Equity – difference between assets and THREE MAJOR FORMS OF BUSINESS

liabilities. Represents ownership of a firm. ORGANIZATIONS

Equity instrument – type of financial instrument 1. Sole proprietorship – an individual

wherein the company (issuer) agrees to pay the personally owns the business. No
amount to the investor in the future based on distinct personality from the owner. The
the future earnings of the company. Most owner is responsible for all debts and
common example is shares. obligations. Owner has full control on
the decision.
Shares / Stocks – ownership in a company.
2. Partnership – formed by two or more
Shareholder / Stockholder – individual who person. Is a separate legal entity.
owns a share. Partners are still obliged to pay the
debts of the partnership. In case of
Stock certificates – legal document which bankruptcy, creditors can compel
certifies the ownership. partners to pay in extent of their
Company – issuer personal assets.
3. Corporation – legal entity, separate and
Shareholders – investor distinct. Limited liability, responsibility
Authorized capital stock – total maximum is only up to the extent of their capital
amount stated in the Articles of Incorporation contribution.
that can be subscribed to or paid by investors of METHODS OF EARNING IN EQUITY SECURITIES
a corporation if the shares have a par value.
1. Capital appreciation – rise in the value
Par value – nominal amount of the value of of the asset in relation to the increase in
shares that is indicated in the face of stock its market price. Market prices of shares
certificate can be very volatile and may change
NOTE: A company cannot issue additional from time to time. Capital depreciation
shares in excess of authorized capital stock but is the investment loss in value because
it can be increased by amending the Articles of of a lower market price of the share.
Incorporation. NOTE: Gain/ loss will only be realized
when shares are sold.
NOTE: If the shares have no par value, the 2. Dividends – payments made by the
corporation does not have an authorized capital corporations to shareholders
stock, but it has an authorized number of shares representing excess earnings of the
it may issue. company. Usually paid quarterly, but
may be paid semi-annually or annually.
Outstanding shares – total shares of stock
It is distributed based on discretion and
issued under binding subscription agreements
approvals of BOD. It can be in the form
to subscribers, whether partially or fully paid. It
of cash (most common), property, or
does not include treasury shares.
own shares. It is only paid after all
Treasury shares – shares that are repurchased claims from debt (maturing interest and
by the company from its stockholders. principal repayments) are settled. It is
note dependent to capital appreciation,
Issued shares – all shares that were issued by
it is based on the current performance
the company, whether outstanding or treasury.
of the business. The ability to declare
dividends may be restricted by
covenants in loan agreements entered
TYPES OF CORPORATE OWNERSHIP
by the corporation. In the PH,
corporations are encourage to declare 1. Preference share
dividends when needed through – prioritized over ordinary.
improperly accumulated earnings tax - A fixed periodic dividend, whether
(IAET). percentage or peso amount, is
NOTE: IEAT is a penalty tax imposed on promised to holders of preference
corporations who intend to shares.
accumulated excess earnings to enable - Par value preference share – have
its shareholders to avoid paying the stated face value, expressed as
10% final tax on dividends that they percentage.
might have received if these were - No par value preference share –
declared. no stated face value, expressed in
NOTE: According to Sec. 43 of the peso amount.
Corporation Code, stock corporation are - preference shareholders do not
not allowed to maintained retained have voting rights, but corporations
earnings more than 100% of its paid-up can opt to give them explicitly in
capitalization at par. the AOI.
NOTE: Corporate taxpayers have 1 year - preference shares are treated as
from the end of the taxable year to quasi-debt, but it has no maturity
disposed of excess retained earnings. date and commonly costs the firm
more than debt.
DEBT VS. EQUITY - in instances of liquidation , the
Debt – payment is required. claim of preference shares is only
Equity – only have expectation to be up to the par value.
repaid in the future, riskier. - bond indenture is an agreement
made when PS is issued.
DEBT EQUITY
Other features:
Voice in NO YES
managemen  Cumulative – all dividends
t in arrears and current
Claim on Prioritized Subordinat dividend should be paid
assets and over e to debt first.
income equity  Callable – can
Type of Temporar Permanent retire/repurchase
financing y outstanding shares within a
Maturity YES NO predetermine period of a
Risk profile Lower risk Higher risk time of a specified date.
Return Lower Higher Call price is higher than
expectations return return issuance price but may
Tax Can be a Cannot be gradually decrease over
implications tax- a tax time.
deductible deductible
 Convertible – convert PS to
expense expense
OS after a certain date.
2. Ordinary shares STOCK MARKET
– true owners of the corporations.
- composed of exchanges and over the
- called as residual owners.
countries where shares are issued and
- dividends are not guarantee.
traded publicly.
- only advantage is limited liability.
- possess voting rights. - both physical and virtual
- granted preemptive right, it
permits ordinary shareholders to - can be considered both as primary or
retain their proportionate secondary market (SM is considerably
ownership in the firm in case of bigger than PM)
new share issuances, thereby - Stock exchange is the physical site
protecting them against dilution of where shares are purchased and sold
ownership. f2f on a trading floor. Most well known
- to exercise preemptive right is New York Stock Exchange.
company gives stock right, permits
SH to buy additional shares cheaper - Organized exchange employ floor
than MP. traders that oversee and facilitates the
- one OS = one vote trading of specific shares.
- solicitation of proxies is controlled - Floor traders are the representatives
by SEC. of different brokerage firms.
OS can be:
 Privately-owned – owned -OTC market is the market wherein
by private investors, not shares can be traded by dealers that are
publicly traded. connected electronically by computers.
 Closely-owned – owned by -Dealers (market makers) – match buy
individual investor/small and sell orders. Responsible for bid and
group of investors. ask price. Required to buy and sell a
 Publicly owned / Publicly minimum of 1,000 securities at a given
traded – owned by mix of price. Dealers can earn through 2
public and private investors, means: Spread between the bid price
shares are actively traded. and ask price or through commission on
 Widely owned – owned by trades. They ensure that there is
many unrelated individual continuous liquidity for each available
or institutional parties. stock.
Other types of OS NOTE: Most popular OTC is the National
1. Supervoting shares – multiple votes Association of Securities Dealers
with one share. Automated Quotation System of
2. Nonvoting ordinary shares – no NASDAQ ( provides the current bid and
voting rights. ask prices for about 3,000 actively
traded securities.

NEW MODES TO TRADE STOCKS

 1. Electronic Communications lower spending. Increase spending means
Network (ECN) – directly links major higher production level and employment and
brokerage firms and traders and vice versa.
removes the need for a middleman.
Impact of changes in the stock prices can be felt
 Transparency
at the following levels;
 Cost reduction
 Faster execution a. Large corporations treat stock market
 After-hours trading as an essential fund for expansion
projects, therefore higher share prices =
- ECN can only work well with shares
higher funds.
that have a substantial amount of
b. At a macro level, share account for a
trading volume.
significant portion of household wealth,
- Exchange-Traded-Fund (ETF) happens therefore increase in share prices =
when a portfolio containing various increase in household wealth.
securities is purchased and a share is Movements in share prices also affect
created based on this specific portfolio household spending.
which can be traded in the exchange. It c. Fluctuation in the share prices affects
is often indexed instead of being expectation of consumers and business
actively traded. It is valued based on the (most important consequence of
underlying net assets value of the movement in share price)
shares. ETF do not have a minimum
PHILIPPINE STOCK EXCHANGE
investment amount unlike mutual
funds, they are like stock index mutual - national and sole stock exchange in the PH
funds. ETF can be treated like a normal
- one of the oldest stock exchange in Asia
share. They are subject to commission
starting in 1927 when it was still Manila
to brokers when they are being traded.
Stock Exchange.
- overall performance of a stock market is
- its trading floor is currently in the PSE
measured through stock market indexes, which
Tower in BGC, Taguig.
represents the average of stock prices currently
being traded. - PSE is composed of a 15-man BOD with
Jose T. Pardo as Chairman.
- the value of stock market is usually set at 100
in a base year. - PSE is created in 1992 due to the merger
of Manila Stock Exchange (Aug. 8, 1927) and
- stock market indexes intend to show
Makati Stock Exchange ( May 27, 1963).
movements of the price over time instead of
the actual stock value. - PSE is granted a SRO status by the SEC in
June 1998.
- if the stock prices increase by more than 20%
it is usually called bull market or bullish. - formerly PSE is an on-profit, non-stock,
member-governed organization but in 2001,
- if the stock prices decrease by more than 20%
transformed to its current structure as
it is usually called bear market or bearish.
shareholder-based, revenue-earning
- increasing share prices may influence higher corporation headed by a president and
spending while declining share prices lead to BOD.
 - PSE through Philippine Central Depository automatically frozen by the PSE.
(PCD) uses the computerized book entry Dynamic Threshold is the maximum
system to transfer ownership of securities allowable price difference between an
from one investor to another, eliminating update in the Last Traded Price (LTP)
the need for physical exchange of scrip and its preceding LTP, it can vary from
between seller and buyer. 10%, 15%, and 20% depending on its
trade frequency.
- scripless trading describes the system
 Disclosure requirement for publicly
where settlement is carried out via book-
listed companies – should be disclosed
entries, rather than by the movement of
within 10 minutes after its occurrence.
physical certificates.
 Securities Investor Protection Fund Inc.
- PSE regulates trading activities through the (SIPF) – comparable to PDIC, provide
Capital Markets Integrity Corporation insurance for bank deposits. Protection
(CMIC), a spinoff of the Market Regulation to investors is automatic upon the
Division of PSE. opening of an account with the PSE
accredited broker.
 Monitor and penalize those that
violates Securities Regulation Code. Corporate Compliance
 Violates AMLA
a. Comply with the laws, regulations, and
 Violates Code of Conduct and
full disclosure of PH government
Professional Ethics for Traders and
b. Have standards of quality operations,
Salesmen
and size under efficient and effective
 Violates CMIC rules
management
 Investigate and resolve trading c. Conduct issuance, offering, and
related irregularities and unusual marketing securities in a fair and
trading activities. orderly manner
CMIC oversees the market through Total d. Give adequate, fair, and accurate
Market Surveillance (TMS), which was information about the company
developed by the Korean Exchange. TMS is e. Ensure that directors and officers act in
equipped with the critical elements of the the interest of all security holders as a
surveillance process and provides a robust whole
monitoring and waring system. General Criteria for Admission to Listing in PSE
CMIC with the approval of the President shall a. Track record of profitable operations –
have the power to restrict, halt, or suspend the must have cumulative consolidated
trading of a listed security in cases of unusual EBITDA, excluding non-recurring items,
trading activities. of at least PHP 50M for 3 full fiscal years
Other initiatives to safeguard interests of the immediately preceding their application
investors include: for listing and a minimum EBITDA of
PHP 10M for each of the three fiscal
 Enforcement of static and dynamic years. FS must be accompanied by an
threshold to protect against unusual unqualifies external auditor’s opinion.
share price fluctuations. Static b. Exception to the 3-year track record
Threshold – 50% increase or decrease, requirement.
  Company has been operating j. Full payment of issued and outstanding
for at least 10 years and has a shares
cumulative EBITDA of at least k. Investor relation program
PHP 50M for at least 2 of the 3  Company information
fiscal years.  Corporate news
 Company is newly formed  Financial report
holding company which uses  Disclosure
the operational track record pf  Investor FAQs
its subsidiary.  Investor contact details
c. Positive shareholders equity  Stock information
d. Market capitalization – at least PHP
500M, represents MV of the company. NOTE: a company that incurs negative
e. Operating history – 3 years prior to stockholders’ equity for 3 years shall be subject
application for listing to delisting which shall take effect 30 days from
f. Minimum capital requirement – approval by the PDE BOD.
minimum of authorized capital stock of Disclosure Rules
PHP 500M of which a minimum of 25%
must be subscribed and fully paid.  Annual report (SEC Form 17-A) –
g. Minimum offering to the public - submitted within 105 days after end of
fiscal year
Market Public offer  Three quarterly reports (SEC Form 17-
Capitalization Q) – submitted within 45 days from the
Not exceeding 33% or 50M end of the first 3 quarters of the fiscal
500M whichever is
year
higher
 Reports on beneficial ownership
Over 500M - 1B 25% or 100M
whichever is  Other periodical reports to update and
higher keep current info on the operation and
Over 1B -5B 20% or 250M financial condition of the company
whichever is
Disclosure must be made promptly if:
higher
Over 5B – 10B 15% or 750M a. Info is necessary to enable the company
whichever is and the public to appraise their position
higher or standing.
Over 10B 10% or 1B b. Info is necessary to avoid the creation
whichever is of a false market for its securities.
higher
c. Infor may reasonably be expected to
h. Minimum number of stockholders – at
materially affect market activity and the
least 1,000 stockholders, each owning
price of its securities
at least 1 board lot. Once listed,
 Change in the control of the
companies shall maintain at all times,
company
maintain a minimum percentage of
 Filing of legal proceeding
listed securities held by the public of
 Change in corporate purpose
10% of the issued and outstanding,
and material alterations on
exclusive of treasury shares.
operations
i. Valuation of assets
 resignation or removal of  change of address or contact
directors, officers, senior numbers of office
management and reason  change in the auditors
 any decision to carry out  any proposed amendment in
extraordinary investment the AOI and by-laws
 losses or potential losses  action filed in curt
 dissolution  appointment of a receiver or
 acts and facts that may liquidator
seriously obstruct the  any acquisition of share
development of activities resulting in its holding 10% or
 any licensing or franchising more
agreement or cancellation  any sale made resulting in such
 any delay in the payment of corporation ceasing to be
debentures, negotiable subsidiary or resulting in its
obligation, bonds, or other shareholder failing below 10%
publicly traded security of the issued capital stock
 creation of mortgage or pledges  firm evidence of significant
exceeding 10% of total assets improvement or deterioration
 any purchase or sale of stock in earnings
10% or more of the total assets  purchase or sale of significant
 contracts that may limit the assets, more than 10%
distribution of profit  new product or discovery
 facts that may affect economic,  public or private sale of
financial, or equity situation additional securities
 authorization, suspension,  call for redemption of securities
retirement or cancellation of  borrowing of significant amount
listing  default of financing or sale
 fines of more than PHP 50K and agreements
other penalties  deviation from capital
 merger, consolidation or spin- investment funds equivalent to
off 20%
 modification in the rights of the  disputes with subcontractors,
holders customers, or suppliers
 declaration of cash dividend,  any increase or decrease by
stock dividend, and preemptive 10% in the monthly, quarterly
right and annual revenues
 change in the fiscal year
PLATFORMS FOR CAPITAL MARKET
 all resolutions
 joint venture, consolidation, 1. Conventional brokerage – investors buy
acquisition, tender offer, take- and sell shares by opening an account
over, reverse take-over, merger with a stock brocker.
 capitalization issues 2. Online trading – lower commission than
 all calls to be maid on unpaid conventional brokers
subscriptions
 3. Mutual funds – investment company 4. Problems with risk estimations
that pools money from various 5. Problems with dividend forecasting
investors and invests them in a different
NOTE: Decision making of investors do not
securities, diversify portfolio.
consider risk, dividends or estimation problems
MARKET CAPITALIZATION separately.

- total MV of all outstanding shares of a HYBRID AND DERIVATIVE SECURITIES

company. This calculated by multiplying
1. Hybrid securities – financial instruments
total outstanding shares by the prevailing
that carry characteristics of both debt
MP per share. It is an important indicator to
and equity instruments. Examples are
determine the size of company.
stock warrants, convertible bonds, and
- it allows investors to benchmark the convertible preference shares.
relative size of a company against another.  Stock purchase warrants –
instruments that grant their
- any exercise of warrants will increase the
holders the right to buy a
number of outstanding shares, thereby
specific number of shares of the
diluting its existing value.
issuer at a specifies price for a
SHARE VALUATION given period of time, somewhat
similar to stock right. It is
- share valuation techniques are commonly detachable, can be sold without
grounded in identifying how much cash flow selling the security or bond it is
can be receive in the future if the investor attached to. Detachable
purchase the share now. warrants are actively traded in
- the value of share is equivalent to the PV broker and dealer market.
of the future cash flows that can be Warrants – exercisable for
received. This approach is most commonly several years, issued at an
called the discounted cash flow approach. exercise price higher than
prevailing MP
ONE-PERIOD /MULTIPLE PERIOD Rights – can only be used within
VALUATION MODEL a few months, issued below
DIVIDEND-BASED VALUATION TECHNIQUES: prevailing MP
 Convertible securities – bonds
1. ZERO-GROWTH MODEL that can be convertible into a
2. CONSTANT GROWTH MODEL specified number of ordinary
VARIABLE GROWTH MODEL shares. It is a cheaper form of
financing than straight bonds.
PRICE EARNINGS MULTIPLES  Convertible preference shares –
can be converted into a
LIMITATION OF SHARE VALUATION
specified number of ordinary
1. Changes in expected dividends – direct shares, sold at a lower price
relationship with share value. compared with straight
2. Changes in risks / required return – preference shares, advantages
inversely proportional to share value. is that I include the guarantee
3. Problems with growth estimations of a fixed dividend payment and
 the opportunity to realize - more advantageous since it is more affordable
capital gains. and convenient in the sense that the investor
need not to look for their tenants.
Motives for the use of convertible
financing include: - in the PH, REIT is also attractive to foreign
investor.
 Deferred ordinary shares
financing - RA 9856/ Real Estate Investment Trust Act of
 Sweetener for financing 2009 requires that REIT companies must
 Can be issued with lesser contribute at least 90% of its reported net
restrictive covenants income to its shareholder not later than the last
 Source of temporary heap day of the 5th month following the close of 10th
funds fiscal year of the REIT.
2. Derivative Securities – securities that
are not debt or equity but derived its
value on an underlying asset which is
another security. Most popular type is
options.
 Options – financial instruments
that grants the holder a chance
to sell or buy a specific asset at
a set price on or before an
expiration date. There are two
types:
- Call option - option to buy a
specified number of shares on
or before a specific date at a
stated strike price.
- Put option – option to sell a
specified number of shares on
or before a specific sate at a
stated strike price.
Options can be traded through
two channels: Stock Brokers
and Organized Option
Exchanges
NOTE: Option do not play a role
in fund raising for companies.

REAL ESTATE INVESTMENT FUND

- companies that generates revenues primarily

through its real properties and real property
management.