Module 3. Securities (Lecture Notes)

What are Securities
The term "security" refers to a fungible, negotiable financial

instrument that holds some type of monetary value.
Securities are fungible and tradable financial instruments used to

raise capital in public and private markets.
Fungible
● Fungible goods are items that are interchangeable (very
similar) because they are identical to each other for practical
purposes.
● Commodities, common shares, options, and dollar bills are
examples of fungible goods.
Financial instrument
● Financial instruments are assets that can be traded, or they can
also be seen as packages of capital that may be traded.
● A financial instrument is a real or virtual document representing
a legal agreement involving any kind of monetary value.
A security can represent ownership in a corporation in the form of

stock, a creditor relationship with a governmental body or a
corporation represented by owning that entity's bond; or rights to
ownership as represented by an option.
Stock
● A stock, also known as equity, is a security that represents the
ownership of a fraction of the issuing corporation. Units of stock
are called "shares" which entitles the owner to a proportion of
the corporation's assets and profits equal to how much stock
they own.
● There are two main types of stock: common and preferred.
Common stock usually entitles the owner to vote at
shareholders' meetings and to receive any dividends paid out
by the corporation.
● Preferred stockholders generally do not have voting rights,
though they have a higher claim on assets and earnings than
common stockholders. For example, owners of preferred stock
receive dividends before common shareholders and have
priority if a company goes bankrupt and is liquidated.
Bond
● A bond is a fixed-income instrument that represents a loan
made by an investor to a borrower (typically corporate or
governmental).
Bond Holder
● A bondholder is an investor who acquires bonds issued by an
entity such as a corporation or government body.
● The holders of bonds receive their initial principal back when
the bonds mature in addition to periodic interest (coupon)
payments for most bonds.
Option
● The term option refers to a financial instrument that is based on
the value of underlying securities such as stocks. An options
contract offers the buyer the opportunity to buy or sell—
depending on the type of contract they hold—the underlying
asset.
Types of Securities
There are primarily three types of securities: equity—which provides
ownership rights to holders; debt—essentially loans repaid with
periodic payments; and hybrids—which combine aspects of debt
and equity.
Securities can be broadly categorized into two distinct types:

equities and debts. However, some hybrid securities combine
elements of both equities and debts.
Equity Securities
An equity security represents ownership interest held by shareholders

in an entity (a company, partnership, or trust), realized in the form of
shares of capital stock, which includes shares of both common and
preferred stock.
Capital stock
● Capital stock is the amount of common and preferred shares

that a company is authorized to issue—recorded on the
balance sheet under shareholders' equity.
Equity securities do entitle the holder to some control of the

company on a pro rata basis, via voting rights. In the case of
bankruptcy, they share only in residual interest after all obligations
have been paid out to creditors. They are sometimes offered as
payment-in-kind.
Pro rata basis
● Pro rata is a Latin term used to describe a proportionate

allocation. It essentially translates to "in proportion," which
means a process where whatever is being allocated will be
distributed in equal portions.
● If something is given out pro rata, it typically means everyone
gets their fair share.
Payment-in-kind PIK
● Payment-in-kind (PIK) is the use of a good or service as

payment instead of cash.
Debt Securities
A debt security represents borrowed money that must be repaid,

with terms that stipulate the size of the loan, interest rate, and
maturity or renewal date.
Debt securities, which include government and corporate bonds,

certificates of deposit (CDs), and collateralized securities (such as
CDOs and CMOs), generally entitle their holder to the regular
payment of interest and repayment of principal (regardless of the
issuer's performance), along with any other stipulated contractual
rights (which do not include voting rights).
CDO’s
● A collateralized debt obligation (CDO) is a complex structured

finance product that is backed by a pool of loans and other
assets and sold to institutional investors.
Like CMOs, collateralized debt obligations (CDOs) consist of a group

of loans bundled together and sold as an investment vehicle.
However, whereas CMOs only contain mortgages, CDOs contain a
range of loans such as car loans, credit cards, commercial loans,
and even mortgages.
Hybrid Securities
Hybrid securities, as the name suggests, combine some of the

characteristics of both debt and equity securities.
Examples of hybrid securities include equity warrants (options issued

by the company itself that give shareholders the right to purchase
stock within a certain timeframe and at a specific price), convertible
bonds (bonds that can be converted into shares of common stock in
the issuing company), and preference shares (company stocks
whose payments of interest, dividends, or other returns of capital
can be prioritized over those of other stockholders).
DEBT SECURITIES VS EQUITY SECURITIES
Debt Securities And Equity Securities
How Securities Trade
Publicly traded securities are listed on stock exchanges, where issuers

can seek security listings and attract investors by ensuring a liquid
and regulated market in which to trade. Informal electronic trading
systems have become more common in recent years, and securities
are now often traded "over-the-counter," or directly among investors
either online or over the phone.
Stock Exchanges
● Exchanges are marketplaces for the trade of securities,
commodities, derivatives, and other financial instruments.
● Companies may use an exchange to raise capital.
● International exchange: new york stock exchange (NYSE),
Nasdaq, London Stock Exchange (LSE), and the Tokyo Stock
Exchange (TSE)
● Local exchange: Philippine stock exchange, Philippine Dealing
Exchange, Makati stock exchange and Manila stock exchange
Over the counter

● Over-the-counter (OTC) is the process of trading securities via a
broker-dealer network as opposed to on a centralized
exchange
● Over-the-counter (OTC) securities are traded without being
listed on an exchange.
● Securities that are traded over-the-counter may be facilitated
by a dealer or broker specializing in OTC markets.
An initial public offering (IPO) represents a company's first major sale

of equity securities to the public. Following an IPO, any newly issued
stock, while still sold in the primary market, is referred to as a
secondary offering. Alternatively, securities may be offered privately
to a restricted and qualified group in what is known as a private
placement—an important distinction in terms of both company law
and securities regulation.
Sometimes companies sell stock in a combination of a public and

private placement.
IPO
● An initial public offering (IPO) refers to the process of offering
shares of a private corporation to the public in a new stock
issuance.
● IPOs provide companies with an opportunity to obtain capital
by offering shares through the primary market.
Primary Market
● In the primary market, new stocks and bonds are sold to the
public for the first time.
● Types of primary market issues include an initial public offering
(IPO), a private placement, a rights issue, and a preferred
allotment.
Secondary Offering
● The term secondary offering refers to the sale of shares owned
by an investor to the general public on the secondary market.
These are shares that were already sold by the company in an
initial public offering (IPO). The proceeds from a secondary
offering are paid to the stockholders who sell their shares rather
than to the company.
Private Replacement
● A private placement is a sale of securities to a preselected

number of individuals and institutions.
● Private placements are relatively unregulated compared to
sales of securities on the open market.
● One advantage of a private placement is its relatively few
regulatory requirements.
In the secondary market, also known as the aftermarket, securities

are simply transferred as assets from one investor to another:
shareholders can sell their securities to other investors for cash and/or
capital gain. The secondary market thus supplements the primary.
The secondary market is less liquid for privately placed securities
since they are not publicly tradable and can only be transferred
among qualified investors.
LOCAL EXCHANGE IN THE PHILIPPINES
The Philippine Stock Exchange, Inc. (Filipino: Pamilihang Sapi ng

Pilipinas; PSE
is the national stock exchange of the Philippines. The exchange was

created in 1992 from the merger of the Manila Stock Exchange and
the Makati Stock Exchange. Including previous forms, the exchange
has been in operation since 1927.
In June 1998, the Securities and Exchange Commission (SEC)

granted the PSE a "Self-Regulatory Organization" (SRO) status, which
meant that the bourse can implement its own rules and establish
penalties on erring trading participants (TPs) and listed companies.
Main role:
The main role of PSE is to 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. The PSE facilitates the selling and buying of the
issued stocks and warrants.
The Philippine Dealing & Exchange Corp. (PDEx) is a dealing

exchange for major banks in the Philippines. The primary exchange
of the country for all sectors is the Philippine Stock Exchange.
PDEx is licensed by the Securities and Exchange Commission (SEC) as

an Exchange under the provisions of the Securities Regulation Code
(SRC). It acts as an electronic trading platform for the Philippine peso
and the United States Dollars.
Security Regulation Code (SRC)

● was enacted is a landmark legislation seeking the achievement
of a free market that is self-regulating.
● monitors compliance of financing and lending companies with
existing laws, rules and regulations and endorse infractions
thereof to the Enforcement and Investor Protection
On February 3, 1936, the Securities and Exchange Commission

announced that it had "relinquished control of the Manila Stock
Exchange."[6]
The Philippine Stock Exchange was formed on December 23, 1995,
from the merger of the Manila Stock Exchange (MSE) (established on
August 12, 1927, based on Muelle de la Industria, Binondo, Manila)
and the Makati Stock Exchange (MkSE) (established on May 15,
1963, based in the Makati Central Business District, within Ayala Tower
One).
Both exchanges traded the same stocks of the same companies.
FOREIGN STOCK EXCHANGE

The New York Stock Exchange (NYSE, nicknamed "The Big Board") [4] is
an American stock exchange in the Financial District of Lower
Manhattan in New York City. It is by far[5][6] the world's largest stock
exchange by market capitalization of its listed companies
The Nasdaq Stock Market (/ˈnæzdæk/ ( listen)) (National

Association of Securities Dealers Automated Quotations Stock
Market) is an American stock exchange based in New York City. It is
ranked second on the list of stock exchanges by market
capitalization of shares traded, behind the New York Stock
Exchange
DIFFERENCE BETWEEN NYSE AND NASDAQ

What is the difference between NYSE and NASDAQ?
INVESTMENT BANKING
Investment banks underwrite new debt and equity securities for all
types of corporations, aid in the sale of securities, and help facilitate
mergers and acquisitions, reorganizations, and broker trades for both
institutions and private investors. Investment banks also provide
guidance to issuers regarding the offering and placement of stock.
Investment banks' activities also may include issuing securities as a

means of raising money for the client groups and creating the
documentation for the Securities and Exchange Commission (SEC)
necessary for a company to go public.
The Securities and Exchange Commission (Filipino: Komisyon sa mga

Panagot at Palitan, commonly known as SEC) is the agency of the
Government of the Philippines charged with the registration and
supervision of corporations and securities, as well as capital market
institutions and participants, in the Philippines. As such, the
Commission champions investor protection in the Philippines, as part
of its mandate.
Functions
The major functions of the SEC include the registration and

supervision of corporations, including financing and lending
companies. It is also charged with the registration of securities,
analysis of every registered security, and the evaluation of the
financial condition and operations of applicants for security issues.
TRADING PARTICIPANTS
"Trading participant" refers to Financial Instruments Business
Operators (securities companies), Transaction-at-Exchange
Operators, Registered Financial Institutions and Commodity
Derivatives Business Operators, etc. holding qualifications to directly
participate in stock exchanges.
● means trading right owners/holders who have been admitted and approved
by the PSE Board of Directors to trade using the trading facilities provided
by the Exchange.

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What are Securities

The term "security" refers to a fungible, negotiable financial

Securities are fungible and tradable financial instruments used to

A security can represent ownership in a corporation in the form of

Securities can be broadly categorized into two distinct types:

An equity security represents ownership interest held by shareholders

● Capital stock is the amount of common and preferred shares

Equity securities do entitle the holder to some control of the

Pro rata basis

● Pro rata is a Latin term used to describe a proportionate

● Payment-in-kind (PIK) is the use of a good or service as

A debt security represents borrowed money that must be repaid,

Debt securities, which include government and corporate bonds,

● A collateralized debt obligation (CDO) is a complex structured

Like CMOs, collateralized debt obligations (CDOs) consist of a group

Hybrid securities, as the name suggests, combine some of the

Examples of hybrid securities include equity warrants (options issued

DEBT SECURITIES VS EQUITY SECURITIES

Debt Securities And Equity Securities

How Securities Trade

Publicly traded securities are listed on stock exchanges, where issuers

Over the counter

An initial public offering (IPO) represents a company's first major sale

Sometimes companies sell stock in a combination of a public and

● A private placement is a sale of securities to a preselected

In the secondary market, also known as the aftermarket, securities

LOCAL EXCHANGE IN THE PHILIPPINES

The Philippine Stock Exchange, Inc. (Filipino: Pamilihang Sapi ng

is the national stock exchange of the Philippines. The exchange was

In June 1998, the Securities and Exchange Commission (SEC)

The Philippine Dealing & Exchange Corp. (PDEx) is a dealing

PDEx is licensed by the Securities and Exchange Commission (SEC) as

Security Regulation Code (SRC)

On February 3, 1936, the Securities and Exchange Commission

Both exchanges traded the same stocks of the same companies.

FOREIGN STOCK EXCHANGE

The Nasdaq Stock Market (/ˈnæzdæk/ ( listen)) (National

DIFFERENCE BETWEEN NYSE AND NASDAQ

Investment banks' activities also may include issuing securities as a

The Securities and Exchange Commission (Filipino: Komisyon sa mga

The major functions of the SEC include the registration and

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