LESSON 6: EQUITY SECURITIES MARKET

Learners should be able to:

1. Describe the different types of market capitalization;
2. Determine value of stocks based on the financial information made
available to them; and
3. Describe the rules and regulations applicable for a listed corporation.

Overview:

Equity securities market is the type of financial market wherein equity

instruments are traded between demanders and suppliers of funds. Equity
instruments is a legal agreement which serves as evidence ownership
interest in a business. Investors include equity instruments in their portfolio
because of capital appreciation and dividends. The most common example
of equity securities is shares. Shares can be classified in two – preference
shares and ordinary shares. Shares are publicly traded in the stock market.
Stock market is composed of two components – exchanges and over the
counters (OTC). Share valuation can be computed via different
methodologies: through dividends (zero-growth, constant growth, variable
growth), free cash flow, book value, liquidation value and price-earnings
multiples.

Equity instrument is a type of financial instrument wherein an issuing

company decides to compensate investors at an amount dependent on the
future earnings of the company (like dividends). Equity instrument is a
contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities. Future earnings set aside for these investors
should be after settling all mandatory payments of the business including
financing charges. Shares are example of equity instrument.

Aside from compensation, shares represent ownership in a business.

People who own shares are called shareholders. The physical legal
document to evidence shares is called a stock certificate. Stock certificates
specify who own the shares and how many shares are owned by this
shareholder. For equity instruments, the company is the issuer while
shareholders are investors.

Authorized capital stock pertains to the maximum amount or number of

shares that can be issued as shares to investors as documented in the
Articles of Incorporation. Outstanding shares are shares of stocks that are
issued to or subscribed by shareholders (whether fully paid or not).
Outstanding shares exclude treasury shares. Treasury shares are shared
bought back by the company from previous shareholders. Only
corporations are allowed to issue shares.

There are two reasons why investors should

consider equity instruments:
• Capital Appreciation – pertains to the possibility of increase in value
of shares often reflected through its market price. Investors can buy and
sell shares in the secondary market, providing a mechanism that allow
trading which influences the value of shares. However, since market price
results from interaction of different market forces, this can be highly volatile
which brings uncertainty to shareholders.

• Dividends – refers to payments distributed by corporation to their

shareholders. The amount of dividend declared is based on the excess
earnings of the company and is approved by the board of directors.
Dividends can be in the form of cash, property (i.e. shares in other
companies) or the company’s own shares. Dividend declaration is primarily
based on the current performance of the business though this the level of
declaration can be levelled by businesses to manage expectations of
shareholders. All dividends are taken from Retained Earnings.
Comparison between Equity and Debt
EQUITY DEBT
Participation in the Can participate through Does not participate
businesses voting on specific
decisions like election
of board directors
Claim on Assets and Subordinate to debt Prioritized over Equity.
Income
Least priority in terms of Claim of creditors are
asset and income satisfied before
distribution distributing to
shareholders.
Type of Financing Permanent Temporary
Maturity Date No maturity date Maturity date is based
on what is stipulated in
contract
Risk and Return Profile Higher risk versus debt; Lesser risk versus
investors expect higher equity; return is limited
returns (through infinite to interest stipulated in
capital appreciation and agreement
dividends)
Impact to Tax Cannot be claimed as Tax-deductible expense
tax-deductible expense for company
by company
Types of Shares
Preference Shares – shares that possess certain characteristics that
prioritize them over ordinary shares. Typically, dividend are already
promised to preference shareholder regardless of business performance.
Preference shares generally do not have voting rights though some
corporations can grant this based on their Articles of Incorporation.
Preference share is quasi-debt; the dividend is somewhat like a
contractually obligated interest without maturity date of debt agreements.
Other features that preference shares can possess include:
Cumulative – Dividends that are not paid in previous years (in
arrears) should be paid, together with the current year dividends, prior to
dividend distribution to ordinary shareholders. Non-cumulative preference
shares mean that company is not liable to pay out dividend in arrears.
Callable – Features which permits corporations to repurchase
outstanding preference shares within a period of time at a set price. This
feature allows corporations to cease commitment to pay required dividends
of preference shares by repurchasing it and is exercised when market
conditions deems it reasonable to do so.
Convertible – Option given to shareholders to convert preference
shares to ordinary shares.

Ordinary Shares – shares that represent equity in the business. Holders

of these are known as residual owners since they will only enjoy return
once claims from creditors and preference shareholders are satisfied.
Ordinary shareholders only receive dividend upon the discretion of the
company’s board of directors and possess voting rights (usually one vote,
one share) to act on specific corporate actions such as issuance of new
shares and election of company directors. Preemptive right - which grants
the right to purchase shares during additional share issuance to protect
their stake from dilution – is given to shareholders. Ordinary shareholders
enjoy limited liability i.e. if the company goes under, they are only liable up
to the amount they invest. In recent years, other types of ordinary shares
are developed such as supervoting shares (share with multiple votes) and
nonvoting ordinary shares.
PROSPECTUS
A prospectus is filed with the Securities and Exchange Commission (SEC).
It's a document that companies use to provide detailed information to the
public about an investment offering, such as stocks or bonds, and is
required to be filed with the SEC before the securities can be sold.

The SEC process for an Initial Public Offering (IPO) involves several key
steps, primarily focused on ensuring transparency and investor protection.
The company, along with its underwriters, files registration statements with
the Securities and Exchange Commission (SEC). The SEC then reviews
these documents, which include a prospectus, to ensure they comply with
regulations and provide adequate information to potential investors. This
review process can take several weeks or months. If the SEC approves,
the company can proceed with the IPO, setting an effective date and price.

https://www.scribd.com/document/422729416/Wilcon-IPO-Prospectus-pdf
Stock Market
Stock market is the avenue where shares are traded publicly. Stock market
can be physical or virtual. This is composed of exchanges and over the
counters (OTC) and can function as primary or secondary market.

Exchanges – organized physical venues for trading of shares which

are facilitated by floor traders. Floor traders, often members of brokerage
firms, meet at the exchange and collect bid and ask offers from each other.
Through this, they connect matching deals and execute trade orders
coming from their clients or their own firms. These are centralized
platforms where securities, such as stocks, bonds, commodities, and
derivatives, are bought and sold through a formalized trading process.
These exchanges provide a regulated marketplace with established rules,
procedures, and infrastructure for trading. Examples of organized
exchanges include the New York Stock Exchange (NYSE), NASDAQ,
London Stock Exchange (LSE),Tokyo Stock Exchange (TSE) and
Shenzhen Stock Exchange (SZSE).

OTC market – markets where shares are traded electronically by

dealers. Dealers or also commonly called as market makers create market
by linking buy and sell orders from their clients. They maintain inventory of
shares from different companies that they use to trade in the OTC market
to maintain equilibrium between purchase and sell orders. Profits are
earned by dealers via the spread between bid price and ask price or
commission through trading. The trading of securities are made directly
between parties, without the involvement of a centralized exchange. OTC
markets are decentralized and typically involve transactions conducted
through broker-dealers, electronic trading platforms, or other
intermediaries. OTC markets facilitate trading in securities that are not
listed on organized exchanges, including stocks of smaller companies,
corporate bonds, and certain derivatives. Over-the-counter (OTC) markets
are a part of the secondary market.

Electronic Communications Network – network that directly

connects key brokerage firms and traders. ECN is becoming relevant
because of its transparency, cost effectiveness and quicker execution. A
type of trading platform that facilitates the electronic execution of trades by
connecting buyers and sellers directly. ECNs operate electronically,
matching buy and sell orders automatically based on predetermined
criteria such as price and quantity. ECNs are commonly used for trading
stocks and other financial instruments and are known for providing efficient
and transparent trading environments. ECN (Electronic Communication
Network) trades primarily occur in the secondary market. Examples are
Fusion markets and Pepperstone.

Exchange-traded Funds – these are formed when portfolio

containing different securities, that are traded on organized exchanges,
similar to individual stocks, is established and a share is traded in the
exchange representing the portfolio. ETFs pool together assets such as
stocks, bonds, or commodities and offer investors exposure to a diversified
portfolio of assets within a single investment vehicle. ETFs trade
throughout the day on exchanges like stocks, allowing investors to buy and
sell shares at market prices. ETFs are popular for their liquidity,
diversification, and potential tax efficiency. Exchange-traded funds are
value based on the market value of the shares within the portfolio.
Platforms for Capital Markets
Conventional Brokerage – Brokers sell and buy shares in the
exchange in behalf of their investors, earning commission in the process.
Online Trading – Digital platforms that investors can use which have
lower commission. Though, investments insights might not be available in
the absence of traditional brokers.
Mutual Funds – Funds set up by investment companies that brings
together money from different investors and invests the pooled money in
different stocks in behalf of all the investors.

Why invest in the stock market?

Historical data as shown that investing in stocks over the long-term

provides superior returns. Stocks offer potentially higher yields compared
with fixed income instruments such as time deposits, government
securities and bonds. Moreover, here are the rationales behind stock
investing:

Participation in the ownership of a company – An individual who invests in

the stock market automatically becomes a stockholder of a particular listed
company regardless of how many shares of stocks he/she holds. As a
stockholder, an investor is entitled to the following benefits: 1) voting rights;
2) dividends to be declared by the company; and 3) share of the remaining
assets of the company if it is to be liquidated.

Liquidity of Funds – A stock market investor has an easier access to

funds given that he/she can always cash in or out his funds anytime, during
trading hours, through his/her stockbroker. Compared to banks which
require high minimum conditions or collaterals for deposits and credit, an
individual can start an investment for as low as P5,000. Note, however,
that the minimum amount of investment varies depending on the
stockbroker chosen and the stocks to be purchased.

Make money – The stock market is a good venue for an investor to grow
his/her money provided that he/she understands the basics of stock
investing. An investor can generate more money either through the cash
dividends declared by the listed company or through the price appreciation
of his/her shares over time – that is – assuming he/she bought the shares
at a low market price then selling it at a higher price. An investor can also
benefit from a listed company’s stock dividend declaration as the shares of
stocks add up to their holdings at no purchasing cost and can later be sold
anytime he/she wishes.

Why do companies go public?

The primary purpose for the public listing of a company is to raise capital in
a cost-effective way. It provides the company another venue to tap
additional funds other than the traditional lenders like banks and other
financing institutions. In this way, the company can expand its business
without increasing debt or draining its cash reserves. Listing in the stock
exchange can also launch the company and its products to public
awareness and interest, whether locally or abroad, and consequently
increase its customer base or attract new institutional investors for the
company.

Other initiatives to safeguard investor interest

Through price fluctuation measures – The PSE enforces static and
dynamic thresholds to safeguard against unusual fluctuations in share
prices.

The Static Threshold enforces a 50% trading band within which the price
of a stock is allowed to move. When the stock price jumps 50% (price
ceiling) or falls 50% (floor price) on a particular day, to be reckoned from
the last closing price or the last adjusted closing price, the trading of the
stock shall be automatically frozen by the PSE upon reaching said limit,
unless there is an official announcement from the listed company or the
proper government agency which would justify such price fluctuations.

The Dynamic Threshold is the maximum allowable price difference

between an update in the Last Traded Price (LTP) of a given stock or
group of stocks and its preceding LTP that is equal to a percentage set by
the PSE, subject to the classification of a stock or a group of stocks based
on its trade frequency. The Dynamic Threshold of a listed stock may vary
from 10% , 15% and 20% depending on its trade frequency.
 Through disclosures – Since timely and reliable company disclosures
are essential components of a fair and efficient market, the PSE also sees
to it that listed companies promptly disclose only factual and truthful
information. The PSE requires that material information, which may affect a
listed company’s stock price positively or negatively, are disclosed within
10 minutes after its occurrence. Disclosures must also be done first to the
PSE so that it will cascade information to every investor and general public
through its communication channels and not to a selected group of
individuals only. Non-compliance with or violations of the PSE Disclosure
Rules are heavily penalized with fines, trading suspension, or even
delisting from the PSE

Through the SIPF – Another tool created for the protection of investors
is the Securities Investors Protection Fund, Inc. or SIPF. The SIPF, which is
comparable to the Philippine Deposit Insurance Corporation providing
insurance for bank deposits, seeks to build and enhance investors’
confidence in the market and is envisioned to protect the investing public
from extraordinary losses, other than the ordinary market fluctuations,
arising as a result of fraud, failure of business, or judicial insolvency of
PSE-accredited stockbrokers. Protection to investors is automatic upon the
opening of an account with a PSE-accredited stockbroker and given by
way of compensation for trade-related obligations of stockbrokers to its
customers.

How should an investor consider the risks involved in

investing?
Stock market investing does not guarantee returns every time, so investors
are best served to familiarize themselves with the risks involved. These
risks may come from company and economic developments here or
abroad. Robust economic growth, low inflation rates as well as stable
interest rates and foreign exchange rates are good news for the stock
market. They usually have a positive impact on market performance as
these indicate a sound macroeconomic environment. An opposite scenario
in any of these economic indicators could negatively affect the stock
market.

Given the inevitable nature of risks in stock market investing, an investor

should then be able to limit and manage his/her risk expectations. An
investor can cope with this by setting the maximum level of gain or loss,
and calculated decisions should be made when this level is reached.

Keep track of my investment

While an investment has been entrusted to a stockbroker, it is also the
investor’s responsibility to spend time and effort in studying his/her
investments. An investor should keep track of the stock price and follow
closely the developments of the company through disclosures posted on
the PSE website as well as news from major newspapers, television, radio
and the Internet. The BGC office also maintains a Library which is open
from 9:00 AM to 4:00 PM, Mondays to Fridays, should an investor want to
do research on his/her investments. Being informed helps an investor
foresee possible gains and losses and thus make sound and wiser
investment decisions.

Philippine Stock Exchange (PSE)

The Philippine Stock Exchange, Inc. (PSE) is a self-regulatory organization
that provides and ensures a fair, efficient, transparent and orderly market
for the buying and selling of securities. The Exchange also offers a
convenient and efficient venue in raising capital to support the growth of
businesses.

Considered one of the oldest bourses in Asia, the PSE traces its roots back
to the country’s two former bourses – the Manila Stock Exchange (formed
in 1927) and the Makati Stock Exchange (formed in 1963). The Manila and
Makati bourses were unified on December 23, 1992 to form the PSE.

In 2018, the PSE moved its headquarters to Bonifacio Global City (BGC) in
Taguig. The fast paced environment in the Taguig business district is well-
suited for the Exchange as it aims to fast track the introduction of new
products and services to boost investor participation and liquidity in the
Philippine stock market.
GROUP CORPORATE STRUCTURE

Capital Markets Integrity Corporation

CMIC is a wholly-owned subsidiary of PSE and was established for the
primary purpose of reinforcing the confidence of the investing public in
capital market institutions and promoting a more active and vibrant market
participation. Accordingly, CMIC acts as the independent audit,
surveillance and compliance arm of the Exchange.

As a self-regulatory organization, CMIC’s primary mandate is to maintain

the integrity of the market and minimize the risk of the investing public by
ensuring that the TPs adhere to all pertinent rules, regulations, and code of
conduct of CMIC and the Exchange, as well as all related legislative and
regulatory requirements. Tasked with regulating and monitoring the
activities of market participants, CMIC enforces rules, guidelines, and
provisions of the Securities Regulation Code, or the SRC, and other
securities laws, applicable to the operations and dealings of the TPs of –
including, in particular cases, Issuers whose securities are listed in – the
Exchange. Verily, under the CMIC Rules, which took effect in March 2012,
CMIC, among other matters, enforces compliance by TPs – and, in the
proper cases, by Issuers – with the securities laws.

The CMIC oversees the market through a world-class and sophisticated

surveillance system called Total Market Surveillance (TMS), which was
developed by the Korea Exchange. TMS is equipped with the critical
elements of the surveillance process and provides a robust monitoring and
warning mechanism. It is designed to safeguard the integrity of the stock
market from fraud, manipulation, and breaches of marketplace rules. The
CMIC conducts investigation of unusual price and volume movements to
identify and sanction trading participants, issuers or investors who might
have committed unfair market practices.

CMIC, with the approval of the PSE President, shall have the power to
restrict, halt or suspend the trading of a listed security of an issuer or the
trading by a trading participant of a particular listed security in cases of
unusual trading activities or possible trading-related irregularities.

Securities Clearing Corporation of the Philippines

SCCP is a wholly-owned subsidiary of PSE and is under the regulatory
supervision of the Securities and Exchange Commission (SEC). It was
incorporated in 1996 to operate as a central securities clearing institution in
the Philippines and thereby manage and support the clearance of trades in
securities listed and executed on the PSE or other official securities market
in the Philippines. It acts as a Central Counter-party to trades executed
at the PSE.

SCCP started its commercial operations on January 3, 2000 and was

granted its permanent license to operate on January 17, 2002. SCCP is
authorized by the SEC to impose fines and penalties and other sanctions
as approved by the SCCP Board of Directors to ensure compliance of its
Clearing Members.

Premier Software Enterprise, Incorporated

Premier is 80% owned by PSE and was incorporated in 2019 as a
separate IT subsidiary to enable the Exchange to meet the growing
demand for technology services related to its various initiatives.
Premier is tasked to build innovative trading solutions, further automate
critical Exchange processes, and explore new technologies such as cloud
services, among others.

As an institution heavily reliant on technology and focused on maintaining

reliable and resilient operational systems, expanding the IT capabilities of
PSE through Premier will help improve the Exchange’s products and
services.

Philippine Dealing System Holdings Corporation

PDS is 20.98% owned by PSE and provides a full suite of services, from
trading to clearing and settlement, and post settlement across different
asset classes. PDS, through Philippine Dealing & Exchange Corp.,
operates the country’s fixed income market. It also functions as the
depository for Philippine equities and bonds through Philippine
Depository & Trust Corp. PDS also offers learning facilities to equip its
markets and communities in keeping pace with market development and
professional practice, here and abroad.

The PSEi, or Philippine Stock Exchange Index, is the

primary stock market index of the Philippines, representing the
performance of the 30 largest and most actively traded companies listed
on the Philippine Stock Exchange. It serves as a benchmark for the
overall health and direction of the Philippine stock market.
PSE Electronic Disclosure Generation Technology or PSE EDGE is
a state-of-the-art, fully automated system that facilitates the efficient
processing, validation, submission, distribution, and analysis of time-
sensitive disclosure reports submitted to the Exchange. The new
disclosure system, which was acquired from the Korea Exchange and
replaces the PSE Online Disclosure System (ODiSy), is equipped with a
variety of features to further standardize the disclosure reporting process of
PSE’s listed companies, improve investors’ disclosure searching and
viewing experience, and enhance overall issuer transparency in the
market.

You may download the list of PSE EDGE Templates

https://edge.pse.com.ph/images/main/List_of_PSE_EDGE_Templates_201
90827.pdf

Some of the notable features of PSE EDGE include :

Flexible disclosure formats – PSE EDGE enables the standardization
and scalability of information contained in each listed company disclosure.
Reports can also be downloaded in PDF format.

Improved disclosure management – PSE EDGE is geared towards

making the disclosure process more efficient without sacrificing the
accuracy and timeliness of disclosure reports. The coordination between
listed companies and the Exchange is seamlessly facilitated by an
advanced yet user-friendly interface.

Comprehensive distribution system – PSE EDGE offers multiple

channels to disseminate disclosures to investors, data providers, the
media, and other stakeholders. EDGE also leverages on the strength of
social media by allowing company disclosures to be shared by a user via
his/her Facebook and Twitter accounts.
 Powerful search tool – Finding required information on listed
companies is faster and easier using PSE EDGE’s advanced search
engine.

Advanced information security – Having a secure system to protect

listed company data is an important component of a world-class stock
market. PSE EDGE addresses this by possessing the latest certification
and encryption modules to ensure that information is firmly secured.

Investing Procedure
The Trading Cycle
Step 1: Choose a Broker

All stock market transactions are done through stock brokerage firms or
trading participants (TPs) accredited by the PSE. There are two types of
TPs in the PSE – traditional and online. The former will assign a trader or
agent to execute your transactions while the latter allows you to trade on
your own through their online facility. Decide whether you want to go with a
traditional or online TP.
Here are the things that may help you shortlist potential TPs: minimum
investment requirement, types of services they offer, commissions
and fees, client feedback, and for online TPs, the features and user-
friendliness of their trading platform. It is important that you trust your
TP and that you are satisfied with their service.

The complete list of PSE-accredited TPs is

https://www.pse.com.ph/directory/

Step 2: Open an account

Contact your chosen TP and find out their account opening requirements.
Submit the required documents and identification cards and proceed with
the account opening process. The TP will do its Know Your Customer
(KYC) procedure.

Step 3: Give your Order

Take the first step to becoming a shareholder by giving your buy order to
your assigned trader or by posting a buy order through your online trading
account. Please note that online accounts are required to be pre-funded
before entering buying orders. The buying order is reflected on the trading
terminal and is matched with a sell order with the same or better price.
Your TP should immediately confirm your executed trades and
subsequently, an official confirmation or invoice should be delivered to you.
For investors using an online platform, the confirmation is reflected real-
time in the trading platform of the online TP. Inform your TP if you would
like to have a stock certificate for the shares you bought so they can inform
you of the process and fee for this procedure.

Step 4: Pay/Deliver before your Settlement Date

Payment for shares bought and delivery of shares sold should be made
before the settlement deadline on settlement date which is two (2) clearing
days from the transaction date (T+2).
For investors dealing with traditional TPs, payment for shares bought and
delivery of shares sold should be made before the settlement deadline on
T+2. To illustrate, for a transaction done on Monday, payment and delivery
by the buyer and seller, respectively, should be done before the settlement
deadline on Wednesday at 12NN.

For investors dealing with online TPs, payment for shares bought and
delivery of shares sold happens on the transaction date.

Step 5: Receive Your Proceeds/Shares

You will receive from your TP either the proceeds of the sale of your stocks
or proofs of ownership of stocks you bought* (confirmation receipt and
invoice) after the settlement processing on T+2. Make sure that the
corresponding confirmation receipt and invoice are provided by your TP.

* Note, however, that while the clearing and settlement cycle is completed
within 2 clearing days after the transaction date, purchased shares are
immediately reflected in the portfolio of the buying investor and the same
investor has the option to sell the shares before T+2 of the initial
transaction.

You’re all set!

All equity transactions, whether buying or selling, have a settlement period
of T+2 (trading day + 2 clearing days). This means that a seller should be
able to deliver the shares, if any, to his TP and the buyer must have paid
the cost of transaction to his TP within 2 clearing days after the trade was
done. Historically, settlement was done manually (27-day cycle). With
scripless trading, wherein settlement is done via the book-entry-system
(thru the Philippine Depository & Trust Corp. or PDTC), transactions are
settled on the second day after trade date. Under this system, the investor
has the option to hold on to his certificate (uplift) or deposit (lodge) this
certificate in PDTC through his TP account.

In the Philippine Stock Exchange (PSE), clearing days specifically exclude

Saturdays and Sundays, as well as legal holidays and other days when the
Bangko Sentral ng Pilipinas (BSP) Clearing Office is closed, according to
the PSE. This means that clearing and settlement of transactions only
occur on weekdays that are not designated as holidays.

EXAMPLE:
An investor bought 100 shares at P100 from a stockbroker on May 30,
2025. When is the payment date? ____________
ANSWER:
T= May 30
Sat & Sun May 31, June 1
+1= June 2
+2= June 3 (Tuesday)
Board Lot System
Equity trading is done by board lot or round lot system. The Board Lot
Table determines the minimum number of shares an investor can buy or
sell at a specific price range. Therefore, the minimum amount of initial
investment varies and will depend on the market price of the stock as well
as its corresponding board lot. Prices of stocks move through a scale of
minimum price fluctuations.

Board Lot Table

Market price (in Php) Tick Size Lot Size

0.0001 to 0.0099 0.0001 1,000,000

0.0100 to 0.0490 0.001 100,000
0.0500 to 0.2490 0.001 10,000
0.2500 to 0.4950 0.005 10,000
0.5000 to 4.9900 0.01 1,000
5.0000 to 9.9900 0.01 100
10.0000 to 19.9800 0.02 100
20.0000 to 49.9500 0.05 100
50.0000 to 99.9500 0.05 10
100.0000 to 199.9000 0.1 10
200.0000 to 499.8000 0.2 10
500.0000 to 999.5000 0.5 10
1000.000 to 1999.000 1 5
2000.000 to 4998.000 2 5
5000.000 and UP 5 5
EXAMPLE:
Mr. X wishes to buy a stock whose market price is P10.00. Based on the
Board Lot Table, the number of shares he can buy at a regular transaction
should be in multiples of 100 shares. In this case, if Mr. X wants to buy
1,000 shares (which is a multiple of 100 shares) his required cash outflow
will be as follows:

Market price/share ₱ 10.00

Number of shares to be bought x 1,000

₱ 10,000.00

Broker’s Commission* (0.25% + 12% VAT) + 28.00

SRC Fee**** (Transaction Value x 0.005%) + 0.50

PSE Transaction Fee (Transaction Value x

+ 0.56
0.005%) + 12% VAT

SCCP Fee (Transaction Value x 0.01%) + 1.00

Total Cash Outlay ₱ 10,030.06

*Broker’s commission varies depending on the broker’s commission structure,

with a maximum allowable commission rate of 1.5% (please refer to Table 2
below)
Schedule of Transaction Fees and Taxes Levied on
Investors
Type of Fee Rate

Transaction Fee 0.005% of the value of transaction

Clearing and
0.01% of the value of transaction
Settlement Fee

Upliftment/
Php50 per certificate
Withdrawal Fee

Cancellation Fee Php20 + 12% VAT

Stock
0.6% of the value of transaction
Transaction tax

10% of
Filipino citizen or resident alien dividends
received

20% of
Non-resident individual engaged in trade
dividends
or business in the Philippines
received
Withholding Tax
25% of
Non-resident individual not engaged in
dividends
trade or business in the Philippines
received

30% of
Non-resident foreign corporation dividends
received
EXAMPLE:
BDO is a publicly listed corporation, currently trading at P588 per share.
BDO’s board lot is __________ 10 shares

EXAMPLE:
An investor wants to invest in SMC, currently trading at P100 per share. If
an investor has P15,000, how many shares is he entitled to buy based on
the board lot including payment of all charges? __________
P15,000/ P100= 150 shares
- 10 shares
140 shares x P100= P14,000 + Fees
PSE Trading Hours
Trading days are from Monday to Friday, 9:00 a.m. to 3:15 p.m.

Time Phase
9:00 am Pre-Open

9:15 am Pre-Open No-Cancel

9:30 am Market Open

12:00 nn Market Recess

1:00 pm to 1:30 pm Market Resume

2:45 pm Pre-Close

2:48 pm Pre-Close No-Cancel

2:50 pm Run-off/Trading-at-Last

3:00 pm Closing VWAP Session

3:15 pm to 3:30 pm Market Close

The trading system being used by PSE
The PSE uses the PSEtrade XTS trading engine which runs on the X-
stream Trading technology of Nasdaq. PSEtrade XTS allows for multi-
asset class trading, expanded trading capacity, and enhanced risk
management and business continuity processes.

Stock ownership certificate

The PSE through the Philippine Central Depository (PCD) uses the
computerized book-entry system to transfer ownership of securities from
one account to another, thus eliminating the need for physical exchange of
scrip between the buyer and seller. Scripless trading describes the system
where settlement is carried out via book-entries, rather than by the
movement of physical certificates. However, you may still request for an
upliftment of your shareholdings to get a physical certificate.

Measures of market performance

Market performance is typically measured by three indicators, namely,
market capitalization; value turnover; and index levels.

Market Capitalization – Market capitalization is the total market value

of all of a company’s outstanding shares. It is calculated by multiplying the
company’s shares outstanding by the current market price of the
company’s share per piece. Market capitalization is an indicator used by
the investment community when determining a company’s size. For
example, if a company has 35 million shares outstanding and each is worth
P100, then the company’s market capitalization amounts to P3.50 billion.

Value Turnover – Value turnover is the amount of transactions in

monetary terms traded on a particular period. It tells how much money is
turned over from the trading of stocks. Value turnover is calculated by
adding up all the transaction value of all shares traded in a specified day,
month, quarter or even a year.

Index Level – The index level is a barometer by which the upward or

downward trend of a group of stocks is established. In the case of the PSE,
there are separate index levels for each of the six sector indices, all-shares
index and PSE index (PSEi). The index levels vary due to the listed
companies included per index and the different base years used when
each index was created.
Stock Valuation
Is the Market Price Reasonable?

Value of the Share = PV of the future Cash Flows (Discounted Cash

Flows approach)

<Publicly listed companies>

1. One-period or Multiple Period Valuation Model

*If the investor’s purpose is to receive a greater return or dividend

during the holding period:

Where:
V0– the current fair value of a stock
Dn– the dividend payment in the nth period from now
Pn– the stock price in the nth period from now
r – the estimated cost of equity capital

Example: You are an investment analyst. Your client asked you to

assess the viability of the investment in ABC Corp. The client expects
to hold the investment for three years and sell it at the end of the
holding period (end of the third year). You’ve forecasted that ABC
Corp. will pay dividends of P2.50 in the first year, P3 in the second
year, and P3.25 in the third year. You expect that at the end of the
third year, the selling price of the company’s stock will be P125 per
share. The estimated cost of capital is 5%. The current stock price is
P110 per share.

Po= (2.5 x 0.9524) + (3 x 0.9070) + ( 3.25 x 0.8638) + (125 x 0.8638)=

P115.88 intrinsic/true value of the company’s stock

Decision: The investor should consider buying this stock because

current selling price is lower than the True Value of the stock.
Dividend-based valuation techniques:

1. Zero Growth Dividend Discount Model (DDM)

The zero growth DDM assumes that all future dividends of a stock will be
fixed at essentially the same peso value forever, or at least for as long as
an individual investor holds the shares of stock. In such a case, the stock’s
intrinsic value is determined by dividing the annual dividend amount by the
required rate of return:

Stock Value= Annual Dividends

Required Rate of Return

When examined closely, it can be seen that this is the exact same formula
that is used to calculate the present value of a perpetuity, which is

Present Value= Dividend

Discount Rate

For the purpose of using this formula in stock valuation, we can express
this as

PV= D
r
where:
PV is equal to the price or value of the stock,
D represents the dividend payment, and
r represents the required rate of return.

This makes perfect sense because a stock that pays the exact same
dividend amount forever is no different from a perpetuity—a continuous,
never-ending annuity—and for this reason, the same formula can be used
to price preferred stock. The only factor that might alter the value of a stock
based on the zero-growth model would be a change in the required rate of
return due to fluctuations in perceived risk levels.
Example:
What is the intrinsic value of a stock that pays P2.00 in dividends
every year if the required rate of return on similar investments in the
market is 6%?

Solution:

Stock Value=P2.00/ 0.06=P 33.33

Tony Stark estimates that the dividend of Ironman Company, an

established technology producer, is expected to remain constant at
P6 per share indefinitely. If his required return on its stock is 15%,
what is the value per share?
Stock Value=P6.00/ 0.15=P 40
2. Constant-growth model or Gordon Growth Model
<named after Myron Gordon>
The most common DDM is the Gordon growth model, which uses the
dividend for the next year (D1), the required return (r), and the estimated
future dividend growth rate (g) to arrive at a final price or value of the stock.
The formula for the Gordon growth model is as follows:

PV = D1
r−g
Where:
PV is equal to the price or value of the stock,
D represents the dividend payment, and
r represents the required rate of return
g represents the constant growth rate

LEGEND
T= TOTAL PERIOD MINUS 1
V FINAL= DIVIDEND AT YEAR N
V BEGIN= DIVIDEND AT YEAR 1

g= CAGR= Compounded Annual Growth Rate=

BOOK: 1.4^0.2= 1.06961037573 -1 X 100= 6.9610% OR 7%
or:
https://www.thecalculatorsite.com/finance/calculators/cagr-calculator.php

This calculation values the stock entirely on expected future dividends. You
can then compare the calculated price to the actual market price in order to
determine whether purchasing the stock at market will meet your
requirements.
Example:
Consider a company that pays a P5 dividend per share (Dividend next
year) , requires a 10 percent rate of return from investors and is
seeing its dividend grow at a 5 percent rate.

A fair price, under this model, is P = 5/(0.10-0.05) = P100 per share.

Decision: At a higher price, investors won't get the desired rate of

return, so they'll sell the stock and lower the price. At a lower price it
will be a bargain since they'll get a higher rate than required, meaning
other investors will bid up the price.

ProGo Company, a selfie stick company, assumes that dividend will

grow by 5%. The last dividend declared is at P2.00. Required return is
15%.
Stock Value=P2 x 1.05 / 0.15- 0.05=P 21 per share
3. Variable-growth model or Non-constant Growth
Dividend Discount Model
Many experienced analysts prefer to use the variable (non-constant)
growth DDM because it is a much closer approximation of businesses’
actual dividend payment policies, making it much closer to reality than
other forms of DDM. The variable growth model is based on the real-life
assumption that a company and its stock value will progress through
different stages of growth.

The variable growth model is estimated by extending the constant growth

model to include a separate calculation for each growth period. Determine
present values for each of these periods, and then add them all together to
arrive at the intrinsic value of the stock. The variable growth model is more
involved than other DDM methods, but it is not overly complex and will
often provide a more realistic and accurate picture of a stock’s true value.

Example: Maddox Inc. paid P2.00 per share in common stock

dividends last year. The company’s policy is to increase its dividends
at a rate of 5% for four years, and then the growth rate will change to
3% per year from the fifth year forward. What is the present value of
the stock if the required rate of return is 8%?

Dividend PV PV
factor
Year 1 P2 x 1.05 2.10 0.9259 1.94439
Year 2 P2.1 x 1.05 2.205 0.8573 1.8903465
Year 3 P2.205 x 1.05 2.31525 0.7938 1.83784545
Year 4 P2.31525 x 1.05 2.4310125 0.7350 1.7867941875
Value after Year 4 50.0788575 0.7350 36.8079602625
P44.27

TV= Next dividend / Rate of return – growth rate= 2.43 x 1.03= 2.5029 /
(8%-3%)= 2.5/ 5%= P50.08
Vicky Company forecasts that dividends of Vir Company will grow by
10% in the next three years and 5% from Year 4 onwards. Required
return of Vicky is 15%. Last dividend received by Vicky Company is
P3.

Step 1. Dividends for the next 3 years:

Y1 = P3.30,
Y2 = 3.63 ;
Y3 = 3.99

Step 2. Present value during initial growth period

Y1 = 3.30 x 0.8696 = P2.87
Y2 = 3.63 x 0.7561 = P2.74
Y3 = 3.99 x 0.6575 = P2.62

Step 3. Value from Year 4 onwards using constant growth model.

Dividends to be received by Year 4 = P3.99x1.05% / (15%-5%)= P41.90

Present Value by end of Y3 = P41.90 x 0.6575= P27.55

Step 4. Add present value for all years.

Stock Value = P2.87 + P2.74 + P2.62 + P27.55 = P35.78
 Other Alternative Valuation Methodologies
Free Cash Flow – cash flow available to creditors and shareholders
after satisfying all contractual obligations. Free cash flow follows the
premise of present value computation wherein annual free cash flow is
discounted using weighted average cost of capital. Since free cash flows
estimates the value of the entire company, market value of debt and
preference shares should be subtracted to arrive at value of ordinary
shares.
Book Value per Share – value per share based on the exact book
value as recorded in the accounting records. This method does not
consider future earning potential of the firm.
Liquidation Value per Share – value per share based on the current
market value of assets (assuming it is sold today) and all liabilities
(including preference shares) are fully paid. This method is more realistic
compared to book value per share but does not consider future earning
potential of the firm.
Price/Earnings Multiples Method – share price is computed by using
the average price/earnings ratio of comparable companies in the same
industry. This is done by multiplying the current earnings per share by the
P/E multiple. It shows how much investors are willing to pay per peso of
earnings.
The formula and calculation used for this process are as follows.

P/E Ratio = Market value per share

Earnings per share

Example: If a company was currently trading at a P/E multiple of 20x,

the interpretation is that an investor is willing to pay P20 for P1 of
current earnings.
 Hybrid and Derivative Securities
Hybrid Securities – financial instruments which possess
characteristics of both debt and equity

1. Stock purchase warrants – instruments that give bearers the right

to purchase stated number of shares of a company at a given price within
a limited time frame. Warrants are detachable and are often used as
sweeteners to bond issuances.

2. Convertible securities – bonds or preference shares that can be

converted to ordinary shares in the future.

Derivative Securities – securities that are neither debt nor equity but
derives value from underlying asset.

1. Options – gives holders chance to purchase (call option) or sell

(put option) a specific asset. Holder can decide whether to exercise the
option or not.
 Dividends vs Split

When a company issues a stock dividend (instead of a cash

dividend), the price may also decrease, as it can dilute the earnings per
share and impact the stock's valuation. If a stock is trading at P60 and
declares a P2 dividend, the price might drop to P58 on the ex-dividend
date. In the Philippines, stock dividends declared out of unrestricted
retained earnings generally do not require specific SEC approval; it's an
exempt transaction under Section 10.1(d) of the Securities Regulation
Code. However, if a company declares dividends based on interim
accounts, particularly unaudited ones, SEC approval is required.

In the Philippines, a stock split is governed by the Securities and

Exchange Commission (SEC). The process involves increasing the
number of outstanding shares of a company without altering the total
amount of its capital. While generally not resulting in taxable income, a
stock split requires adherence to specific SEC rules and regulations,
particularly concerning disclosure and per-share calculations in financial
statements.

Steps to Undertake a Stock Split:

1. Board Resolution- The company's board of directors must approve the
stock split.
2. Shareholder Approval-Shareholders must also approve the stock split,
often through a vote at a shareholders' meeting.
3. SEC Notification and Filings-The company must notify the SEC and file
necessary documents, including any required amendments to the Articles
of Incorporation.
4. Disclosure-The company must disclose the stock split in its financial
statements and any other relevant filings.
 Rights vs Warrants
-Stock Rights- is a market offer, wherein a company need not go public to
raise further capital, instead it gives its current shareholders the right <not
obligation> to subscribe to newly issued shares in proportion to their
existing shares, usually at a discount to the market price.

EXAMPLE:
Mr. X owns 500,000 shares of ZZZ Inc.’s common stock with 40M
outstanding. ZZZ annouces a plan to sell an additional 10M shares
through a rights offering. The market value of the stock is P50 before
rights offering and the new shares are being offered to existing
shareholders at a P10 discount. If Mr. X exercise the preemptive
rights, how many new shares can he purchase? __________

500,000 sh/ 40,000,000 sh= 1.25% x P10,000,000 = 125,000 shares

Stock Warrants- gives the investor the right to purchase a company’s

stock at a specific price and on a specific date, however, once the time
elapses it becomes worthless.
Listed corporations in the Philippines are subject to various rules and
regulations to ensure transparency, fairness, and investor protection. Here
are some of the key regulations applicable to listed corporations in the
Philippines:

1. Securities Regulation Code (SRC): The SRC is the primary law

governing the issuance, registration, and trading of securities in the
Philippines. It sets out the regulatory framework for listed corporations and
regulates activities such as public offerings, disclosure requirements,
insider trading, and market manipulation.

2. Philippine Stock Exchange (PSE) Rules: Listed corporations must

comply with the rules and regulations of the Philippine Stock Exchange,
the country's primary stock exchange. These rules cover areas such as
corporate governance, disclosure requirements, trading procedures, and
delisting criteria.

3. Corporate Governance Code: The Securities and Exchange

Commission (SEC) of the Philippines has issued a Corporate Governance
Code for Publicly Listed Companies, which provides guidelines for good
corporate governance practices. Listed corporations are expected to
comply with the principles and recommendations outlined in the code,
which cover areas such as board composition, shareholder rights,
transparency, and accountability.

4. Disclosure Requirements: Listed corporations are required to disclose

information to the public in a timely and accurate manner. This includes
financial reports, material information, corporate developments, and
any other information that may affect the company's stock price or
investors' decisions.

5. Code of Corporate Governance: The SEC requires listed corporations

to adopt a Code of Corporate Governance, which sets out the company's
policies and practices related to governance, risk management, and
compliance. The code should be aligned with the SEC's Corporate
Governance Code and should be disclosed to shareholders and the public.

6. Insider Trading and Market Abuse Regulations: The Philippines has

laws and regulations prohibiting insider trading and market abuse. Listed
corporations and their insiders are prohibited from trading securities based
on material non-public information, and the SEC enforces rules to prevent
market manipulation and other fraudulent activities.

7. Annual General Meeting (AGM) Requirements: Listed corporations

are required to hold an annual general meeting of shareholders, where
important matters such as the election of directors, approval of
financial statements, and other corporate resolutions are discussed
and voted upon.

8. Regulatory Oversight: The SEC is the primary regulatory authority

overseeing listed corporations in the Philippines. The SEC has the
authority to enforce securities laws and regulations, conduct investigations,
impose sanctions for non-compliance, and oversee the operation of the
Philippine Stock Exchange.

9. Other Applicable Laws: In addition to securities laws and regulations,

listed corporations in the Philippines must also comply with other relevant
laws and regulations, including corporate law, tax law, accounting
standards, and labor laws.

It's important for listed corporations in the Philippines to stay informed

about the latest regulatory developments and ensure compliance with
applicable laws and regulations to maintain the trust of investors and
regulators.
 ASSIGNMENT
True or False
1. OTC is traded in the secondary market.
2. Treasury shares are part of the outstanding shares since they are held
by the company itself.
3. Dividends are guaranteed payments to shareholders and must be paid
out regularly.
4. Equity financing is considered permanent because it has no maturity
date.
5. Interest payments on debt can be deducted as an expense for tax
purposes, while dividends cannot.
6. A prospectus is submitted to the SEC after securities have been sold to
investors.
7. Preference shares always carry voting rights equal to ordinary shares.
8. A stock dividend can cause the stock price to decrease due to dilution of
earnings per share.
9. Ordinary shareholders have the highest priority in receiving company
assets during liquidation.
10. For an IPO, a company must disclose detailed information through a
prospectus filed with the SEC.
11. In conventional brokerage, investors directly trade shares on the
exchange without any intermediary.
12. Online trading platforms always offer full investment advisory services
like traditional brokers.
13. Mutual funds allow investors to control and individually select each
stock within the fund.
14. Online trading platforms charge higher commissions than conventional
brokers due to their advanced technology.
15. The Philippine Stock Exchange was formed in 1992 through the
unification of the Manila and Makati Stock Exchanges.
16. The Philippine Dealing System Holdings Corp. operates only the
equities market and does not handle bonds or fixed income instruments.
17. The PSEi consists of the 30 smallest and least active companies on
the Philippine Stock Exchange.
18. PSE EDGE allows disclosures to be shared via social media platforms
like Facebook and Twitter.
19. When buying stocks through an online trading participant (TP), your
account must be pre-funded before placing a buy order.
20. Settlement of trades happens immediately on the transaction date
(T+0) for both traditional and online trading participants.

Multiple Choices.
1. Preferred stock is valued as if it were a
a. fixed-income obligation b. Bond. c. Perpetuity. d. common stock.

2. The cost of preferred stock is

a. lower than the cost of long term debt.
b. higher than the cost of common stock.
c. higher than the cost of long term debt and lower than the cost of
common stock.
d. lower than the cost of convertible long term debt and higher than the
cost of common stock.

3. The disadvantages of issuing common stock versus long term debt

include all of the following EXCEPT
a. the potential dilution of earnings.
b. high cost.
c. no maturity date.
d. the market perception that management thinks the firm is over valued,
causing a decline in stock price.

4. Which of the following is NOT a feature of the PSE EDGE system?

a. Flexible disclosure formats
b. Built-in trading and investment simulator
c. Advanced information security
d. Comprehensive distribution system
5. BB’s stock is currently selling for P160.00 per share and the firm’s
dividends are expected to grow at 5 percent indefinitely. In addition, its
most recent dividend was P5.50. If the expected risk free rate of return is 3
percent, the expected market premium is 5 percent, and it has a beta of
1.2, BBB’s stock would be _________.
a. overvalued c. properly valued
b. undervalued d. Not enough information to tell
Problem Solving.
AAA has a beta of 1.10. The risk-free rate of interest is currently 6%, and
the required return on the market portfolio is 13%. The company plans to
pay a dividend of P2.91 in the coming year and anticipates that its future
dividends will increase at an annual rate consistent with that of the 2022–
2024 period:

Year 2022 2023 2024

Dividend 2.25 2.45 2.67

1. Determine the dividends growth rate.___________

2. Estimate the value of AAA’s stock. _______________

3. DDD has common stock with a market price of P25 per share and an
expected dividend of P2 per share at the end of the coming year. The
growth rate in dividends has been 5 percent. The cost of DDD’s common
stock equity is ______________

4. EEE has common stock with a market price of P55 per share and an
expected dividend of P2.81 per share at the end of the coming year. The
dividends paid on the outstanding stock over the past five years are as
follows:

Year 1 2 3 4 5
Dividend 2.00 2.14 2.29 2.45 2.62
The cost of the firm’s common stock equity is ___________________

5. FFF has common stock with a market price of P100 per share and an
expected dividend of P5.61 per share at the end of the coming year. A new
issue of stock is expected to be sold for P98, with P2 per share
representing the underpricing necessary in the competitive capital market.
Flotation costs are expected to total P1 per share. The dividends paid on
the outstanding stock over the past five years are as follows:

Year 1 2 3 4 5
Dividend 4.00 4.28 4.58 4.90 5.24
The cost of this new issue of common stock is ___________
6. The COLLECTOR has agreed to sell the reality stone to GGG in three
years at a price of P100,000. The current risk free rate is 7 percent. At
what price should she value her collection today? _________

7. Asset P has a beta of 0.9. The risk free rate of return is 8 percent, while
the return on the market portfolio of assets is 14 percent. The asset’s
required rate of return is _________________

8. What is the expected market return if the expected return on asset X is

20 percent, its beta is 1.5, and the risk free rate is 5 percent? _________

9. What is the expected risk-free rate of return if asset X, with a beta of 1.5,
has an expected return of 20 percent, and the expected market return is 15
percent? _____________

10. A firm has determined its cost of each source of capital and optimal
capital structure, which is composed of the following sources and target
market value proportions:

Source of Capital Target Market Proportions After-Tax Cost

Long-term debt 40% 6%
Preferred stock 10 11
Common stock equity 50 15
The weighted average cost of capital is _________________

11. Horizon Corp. reported total assets of Php1,750,000 financed by 70%

liabilities. It is further noted that their retained earnings is Php400,000. The
outstanding shares of Horizon is 40,000. If the value of the stocks of
Horizon in the market is 1.75x of the value issued to the primary market,
the value of the Horizon prevailing in the secondary market is _____.

12. A 5% preferred stock with a par value of Php100 was offered in the
market. The dividends are to be paid annually. If the required return is
16%, the value of the preferred stock would be _______.
13. A firm recently paid dividends amounting to Php5.36 per share. Four
years ago they’ve declared Php4.50 per share. The growth is found to be
constant. If the required return is 15%, the value of the stock is _________

14. A stock with a beta of 1.45, risk free rate is an annual rate of 5% and
the market return is quoted at an annual rate of 11%. The stock committed
to declare a regular dividends of Php5.20 per share. In 2020, a global
pandemic affected the operations of the company that increased its beta to
1.75. The new equilibrium price of the stock based on the recent events
will be _____

15. An investor is planning to purchase a stock of Prime Corp. The

dividends per share of Prime Corp is expected to be: Year 1 – Php10; Year
2 – Php12; Year 3 – Php13. The investor also planned to sell it out after 3
years at Php150 per share. Suppose that the required return is 15%, the
value of the stock today is _______

16. DDD has an outstanding preferred issue of stock with a par value of
P100 and an annual dividend of 12% (of par). Similar-risk preferred stocks
are yielding a 14% semiannual rate of return. What is the current value of
the outstanding preferred stock? _____________

17. ABC is looking for an investment from ZZZ Inc, a publicly listed
company. Based on available dividend information for the last 5 years:

Year Dividend per share

1 P5
2 5.5
3 5.9
4 6.4
5 7.1

Compute the compound annual growth rate ___________

18. What is the current price per share of the ordinary shares if your know
the current dividend yield is 8%, the P/E is 10 and the annual dividend per
share is P2.50? ____________