THE PHILIPPINE FINANCIAL MARKET

(A General Overview)

Learning outcomes

• Financial Institutions & Intermediation– describe the functions of a financial institution– classify the different types of financial

institutions– identify and distinguish the predominant types

of financial institutions

Learning outcomes

• The Financial Market– identify the different segments of the financial

market– describe the money market– discuss the different instruments traded in the

money market– define the capital market– discuss the different segments and instruments of

the capital market

FINANCIAL INSTITUTIONS & INTERMEDIATION

Financial intermediation

• is the process of acquiring funds from surplus economic units for the purpose of making available such funds to deficient economic units

•

Sources and Users of Funds

Sources• Individuals• Institutional Funders

Users• Corporations• Government

Financial institutions: Intermediaries• facilitate the intermediation process

• gather funds in quantities & at terms that are acceptable to savers

• supply funds in quantities and at terms agreeable to users

Types of financial institutions

• Private Banks

• Specialized Gov’t. Banks

• Private Non-Bank Financial Intermediaries

• Gov’t. NBFIs

Banks

• Private Banks– Commercial banks

(KBs)

– Universal banks

– Thrift banks

– Rural Banks

• Specialized Gov’t. Banks– Development Bank of

the Phils.

– Land Bank of the Phils.

Commercial banks

• accept demand deposits subject to withdrawal by checks and other types of deposits

• , drafts, bills of exchange, buy and sell foreign exchange, lend money and acquire readily marketable bonds

Universal banks

• expanded KBs

• takes on the functions of KBs and investment houses

• can underwrite securities

• act as selling agents for commercial papers

• can own up to 35% of non-allied undertakings

Development banks

• are banks organized principally to help finance development undertakings in agriculture and industry through the extension of medium to long term loans (agri-related loans, loans to SME)

Non-bank financial intermediaries

• Private NBFIs– Investment houses

– Finance companies

– Investment companies

– Securities dealers

– Securities brokers

– Insurance companies

– Pawnshops

– Savings & Loan Asso.

• Government NBFIs– Social Security System

(SSS)

– Government Service Insurance System (GSIS)

– National Dev’t. Corporation (NDC)

– National Home Mortgage Finance Corp.

Quasi-banks

• could borrow from 20 or more lenders for the borrower’s own account for the purpose of relending or purchasing receivables or other obligations

• issues deposit substitutes:– PNs– certificates of assignment with recourse– repurchase agreements

Investment houses

• underwrite debt and equity issues and medium to long-term financing

• offer advisory and related services in connection with corporate mergers, acquisitions and restructuring

Regulators

• Bangko Sentral ng Pilipinas

• Securities and Exchange Commission

• Bureau of Internal Revenue

• Bureau of Treasury

THE FINANCIAL MARKET

The Financial Market

Money market• a vehicle for mobilizing short term funds

which can be accessed by borrowers at a relatively short period of time;

• a system comprising of a network of dealers intermediating between suppliers and users of short term funds; and

• a structure revolving around the trading of short term fixed income instruments issued by corporations., financial institutions and the government

Capital market

• portion of the financial sector involved in: one, the mobilization and intermediation of private savings; and two, the allocation of medium and long term financial resources through a variety of debt and equity instruments for both private and public sector domestic investment.

Capital market components

• Non-securities market– provides non-negotiable instruments to fund

medium to long term projects (i.e MTLs)

• Securities market– provides medium to long-term to project

proponents through the latter’s issuance of negotiable debt instruments or equity shares

Capital market instruments

• Debt issues– are evidence of indebtedness issued by either

the gov’t. or private corporations– they could have a specified maturity or an

indefinite maturity in the case of consols– could have fixed or floating rates– are either issued to the public or issued on a

private placement basis

• Equity issues– equity share issuance is an alternative method

of raising capital funds– a corporation can issue either common or

preferred shares.

THE PHILIPPINE STOCK MARKET

History• Started in 1927 by 5 Manila Businessmen

– Called the Manila Stock Exchange

• 1963, Makati Stock Exchange was organized• July 14, 1992 – Philippine Stock Exchange was

incorporated (uniting Manila and Makati Stock Exchanges)

• Right now there are 150 local and 34 foreign trading participants called STOCK BROKERS

• As of date, there are 249 firms that are listed in PSE

Role of the PSE

• PSE is a private, non-profit and non-stock organization created to provide and maintain FAIR, EFFICIENT, and orderly market for the purchase and sale of securities

• Brings together companies who would want to raise capital through issuance of new securities

• Facilitate buying and selling of shares

• Contributes to the growth of the economy

Securities listed in the PSE

• These are the types of securities that you can buy from the Phil. Stock Exchange– Common Stocks– Preferred Stocks– Warrants– Philippine Deposit Receipts (PDRs)– Small Denominated Bonds (SDTs)

What are securities? Stocks?• Securities are proof of one’s

ownership or indebtedness in a company. (ex: TBills, FXTN, & other securities traded in the money market.

• Stocks are shares of ownership in a corporation (you become part-owner)

Interpreting Stock Information

Minimum Amount of transaction

Some Popular Companies Listed in PSE

Procedures in Buying/Selling

• Choose a stockbroker• Open account with the broker• Instruct buy/sell order to the broker (amount &

price)• Buying

– Pay broker (amount plus fees)

– Broker to transfer securities in the depository of the investor

• Selling– Seller’s depository account will be deducted

– Received proceeds from brokers (amount less fees)

Procedures in Buying/Selling

Transaction Fees

FEES/TAXES SELLER BUYER

a.  Brokerage Commission (maximum of 1.5% of transaction cost + 12% VAT) X X

b.  SCCP Fee of 0.0001 x value of transaction X X

b.  Transfer Fee of Php 100.00 + 12% VAT   X

d.  Cancellation Fee of Php 20.00 + 12% VAT X  

e.  Stock Transaction Tax (½ of 1% value of transaction in lieu of capital gains tax) X  

Sample Transaction

• Mr. X wishes to buy a stock whose market price is P10.00. Based on the Board Lot Table, the minimum number of shares he can buy at a regular transaction is 1,000 shares (a). In this case, the amount that he needs is about P10,000.00 plus charges. His required cash outflow will be as follows:

Market price/share P 10

Minimum number of shares x 1,000

P 10,000.00

Broker's Commission (1.5% + 12% VAT) + 168

Transfer Fee + 12% VAT + 112

SCCP Fee + 1

Total Cash Outlay P 10,281.00

Sample Transaction

• Mr. Y wishes to sell a stock whose market price is P5.00. Based on the Board Lot Table, the minimum number of shares he can sell at a regular transaction is 1,000 (b). In this case, the proceeds of the sale is about P5,000.00 less charges. His cash inflow will be as follows:

Market price/share P 5

Minimum number of shares x 1,000

P 5,000.00

Broker’s Commission (1.5% + 12% VAT) - 84

Stock Transaction Tax - 25

PCD and SCCP Fees - 0.5

Cancellation Fee + 12% VAT - 22.4

Net Cash Receivable P 4,868.10

How do people profit in the Stock Market?

A. Capital gains

B. Cash Dividend

C. Stock Dividend

D. Stock Rights

Some Risks Related to Investing in the Stock Market

• Financial Risk

• Interest Rate Risk

• Market Risk

• Political Risk

• Emotional Risk

Tips in investing in the Stock Market

• The money you invest in the stock market should be your excess cash which you are willing to lose!

• Since Stock Market is subject to volatilities, you should be able to allocate time to monitor your investments

Thank You