Primary Market

1.Definition of Primary Market

2. Types of Primary Market
3. Entities in the Primary Market
4. Functions of Primary Market
5. Investment House
The Primary Market is where securities are created. It’s in this
market that firms sell new stocks and bonds to the market for the
first time. An initial Public Offering, or IPO, is an example of a
primary market. In the primary market, sell new stocks and bonds to
the public. The primary market is where securities are created, while
the secondary market is where those securities are traded by
investors.
The primary market is a part of the capital market. It enables the
government, companies, and other institutions to raise additional
funds through the sale of debt and equity related securities. For
example, primary market securities can be notes, bills, government
bonds, and stocks of companies.
 Parts of Primary Market
 1. Initial Public Offering:
 An initial public offering (IPO) refers to the process of offering shares of a
private corporation to the public in a new stock issuance.
 An IPO allows a company to raise capital from public investors. An initial public
offering (IPO) is when a private company becomes public by selling its shares
on a stock exchange.
 Private companies work with investment banks to bring their shares to the
public, which requires tremendous amounts of due diligence, marketing, and
regulatory requirements.
 If you participate and buy stocks in an IPO, you become a shareholder of the
company. As a shareholder, you can enjoy profits from sale of your shares on
the stock exchange, or you can receive dividends offered by the company on
the shares you hold.
2. Private Placement
A private placement is a sale of stock shares or bonds to pre-selected
investors and institutions rather than on the open market. It is an alternative
to an initial public offering (IPO) for a company seeking to raise capital for
expansion.
Private placement offerings are securities released for sale only to accredited
investors such as investment banks, pensions, or mutual funds.
 Disadvantages of using private placements
 a reduced market for the bonds or shares in your business, which may have a
long-term effect on the value of the business as a whole.
 a limited number of potential investors, who may not want to invest
substantial amounts individually.
3.Public Issue
It is defined as Issue of stock on a public market rather than being privately funded by the
companies own promoter’s, which may not be enough capital for the business to start up,
produce, or continue running. By issuing stock publically, this allows the public to own a part of
the company, though not be a controlling factor.
When an issue / offer of shares or convertible securities is made to new investors for
becoming part of shareholders' family of the issuer (Entity making an issue is referred as
“Issuer”) it is called a public issue.
Public Issue is a method to raise share capital by selling securities to the public at large.
Public Issues is primarily used by large-scale companies to raise funds.
What is the difference between IPO and FPO
IPO is the first public issue of the shares of a private company that is going public
whereas FPO is the second or subsequent public issue of the shares of an already listed public
company. ... On the other hand in FPO, the investors are aware as the company is already listed
on stock exchange.
4. Preferential Allotment (Right Issue)
A rights issue is an issue of rights to buy additional securities in a company
made to the company’s existing security holders. 
With the issued rights, existing security-holders have the privilege to buy a
specified number of new securities from the firm at a specified price within a
specified time. 

A rights issue is an invitation to existing shareholders to purchase additional

new shares in the company.
This type of issue gives existing shareholders securities called rights.
With the rights, the shareholder can purchase new shares at a discount to
the market price on a stated future date.
 ENTITIES IN THE PRIMARY MARKET
 1. Company – The company issues securities for the first time in the primary market. This
process is known as Initial Public Offering. Since the securities are sold for the first time, the
primary market is known as the New Issue Market.
 2. Underwriter – The underwriter decides the sale price of the new issue securities. Financial
institutions such as investment banks, insurance companies, etc. offer underwriting services.
Also, the underwriter facilitates and monitors the new issue offering. Hence, underwriting is
an entire process of raising capital by selling new stock to investors through IPO
 3. Investors – They are the purchasers of the new security in the primary market.
 The company issues the securities to its investors. The issue can be in the form of a public
issue, private placement, rights or bonus issue. Once the company receives the money, it
issues the certificate to the investor. The certificate can be issued at face value, premium
value or par value. When the issue closes, securities are traded in the secondary market. The
trading in the secondary market can happen on the stock exchange.
 FUNCTION OF PRIMARY MARKET
 The key function of Primary Market is to facilitate capital growth by enabling individuals to
convert savings into investments.
 It facilitates companies to issue new stocks to raise money directly from households for
business expansion or to meet financial obligations.
 PRIMARY DISTRIBUTION OF SECURITIES
 Primary distribution refers to the sale of a new security, public reception to new issue is still
unknown factor, hence great care is required when an initial issue has to be distributed that
even well established companies take precautions in marketing a new issue through
experienced institutional security dealer.
 (5 best stock brokers in the Philippines: First Metro Sec Pro., COL Financial, BDO Securities,
BPI Trade, Philstocks). Primary distribution is mostly done via the investment bankers, private
placement, or direct sale by a company to individual investors. New issues are never traded
through the security exchanges.
 THE INVESTMENT HOUSE
 An investment or bank is an intermediary between the sources of capital, the investors, and its users, the
business firm.
 The primary business of the investment house is the marketing of financial instruments.
 Its broader role encompasses investment and consultancy services.
 An investment banker may find itself in the position of creditor, investor, agent or consultant
 It is called a bank because it is a financial institution that acquires funds for business use, however it does
not accept money deposits.
 The investment banker work in an investment banking firm or an investment banking house.
 Investment House in the Philippines:
RCBC CAPITAL
AB CAPITAL AND INVESTMENT CORPORATION (Asian Bank)
CLSA EXCHANGE CAPITAL, INC
INVESTMENT AND CAPITAL CORPORATION
ORTIZ JM AND COMPANY INCORPORATED
STATELAND INCORPORATED
COMPETITIVE BIDDING
The marketing of securities may be done through formal negotiations between the
investment banker and the issuer or through competitive bidding.
Under the competitive bidding, the issue is auctioned by the company and awarded
to the highest bidder.
A common practice is for a group of investment bankers to form a syndicate.
The members of the syndicate may agree among themselves as to the price they are
going to bid.
This is determined after considering the estimated selling price to the public and
the “spread” of gross profit, of the syndicate.
There is a separate agreement that governs the relationship of the individual
members.
 There are three functions of investment banker.
 1. Underwriting
The term underwriting is borrowed from the field of insurance. It means assuming a risk.
The investment banker assume the risk of selling security issue at a satisfactory price.
A satisfactory price is the one that generates profit for the investment banking house.
The procedure, the managing investment banker and its syndicate will buy a security issue from a
corporation in need of funds.
On a specific day, the firm that is raising capital is presented with a check in exchange with the
securities being issued.
At this point investment-banking syndicate owns the securities.
The corporations has its cash and proceed to use it.
If the price of the newly issued security falls below that paid to the firm by the syndicate, the
syndicate will suffer a loss.
Its objective is to sell the new issue to the investing public at a price per security greater than its
cost.
 An example of an underwriting agreement on a firm basis through a syndicate is the
public offering of the 8% debenture bonds of Northern Motors, Inc. Three investment
houses agreed to purchase the bonds outright in the following corporations: CCP
Securities Corporation, the syndicate manager, P2 million; Bancom Development
Corporation P1 million; and Private Development Corporation of the Philippines, P
500,000. Likewise, the CCP securities Corporation was the sole underwriter on firm
basis of the Cummins Diesel Sales and Service Corporation 12% guaranteed bonds worth
P1,000,000.

 SPREAD The originator conducts investigations on the feasibility of an issue before the
drawing of the underwriting contract. Both the present and future financial positions of
the company and the viability of the project for which the funds to be raised will be
invested and the projection of market conditions are explored.
 The investment banker has to determine its gross profit or spread
 The spread will be determined by the amount of risk involved, the extent of selling
campaign necessary and the bargaining positions of the parties (the issuer and the
investment house)
 2. DISTRIBUTION OF SECURITIES
 Once the syndicate owns the securities, it must get them into hands of the ultimate investors.
 This is the distribution or selling functions of investment banking.
 The investment banker may have different branches with dealers involved in the selling effort.
 The syndicate can be viewed as wholesaler of security and dealers are retailers of security.
 Prospectus. A prospectus is a primer on a security issue. It has a detailed description of its
features and includes factual information on the operations and financial position of the issuing
company.
 3. Advising
 The investment banker may advice the firm to issue in a proper timing to avoid the higher yield
that are forthcoming.
 The banker can analyze the firm’s capital structure and make recommendations as to what
general source of capital should be issued
 Secondary Market

1. Definition of Secondary Market

2. Types of Secondary Market
3. Investment Banks
4. Investment Banker, Functions of Investment Banker
5. Securities and Exchange Commission as Regulatory Body
6. PSE, Functions of PSE
7. Buying and Selling at PSE: Unit Trading, Margin Trading, Stop Loss Order
 SECONDARY MARKET
 The Secondary Market is created for seasonal securities. These are
securities which have passed the test of public acceptance. They are being
traded by original holders. The security exchanges are the principal secondary
market for the public offering of seasonal securities.
 A corporation usually resorts to an investment house which may underwrite
the security by itself or as part of an underwriting syndicate or merely act as
an agent in a selling group.
 Underwriter is a bank of financial institution that pledges to buy all the
unsold shares in an issue of new shares.
 Underwriter syndicate is a temporary group of banks and broker-dealers who
come together to sell new offerings of equity or debt securities to investors.
Look at the picture above to get the idea. First, the
companies issue stocks to its investors. In the financial
term, it’s called IPO (initial public offering). Then once
these companies get listed on the stock exchange, these
investors go to this market and sell these stocks to other
investors. It’s a simple thing to understand. This is a
place where investors buy or sell their stocks and make
profits or to avoid more losses in the future.
1. Direct Search Market: This is the least efficient as the buyers and the sellers get involved in search of each
other without taking any assistance. Transactions are not as frequent as other markets. No broker gets
interested in the market as transactions are infrequent. And there’s very little chance for each party to get the
best price.
2. Broker Market: This market is more efficient than the direct search market. The brokers are involved in the
transactions as they earn a commission for bringing the buyers and the sellers together. In the broker market,
the brokers share extensive information about the prices of the stocks.
3. Dealer Market: Here, the efficiency is much more than the broker market. The reason behind this is in the 
dealer market, there is constant bidding of the stocks; thus, no time gets wasted in order to search for a
partner. Dealers own the inventories of stocks, and these stocks are being sold and bought to earn profits.
There are two things that are important here. Firstly, in the dealer market, there is no time wastage. Secondly,
the dealers can provide a guarantee for the inventories of stock they hold. NASDAQ is the best dealer market.
4. Auction Market: In an auction market, the buyers and sellers get into a negotiation and bargain for the
price. The person who acts as an arbitrator between the buyers and sellers is the specialist and facilitates
proper dealing and filling orders by public customers. This person is also a dealer of a certain stock. The New
York Stock Exchange (NYSE) is the most efficient stock exchange in the USA.
 Investment Bank:
is a special segment of banking operation that helps individuals or
organizations raise capital and provide financial consultancy services to them.
They act as intermediaries between security issuers and investors and help new
firms to go public.

An investment banker's main role is to provide arrange of financial services to

companies and governments. As an investment banker, you will use your
expertise to advise your clients on how best to reach their financial goals.

Investment banks don't take deposits. Instead, one of their main activities
is raising money by selling 'securities' (such as shares or bonds) to investors,
including high net-worth individuals and organizations such as pension funds. ...
They give money a productive purpose by channeling it into projects.
 THE INVESTMENT HOUSE
 An investment or bank is an intermediary between the sources of capital, the
investors, and its users, the business firm. The primary business of the
investment house is the marketing of financial instruments. Its broader role
encompasses investment and consultancy services.
 In the performance of its functions, an investment banker may find itself in
the position of creditor, investor, agent or consultant.
 It is called a bank because it is a financial institution that acquires funds for
business use, however it does not accept money deposits.
 . It acts as depository of financial instruments acquired either on an agency
basis or through outright purchase.
 Definition of Investment Banker
 The investment banker is a financial specialist involved as an intermediary in the merchandising
of security. He or she acts as a middle person by facilitating the flow of savings from those economic
units who wants to invest to those units that want to raise funds. The investment banker work in an
investment banking firm or an investment banking house.
 Investment House in the Philippines:
 1. RCBC CAPITAL
 2. AB CAPITAL AND INVESTMENT CORPORATION (Asian Bank)
 3. CLSA EXCHANGE CAPITAL, INC
 4. INVESTMENT AND CAPITAL CORPORATION
 5. ORTIZ JM AND COMPANY INCORPORATED
 6. STATELAND INCORPORATED
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 SECURITIES AND EXCHANGE COMMISSION: an independent government agency which supervises the
securities market, oversees the operation of the PSE and its members, and ensures compliance with the
provisions of the securities act. Also issues the rules and regulations subject to the approval by the
Monetary Board.
 FUNCTIONS
 Major Function include: Registration of securities, analysis of every registered security, evaluation of the
financial condition and operations of applicants for security issue.
 FUNCTIONS OF SEC DEFINED IN Section 5 of the Securities Regulation Code
 Supervision of over all registered business entities in the country, including suspensions and revocations
of their registration.
 Policymaking with regard to the market insecurities.
 Control over and approval of security registration statements
 Power to investigate violations of securities laws and to impose sanctions for such violations.
 Power to issue subpoenas, punish for contempt, and issue cease and desist orders in furtherance of its
law enforcement mission.
 MARKET TRANSPARENCY
 I is an assumption that investor can only make informed and
intelligent stock information about the particular stocks he
wants to buy.
 The PSE required the listed companies to disclose timely,
complete and accurate material information to the exchange
and the public regularly.
 FAIR MARKET – PSE assures that no investor will have undue
advantage over another market player in manipulating prices
and engaging into insider trading.
 -Insider trading is the act of buying and selling a particular stock
based on certain privileged information which is not available to
the public, this is illegal and prohibited by the PSE.
 EFFICIENT MARKET
 EFFICIENT MARKET – Orders are executed and
transactions are settled in the fastest possible way.
 -Fully automated machine is installed. Installation of
trading terminal outside metro manila to encourage
provincial investors.
 An efficient market is one where all information is
transmitted perfectly (everyone receives the information),
completely (everyone receives the entire information),
instantly (everyone receives the information at once(, in
for no cost (everyone receives the information for free)
 MARKET EFFICIENCY
 Market efficiency concerns the extent to which market prices incorporate available
information.
 The subject of market efficiency is, therefore, of great interest to investment managers.
 1 Market Efficiency and Active Manager Selection
 A. The first step is the evaluation of market opportunity. What is the opportunity and why is
it there?
 We consider the past history of active returns meaningless unless we understand why markets
will allow
 Those active returns to continue to the future.
 2. Government and market regulators also are about the extent to which market prices
incorporate information. Efficient market imply informative prices- prices that accurately
reflect available information about fundamental values. In market-base economies, market
prices help determine which companies (and which projects) obtain capital. Prices that are
informative help direct scarce resources and funds available for investment to their highest-
valued uses
 Efficient market hypothesis is that it is not possible to beat the market on consistent basis by
generating returns in excess of those expected for the level of risk of investment.
 The efficiency of a market is affected by the number of market participants and depth of
analyst coverage, information availability, and limits to trading
 Three forms of efficient market:
 In the weak form, asset prices fully reflect market data, which refers to all past price and trading
volume information. In weak form, past prices, historical values and trends can’t predict future
prices. Weak form efficiency states that stock prices reflect all current information.
 In the semi strong form, asset prices reflects all publicly known and available information
 In the strong form, asset prices fully reflect all information, which includes both public and private
information. It refers to market where share prices fully and fairly reflect not only publicly
available information and all past information, but also private information (insider information). In
such market , it is not possible to make abnormal gains by studying any kind of information
 Market Efficiency Illustrative Example
 Company ABS is a publicly listed-traded technology company listed in the NYSE.
The company releases a new product that is more advanced that is anything in
the market. If all the markets that company ABC operates in are efficient, then
the release of the new product should not affect the company’s share price.

 1. Company ABS hires workers from an efficient labor market. All workers are,
therefore paid the exact amount that they contribute to the company.
 2. Company ABC rents capital from an efficient capital market. Therefore the
rental paid to a capital owners is exactly equal to the amount contributed to
the economy
 3. If the NYSE is an efficient market, then company ABC’s share price perfectly
reflects all information about the company. Therefore, all participants on the
NYSE could predict that company ABC would release the new product. As a
result, the company’s share price does not change.
 Intrinsic Value refers to the true value of an asset, where as
market value refers to the price at which an asset can be bought
and sold.
 When markets are efficient, the two should be the same or very
close.
 But when market are not efficient, the two can diverge
significantly.
 PHILIPPINE STOCK EXCHANGE
 A self-regulatory organization with the authority to police its ranks through the Compliance and
Surveillance Group (CSG)
 The PSE is a private non-profit and non-stock organization created to provide and maintain a fair,
efficient, transparent and orderly market for the purchase and sale of securities such as stocks, warrants,
bonds, options and others.
 THE ROLE OF THE PSE
 -The PSE bring together companies which aim to raise capital through the issue of new securities
 -Companies have an easier access to their funds through the listing of their share in the stock exchange. It
is easier to raise new capital through initial public offering if listed in Exchange.
 -PSE plays a vital role in the financing of productive companies that uses the funds for further expansion
that is essential for the economic growth.
 -The PSE facilitates the selling and buying of the issued stocks and warrants.
 -It provide suitable market for trading securities to individuals and organization who want to invest their
savings and excess funds.
 -The PSE is committed to protect the interest of the investing public. Develop and maintain an efficient,
fair, orderly and transparent market.
 UNIT TRADING
 For the convenience in making and executing orders, the exchanges establishes a unit of trading
called board or round lot.
 Board lot means buying or selling the securities in an established amount.
 The PSE establishes board lots on the basis of respective price ranges, for example, with an offering
price for shares from P0.01 to P0.024 centavos the board lot is 20,000 shares; for the P50 to P100 price
range per share, the board lot is 10 shares.
 That is, orders for stocks prices from one centavo to .025 centavos should always be in terms of 20,000
shares, and for the P50 to P100 price, in terms of ten shares.
 BUYING AND SELLING ORDERS - The order to buy or sell may either be at the
market price basis or a limit order (serve as a goal signal). The market price
order is easier to execute because the broker will buy or sell at whatever price
the security is being traded at the order is made. The limit order specifies a
maximum order price to buy at not more P10, it means that that the broker is
instructed to buy at P10 or less. A broker ordered to sell at no less than P10
could sell the security only at any price at over P10.
 Trading in the exchange is a continuing auction sale. (The PSE is open
Monday through Friday from 9:30 am to 12:45 pm Philippine Standard Time. The
PSE does not close for lunch, there is typically less liquidity during the middle
of the day. Most trading happens near the beginning and the end of the day.
Market resumes 1:30 PM and Pre close 3:17 PM)
 Brokers with buy orders compete with each other in purchasing the stocks at the lowest bid price. Bid
price is the price the buyer is willing to pay for a certain security. Brokers compete with each other in
selling the stocks at the highest asked price. Asked price is the price at which the security is offered for
sale.
 It is evident that exchanges do not fix price of securities on their floors. The market price is dictated by
supply and demand conditions and the continuous bargaining between buyers and sellers.
There are many factors that influence stock price; discovery of oil, world price of copper, available reports
on a company etc.
 However, the PSE controls price behavior imposing minimum fluctuations for each security in accordance
with its respective range. Quotations mat not fail below nor rise beyond 20% of the last sales price. To
illustrate; minimum fluctuations allowed for securities within the price range of P50 to P100 per share is
P1. Shares for P100 may not be quoted above P101 nor below P99. Or if the last sales price is P100 the
subsequent quoted price may not rise above P120.
 100 x 20% = 20 neither 100 + 20 = 120 nor 100 – 90= 80
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 Market Open P185.50
  
 Previous Close: P184.90
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 Day Range: P184.90 – P187.00
 52 Wk Range P91.10 - P211.00
 Market Value P202.7B
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 EFFICIENT MARKET – Orders are executed and transactions are settled in the fastest possible
way.
 -Fully automated machine is installed. Installation of trading terminal outside metro manila to
encourage provincial investors
 FAIR MARKET – PSE assures that no investor will have undue advantage over another market
player in manipulating prices and engaging into insider trading.
 -Insider trading is the act of buying and selling a particular stock based on certain privileged
information which is not available to the public, this is illegal and prohibited by the PSE.
 MARKET TRANSPARENCY – It is an assumption that investor can only make informed and
intelligent stock information about the particular stocks he wants to buy.
 The PSE required the listed companies to disclose timely, complete and accurate material
information to the exchange and the public regularly.
 MARGIN TRADING – An investor may pay in full for the security he buys or he may just put up a portion
of the purchase price. Margin trading refers to the purchase of securities where the buyer only pays a
part of the purchase price with the balance usually advance by the broker, payable at specified future
time. Thus an investor Mr. X may buy P5,000 worth of stock and pays only P2,500 to the broker. The
balance is payable at a later date. The margin payment is commonly expressed in percentage. In our
example, the buyer Mr. X puts up 50% of the purchasing price. The broker advances the money for the
unpaid balance P2,500 to the seller of the security. Mr. X then owes to the his broker the amount
advanced on which the broker may charge interest. The broker keeps the security purchased as a
collateral.
 STOP LOSS ORDER – The authority of the broker to sell the purchased security at a target price is
contained in a stop loss order. However the broker is no obliged to wait until the specified price is
reached since the order is usually issued by the investor to protect himself against loss in a highly
fluctuating market. The broker is given the discretion I determining the best price at which to sell even
if the target price is not reached.
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 Government and Financial Institution
 Government financial assistance in the past has been mostly for the acquisition and maintenance of fixed
assets.
 This shift in the government’s financial policy could partly be attributed to the growing awareness of the
government to the importance of working capital in the operation of a firm and the partially of the World
Bank in Financing SME’s.

 Sources of Government Financing

 Government advances for working capital needs are mostly to provide for fixed or permanent working
capital needs and to extent working capital financing to small and medium scale businesses.
 Landbank of the Philippines and Rural Banks are the primary source of financing (government bank).
 Secondary market simply represent trading in already existing financial claims.
If you buy your brother’s Meralco common stock, you have made a secondary
market transaction. Secondary market reduce the risk of investing in financial
claims. Should you need cash, you can liquidate your claims in the secondary
market.
 Financial intermediaries are financial institutions which include commercial
banks, savings and loan association, credit unions, life insurance companies, and
mutual funds. Financial institutions has common characteristics: they offer
their own financial claims of another economic unit. These latter claims can be
called indirect securities, to economic units with excess savings. The proceeds
from selling their indirect securities are then use to purchase the financial
claims of other economic units. These latter claims can be called as direct
securities.
Mutual Fund – combination of funds of the people to buy securities.
Crowdfunding – combination of funds of the people to produce product.
 Examples:
 A mutual fund might sell a mutual fund shares (their indirect security) and
purchase the common stock (direct securities) of some major corporations.
 When a company pools money from interested investors and invests in securities
like stocks, bonds and short-term debt instruments (treasury bills, commercial
paper)
 A life insurance companies sell life insurance policies and purchases huge
quantities of corporate bonds. Financial intermediaries thereby involve many small
savers in the process of capital formation.
 Another financial intermediary are private pension fund. In comparison to
insurance companies, first, private pension funds have grown at a much faster rate
than insurance company, second, a greater proportion of the financial asset mix of
the pension funds is devoted to corporate stocks and bonds. Third, the pension
funds invest more heavily in corporate stocks than they do in corporate bonds.
Private Pension fund – faster rate of growth and greater portion of fixed asset and invest heavily in stocks.
 Movement of Savings
1. The direct transfer of funds – Here the firm seeking cash sells its
securities directly to savers (investors) who are willing to purchase them in hopes
of earning a reasonable rate of return.
New business formation is a good example as the new business ay go directly to a
saver or group of savers called venture capitalists.
The venture capitalist will lead funds to the firm or take an equity position in the
firm if they feel the product or service the new firm hopes to market will be
successful.
 2. Indirect transfer using the investment banker – The managing investment-
banking house will form a syndicate of several investment bankers.
 The syndicate will buy the entire issue of securities from the firm that is in
need of financial capital.
 The syndicate will then sell the securities at a higher price than it paid for
them of the investing public (the savers).
 Note that second method of transferring savings, the securities being issued just
pass through the investment-banking firm.
 They are not transformed into a different type of security
 Indirect transfer using the financial intermediary.
 This system operates in life insurance and pension funds.
 The financial intermediary collect the savings f individuals and issues its own
(indirect) securities in exchange of the savings.
 The intermediary then uses the funds collected from the individual savers to
acquire the business firm (direct) securities, such as stocks and bonds.