WEEK 2: Introduction to Equity (g) Other instruments as may in the future be

Markets and Securities determined by the Commission(Securities and

Exchange Commission).
Securities – defined as a financial instrument
or financial asset that can be traded in the open TYPES OF SECURITIES
market. E.g., a stock, bond, options contract, or Debt Securities – involved borrowed money and
shares of a mutual fund, etc. the selling of a security.
Republic Act No. 8799 Equity Securities – refers to stocks and a share
or the Securities Regulation Code (portion) of ownership in a company.

– defined as shares, participation or interests in a Derivative Securities – instruments whose value

corporation or in a commercial enterprise or depends on (underlying assets) basic variables.
profit-making venture and evidenced by (could be
Hybrid Securities – combines characteristics of
in a form of) a certificate, contract, instruments,
both debt and equity securities.
whether written or electronic in character.
- fungible(or tradable in nature), negotiable Real VS Financial Assets
financial instrument that holds some type of
monetary value Real Assets (Non-financial Assets) are the assets
that a business or investor owns, such as land,
- represents an ownership position in a publicly- building, and more. These are used to produce
traded corporation via stock; a creditor goods and services. (Mahirap itrade, tangible in
relationship with a governmental body or a nature).
corporation represented by owning that entity's
bond; or rights to ownership as represented by an A financial asset, on the other hand, are liquid
option. assets that one can easily or quickly convert into
cash, such as stock, bonds, and securities, etc.
Certificate of Ownership – certificate issued in these are claims on real assets or claims on asset
equity securities (Stock Market) income.
Certificate of Indebtedness – certificate issued in
Bond Market Market and Market Structure
It includes: Market - is a place where buyers and sellers can
meet to facilitate the exchange or transaction of
(a) Shares of stocks, bonds, debentures, notes goods and services.
evidences of indebtedness, asset-backed
securities; Market structure - refers to how different
industries are classified and differentiated based
(b) Investment contracts, certificates of interest or on their degree and nature of competition for
participation in a profit sharing agreement, goods and services.
certificates of deposit for a future subscription;
Types of Market Structure:
(c) Fractional undivided interests in oil, gas or
other mineral rights;
• Perfect Competition
(d) Derivatives like option and warrants; - occurs when there is a large number of
small companies competing against
(e) Certificates of assignments, certificates of each other
participation, trust certificates, voting trust - sell similar products (homogeneous),
certificates or similar instruments lack price influence over the
commodities, and are free to enter or
(f) Proprietary or nonproprietary membership exit the market
certificates in corporations; and
 • Oligopoly Saves time and money - serve as a platform
- consists of a small number of large where buyers and sellers can easily find each
companies that sell differentiated or other without making too much efforts or wasting
identical products time.
- competitive strategies are dependent
Structures of Financial Markets:
on each other
- strategic planning by these types of By Nature of Claim
players is a must
• Monopoly • Debt Market: The market is the market
- a single company represents the wherein fixed claims or debt instruments,
whole industry such as debentures or bonds, are traded
- no competitor, and it is the sole seller between investors (debt securities).
of products in the entire market • Equity Market: A market wherein the
- restrict other companies from entering investors buy and sell equity
the market; has the power to control instruments(such as stocks). It is the
the market and set prices for its good market for equity claims (equity securities).
• Monopolistic Competition
- refers to an imperfectly competitive By Timing of Delivery
market with the traits of both the
• Cash Market: This market can be defined
monopoly and competitive market
as a market where all the transaction are
- sellers compete among themselves
settled in real-time between buyers and
and can differentiate their goods in
sellers.
terms of quality and branding to look
• Futures Market: Futures market is one
different.
wherein commodities are delivered at a
future specified date.
Financial Market
By Organizational Structure
- primarily refers to a marketplace where buyers
and sellers participate in the trade. • Exchange-Traded Market: This market has
a centralized organization with the
- known for transparent pricing, strict regulations, standardized procedure.
costs and fees and clear guidelines. • Over-the-Counter Market: This market is
characterized by a decentralized
- acts as an intermediary (middle man) between organization, having customized
savers and investors, or they help savers to procedures.
become investors. On the other hand, they also
help businesses to raise money to expand their By Maturity of Claim
business.
• Money Market: The market where
“No such thing as free lunch” means lahat ng monetary assets such as commercial
transactions in financial industry entails cost. paper, certificate of deposits, treasury bills,
etc. which mature within one year or less,
Functions of Financial Markets: are traded is called money market.
• Capital Market: The capital market is
Price Determination - interaction between
defined as a market wherein medium and
investors, industries and other market forces
long term financial assets are dealt with. It
helps to determine the price(of a certain security).
can be further divided into two types:
Mobilization of Savings - helps in connecting
Primary Market: A financial market, wherein the
those with money with those who require money.
company listed on a stock exchange, for the first
Ensures Liquidity - investors can easily sell those time, issues new security or already listed
assets and convert them into cash whenever they company brings the fresh issue. It is also known
want. as IPO.
Secondary Market: Alternately known as the • Banker’s Acceptance
Stock market, a secondary market can be defined - a form of short-term debt that is issued
as an organized marketplace, wherein already by a firm but guaranteed by a bank
issued securities are traded between investors, - created by a drawer, providing the
such as individuals, merchant bankers, bearer the rights to the money
stockbrokers and mutual funds. indicated on its face at a specified date.
- often used in international trade
because of the benefits to both the
The Money Market
drawer and the bearer
- an organized exchange market where - maturity date usually lies between one
participants can lend and borrow short-term, high- month and six months from the issuing
quality debt securities with average maturities of date
one year or less.
• Repurchase Agreement (Repo)
Types of Instruments Traded in the Money Market: - a short-term form of borrowing that
involves selling a security with an
• Treasury Bills agreement to repurchase it at a higher
- issued with a full guarantee by the price at a later date
government - commonly used by dealers in
- issued to refinance Treasury bills government securities who sell
reaching maturity and to finance the Treasury bills to a lender
government’s deficits - agreements’ date of maturity ranges
- short-term in nature, usually with tenors from overnight to 30 days or more
of 91, 182 and 364 days and sold at a - Federal Reserve buys repurchase
discount agreements as a way of regulating the
money supply and bank reserves
• Certificate of Deposit (CD)
- issued directly by a commercial bank, • Eurodollars
but it can be purchased through - dollar-denominated deposits held in
brokerage firms foreign banks, and are thus, not subject
- fixed maturity date and interest rate, to Federal Reserve regulations
and they attract a penalty for - very large deposits of eurodollars are
withdrawing prior to the time of maturity held in banks in the Cayman Islands
- short-term in nature, usually with and the Bahamas
maturity date ranging from three - pay a slightly higher interest rate than
months to five years and can be issued U.S. government debt
in any denomination.

• Commercial Paper The Bond Market

- unsecured loan issued by large
institutions or corporations to finance - is where investors go to trade (buy and sell) debt
short-term cash flow needs securities, prominently bonds, which may be
- only institutions with a high credit rating issued by corporations or governments. By
can issue commercial paper buying a bond, credit, or debt security, you are
- issued in denominations of $100,000 lending money for a set period and charging
and above interest—the same way a bank does to its
- comes with a maturity date between debtors.
one month and nine months.
 The Equity Market • Swaps
- involve two holders, or parties to the
- a market in which shares of companies are contract, to exchange financial obligations
issued and traded, either through exchanges or - over-the-counter products, which means
over-the-counter markets. they are not regulated and are not bound
- gives companies access to capital to grow their by specific trading rules and regulations
business, and investors a piece of ownership in a - unstandardized, meaning customizable to
company with the potential to realize gains in their suit the requirements of both parties
investment based on the company's future involved
performance. - Interest rate swaps are the most common
swaps contracts
The Derivatives Market

- refers to the financial market for financial Alternative Investments

instruments such as futures contracts or options
that are based on the values of their underlying - is a financial asset that does not fall into one of
assets. the conventional investment categories (stocks,
bonds, and cash)
Types of Derivatives Contract:
- include private equity or venture capital, hedge
• Options funds, managed futures, art and antiques,
- give the buyer the right, but not the commodities, and derivatives contracts
obligation, to buy or sell an underlying
- real estate is also often classified as an
asset at a specific price (referred to as the
alternative investment.
strike price) during a specific period of time
• American Options - exercised at any time
before the option’s expiry
• European Options - can only be exercised on WEEK 3: Securities and FOREX
its expiration date.
Financial Markets and the Economy
• Futures
- standardized contracts that allow the - developed considerably since the Asian
holder of the contract to buy or sell the Financial Crisis (AFC)
respective underlying asset at an agreed - financial liberalization, prudential supervision,
price on a specific date and regulatory reforms have
- not only possess the right but also are
under the obligation, to carry out the significantly improved the stability, efficiency,
contract as agreed depth, and accessibility of the domestic financial
- standardized, meaning they are traded on markets and institutions
the exchange market.
- expansion in the share of foreign funding
• Forwards
- rise in the external indebtedness of the non-
- similar to futures contracts in the sense
financial sector
that the holder of the contract possesses
not only the right but is also under the - the adoption of measures to improve monetary
obligation to carry out the contract as operations of the BSP
agreed
- over-the-counter products, which means - helps reduce risk concentration and increase
they are not regulated and are not bound market resilience
by specific trading rules and regulations
- unstandardized, meaning customizable to - greater global integration has also increased
suit the requirements of both parties systemic risk
involved.
 Financial System Third or Fourth Market – trade exchange listed
securities and are pure order driven markets,
– is a network of financial institutions – such as where price discovery is initiated by investors and
insurance companies, stock exchanges, and all matching of buyers and sellers is via an
investment banks – that work together to electronic network.
exchange and transfer capital from one place to
another. Order Types:

Clients of the Financial System Market Orders – “buy” or “sell” orders for a
specified quantity at the best currently available
• Investors - through the financial system, prices (the highest current bid and the lowest
they receive capital to fund projects and current ask).
receive a return on their investments.
• Banks – includes public, commercial, Limit Orders – traders specify both the price and
central, cooperative, state-managed quantity they want to trade. A buy order is
cooperative, and state-managed land executed if the ask drops to the price, and a sell
development banks. order is executed if the bid rises to the price.
• Non-bank Financial Institutions – includes Stop Order – lets traders lock in their profits or
finance and loan companies, insurance limit losses on existing positions.
companies and mutual funds.
Investment Banking
Dates Associated with Securities Trades
- a specific division of banking related to the
creation of capital for other companies, Trade Date (TD)
governments, and other entities. • the date of trade execution, applicable to
trades
- include underwriting new debt and equity • executed directly between two
securities, aiding in the sale of securities, and parties
helping to facilitate mergers and acquisitions, • executed between an exchange
reorganizations, and broker trades for both member and the exchange
institutions and private investors. • important that the TD is accurate –
impacts entitlement to equity income
- Investment bankers help corporations, events
governments, and other groups plan and manage
the financial aspects of large projects Value Date (VD)
• intended settlement date (aka
- Goldman Sachs, Morgan Stanley, JPMorgan Contractual Settlement Date)
Chase, Bank of America Merrill Lynch, and • forward looking; determined at time of
Deutsche Bank trade execution
• in most cases, VD is the default
Securities Trading “settlement cycle” (e.g. T+1, T+2)

- Publicly traded securities are listed on stock Settlement Date (SD)

exchanges/over-the-counter • date settlement actually occurred (aka
Actual Settlement Date)
Primary Market - Initial Public Offering (IPO) - • backward-looking; known only after
company's first major sale of equity securities to settlement has occurred
the public • if SD = VD = settlement has occurred ‘on-
Secondary Market (aftermarket) – securities are time’
simply transferred as assets from one investor to • if SD is later than VD = settlement ‘failure’
another = delayed settlement
 Trading Participants Local Exchange (PSE and PDEX)

Stock Exchange – an organized marketplace or 1927 – Establishment of the Manila Stock Exchange
facility that brings buyers and sellers together and (MSE)
facilitates the sale and purchase of stocks 1963 – Establishment of the Makati Stock Exchange
(MkSE)
Investors – also referred to as stockholders or 1992 - Consolidation of MSE and MkSE into the
shareholders, are those who own shares of stock Philippine Stock Exchange (PSE)
of a publicly listed company 1995 – Launch of an electronic auction system for
bonds
Listed Companies – also called “issuers”, are 1997 – Launch of scripless government securities
those whose shares of stock are traded on the 1998 – Launch of Small Investors Program for
Exchange government bonds, which lowered the minimum
denomination from PHP10 million to PHP25,000
Stockbrokers – act as an agent between a buyer 2001- The PSE transformed from a nonprofit,
and seller of stocks in the market. For their nonstock, member-governed organization into a
shareholder-based, revenue-earning corporation;
services as stockbrokers, they receive from their
Government bonds were first listed and traded on PSE
clients either a buying or a selling commission. 2003 – Incorporation of the Philippine Dealing &
• Traditional – those who assign a licensed Exchange Corp. (PDEx): Listing of the PSE on the
salesman to handle your account and to take local stock exchange
your orders via a written instruction or a
phone call. The Philippine Stock Exchange, Inc.
• Online – those whose main interface is the
internet where clients execute their orders - was incorporated on July 14, 1992 as a non-
and access market information online stock corporation with the primary objective of
providing and maintaining a convenient and
Clearing House – Securities Clearing Corporation suitable market for the exchange, purchase and
of the Philippines (SCCP) – responsible for sale of all types of securities and other
establishing the cash and securities liabilities and instruments; became a stock corporation on
entitlements of its clearing members August 3, 2001.
Depository – Philippine Depository and Trust - has two wholly-owned subsidiaries, the
Corp. (PDTC) – acts as securities depository or Securities Clearing Corporation of the Philippines
“custodian” of listed shares of stock that are (SCCP) and the Capital Markets Integrity
traded at the PSE. Corporation (CMIC)
The PDTC performs book-entry transfer of
securities: - current President and Chief Executive Officer of
the Philippine Stock Exchange, Inc. (PSE) is
1. From seller’s to buyer’s accounts during Ramon S. Monzon.
settlement of Exchange trades;
2. From one PDTC participant to another per The Philippine Dealing & Stock Exchange
client instruction, and; Corp. (PDEx)
3. From lender’s to borrower’s account for
- was incorporated in 2003 to provide trading
loan transactions.
infrastructure for the fixed-income (FI) market.
Settlement Banks – duly licensed commercial
- PDEx operates the organized secondary market
banking institution accredited by SCCP for the
for the trading of FI securities which includes both
clearing and settlement of the Cash Element of
Government and Corporate Securities.
SCCP-Eligible Trades. Each settlement bank has
connectivity with CCCS real-time and online. - responsible for calculating the Philippine
Dealing System Treasury Reference Rates
Transfer Agents – “official keeper” of the
(PDST Rates). This system may be used as the
corporate shareholder records. The stock transfer
basis for valuing and marking-to-market interest
agents provide the issuer or the listed company
rate-sensitive instruments
with a list of holders of its securities.
- current President and Chief Executive Officer of Elements of an FX Cash Flow
the Philippine Dealing & Exchange Corp. (PDEx)
is Ma. Theresa B. Ravalo. • Direction
o Inflow or Outflow
• Currency Involved
Foreign Exchange (forex or FX) o Currency bought and currency sold
• Value Date
- is the trading of one currency for another o Spot or Forward
- can take place on the foreign exchange market, • Domicile
also known as the forex market o Locus of Settlement

- largest, most liquid market in the world, with

trillions of dollars changing hands every day (FX
Currencies in an FX Transaction
market recorded USD5.3T in 2013)
- an electronic network of banks, brokers, Commodity Currency is
institutions, and individual traders (mostly trading a currency in forex that
through brokers or banks) comes from a country
with large reserves of
some specific valuable
Foreign Exchange (FX) Contract item, or commodity.
Terms Currency is the
currency in which an
exchange rate is
quoted.

ISO International Standard 4217 (International

Currency Codes)

Parties involved in an FX Transaction

Market makers (or sometimes referred to as
Quoting Party) are professional traders who
offer to sell securities at a given price (the ask
price) and will also bid to purchase securities at a
given price (the bid price).
Price takers (or sometimes referred to as Calling
Party) come into the market and trade on existing
orders. If a price taker wants to buy, the contract
must be bought at a price maker's offer, and if a
price taker wants to sell, the contract must be sold
at a price maker's bid. Price Taker has to deal at
the price of Market Maker.
Reciprocal Currency Determining Forward Value Date
- describes a situation where a currency pair Fix the Spot Date
involves the U.S. dollar (USD), but the USD is not
the base currency; instead, it is the quote • Transaction Date June 16
currency (also known as the counter currency). • Spot Value Date (T+2) June 18

Remember the abbreviation K.A.P.E. on Rules in determining the Forward Value Date
reciprocal currency which includes the following:
Date-to-Date Rule
• K – Kiwi – NZD/USD
• 1-month Forward July 18
• A – Aussie – AUD/USD
• P – Pound – GBP/USD Month-end to month-end Rule
• E – Euro – EUR/USD
• Transaction Date June 28
• Spot Value Date (T+2) June 30
• 1-month Forward July 31
Understanding a Two-Way Quote
Quote – the price at which an asset can be traded;
it may also refer to the most recent price that a
buyer and seller agreed upon and at which some
amount of the asset was transacted.
Two-way (or two-sided) quote – indicates both the
current bid price and the current ask price of a
security during a trading day on an exchange. A
two-way quote tells traders the current price at
which they can buy or sell a security.
Bid Price – maximum price that a buyer is willing
to pay
Ask Price – minimum price that a seller is willing
to take
Spread – difference between the bid and the ask,
giving traders an idea of the current liquidity in the
security.

What is a Pip?

Last significant digit in a quote; depends on how

a currency pair is quoted, different from basis
point.