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Quotes for the day!

Do not save what is left after
spending but spend what is
left after saving.

Warren Buffet
Investor MARKETS Borrower
BANKS ( To Companies




What are the money and capital

• Financial markets are classified into the money

market and the capital market. The money
market is where short-term funds are raised
through the buying and selling of short term debt
securities such as commercial papers. The
capital market is where long-term funds are
raised through the bond market, which deals
with long-term debt securities such as bonds,
the stock market which deals with equity
securities or stocks.
What are the primary and secondary

• Basically, it is in the capital market, called

the stock market, where an investor can
buy and sell stocks. This market consists
of the primary market or secondary
market, depending on whether the
securities were sold by the company itself
or by an existing shareholder(s).
Primary market

• In the primary market, new shares are issued and sold to

the investing public for the first time. It is where capital is
actually raised by the company selling stock directly to
investors typically through an initial public offering. For
instance, if San Miguel Corporation decides to sell a new
stock to raise equity funds, it will be a primary market
transaction. Since it is the first time the company has
sold stock to the public, it is called an initial public
offering (IPO). The proceeds of the sale go to San
Miguel Corporation, the issuing company. Investors who
have subscribed to the IPO have provided the company
with the necessary funds to continue its operation and
expansion, and become part owners of the company.

Primary market
• An underwriter or investment banker assists the issuer of a new
security in setting the offering price and in marketing the securities
to the public. The investment bankers serves as a middleman in the
transfer of funds between the company in need of capital and the
public, and facilitates the issuance of shares.

• There is occasionally a secondary offering in the primary market.
This means that the shares of stock being offered were previously
issued but is being offered to the public for the first time by a large or
controlling shareholder. As such, the selling stockholder gets the
proceeds of the sale.
Secondary market
• The secondary market is where securities can be bought
and sold after they have been issued to the public in the
primary market. Thus, if you decide to buy existing shares
of San Miguel Corporation, you cannot buy them directly
from the issuing company anymore since they have all
been sold to the investing public during the initial public
• So, how can you avail of San Miguel shares when the IPO
has been completed? Investors can only buy these shares
from existing shareholders who are willing to sell their
shares. When they do so, it is a secondary market
transaction. The proceeds from this transaction don not go
to the issuing corporation; instead they go to the investor
who sold his shares.
Secondary market
• The secondary market is where the original shareholders
sell their shares to other investors. An investor can only
make a profit when he can sell his shares at a price
higher that the purchase price. This market gives a
continuous reflection of the value of securities (prices) at
some point in time according to the best available
• Secondary markets include the stock exchange and the
over-the-counter (OTC) market.
What is a stock market and stock
• There are differences in their definition but real concept
of a stock exchange and stock market remains constant.
Simply defined, a stock market is an organized activity
involving the buying and/or selling of securities done
within a stock exchange.

• In a fundamental sense, a stock exchange brings buyers

and sellers together. It is an organization whose function
is to facilitate the purchase and sale of stocks and other
securities. It is a market where investors can buy and
sell securities after they have been offered in the primary
What is a stock market and
stock exchange?
• Remember that the stock exchange is not a capital raising
mechanism. As part of the secondary market, it is only adjunct to the
capital raising market or primary market. It is merely a place or
means where existing shareholders can sell their shares to those
who are ready to buy.

• The stock exchange and the stock market facilitate the flow of
savings into investments by providing a ready market for the resale
of securities. The inflow of funds in the stock market is one efficient
way of directing a needed resource (in this case, money) into a
growing economy. As such, the stock exchange plays a key role in
economic development by providing a centralized environment that
brings together the demanders and suppliers of funds to make
secure and fast transactions.
What is the over-the-counter
• Stocks of corporations not listed and therefore not traded
in the stock exchange but registered and licensed by the
Securities and Exchange Commission for sale to the
public are only available in the so-called over-the-
counter (OTC) market. This market is not a specific
organization but another way of trading securities. OTC
transactions are carried out by direct inquiries and
negotiations among the buyers and sellers through the
use of mail, telephone, telegraph, Teletype, or other
forms of communications.
What are the advantages of the
stock market?
• The stock market is a better market for the trading of securities as
opposed to the OTC because of the following:

• Most accessible market

Through the offices of member firms located everywhere, even
in the provinces, stocks are available to millions of people.
• Ready market
With a simple phone call, an investor can buy and sell stock,
virtually within minutes. Market transactions are done swiftly,
conveniently and at a fair price.
What are the advantages of the stock
• Liquidity of the market
Hundreds of different stocks are available to thousands of
buyers and sellers and can readily be turned into cash due to the large
number of market players. The OTC market is generally much thinner
or less liquid which makes it more difficult to sell at a certain time in a
failing market due to lack of buyers.
• Operates in full public view
Transactions and price data are readily available through
newspapers, radio, television and information networks. Unlike the
stock exchange, the over-the-counter stock prices are not published
daily in the newspapers, which makes it more difficult for an investor to
keep track of his investment.
Who are the players in the stock
• Investors are the ones who buy and sell securities in the hope of
receiving dividend income and making a profit through capital
appreciation. These buyers and sellers are not the only players in
the stock market. Other persons or institutions ensure that the stock
market is a readily accessible, efficient, orderly and transparent
market. These are:
1. Stockbroker
2. Stock exchange
3. Transfer agent
4. Clearing House
5. Listed company
• Anyone who wishes to buy shares of stocks or bonds
must have a stockbroker. He acts as an agent or
middleman between the investor and other
buyers/sellers. As an intermediary, the stockbroker
executes orders for clients, purchasing or selling the
stocks on the stock exchange. He is the only person or
corporation authorized and licensed by the Securities
and Exchange Commission to trade in securities. They
are commonly known as members, member-brokers, or
member-firms of the Philippine Stock Exchange.
Stock exchange
• This is the organization that oversees the
transactions of the buyers and sellers
placed through the member-brokers. Its
professional management ensures that the
market is efficient, fair, transparent and
orderly by enforcing its rules and
Transfer agent
• When shares are purchased and transferred
from the seller to the buyer, the transaction
should be recorded in the stock books of every
listed company which record the complete
shareholdings of each stockholder of the
company. But most companies have his record
keeping done by a separate agency, called the
transfer agent. Thus, when a transaction has
been done, the details are kept in a ledger or
record book by the company’s transfer agent.
Transfer agent
• As such, the transfer agents maintains the
ledgers for each issuer company showing the
name and address of, and the number of shares
held by each registered stockholder. Another
function of a transfer agent, which is either a
commercial bank or trust company, is to cancel
old certificates, issue new certificates and
change the name of the certificates into the
buyer’s name when the shares have been sold.
Clearing House
• When a transaction has been made, the seller – through
his stockbroker – has to deliver the stock certificate to the
buyer who in turn orders his stockbroker to pay for the
shares purchased. This seems to be an easy process. But
considering the thousands of transactions executed
everyday and the nearly 200 stockbrokers involved, broker-
to-broker payments and delivery of certificates would
become complicated. To facilitate transactions and make
the market more orderly, all payments by all stockbrokers
are done to a centralized institution, called the
clearinghouse. Thus, all stockbrokers will make payments
to and receive payments from the clearinghouse for
purchases and sales they have made for their clients. At
the same time, all stock certificates will be delivered to and
obtained from this central institution.
Listed company
A corporation that offers and lists its shares in the
stock exchange is called a listed company or issuer. A
listed company is also known as a publicly owned company
in view of the fact that its shares were sold to the investing
public. These are the companies that raised their required
funds through such issuance of securities to the public. The
capital raised provides the company with the necessary
funds to be invested in business facilities and equipment.
An issuing company becomes a listed company, whose
shares are traded in the stock market, after it has met the
strict listing requirements imposed by the stock exchange.