CAPITAL MARKET

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DEFINITION

 Market where buyers and sellers engage in trade of financial

securities (equity & debt),
 Deals with longer term loanable funds,
 Help channelize surplus funds from savers to institutions
which then invest them into productive use.
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 1. Resource Allocation
- to allocate resources efficiently to
FUNCTIONS maximize the welfare and continuous
availability of funds.
OF 2. Price Discovery
CAPITAL - generate transparent price signals
consistent with efficient use of
MARKET resources.

3. Risk Management
- encourage good risk management that
diversifies losses & profits, minimizes
transaction cost and time.

4. Economic growth and Development

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 COMPONENTS
OF CAPITAL
MARKET

Bond Market Mortgage Market Stock Market

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 BOND MARKET

 Market for debt instruments of any

kind

 Primarily done over-the-counter,

 Traded among the large financial

institutions.

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 Residenti Commerci
MORTGAGE MARKET al al

Industrial
Real Estate
Farmland
Portion of the capital
market which deals with
loans on:

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 STOCK MARKET COMPONENTS

Portion of capital market where the 1.Organized changes

common and preferred stocks
issued by corporations are traded. 2. Less formal over-the
counter markets

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 Banks

 Financial service

 Power and energy

 Transportation services

 Construction and other related products

 Holding firms

 Food, beverages, and tobacco

 Manufacturing, distribution, and trading

 Hotel recreation and other service

 Bonds, preferred and warrants

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 TITLE
COST OF CAPITAL As new capital funds
made available, decisions
 The amount of return an should be based on:
investment could have
 The cost of such
garnered if that investment
procurement of new
was executed,
capital;
 Opportunity cost of
 The additional income to
investing the same amount
be derived from its use.
of cash into different
investment opportunities.

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 SECURITIES TYPES
FIXED INTEREST
• Income yielding paper traded  Debentures
 Preferred stocks & bonds
on the stock exchange or  All government securities

secondary markets. VARIABLE INTEREST

 Common stocks & bonds
• Essential  Preferred stocks with participating
featured
characteristics: Saleability
OTHERS
 Bills of exchange
 Assurance policies

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THE FOLLOWING ARE CONSIDERED SECURITIES
• Bonds
• Debentures
• Notes
• Evidences of indebtedness
• Shares in a company
• Pre-organization certificates of
subscription
• Investment contracts
• Certificates of interest or participation
in a profit sharing agreement
• Collateral trust certificates
• Voting trust certificates
• Equipment trust certificates
• Certificates of deposit for a security
• Certificate of assignment
• Repurchase agreements
• Proprietary or non-proprietary
membership certificates
• Commodity futures contract
• Transferable stock options
• Pre-need, pension and life plans
• Joint venture contracts
• Other similar contracts and investments
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  Securities are issued and offered
by the corporation for the first

PRIMARY time to the public,

 Done through a process known as
MARKET
Initial Public Offering (IPO)
 Acquired directly from the
company
 Provides long-term capital to
corporations.

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  Dealing with the resale and

purchase of securities or other

SECONDARY
titles to property or commodities,
MARKET
 Provides liquidity to investments

made in the primary market,

 Provides with means for easy

conversion.

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SECURITIES OFFERING
IN
THE CAPITAL MARKET

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 BUSINESS FIRMS

INSTITUTIONAL NON-INSTITUTIONAL

Banking Institutions Non-bank financial Individual Investors

Institutions (NBFI)

Private Banks
Government Private NBFI
NBFI
1. Insurance Companies
Government Banks 2. Lending Investors
1. GSIS
3. Securities
1. DBP 2. SSS Dealers/Brokers
2. LBP 3. NIDC

THE EXTERNAL SOURCES OF LONG-TERM

CAPITAL
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SOURCES OF CAPITAL FUNDS OBTAINED
BY FIRMS:

1. Institutional
2. Non-Institutional

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INSTITUTIONAL
1.Bank financial institutions
2.Non-bank financial institutions

NON-INSTITUTIONAL

Personal resources
Franchising
Joint ventures and strategic alliances etc.
 TWO WAYS IN DISPOSING
SECURITIES
1. BY PUBLIC OFFERING
may be directed to:

GENERAL PUBLICS - groups of people who indirectly

consume a non-business organization’s goods or services.

SPECIAL PUBLICS – consist of holders of securities to the

issuing corporations.
Special groups like employees and customers of the issuing
corporation.
 TWO WAYS IN DISPOSING
SECURITIES

2. PRIVATE PLACEMENT

selling of securities by private negotiation directly to

insurance companies, commercial banks, pension funds,
large scale & wealthy individual investors.
 PRIVATE SECONDARY
DISTRIBUTION DISTRIBUTION

• Firm’s securities are sold for • First buyers of securities

THE resell their interests to the
the first time to the public
MARKETING other parties

OF
• May be achieved through the
• May be achieved through the SECURITIES ff:
ff:
- stock exchanges
- investment bankers - over-the-counter trading
- private placement

- individual investors
THE INVESTMENT BANKER
Any person engaged in the business in
underwriting securities issued by other persons
or firms

UNDERWRITING
Act/process of guaranteeing the distribution & sale of
securities of any kind issued by another corporation.

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 FUNCTIONS OF INVESTMENT
BANKER
Investigate the corporation’s financial condition & needs
Advise the corporation considering new issues of
securities
Originate new issues
Arrange for syndicate distribution
Underwrite securities
Market securities
PRIVATE PLACEMENT
Selling of securities by private negotiation directly to insurance
companies, commercial banks, pension funds, large scale &
wealthy individual investors.

INDIVIDUAL INVESTORS
Those with excess funds willing to forego or postpone a part of
his ability to spend.

STOCK EXCHANGE & OVER-THE-COUNTER TRADING

The secondary marketing of securities is done through the
stock exchange or over-the-counter trading.
UNDERWRITING & SELLING THE FIRM’S
SECURITIES

Methods for Underwriting Securities:

- Negotiated Underwriting
- Competitive Underwriting
- Commission Sales
- Direct Sales
- Firm Commitment Basis

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NEGOTIATED UNDERWRITING

Refers to the condition when

the issuing firm & the
investment banker meet & agree
on the terms & conditions of
the underwriting.
COMPETITIVE UNDERWRITING

Similar to except that the

underwriting group bids against
other underwriting groups for
the initial purchase of the
securities at the public auction.
COMMISSION-BEST EFFORTS BASIS

When the investment banker acts as a

selling agent for the issuer & not as an
underwriter, he is paid a commission.

The investment banker agrees to try his

“best efforts” to sell the security.
 DIRECT SALE

The instance when the issuer sells

directly to the public, bypassing the

underwriter entirely.
FIRM COMMITMENT BASIS

An underwriting agreement wherein

the investment house agrees to

purchase the issue from the issuing

corporation.