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1. Name: John Michael J. Zamoras

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 UNIT 1: Analyzing Capital Market Components: Primary and Secondary Markets, and
Investment Instruments

This unit explores the critical components of capital markets, focusing on the
primary and secondary markets and the various investment instruments that shape
market dynamics. Understanding these elements is essential for grasping how capital
markets function and their role in financial systems.

Learning Outcomes

After completing this unit, the student will be able to:

• Illustrate and report on capital market components, including primary and secondary
markets, and various investment instruments within the market structure

Pretest

Discussion Question:

1. Describe the differences between the primary and secondary capital markets. How do each of
these markets function, and what role do they play in the overall financial system?
2. What are some common investment instruments traded in capital markets, and how do their
characteristics influence investment strategies? Provide examples of how these instruments
might be used in a diversified investment portfolio.

Well done and thank you for answering the test. The next section is the content of this unit.
It contains information on the components of capital markets, focusing on the primary and
secondary markets and the various investment instruments that shape market dynamics.
Enjoy and have fun learning.
 Content

I. Introduction to Capital Markets

Capital markets are a cornerstone of the financial system, serving as the crucial platform for
raising capital and enabling investment. They facilitate the flow of funds between investors and entities
seeking to finance growth, development, and operations. Capital markets are broadly categorized into
two main segments: the primary market and the secondary market.

The primary market is where new securities are introduced and sold for the first time. This
segment is vital for companies and governments looking to raise fresh capital by issuing new stocks,
bonds, or other financial instruments. The primary market not only supports initial funding but also plays
a critical role in capital formation and economic expansion.

Conversely, the secondary market involves the trading of existing securities, providing liquidity
and enabling investors to buy and sell assets after their initial issuance. This market segment enhances
market efficiency by allowing investors to adjust their portfolios and realize gains or losses from their
investments. The secondary market encompasses stock exchanges and over-the-counter (OTC) platforms,
each contributing to the overall fluidity and accessibility of capital markets.

Together, these segments and the various investment instruments they encompass form the
intricate structure of capital markets, influencing economic activity and investment strategies across the
globe.

II. Primary Market

The primary market is the initial arena where new securities are issued and sold to investors for
the first time. It plays a crucial role in the financial system by providing a direct channel for companies and
governments to raise capital. This capital is essential for funding expansion projects, undertaking new
ventures, and meeting operational needs. By issuing new securities, entities can obtain the necessary
funds to drive growth and achieve strategic objectives.

Processes involved:

A. Initial Public Offerings (IPOs) An IPO marks a significant milestone for a company as it transitions
from private to public status. Through an IPO, a company offers its shares to the public for the
first time, enabling it to raise substantial capital. The process involves extensive regulatory filings,
valuation assessments, and marketing efforts to attract potential investors. Attached below is the
process of initial public offerings.
 Figure 1: IPO Process Diagram (START TO FINISH)

1. Preparation

• Due Diligence: The company undergoes thorough due diligence, reviewing its financials,
operations, and legal standing to ensure accuracy and compliance with regulations.

• Prospectus: A detailed prospectus is created, providing investors with essential information about
the company and its financial health. This document is submitted to the SEC for approval before
being shared with the public.

2. Roadshow

• Marketing to Investors: The company’s management team presents its investment case to
potential investors through a series of meetings and presentations.

• Investor Engagement: These roadshows, often held in major Philippine cities, allow the
company to gauge investor interest and gather feedback that will influence the final offering.

3. Pricing

• Determining Issue Price: The issue price is set based on investor feedback, market conditions,
and the need to raise sufficient capital.

• Balancing Interests: This price must attract investors while reflecting the company’s true value,
ensuring a successful initial sale.

4. Offering

• Public Sale: The company’s shares are offered to the public and listed on the stock exchange,
such as the PSE.

• Investor Participation: The success of the offering is measured by how well the shares are
received and how they perform in the initial trading period.
5. Post-IPO Activities

• Secondary Market Trading: After the IPO, the shares are traded on the secondary market, with
prices fluctuating based on supply and demand.

• Ongoing Compliance: The company must maintain strong investor relations and comply with
SEC regulations through regular financial reporting.

B. Private Placements. Unlike IPOs, private placements involve the sale of securities to a select group
of investors, such as institutional investors or accredited individuals. This method allows companies
to raise capital without the need for a public offering, often providing a faster and more discreet way
to secure funding. Private placements are typically used for raising capital in smaller amounts or for
specialized investment opportunities.

C. Underwriting. Investment banks often play a pivotal role in the primary market by underwriting new
issues of securities. Underwriting involves the investment bank purchasing the securities from the
issuer and then reselling them to investors. This process helps to ensure that the issuer raises the
desired amount of capital while transferring the risk of unsold securities to the underwriter.

Figure 2: Flowchart of the Primary Market Process

ISSUER (Company/Government)

Regulatory Authorities
(Approval Process)

Underwriters
(Underwriting Process)

Marketing and Roadshow

Pricing and Finalization

Issuance

Post-issuance activities and Investor

Primary Market Process:

1. The process begins with the issuer, which could be a company seeking to raise capital or a
government entity needing funds for projects. The issuer prepares by conducting internal
assessments, engaging legal and financial advisors, and developing a strategy for the securities
issue. This preparation includes evaluating financial needs, deciding on the type and number of
securities to issue, and preparing necessary documentation.
2. Before securities can be offered to the public, they must be approved by regulatory authorities,
such as the Securities and Exchange Commission (SEC). The issuer files a registration statement
containing detailed information about the company, the securities being offered, and the risks
involved. The regulatory body reviews this information to ensure it meets all legal requirements
and protects investor interests.
3. Underwriters (Investment banks).
a. Conduct Due Diligence: Underwriters, often local investment banks or financial
institutions, conduct due diligence to assess the issuer's financial health and the risks
associated with the securities.
b. Determine Issue Price: Based on their analysis and market conditions, underwriters help
set the issue price and structure of the securities.
c. Negotiate Terms: They negotiate terms with the issuer, including the number of securities
to be issued and the underwriting fee.
4. Marketing Roadshow.
a. Promote Securities
Local Roadshows: Issuers and underwriters conduct roadshows in major
Philippine cities such as Manila, Cebu, and Davao to attract potential investors. These
presentations provide detailed information about the securities and the issuer.

Investor Feedback: They gather feedback from potential investors to gauge

interest and adjust the offering as needed.

5. Pricing and Finalization

a. Set Financial Terms
• Finalize Issue Price: The final issue price is set based on investor demand and market
conditions. In the Philippines, this step involves close coordination between the
issuer, underwriters, and the SEC.
• Allocate Shares: Securities are allocated to investors based on the final pricing and
demand.
6. Issuance
a. Sell Securities
• Public Offering: The securities are officially offered to the public or private investors
through the Philippine Stock Exchange (PSE) for equities or through other approved
channels for bonds and other instruments.
• Transfer Funds: The funds raised from the sale of securities are transferred to the
issuer, providing them with the capital needed.
 7. Post-Issuance Activities
A. Initial Trading

• Secondary Market Trading: Once issued, the securities begin trading on the PSE (for
stocks) or other trading platforms for bonds. This provides liquidity and allows investors
to buy and sell the securities.

• Monitor Performance: Issuers and investors monitor the performance of the securities
and market reaction to assess the success of the offering.

8. Investor
A. Invests in the Securities

Purchase and Hold/Trade: Investors in the Philippines purchase the newly issued
securities, which they may hold for long-term investment or trade on the secondary market.

The SEC plays a central role in regulating and overseeing the primary market process in
the Philippines, ensuring that all transactions comply with local laws and regulations.
Marketing and roadshow practices are tailored to the local market, involving presentations
in key cities and engagement with domestic investors. The Philippine Stock Exchange (PSE)
is the primary platform for trading stocks, while bonds and other securities may be traded
through other channels approved by the SEC.

III. Secondary Market

The secondary market is where previously issued securities are bought and sold among
investors. This market provides liquidity and enables investors to adjust their portfolios.

A. Types of Secondary Markets

1. Stock Exchanges. In the Philippines, the primary platform for trading stocks and other
securities is the Philippine Stock Exchange (PSE). The PSE is similar to other international
exchanges like the New York Stock Exchange or National Association of Securities
Dealers Automated Quotations (NASDAQ). It serves as a centralized marketplace where
buyers and sellers can trade shares of publicly listed companies. The PSE plays a crucial
role in the country’s financial system, providing a regulated and transparent
environment for trading.
2. Over-the-Counter (OTC) Markets. In the Philippines, OTC markets are less formal and
decentralized, where trading occurs directly between parties rather than through a
centralized exchange like the PSE. These markets are often used for trading securities
that are not listed on the PSE, such as certain bonds, derivatives, and other financial
instruments. Transactions in the OTC markets are typically negotiated between brokers
and dealers, providing flexibility but also requiring a higher level of due diligence by the
participants.
3. Market Participants in the Philippines. The secondary markets in the Philippines involve
a variety of participants, including individual retail investors, institutional investors such
as banks and mutual funds, market makers who provide liquidity by buying and selling
securities, and brokers who facilitate transactions on behalf of their clients. These
 participants interact within the PSE and OTC markets, contributing to the overall activity
and liquidity of the market.

B. Fundamental Concepts of the Secondary market

1. Liquidity. Liquidity in the Philippine context refers to the ease with which securities can
be bought or sold on the PSE or OTC markets without causing significant changes in their
prices. High liquidity means that there are plenty of buyers and sellers, making it easier
to execute trades quickly and at a fair market price. This is crucial for investors who want
to enter or exit positions without incurring significant costs or losses.

2. Market Price. The market price in the secondary market represents the current price at
which a security is being traded. In the Philippines, this price is determined by the supply
and demand dynamics within the PSE or OTC markets. Market prices fluctuate
throughout the trading day based on various factors, including company performance,
economic conditions, and investor sentiment. Understanding how market prices are
formed helps investors make informed decisions about buying or selling securities.

IV. Investment Instruments

1. Stocks. Stocks represent ownership in a company and provide shareholders with rights to
dividends and voting on corporate matters. In the Philippines, stocks are primarily traded on
the Philippine Stock Exchange (PSE), which lists a variety of companies from different sectors.
Investing in stocks on the PSE allows individuals to participate in the growth and profitability
of listed companies. Stockholders can benefit from capital gains and dividends, though
investing in stocks also carries risks, including market volatility.

Figure 3: Most Active Stocks in the Philippines

Source: Philippine Stock Exchange, Inc. https://www.pse.com.ph/most-active/

2. Bonds. Bonds are debt securities issued by corporations or the government. Investors in bonds
receive regular interest payments, known as coupons, and are repaid the principal amount at
maturity.

In the Philippines, government bonds are issued by the Bureau of the Treasury and are
considered low-risk investments. Corporate bonds, issued by companies, offer potentially
higher returns but come with higher risk. The Philippine Dealing System (PDS) facilitates the
trading of bonds. As of February 2023, the LandBank bond fund of the LandBank of the
Philippines was the best bond fund in the Philippines with approximately 2.78 percent ROI in
one year. This was followed by the Manulife Asia Dynamic Bond Feeder Fund of Manulife
Investment Management with an ROI of 1.76 percent in a year.

Figure 4: Public Offerings for Treasury Bonds

Source: Bureau of the Treasury Philippines https://www.treasury.gov.ph/?p=66315

3. Mutual Funds. Mutual funds pool investments from multiple investors to create a diversified
portfolio of assets, including stocks, bonds, and other securities. Managed by professional fund
managers, these funds aim to provide investors with a balanced and diversified investment.

In the Philippines, mutual funds are regulated by the Securities and Exchange Commission
(SEC). They offer investors a way to achieve diversification and professional management
without having to select individual securities themselves.
 To view the list of registered investment companies or mutual funds in the Philippines
as of September 2020 click here: https://www.sec.gov.ph/wp
content/uploads/2020/10/2020IC_List-of-Registered-Investment-Companies.pdf

4. Derivatives. Derivatives are financial contracts whose value depends on the performance of
an underlying asset, such as stocks, bonds, or commodities. Common derivatives include
options, futures, and swaps.

In the Philippine market, derivatives are used mainly for hedging purposes to manage risk.
They are also used for speculative purposes to potentially profit from changes in asset prices.
The Philippine Stock Exchange offers some derivative products, and market participants should
be aware of the associated risks. Currently, only banks and insurance companies (either
directly or through banks) are permitted to trade derivatives in over-the-counter (OTC)
markets. The Bangko Sentral ng Pilipinas (BSP) specifically authorizes banks to engage in
trading derivatives related to interest rates and foreign exchange.

5. Exchange-Traded Funds (ETFs). ETFs are investment funds traded on stock exchanges, similar
to individual stocks. They typically track a broad market index or sector, providing investors
with exposure to a diversified set of assets.
ETFs are becoming increasingly popular in the Philippines for their liquidity and cost-
effectiveness. They offer an accessible way for investors to diversify their portfolios and gain
exposure to various sectors or indices. The PSE has introduced several ETFs that track major
indices and sectors.
To know more about ETF kindly view this file: https://documents.pse.com.ph/wp-
content/uploads/sites/15/2021/04/ETF-Final-6-pager-opt.pdf

These investment instruments offer a range of options for investors in the Philippines, each with
its own characteristics and benefits. Stocks and bonds provide traditional investment opportunities,
mutual funds offer professional management and diversification, derivatives cater to more advanced
strategies, and ETFs combine the benefits of mutual funds and individual stocks. Understanding these
instruments and their role in the market can help investors make informed decisions and tailor their
investment strategies to their financial goals and risk tolerance.

V. Conclusion

Capital markets are essential components of the financial system, enabling the flow of capital
between investors and entities seeking funding. The primary market facilitates the issuance of new
securities, such as stocks and bonds, helping companies and governments raise necessary funds for
growth and development. Conversely, the secondary market provides liquidity by allowing investors to
trade existing securities, thereby influencing market efficiency and portfolio management.

In the Philippines, the primary market involves processes such as Initial Public Offerings (IPOs),
private placements, and underwriting, with detailed steps including preparation, roadshows, and post-
IPO activities. Meanwhile, the secondary market encompasses platforms like the Philippine Stock
Exchange (PSE) and over-the-counter (OTC) markets, where stocks, bonds, and other financial instruments
are traded. Key concepts like liquidity and market price play a crucial role in these markets, affecting how
securities are bought, sold, and valued. Understanding these investment instruments—stocks, bonds,
mutual funds, derivatives, and ETFs—empowers investors to make informed decisions and navigate the
complexities of the Philippine financial landscape effectively.

Thank you for reading the content. Now that you had learned about the critical components of
capital markets, focusing on the primary and secondary markets and the various investment
instruments that shape market dynamics, you may do the succeeding activities. If you have
questions regarding the activity, you may contact me to the number indicated in the course guide.

Learning Activity

1. How do the primary and secondary markets work in the Philippine capital markets?
What roles do IPOs and private placements play in the primary market?

2. How do the Philippine Stock Exchange (PSE) and over-the-counter (OTC) markets help
investors buy and sell securities? What effects do these markets have on investing and
company fundraising?

Assessment

A. Group Presentation

Instruction: In groups, research and present on specific investment instruments (e.g., stocks, bonds,
derivatives) and their roles within primary and secondary markets. Your goal is to report on the
characteristics and functions of these instruments, highlighting their roles within primary and
secondary markets.

Dynamics:

3. Form groups of 4-5 members. Assign roles within the group, including researcher, writer,
presenter, and visual designer.
4. Choose specific investment instruments to focus on (e.g., common stocks, corporate
bonds, call options). Make sure that your choice of instrument is different from the other
groups to cover a broad range of topics.
5. Research according to the following:
▪ Characteristics and Functions
➢ Stocks: Investigate ownership rights, dividends, voting rights, and market
behavior.
➢ Bonds: Explore types of bonds (government, corporate), interest rates,
maturity periods, and credit ratings.
➢ Derivatives: Examine types (options, futures), how they derive value
from underlying assets, and their uses in hedging and speculation.
▪ Primary Market Roles:
➢ Explain how these instruments are issued and sold in the primary market.
➢ Discuss the role of investment banks, underwriters, and the issuance
process.
 ▪ Secondary Market Roles:
➢ Describe how these instruments are traded on secondary markets.
➢ Explore liquidity, market makers, and trading platforms.

6. Each Presentation should last between 15-20 minutes

7. Use Multimedia tools (example: power point presentation) to enhance your
presentation.
8. Ensure the presentation is interactive. Prepare to answer questions from the audience

Congratulations!!!!!! You did a great job! Keep on learning. If you have questions about the
lesson please don’t hesistate to contact your instructor via FB messenger/text/call. God Bless!