USLS - FINMGT.2 (FINMAR) STOCK MARKET TRADING “Capital Market - segment of the financial market with dealings in securities with maturities beyond one year. These securities are long-term commercial papers, bonds and stocks *Security Market - market for investment instruments and capital raised in the Philippine Stock Exchange “Primary Market - refers to the issuance of new securities representing as an actual transfer of funds from investor to the issuing entity. This is commonly called the initial public offering or (IPO). Here the stock (securities) are offered to the public for the first time. “Secondary Market - refers to the trading of secuirties (stocks) providing a liquidity mechanism in the market for the investors (the actual trading of shares between the buyers and sellers). This the market for seasoned securities (passed the test of public acceptance) Underwriting - process of allowing private entity to market the new issue securities under the primary market This private entity are called Underwriters or investment house. Types of underwriting agreement: * Ona Firm Basis - that the underwriter agrees to purchase all the shares of the issuing corporation. With this, the issuing corporation is already assured of the proceeds from selling of the securities. *Stand-by Basis - the investment banker allows the issuing corporation will allow the issued securities to be sold to interested buyer like institutional buyers and investors and whatever left unsold, will be marketed by the underwriter. * Best Effort Basis - an underwriting agreement whereby the underwriter will exert its best effort to market the securities of the issuing corporation. Trading in the Secondary Market * Stock Exchanges - place or an organized market for securities take place with its own set of rules. In the Philippines we have the Philippine Stock Exchange. * Over the counter market (OTC) - trading of securities that does not pass thru the exchange. The trading of securities is between the buyer and the seller * Brokers - a person or firm that buys and sells the securities for the account of others. The broker will receive commission brokers fee everytime there is a sell or buy transactions. * Dealer/Trader - a person or a firm that buys and sells securities for his own account,Price in the market: * Bid Price - this is the buyers price. The minimum amount of the securities that the sellers are willing to sell to the buyers. * Asked Price - this is the sellers price. The maximum amount of the securities that the buyers are willing to buy from the seller. Unit of securities measurement * Board lot or Round lot - the unit of trading of shares in the stock exchange. The higher the stock price, the lower number of shares in a lot. The lower the stock price, the higher number of shares in a lot. * Odd lot - represent number of shares of stock that do not conform to the required lot set by the exchange. Types of Orders * Market Order - an order to buy or sell securities at the prevailing market price at the time the trading takes place.. Example: BPI is currently selling at P46, investor instructs the broker to buy or sell at P46. * Limit Order - an order to buy or sell securities at a specified volume and price. An order by the investor to broker specifying the maximum price to buy and the minimum price to sell. Example: buy TEL 1,000 shares at P00. If the price of TEL goes up to P910, the order will not be completed. * Buy up - an order to buy securities at the price higher than the prevailing rate in order to satisfy the volume requirements of the investor. Example: an investor wants to purchase one million shares of SMPH currently trading at P6.30. If the volume offered by the sellers at P6.30 is not enough to satisfy his requirements, the investor may instruct the broker to buy at the next higher fluctuation (price fluctuation of P 0.10 or P6.40 to satisfy his demands * Sell down - an order to sell securities at the price lower than the prevailing rate in order to satisfy the volume requirements of the investor. Example: an investor wants to unload (sell) 100,000 shares of PNB currently trading at P26. If the volume offered by the buyer P26 is not enough to satisfy his requirement, the investor may instruct the broker to sell at the next lower fluctuation (price fluctuation of P 0.50 or P25.50) to complete his order. Trading of stock maybe done: * Margin Trading - trading of stock where you anticipate that the price will go up. So you buy when the price is low and sell when the price is high, making 2 margin. In margin trading, the purchase stocks partly finance by the broker with the purchased stocks as collateral. * Short Sales - is the sell of securities not owned by the seller with the hope of buying back the same security at a lower price to lock in profits. So you sell when the price is high and buy when the price went down.