LESSON 6

EQUITY MARKETS
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Article Table of Contents:

 Equity Market: Meaning

 How does Equity Market Work?

 Stock Exchange or Over-the-Counter

 Types of Equity Market

 Participants of Equity Market

 Procedures of Equity Market

 Advantages of Equity Market

 Disadvantages of Equity Market

 Knowing the Philippine Stock Exchange

1. EQUITY MARKET: MEANING

.

An equity market is a market place where shares of public companies are bought and
sold. It is commonplace where the issuers of the shares (Companies) and the
subscribers of the shares (Investors) come together. The trading takes place on a stock
exchange or on the over-the-counter (OTC) markets, depending on the type of issue.
After the listing of stocks takes place, there is a substantial number of buyers and
sellers.

Equity Markets are a win-win situation for the company and the investors. It gives a
platform to the companies for (1)raising equity share capital, and investors get a
platform for making investments with expectations of getting good returns in the future.
(2)Equity Market helps the companies to transform from private to public. (3)Equity
Market boosts the Equity Financing process. It is also termed as Stock Market or Stock
Exchange.

2. HOW DOES EQUITY MARKET WORK?

.
The functioning of an Equity Market is a bit similar to that of an Auction Market. In
Primary Markets, lots of buyers bid for the stock according to their estimation of the
market value within the price bands. The company after analyzing all bids allocates the
shares according to the timing of the bid and the price band. In the case of the
Secondary Market, the companies list their shares on the Stock Exchange or Over-the-
Counter Exchange and the buyer’s bid for the same. Prices of the security fluctuate
according to the demand-supply factor. In the case of the Primary Market, the issuance
takes place directly from the companies end through an IPO (Initial Public Offering) and
FPO (Follow-on-Public Offering). In the case of the Secondary Market, the buying and
selling of shares take place from one shareholder to another through the broker on the
stock exchange.

3. STOCK EXCHANGE OR OVER-THE-COUNTER

.

In the investment world, the purchase or sell of shares and securities can be from the
publicly listed and traded securities or it could be privately traded shares and securities.
The buying and selling of the shares can be in the form of publicly-traded securities or
privately-traded securities. Trading of public stocks takes place on Stock Exchanges
and that of private stock takes place on Over-the-Counter Markets. The Company
has an option of listing its shares on a Stock Exchange or on the OTC Market.

(Public)Stock Exchange functions on a centralized system in a systematic manner.

Here there is no involvement of any third party like dealers, in the trade. The
trading takes place through a designated exchange and in a completely
transparent manner. The exchange could be a physical place or a virtual place. The
prices offered for particular security remains the same for all investors, as all trades are
undertaken from the same place.

(Private)Over-the-Counter (OTC) Markets work on a decentralized system. Third-

parties like brokers and dealers play a very vital role in making this whole system
work. They are the ones, who mostly quote prices of stock. There exists a high
counterparty risk in OTC Markets. It is less transparent and less regulated.

4. TYPES OF EQUITY MARKET

.

The division of Equity Markets takes place in two major types, i.e. Primary Market and
Secondary Market.

Primary Market
The type of Equity Market, where the shares are sold directly by the company to the
public is known as the Primary Market. The issuance is through Initial Public
Offering (IPO) or Follow-on-Public Offering (FPO). In this market, the company
dilutes its ownership in the company by offering it to the public. Primary Market
gives a platform to the private company to metamorphose into a public company. Mostly
in this market, the issuance of shares takes place for the first time.

Secondary Market

The type of Equity Market, where trading of already listed shares takes place is
known as the Secondary Market. Here, the buying and selling of shares take place
from one investor to another. There is no direct trading between the company and
a shareholder. In this Market, there is no dilution of ownership by the company;
existing listed shares are only traded in this market.

5. PARTICIPANTS OF EQUITY MARKET

.

Let’s look at a few Equity Market participants, which play a different set of rules.

Companies

There are many companies from different sectors, segments, countries, size, etc issues
their shares in the Equity Market for the general public.

Retail Investors and Institutional Investorss

Both types of investors play a very important role in Equity Markets. Retail Investors are
individual investors, investing a smaller chunk. Institutional Investors make investments
in a larger chunk.

Financial Intermediaries

There are many Financial Intermediaries in the Equity Market, which makes this market
function well.

Depository and Depository Participants are the authorized body, who are responsible
for keeping the share certificate safe with them. The certificate can be in electronic form
or physical form.

Clearing Houses are the second important participants in the Equity Market. Their main
job is to settle all the trades within 2-3 days of the trade.
Stock Brokers are licensed financial intermediaries, linking investors and the stock
exchange, thereby facilitating the trade.

Stock Exchanges act as a platform for trading in an Equity Market.

Banks are an important participant, which transfers funds for facilitating trade.

These were important financial intermediaries in the Equity Market.

Regulatory Authority

The Regulatory Authority acts as a watchdog in the Market. Their main role and
objective are to ensure and see that no fraud takes place and investors’ interest is taken
care of in all the regulatory, controlling, and operational matters. If any participant is
working unethically, they have full authority of taking any stringent action. Securities
Exchange Commission (SEC) is the regulatory body of the Philippines.

6. PROCEDURES OF EQUITY MARKET .

Equity Market performs many procedures, apart from trading. Other procedures are as
follows:-

Risk Management

The Equity Markets, with the help of the Securities Exchange Commission (SEC), tries
to work in the best interest of the investors. It tries to reduce the risk for the retail
investors by curbing frauds initiated by the Company. The Equity Market adopts many
practices like margin requirements, liquid assets management, voluntary closeout for
Risk Management.

Information Dissemination

The Stock Exchanges also insist the company to regularly file information about the
company and any change in its management, developments in the board meetings, a
decision with regard to the declaration of dividend, rights or bonus issues, etc for timely
dissemination of information to the investors. So, they can take an informed decision
with regard to investments.

Settlement and Clearing

The Stock Exchange of the country acts as a settlement and clearing-house for the
trade settlement. After the trade takes place, it takes 2-3 days for the stock exchange to
clear and settle the trade.

The above-mentioned were some important procedures conducted by the Equity

Markets, apart from Trading.
7. ADVANTAGES OF EQUITY MARKET .

 Equity Markets helps in the creation of wealth for the investors by getting
ownership in the company. It is a tool useful for investors for making high profits.

 It is a platform, which gives access to a cheaper source of finance for the

issuing company.

 This Market boosts the Company’s expansion and research and development
targets.

 Equity Market gives Companies a platform for making them visible to the world.

 A presence in Equity Market, claims stability and attracts investors including

Foreign Direct Investments (FDIs) and Foreign Portfolio Investments (FPIs).

 It provides liquidity for investors. They can easily enter and exit the markets.

 The investors get a dividend return and capital gain return, which is, however,
not fix in nature.

 The investors have limited liability in the company. The risk is borne only to the
extent of ownership.

 By having part ownership the shareholders enjoy voting rights in the company
and are able to vote on the important decisions of the company.

 The Equity Market frees the company from any interest rate burden as there is
no commitment about dividend on equity by the company.

8. DISADVANTAGES OF EQUITY MARKET .

 Equity Market’s volatility is the biggest risk for the issuing company and the
subscriber.

 This market does not give a guaranteed return to the investor.

 As Equity shareholders have ownership in the company, at the time of liquidation

they get money on the basis of the residual claim.

 One of the biggest disadvantages of the Equity Market is that disclosure of a lot
of information takes place for the general public at a large.

 The advantages and disadvantages are non-exhaustive in nature.

The equity market is an important market that keeps the economy running. Irrespective
of all of its limitations, it is helpful for the investor, company, and the country at a large.
A country with a stable equity market is considered a good country. In conclusion, the
Equity Market along with all other participants acts as a backbone of the economy.

9. KNOWING THE PHILIPPINE STOCK EXCHANGE .

1. What is the Philippine Stock Exchange, Inc.?

The Philippine Stock Exchange, Inc. (PSE or Exchange) is a private non-profit

and non-stock organization created to provide and maintain a fair, efficient,
transparent and orderly market for the purchase and sale of securities such as
stocks, warrants, bonds, options and others.
 
2. What is the role of the PSE?
 
The PSE bring together companies which aim to raise capital through the
issue of new securities. Through the listing of their share in the stock
exchange, companies can have easier access to funds. Raising new capital
through an additional public offering is easier and less expensive when the company
is already listed in the Exchange. Therefore, the PSE plays a vital role in the
financing of productive enterprises that use the funds for growth and
expansion of new jobs. It is therefore essential to the growth of the Philippine
economy.
 
Furthermore, the PSE facilitates the selling and buying of the issued stocks and
warrants. It provides a suitable market for the trading of securities to individuals and
organizations seeking to invest their saving or excess funds through the purchase of
securities.
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Apart from these functions, the PSE has committed itself to (a) protecting the
interest of the investing public; and (b) developing and maintaining an
efficient, fair, orderly and transparent market.
 
Efficient      
This means that orders are executed and transactions are settled in the fastest
possible way. Some reforms have been instituted or are being carried out by the
PSE to make the market more efficient, such as:

·        installation of fully automated trading system;

·        installation of computer trading terminals in cities outside Metro Manila to
encourage the entry of provincial investors; and creation of a central cleaning and
depository system to mobilized stock certificates and allow transfer of shares and
funds by book entry.
 
Fair     
 This means that the PSE assures that no investor will have an undue advantage
over another ,market player in trading by manipulating prices and engaging into
insider trading. Insider trading is the act of buying or selling a particular stock based
on certain privileged information which is not available to the public. As such it is
considered as illegal and prohibited by the PSE.
 
Market Transparency     
Transparency proceeds from the assumption that the investor can only make
informed and intelligent information about the particular sock he wants to buy. The
PSE requires listed companies to disclose timely, complete and accurate material
information to the Exchange and the public on a regular basis. Such information
would include stock price information, corporate conditions and developments which
tend to affect stock prices like dividend, mergers and joint ventures, and the like.
 
3. How did the PSE begin?
 
      The Philippine Stock Exchange began 70 years ago, on August 8, 1927. Five
Manila based businessmen, namely W. Eric Little, Gordon W. Mackay, John J.
Russell, Frank W. Wakefield and W.P.G. Elliot felt that increasing trading activity
would stimulate the business atmosphere. They got together, put their plan into
action and founded the Manila Stock Exchange, the first Stock Exchange in the
Philippines and one of the oldest in the Far East. It was originally located in
downtown Manila, transferred in1970 to its own three-story building in Binondo, and
then moved to Pasig in 1992.
 
      On May 27, 1963, the Makati Stock Exchange was organized by five other
businessmen. These were Hermenegildo B. Reyes, Bernard Gaberman, Eduardo
Ortigas, Aristeo Lat and Miguel Campos. It started it operations on November 16,
1965 and was located in Makati, then emerging center for finance.
 
      So, for about thirty years the Philippines had toe stock exchanges, the Manila Stock
Exchange (MSE) and the Makita Stock Exchange (MKSE). Although the two
exchanges remained as separate entities, they basically were trading the same
listed issues.
 
      The existence of two stock exchanges in one country caused confusion among
(prospective) investors because the two bourses had different policies, different
members and, last but not the least, different stock prices for the same listed stocks.
 
      The idea to unite the two exchanges and have it managed by a professional group
emerged and was attained when the Philippine Stock Exchange, Inc. was
incorporated on July 14, 1992. To further consolidate logistics and to hasten the
development of a more efficient capital market, the leaders of both bourses agreed
to unify on December 23, 1993 under the PSE.
 
      On March 4, 1994 the Securities and Exchange Commission granted the Philippine
Stock Exchange, Inc. its license to operate as a securities exchange in the country
stating that “a unified Stock Exchange is vital in developing a strong capital market
and a sustainable economic growth.” It simultaneously canceled the licenses of the
MSE and the MKSE.
 
      The Philippine Stock Exchange is currently the only organized exchange in the
Philippines licensed for trading stocks and warrants.
 
4. How is the PSE managed?

      One of the non-broker members heads the Exchange, appointed by the Board
as the President and Chief Executive Officer (CEO). The President, along with
the professional management of the PSE, executes the policy determinations
of the Board and ensures that the Exchange is operating efficiently. It carries
out for the members, listed companies and exchange system to ensure that stock
market operation in the Philippines is kept within the standards of fairness,
transparency, professionalism, trust and integrity. Additionally, it sets the rules
and regulations of the Exchange, monitors its implementation and ensures
that the investing public is given protection in the transaction of their
investments. The Exchange also ensures that all legal requirements under the
Corporation Code and the Revised Securities Act are met.
 
 
5. How is the PSE organized?
 
The PSE”S organizational structure holds five (5) groups, namely: Listings &
Disclosure Group, Compliance & Surveillance Group, Operations/Automated
Trading Group, Finance and Investment Group and Business Development &
Information Group along with the Office of the General Counsel, Membership
Department and Human Resources Management Department, which reports
directly to the Office of the President.
The functional responsibilities of each department are as follows:
 
a.Listings and Disclosure Group               
This group is composed of the following departments: Listing Processing,
Legal Advisory and Corporate Disclosure. It processes and evaluates listing
applications, conducts legal due diligence, and monitors compliance to continuing
listing requirements including disclosure of listed companies. It also coordinates
IPO (initial public offering) distribution.
 
b.Compliance and Surveillance Group     
This group acts as the police of the Exchange. It is composed of the
Compliance Audit Department, Special Investigation Department, Market
Surveillance Department and Legal Section. The group conducts legal audit
and review aside from auditing of member-brokers books and operations. It also
monitors the member’s compliance to set rules and regulations and enforces
appropriate sanctions to violators or erring member-brokers. It takes responsibility
in the operation of the surveillance activity, to ascertain that there are no illegal
postings and dealings made in any of the issues listed in the Exchange.

c.Operations/Automated Trading Group              

 Placed under this group are the Computer Operations Unit, Systems
Development Unit and Systems Integration and technical Support Unit along
with the Trading & Settlement Department, Administration Department and
PSE Plaza Operations Department to function as one group. It is considered as
one of the most critical responsibility areas in the organization since it handles
the operation of the automated trading and clearing and settlement activities for
stock operations.
 
The Automated Trading Group examines and controls the monitoring, logging and
analysis of computer system resource utilization; the maintenance of network
connections of all workstations at the trading floor and remote offices; managing of
database of off-floor installed sites; and the implementation and integration of the
different components of the trading and office systems.
 
On the other hand, the Trading and Settlement Department monitors compliance of
member-brokers to the clearing and settlement requirements of the settlement banks
and central depository. It coordinates with these agencies and the custodian banks,
both local and foreign, any trading discrepancies, irregularities or settlement
concerns of the member-brokers and investing public.
 
The Administration Department and the PSE Plaza Operations Department handles
the building maintenance, security and administration as well as the procurement
management and utilization of supplies and equipment including the daily
administrative requirements of the Exchange. It is also responsible for the daily
dissemination of all the listed companies’ corporate announcements along with the
foreign quotation report.
 
d.Finance and Investment Group              
The group is responsible for the management of the company’s financial
resources. It is composed of the Accounting Department, Treasury Department,
Payroll and Budget Section and Investments Monitoring Section which handles the
maintenance of book of accounts, preparation of financial statements and budget,
management and placement of PSE funds, monitoring of accounts receivables and
billing of accounts.
 
e.Business Development and Information Group     
This group is comprised of the following: Product Development Department, Market
Development Department, Research and Public Information Department, Corporate
communications Department, PSE Training Institute and PSE Rule Book/Task Force
Quality Unit.
 
e.1 .The Product Development Department is in charge of the expansion,
development and packaging of domestic and foreign financial products,
equity-related securities, debt-related securities and other forms of securities and
derivatives. It coordinates with private businesses, government agencies and
associations in the overall development and packaging of the securities, derivatives
and trading facilities.
 
e.2 .The Market Development Department handles the expansion, development
and monitoring of the investor base for both domestic and foreign market on
an individual and institutional level. It looks at the PSE trading operation’s
presence and positioning in the domestic, regional, and international markets
including the expansion and development of market intermediation services and
facilities covering secondary, over-the-counter (OTC) and third markets.
 
e.3 .The research and Public Information Department is composed of the
Research Services Sections, Information and Publications Section and the Public
Information and Assistance Center (PIAC). It conceptualizes, processes,
consolidates and handles multi-media dissemination of statistical and
analytical information and studies related to the business requirements of
members. It conducts research and provides information support to the
expansion and development of the Exchange trading operations and its markets.
It also maintains, develops and disseminates information through manual or
electronic libraries and documentation. The department produces regular
publications – Weekly Report, Monthly Reports, and Fact Book – that provide market
users with a review of the market’s performance along with historical and current
data on stock trading activities and listed companies. The Department also acts as
the liaison of the Exchange through the sharing of data and information with foreign
individuals, organizations and institutions.
 
Under the Research and Public Information Department is PIAC which implement
the Exchange’s continual public assistance program by covering information
promotion and facilitation along with complaints mediation in the physical center at
the principal offices of the PSE. It also manages the operation of the PSE Souvenir
Shop.
 
e.4. The Corporate Communications Department manages all forms of media
and public relation through press releases, information and educational
campaigns. It is in charge of managing and developing business promotional and
marketing exposure requirements of the PSE including the production and
dissemination of corporate internal bulletin and other forms of information materials.
 
e.5 .The PSE Training Institute is responsible for the development of
programs/curricula along with providing lectures, trainings and seminars
about securities market participants. Aside from in-house seminars, it conducts
road shows to investors in the provinces. The Institute also provides logistics
support to all training-related activities of the departments in the PSE. In the future,
the Institute plans to conduct activities such as the Certified Securities
Representative (CSR) seminars and the technical and fundamental analysis
seminars in the coordination with other intuitions.
 
The PSE Rile Book/Task Force Quality is responsible for the codification and the
manualization of the PSE’s rules, guidelines, procedures and other legislative
materials coming from government agencies, into a consolidated and
comprehensive Manual of Rules of the Exchange.
 
The PSE Rule Book consists of five (5) volumes which are: (1) Corporate Rules, (2)
Membership Rules, (3) Listing and Disclosure Rules, (4) Trading and Settlement
Rules, and (5) Compliance and Surveillance Rules.
 
f.Membership Department     
This department manages, implements and coordinates members’
requirements, planned activities and projects with the end in view of assisting
PSE management in the expansion, consolidation and development of its
membership. It also processes membership applications and various
corporate changes of member-brokers for approval by the Membership
Committee. It is in charge of circular preparations concerning membership, and
the monitoring of financial statements of brokers and SEC licenses of its stock
traders. In coordination with the Membership Committee, it facilitates memberships
arbitration. Further, the Membership Department organizes and prepares social
activities for all members.
 
g.Human Resources Management Department     
This department, under the Office of the President, handles employee career
management, administration of employee compensation and benefits,
management of corporate culture and organization development, implementation of
the company’s performance management system and formulation and enforcement
of company policies. To ensure continuing organization and employee
development, this department integrates the organizational structure/processes
and workforce issues into the business equation and evaluates group processes
and dynamics to tailor-fit results with a corporate staff training and management
development program.

h.Office of the General Counsel         

The Office of the General Counsel renders corporate legal services and serves
as the primary legal advisor to the Board of Governors, the President, the
Chief Operating Officer, the various departments, officers and employees of
the Exchange. It also coordinates with the external legal consultants on matters
referred by the exchange; represents the Exchange before judicial and
administrative/quasi-judicial bodies; and, attend legislative and administrative
 hearings or meeting as well as draft position papers and/or comments to pending
legislation and administrative issuances.
 

6. Where is the PSE located?

 
The PSE has two trading centers located at the PSE Centre in Ortigas, Pasig –
where its executive officers are situated – and at the PSE Plaza in Makati City.
 
7. What are the business hours of the PSE?
 
Except Saturdays, Sundays, legal holidays and days when the Bangko Sentral ng
Pilipinas (BSP) Clearing Office is closed, trading hours in the Philippine Stock
Exchange shall be in one continuous session with the following daily schedule:   

 Playing of the National Anthem   8:45 a.m.    

Pre-open Period     9:00 a.m. ~   9:30 a.m.    
Calculation of Open Price/Market Open  9:30 a.m.    
Regular Trading Period   9:30 a.m. ~ 12:00 noon    
Closing Time    12:00 noon 
 

A ten (10) minute extension from closing time shall be allowed to execute orders at
closing prices.

 
8. How do you contact the PSE?
 
Mailing address :   Public Information and Assistance Center
                             Ground Floor, Philippine Stock Exchange Centre
                             Exchange Road, Ortigas Center
                                   Pasig City 1605, Philippines
 
      Telephone Numbers:  (632) 637-8818 (hotline)
                                         (632) 636-0122 to 41 (trunk)
                                          Loc. 403, 410
 
      Facsimile Numbers:   (632) 634-5113; 636-0812; 636-0806
                                         (632) 637-8813