WEEK 1: STOCK MARKET TRADING
INTRODUCTION
Owning shares is one of the greatest tools to wealth creation you can find. Shares, apart from owning fixed property,
should form the cornerstone of any investment portfolio. You do however need a firm understanding of the stock
market basics before dipping your toes (and your money) into the sea of opportunity which is the stock market. It is like
having a business but not having to show up at work.
LESSON PROPER
Introduction to Securities Market
The securities markets provide a regulated framework for efficient flow of capital (equity and debt) from investors to
business in the financial market system. Securities markets are basically a platform for allocation of savings to
investments. Like any market, the securities market is also a place where buyers and sellers get together; the only
difference being that the securities market also contributes to capital formation, apart from providing liquidity and price
discovery. Due to the power of securities markets, the savings of households, business firms and government can be
channelized to fund the capital requirements of a business enterprise.
Key Characteristics of Securities
Before we understand what are securities markets let us first understand what a Security is? A security could be a
share / bond or any other financial instrument that has value or is linked to an underlying instrument that has value.
According to the Securities Contracts Regulation Act (SCRA), a security is one that is exchange tradable. Here are some
key features of securities; as applicable to financial markets.
Securities represent the terms of exchange of money between two parties; the buyer and the seller in this case.
Securities can be issued by borrower’s/ equity funders to raise money at a reasonable cost and gives security
ownership to investors.
Businesses issue securities to raise money from investor with surplus funds through a regulated contract and a
regulated and monitored mechanism.
While the issuer of the security provides the terms for raising capital, investors have a claim to the rights
represented by the securities.
Securities can be broadly classified into equity (risk participation) or debt (claim on cash flows).
While debt securities are issued for a specific period, equity securities are perpetual. Debt securities pay interest
while equity pays out dividends, but it is not assured.
Security Markets: Structure and Participants
Securities market can be broken up into three broad segments, although both are very closely inter-related.
1. Primary market refers to the segment of the market where the securities are issued by companies either as a
new issue or as an offer for sale. Both equity and debt securities have a primary market where they are first issued.
2. Secondary markets are where the actual trading of these securities takes place. Primary issues of debt and
equity eventually get traded in the secondary market for price discovery. The secondary market is the normal
trading market.
3. Derivatives market deals in futures and options. Unlike equities that signify ownership, derivatives are just
contracts and are used to manage the risk underlying in the security. Traders can also trade in derivative contracts.
Let us now turn to the key participants in the securities market
Investors are individuals or institutions with surplus funds which are used to purchase securities. The objective of
investors is to convert savings into financial investments. Such investors can be retail or institutional.
Issuers are the businesses or fund raisers looking to raise money by issuing securities. They issue securities for short-
term and long-term capital needs of the business. Issuers include companies, governments, financial institutions, mutual
funds etc.
Other than the issuers and the investors who are the essential participants, there are a number of intermediaries who
make the smooth functioning of securities market possible.
Key Intermediaries in the Securities Market
Intermediaries, as the name suggests, are agents coordinating between investors and issuers. SEC (Intermediaries)
Regulations, 2008, classifies intermediaries as follows.
AMCs / Portfolio Managers manage a portfolio of securities and offer units that represent participation in a pool
of money. They help investors diversify risk and build wealth.
Investment bankers or lead managers manage IPOs, rights issues, debt raising, and placement with institutions,
syndication and give corporate advisory services too.
Underwriters guarantee the sale of an IPO and give comfort to issuers by undertaking to take up shares that
don’t get sold. They are paid an underwriting fee for this service.
Brokers are registered trading members of stock exchanges and they execute transactions in the secondary
market. They also market IPOs and also give appropriate advice to clients.
Sub-brokers / Franchisees are affiliated to brokers and help the brokers to reach out to a larger network of
investors in specific geographies.
Clearing members are members of the stock exchange who are responsible for the clearing and settlement of
trades on a daily basis on the stock exchange.
Bankers to an issue are appointed during IPOs, to collect application forms and monies from investors and
coordinate with lead managers and facilitate transfer of funds.
Registrars & Transfer Agents (RTAs) maintain the record of investors on behalf of the issuer. They manage
allotment of IPOs, effect transfer of ownership and execute corporate actions.
Depository Participants (DPs) are the link between the depository and the investors. They hold the shares of
investors in custody in electronic form.
Custodians are to institutional investors what the DP is to retail investors. Custodians manage transactions
pertaining to delivery of securities and money after a trade is made through the broker, and also provides
accounting for securities and money.
Trustees are appointed when beneficiaries may not be able to directly supervise if money invested is being
managed properly. Mutual funds and debentures have trustees.
Credit rating agencies rate a debt security based on the ability of the company to service its interest and
principal obligations on time. Ratings are periodically reviewed.
Investment advisers help investors to make an informed choice of securities in a manner that is in sync with
their long term goals.
THE PHILIPPINE STOCK MARKET
What is a Stock Market?
A market is a set up where two or more parties engage in exchange of goods, services and information. Ideally a market
is a place where two or more parties are involved in buying and selling (Buyers and Sellers). The Philippine stock market
is the place where people can invest in ‘publicly listed’ companies in the Philippine Stock Exchange (PSE).
There are different types of market namely:
Commodity Market (Shopping malls, dep’t stores, retail stores);
Virtual market (online shopping, eBay, Lazada etc.);
Auction Market (Subasta sales, Auction sales);
Factor Market (exchange of raw materials to produce other goods);
Black Market (exchange of illegal goods like drugs and weapons);
Knowledge Market (exchange of information and knowledge based products); and
Financial Market (exchange of rights and liquid assets like money).
Stock Market, as the name suggests, is just another type of the Financial market.
Financial markets are of the following types:
Bond Market (exchange of long-term debt securities, usually in the form of bonds);
Money Market (lending and borrowing on short-term basis, exchange of short-term securities);
Foreign Exchange Market/ Currency market (trading of currencies);
Predictive Markets (exchange of good or service that takes place for the future)
and in a Stock market, sellers and buyers exchange shares or what we call STOCKS.
WHAT IS STOCK?
Stocks are shares of ownership in a corporation. The stock market is a place where stocks are bought and sold. The
Philippine Stock Exchange (PSE) is the corporation that governs our local stock market. People buy or invest in stocks to
benefit from a company's tremendous value potential over time.
Once you buy or invest into a stock you now become part owner or a shareholder of that particular corporation.
A stock what its name suggests – you share in the ownership of a company. It represents a claim on the company’s
assets and earnings. It is sometimes called equity or shares but they all mean the same thing.
Holding a company’s shares means that you are one of the many owners (shareholders) of a company and have claim to
everything it owns. This claim is usually very small but you are entitled to your portion and hold your voting rights.
Shares were held in certificate form but electronically held shares have become the norm. All Philippine shares are held
by Securities and Exchange Commission (SEC) in electronic format. This makes it far easier to trade the shares at the click
of a mouse button. Share certificates had to be taken to the broker and then to the transfer secretaries which made it
and difficult task.
Being a shareholder does not give you title to the day-to-day running of the business. Your extent to which you have a
say in the company is limited to one vote per share at annual meetings where you vote for the board of directors. Being
a shareholder of San Miguel Breweries does not entitle you to walking into their plant in all parts of the country and
helping yourself to a couple of beers or calling the Chief Executive Officer to share your ideas on how they should run
the company.
Large institutional shareholders have the biggest say in the appointment of management and they have to increase the
value of the company for shareholders. Profits are shared in the form of dividends. Your claim on the assets is only
relevant should the company go bankrupt.
An important feature of owning shares is your limited liability should the company not be able to pay its debt. No matter
what happens, the maximum value you can lose is the value of your investment in that company. Your personal assets
are never under threat should the company go bankrupt.
How to make money in stocks?
As a Shareholder, you can now participate in the company's growth and success through stock Price Appreciation and by
earnings Dividends.
Capital or price appreciation is an increase in the market price of your stock over time brought about by an increase in
its potential value and the demand to buy its shares. The faster a company can grow, the faster its price can appreciate.
Profitable corporations can also issue dividends, whether in cash or in additional shares of stock as a means for
shareholders to share in their distributed profits.
Why Invest in the Stock Market?
History has proven that investing in quality stocks can provide greater returns than most investment instruments. This
offers you the best chance in achieving your financial goals and gives you the ability to later enjoy the benefits of your
money working for you.
The track record of the stock market also shows that a good basket of stocks climb more often than decline - reducing
risk over the long-term.
Another reason why stocks can outperform other asset classes is because it can compound the value of your investment.
Companies can reinvest the profits they make to generate even more profit. Moreover, any dividends you receive can
also be used to buy more shares and thereby enlarging your overall value as well.
THE PSE and PSEi
The Philippine Stock Exchange, Inc. (“PSE” or the “Exchange”) is a private organization that provides and ensures a fair,
efficient, transparent, and orderly market for the buying and selling of securities.
PSE traces its roots from the country’s two former bourses: the Manila Stock Exchange (“MSE”) and the Makati Stock
Exchange (“MkSE”). Founded in March 1927, the MSE was the first stock exchange in the Philippines and one of the
oldest in Asia. MkSE, on the other hand, was established in May 1963 and became the second bourse to operate in the
country.
While trading the same listed issues, MSE and MkSE remained separate entities for almost thirty years. December 23,
1992 marked a milestone for the Philippine capital market when the MSE and MkSE were unified to become the PSE. At
present, PSE maintains two trading floors—one in Pasig City and another in its head office in Makati City.
In June 1998, the Securities and Exchange Commission conferred to the PSE the status of a Self-Regulatory Organization,
which allows the PSE to implement its own rules and impose penalties on erring trading participants and listed
companies. In 2001, the PSE was reorganized and transformed from a non-stock, member-governed organization into a
shareholder-based, revenue-generating corporation. On December 15, 2003, PSE shares were listed by way of
introduction.
Week 3 & 4
How do I make my money grow in the Stock Market?
“Through capital appreciation or when there is an increase in the market price of your stock, and through dividends
issued by the company you invested in.”
There are two ways to make your money grow in the stock market:
1. Through an increase in stock price or capital appreciation
Capital appreciation is an increase in the market price of your stock. It is the difference between the amount you paid
when buying shares and the current market price of the stock. However, if the company doesn’t perform as expected,
the stock’s price may go down below your purchase price. For example, if you buy a share of stock at Php100.00, and it
rises to Php110.00, your capital appreciation or gain is Php10.00. Keep in mind, though, that you only realize your gain of
Php10.00, if you sell at Php110.00. If you choose to hold it and it further increases to Php150.00, your capital gain would
be Php50.00. However, if your stock decreases to Php100.00 then sell it at that price, your capital gain is zero.
2. Through dividends declared by the company
Dividends are paid out to shareholders, representing earnings of the company that is not going to be reinvested in their
business. In general, there are two types of dividends that can be given by companies: cash and stock dividends.
Cash dividend is the earnings for every share of stock declared by the company. So, if the company declares a dividend
of 25 centavos per share, a stockholder with 10,000 shares will receive a cash dividend of Php2,500.00, gross of tax
(Php0.25 x 10,000) in cash.
Stock dividends are additional shares given to shareholders at no cost. If the company declares a 25 percent stock
dividend, a stockholder with 10,000 shares will be entitled to an additional 2,500 shares of stock. These shares can also
be sold anytime after the shares have been issued.
INVESTMENT or TRADING Guidelines
1. Start to save as much as you can as soon as you can.
2. Be sure that the money you will invest in stocks is an amount that you can set aside for long-term investment
3. Know your investments or Trade. Understand more about the company you are looking to trade or invest in.
4. Do not put all your eggs in one basket. Try to maintain a portfolio of at least three to five good stocks.
5. Plan your trade and trade your plan.
When should I start stocks Investing?
“Time is your most precious asset. Those who start investing sooner rather than later have a tremendous advantage.”
When it comes to investing in stocks, time is your most precious asset. The longer your time horizon is, the more time
you have to make your money grow.
Compounding is, in fact, the single most important reason for you to start investing right now in stocks. It is the
multiplier effect that occurs when earnings or dividends on your investments begin to generate their own earnings.
Every day you are invested is a day that your money is working for you.
Investing helps you ensure a financially secure and stable future.
Starting Age 25
Annual Investment Php 60,000.00
Years Investing 10 years
Total Investment Php 600,000.00
Ending Value at age
Php 20,189,953.00
65
Starting Age 35
Annual Investment Php 60,000.00
Years Investing 10 years
Total Investment Php 600,000.00
Ending Value at age
Php 7,784,101.00
65
Starting Age 45
Annual Investment Php 60,000.00
Years Investing 10 years
Total Investment Php 600,000.00
Ending Value at age
Php 3,001,108.00
65
NOTE: The above hypothetical examples are assumed to grow by 10% a year. This is for illustrative purposes only.
Those who start investing sooner rather than later have a tremendous advantage. If you keep your money in good
quality stocks over the long-term, and then reinvest the dividends earned as you receive them, your investment grows
exponentially over time.
How much of my savings should be invested in stocks?
To determine how much you can afford to invest, you need to determine your financial net worth (what you own minus
what you owe).
A portion of your funds should be in short-term liquid investments, such as bank savings, time deposits, and Treasury
bills, to cover living expenses, and any possible emergencies. The amount to keep will vary according to your individual
lifestyle. A practical rule of thumb is to keep at least 6 to 12 months’ worth of living expenses in short-term liquid
investments. The remainder of your savings can be invested in medium or long-term instruments such as bonds, stocks
or both, depending on the time horizon of your financial goals.
A more conservative approach is to keep at least 75% of your savings in short to medium-term fixed income
instruments. The balance of 25% can be set aside for your investment in stocks.
How do I keep track of the stock market and my investments?
It is always good practice to be informed about your investments and there are several ways by which you can monitor
the stock market and your stock investments, particularly, for stock price movements, corporate news and updates, and
other relevant market information.
1. The PSE website ([Link]) is a very good source of information about the stock market and the specific stocks
that you invest in. The following are some of the basic information available to you in the website:
I. PSE News
II. Corporate Disclosures
III. Market Information
a. Stock Quotes
b. Gainers/Losers
c. Active Stocks
d. Dividends/Rights
IV. The PSE Index Chart
V. Listed Company Update
VI. IPO News
VII. PSE Regulations
VIII. Trading Participant News
You may also log on to the official market education website of the PSE, the PSE Academy ([Link]),
for a full access to free downloadable reading materials and video books.
2. The PSE Library contains a wealth of stock market-related reports, books, and other reading materials. It is open to
the public for free from 9:00 a.m. – 12:00 n.n. and from 1:00 p.m. - 4:00 p.m., Mondays to Fridays. The library is
located at the 3/F PSE Plaza, Ayala Triangle, Ayala Avenue, Makati City. You can contact the PSE Library at
telephone number (632) 688-7525.
Stock market related publications are also available at the PSE Public and Investor Relations Section (PIRS) at the 2/F PSE
Plaza, Ayala Triangle, Ayala Avenue, Makati City, with telephone number (632) 819-4100.
3. Contact your stockbroker or access your account online for any market information and details of your investments.
You can also find information on prices, bid and ask values, traded volumes, and research reports and analysis on
listed companies.
4. Stock market information from major newspapers, television, radio, and the Internet.
For traditional stockbrokers, settlement of all transactions, either buying or selling, is usually done after three (3)
working days from the transaction date or T+3. This means that the buyer must pay for the costs of the transaction to his
stockbroker within 3 working days after the trade was done. Similarly, the seller will receive the proceeds of the sale
from the stockbroker after the third day from the transaction date.
For online stockbrokers, settlement of all transactions is done on the transaction date. To buy shares of stock, you will
need to fund your account prior to any purchase. In the same manner, the proceeds of your sale will be credited to your
account not later than 3 working days from the transaction date.
Trading in the Philippine stock market is daily, Mondays to Fridays, except during holidays or when the Bangko Sentral
ng Pilipinas Clearing Office is closed. Effective January 02, 2012, the trading schedule will have a morning and afternoon
session. The morning session is from 9:30 a.m. to noon, while the afternoon session starts from 1:30 p.m. until 3:30 p.m
including a 15-minute run-off period. Note that you can start placing your orders 30 minutes before the market opens or
at 9:00 a.m.
If you want to exercise your trading skills and gain more confidence before actually investing, we encourage you to try
the “PSE Stock Trading Game.” To join, log on to the PSE website ([Link]) and click the “Stock Trading Games”
link found under the Online Systems section at the left hand side of the PSE home page.
What are the costs of trading?
These are the basic charges involved in buying and selling stocks:
TYPE OF FEES AMOUNT
1. Stockbroker’s commission plus 12% Value-added Tax 0.25% to 1.5% of transaction amount or a minimum of
on commissions * Php20.00, whichever is higher
2. Clearing Fee 0.01% of transaction amount
3. PSE Transaction Fee 1/200 of 1% of transaction amount
4. Stock Transaction Tax 0.5% of transaction amount
Note: *Varies depending on stockbrokers’ fee structure
Who are the stock market participants?
1. Philippine Stock Exchange (PSE)
The role of the PSE goes beyond bringing buyers and sellers together and facilitating sale and purchase of stocks. It
makes sure that these transactions are done in an efficient, orderly, fair, and transparent manner. It enforces rules and
regulations that its members (publicly listed companies and trading participants) must strictly abide by. In this way, the
PSE fulfills its function as the guardian of the stock market.
The PSE also plays a key role in bringing about economic development by providing a centralized environment where
companies in need of capital have easier access to funds through stock investors. Companies can sell their shares
through an Initial Public Offering (IPO) to potential investors. Through this, they can expand their business to produce
more goods and services as well as create more jobs. The investing public can own a part of the company with the
assurance that their investment interests are safeguarded by the PSE.
2. Publicly Listed Companies
A company becomes publicly listed when its shares are traded in the PSE. To become a publicly listed company, a
company must meet the stringent listing and reportorial requirements of the PSE to safeguard the investors’ interests
and ensure transparency.
3. Trading Participants or Stockbrokers
A Stockbroker or Trading Participant acts as an agent/broker between buyer and seller of stocks in the stock market. A
Trading Participant is licensed by the Securities and Exchange Commission and is a member of the PSE, authorized to
execute orders for purchases or sales of stocks.
4. Stockholders or Investors
Investors in stocks or stockholders are those who own shares of stock of a publicly listed company, at least until the time
that they decide to sell them. Stockholders are accorded certain rights set by the PSE. These rights are accorded to them
by the company they have now become part owners of.
How are stocks traded?
Once you open a stockbrokerage account, you can start buying and selling stocks. Placing an order can be done by
calling your stockbroker and discussing with him or her the listed companies you want to invest in, the price at which
you want to purchase or sell the stocks, and the amount of shares you would like to buy or sell. Alternatively, you can
place your buy or sell order directly through your online trading account with your online stockbroker.
When a buy or sell order is placed for any listed company on the Philippine Stock Exchange (PSE), the stockbroker or
trading participant (TP) transmits the order electronically to the PSE. All trades or executed transactions can be viewed
on the ticker tape report real-time. You can monitor the trades on the ticker tape on TV, such as ABS-CBN News Channel,
Insular Board in Makati City, and through PSE’s and stockbrokers’ websites.
Upon placement of a buy or sell order, your stockbroker will give you a confirmation receipt as proof of your trade. After
a period of one trading day and another working day (T+1), you should receive a written confirmation of your order. If
you placed your order online, you should receive your order confirmation immediately or within 24 hours.