING PROCEDURES:

1. Choose a stockbroker. The PSE has a complete list of information about all its
trading participants who are authorized and qualified to trade securities for you. This
list is also available on the PSE's website and the telephone directory's Government
and Business listings yellow pages under the category of stock and bond brokers.
Aside from representing you in the stock market, a stockbroker can also offer you
services such as access to market reports/studies, on-time delivery of important
documents, and advise on your investments. It is then important that you trust your
stockbroker and that you are satisfied with its services.

2. You shall be required to open an account and fill out a Customer Account
Information Form and to submit identification papers for verification. The stockbroker
will then assign a trader or agent to assist you in either buying or selling any listed
security. There are also stockbrokers who have an online trading facility that allows
you to post orders by yourself, but sufficient understanding of how the stock market
works is key. If you choose to be assisted by a trader or agent, you can discuss with
him/her what stocks you want to buy or sell.

3. Give the order to your trader, and then ask for the confirmation receipt. Your buy
or sell orders are relayed to the stockbroker's dealer for execution. In an automated
system as in PSE, the order is keyed in through a trading terminal and automatically
matched. Confirmation of done trades - via phone, email or online - is made as soon
as possible and subsequently, an official confirmation or invoice should be delivered
to you.

4. Pay before settlement date. The delivery or payment should be made before the
settlement date of T+3. For traditional stockbrokers, settlement of transactions is
usually done after three (3) working days from the transaction date. This means that
for transactions done on Monday, as an illustration, payment should be received by
Thursday. Meanwhile for online stockbrokers, settlement of all transactions is done
on the transaction date. Settlement of accounts is performed by the clearing house.

5. You shall receive from your broker either the proceeds of sale of your stocks
(after 3 business days) or proofs of ownership of stocks you bought (confirmation
receipt and invoice). If you wish to have a physical certificate of the stocks you
bought, you can give instructions to your broker and pay the required upliftment fee.

You can purchase shares of stocks either through an initial public offering (IPO) or
through the open market (also referred to as the secondary market). Shares sold
through IPOs are offered for the first time to the public by the company (primary
market) whereby proceeds of the sale go directly to the company. Shares of listed or
publicly traded companies are only bought during trading hours. These shares have
since been transferred from one owner to another and proceeds of the sales do not
go directly to the company but to the owners of the shares.
 The Trading Cycle

All equity transactions, whether buying or selling, have a settlement period of T+3
(trading day + 3 working days). This means that a seller should be able to deliver the
stock certificate, if any, to his broker and the buyer must have paid the cost of
transaction to his broker within 3 working days after the trade was done. Historically,
settlement was done manually (27-day cycle). With scripless trading, wherein
settlement is done via the book-entry-system (thru Philippine Central Depository or
PCD), transactions are settled on the third day after trade date. Under this system, the
investor has the option to hold on to his certificate (uplift) or deposit (lodge) this
certificate in PCD through his broker-participant account.
Board Lot System
Equity trading is done by board lot or round lot system. The Board Lot Table determines
the minimum number of shares an investor can buy or sell at a specific price range.
Therefore, the minimum amount of initial investment varies and will depend on the
market price of the stock as well as its corresponding board lot. Prices of stocks move
through a scale of minimum price fluctuations.

Market Price (in Php) Tick Size Lot Size

0.0001 to 0.0099 0.0001 1,000,000

PSE Trading Hours/ Market
Phases
0.0100 to 0.0490 0.0010 100,000
8:45 am National Anthem
0.0500 to 0.2490 0.0010 10,000
9:00 am Pre-Open Auction Period
0.2500 to 0.4950 0.0050 10,000
9:15 am Pre-Open No-Cancel
Period
0.5000 to 4.9900 0.0100 1,000

9:30 am Opening Period -

5.0000 to 9.9900 0.0100
Continuous Trading 100

10.0000 to 19.9800 12:00 nn 0.0200

Market Recess 100

20.0000 to 49.9500 1:30 pm 0.0500

Continuous Trading 100

50.0000 to 99.9500 3:15 pm 0.0500

Pre-Close Auction Period 10

3:18 pm
100.0000 to 199.9000 Pre-Close
0.1000 No-Cancel 10
Period

200.0000 to 499.8000 0.2000 10

3:20 pm Closing Period - Run-
off/Trading-at-Last
500.0000 to 999.5000 0.5000 10
3:30 pm Market Close
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:
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 follows:

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:
Ms. Y wishes to sell a stock that is trading at P10.00. Based on the Board Lot Table, the number of
shares she can sell at a regular transaction should be in multiples of 100 shares. In this case, if Ms. Y
wants to sell 1,000 shares (which is a multiple of 100 shares), her cash inflow will be as follows:

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