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Capital Market Participants Importance and Other Functions of Capital

Market
Stock Exchange- stock exchange is an organized
marketplace or facility that brings buyers and  The capital market helps in capital
sellers together and facilitates the sale and formation and economic growth of the
purchase of stocks. (PSE) country.
 The capital market prides incentives to
Investors- also referred to as stockholders or savers in the form of interest or
shareholders, are those who own shares of dividend and transfers funds to
stock of a publicly listed company. investors.
 The capital market provides a market
Stock Brokers- They act as an agent between a
mechanism for those who have savings
buyer and seller of stocks in the market. and to those who need funds for
Receives a commission productive investments.
Types of Brokers  The capital market encourages
economic growth.
1. Traditional- take your orders via a
written instruction or a phone call
2. Online- interface is the internet where Types of Capital Market
clients execute their orders and access • Primary Market-Where new equity
market information online stock and bond issues are sold to
investors
Listed Companies- issuers, shares of stock are
• Secondary Market-Which trade existing
traded on the Exchange
securities
Clearing House- ensure the orderly settlement
4 ways of Raising Capital Market
of equity
1. Public Issue- selling securities at public
Depository- custodian at large, most vital method to sell
Settlement Banks- accept deposits of funds for financial securities
payment of securities bought etc. 2. Right Issue- pro-rata basis
3. Private Placement- about selling
Transfer Agents- official keeper securities to a restricted number of
classy investors
4. Preferential Allotment- When a listed
Capital Market- This refers to activities that company issues equity shares to a
selected number of investors at a price
gather funds from some entities and make them
that may or may not be pertaining to
available to other entities needing funds.
the market price
Core Function of Capital Markets-To improve
the efficiency of transaction so that each Auction Market- bid and ask prices
individual entity does not need to do search and
analysis, create legal agreements, and complete Dealer Market- participants in the market are
funds transfer. joined through electronic networks

Purpose of Capital Market


 They bring together investors 4. Corporate Bonds- issued by
holding capital and companies seeking corporations, partnerships, limited
capital liability companies, and other
through equity and debt instruments commercial enterprises
 They provide a secondary market where
holders of these securities can exchange
them with one another at market Treasury Bonds Interest Rate- are medium to
prices. Without the liquidity created by long-term investments issued by the Philippine
a secondary market, investors would be government. They form part of the
less inclined to purchase equity and Government’s program to make securities
debt instruments for fear of being available to small investors.
unable to unload them in the future.

Bond- A bond is a debt financing contract that MORTGAGE- A mortgage is a debt instrument,
allows investors to lend money to a borrower. secured by the collateral of specified real estate
The borrowers are typically the government or property, that the borrower is obliged to pay
corporations who need additional capital or back with a predetermined set of payments.
financing. The amount issued by the investors Also known as claims on property
are paid with interest at a given term, usually at
a fixed interest rate.
MORTGAGE LOANS
FACE VALUE The price of a bond when first
issued. Types of Mortgage Loans

COUPON RATE The periodic interest payments 1. Fixed Rate Mortgage- Interest rate and
promised to bondholders are a fixed percentage monthly payment remains fixed for the
entire term of the loan
of bonds face value.
2. Adjustable Rate Mortgage- Rate of
MATURITY The time until the principal is interest remains fixed for an initial
scheduled to be repaid. period of time. Once that initial period
is over, rate varies with some
2 Types of Bonds according to Maturity benchmark index
3. Hybrid Mortgage- It combines the
• Treasury Bills (T-Bills). Debt investments
features of both fixed rate mortgage
with short term maturity of less than a
and adjustable rate mortgages
year. 91, 182, 364-day
4. Interest Only Mortgage- Here for a
• Treasury Bonds (T-Bonds). Debt
specified period of time, only interest is
investments with long term maturity of
repaid. No payment is made towards
more than one year. 2, 5, 7, 10-20 years
principal. Once that period is over,
principal amount has to be repaid
4 Types of Bonds according to Issuer

1. Treasury Securities
2. Government Bonds- Issued by
government agencies
3. Municipal Bonds- issued by state and
local governments
MORTGAGE LENDING INSTITUTIONS 2. Poison Pills- special rights awarded to
shareholders or specific managers upon
Lending Institution- these are organizations specified events
such as banks, credit unions or finance 3. Golden Parachute- specifies
companies that make loans. compensation to managers in the event
that they lose their jobs
Mortgagor – borrower

Mortgagee- lender
RISK OF STOCKS
There must be mortgage document
2 Key Investment Risks
Where do we get Mortgage Loans?
1. Returns are not guaranteed- While
1. Banks stocks have historically performed well
2. Mortgage Brokers over the long term, there’s no
3. Local Government guarantee you’ll make money on a stock
at any given point in time
2. You may lose money- you might lose all
INITIAL PUBLIC OFFERING of your money when you buy and sell
stocks, especially if you’re not planning
IPO- it is the first time a company’s stocks are
to invest for the long term
offered to the public for purchase

How does initial public offering happen? Volatility is measure in very precise ways
1. Find an investment bank
 Standard deviation- measures how
2. PSE screens the companies and makes
widely a stock’s price has gone up and
sure that they comply with all of the
down in the past from its average price
requirements
 Beta- measures how the stock is doing
3. When everything is set and ready, on
compared to a given benchmark
the initial public offering day the shares
will be publicly traded in the stock
market Stock Exchange- Organized and regulated
financial market where securities (bonds, notes,
CORPORATE MONITORING ROLE shares) are bought and sold at prices governed
by the forces of demand and supply. Only the
Stock Purchases- Use excess cash to purchase members can deal in i.e., buy & sell securities.
shares in the market at a low price
Function of Stock Exchange
Market for Corporate Control- A firm may
engage in acquisitions to increase the value of a • Provide central and convenient meeting
target firm places for sellers and buyer of
securities.
Barriers to Corporate Control • Increase the marketability and liquidity
of securities.
1. Antitakeover amendment- designed to
• Contribute to stability of prices of
protect shareholders against an
acquisition that will ultimately reduce securities.
the value of their investment in the firm • Equalization of price of securities.
• Smoothen price movement.
• Help the investors to know the worth of
their holdings.
• Promote the habit of saving and
investment.
• Help capital formation.
• Help companies and government to
raise funds from the investors.
• Provide forecasting service.

Types of Members/ Brokers


• Floor brokers- execute orders for
members
• Commission brokers- execute orders of
their customers
• Jobbers- professional independent
brokers
• Tarawaniwalas- can act both as a broker
and jobber
• Odd lot dealers- in buying and selling of
securities in odd lots
• Badliwalas - carry over business
• Arbitrageurs- keep a close watch on the
prices of shares
• Sub-Brokers or Remisiers-agents of
stock brokers

INVESTOR PARTICIPATION IN THE SECONDARY


MARKET

Investor - is any person who commits capital


with the expectation of financial returns
Secondary Market- market wherein the trading
of securities is done

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