MODULE CONTENT
Stocks
Some corporations may raise money for their expansion by issuing stocks. Stocks are
shares in the ownership of the company. Owners of stocks may be considered as part owners
of the company. There are two types of stocks: common stock and preferred stock. Both will
receive dividends or share of earnings of the company. Dividends are paid first to preferred
shareholders.
Stocks can be bought or sold at its current price called the market value. When a person
buys some shares, the person receives a certificate with the corporation’s name, owner’s name,
number of shares and par value per share.
Bonds
Bonds are interest bearing security which promises to pay amount of money on a
certain maturity date as stated in the bond certificate. Unlike the stockholders, bondholders are
lenders to the institution which may be a government or private company. Some bond issuers
are the national government, government agencies, government owned and controlled
corporations, non-bank corporations, banks and multilateral agencies. Bondholders do not vote
in the institution’s annual meeting but the first to claim in the institution’s earnings. On the
maturity date, the bondholders will receive the face amount of the bond. Aside from the face
amount due on the maturity date, the bondholders may receive coupons (payments/interests),
usually done semi-annually, depending on the coupon rate stated in the bond certificate.
Comparison of Stocks and Bonds
Stocks Bonds
A form of equity financing or raising money A form of debt financing, or raising money
by allowing investors to be part owners of the by borrowing from investors
company.
Stock prices vary every day. These prices Investors are guaranteed interest payments
are reported in and a return of their money at the maturity
various media (newspaper, TV, internet, etc). date
Investors can earn if the stock prices Investors still need to consider the borrower’s
increase, but they can lose money if the credit rating. Bonds issued by the
stock prices decrease or worse, if the government pose less risk than those by
company goes bankrupt.
companies because the government has
guaranteed funding (taxes) from which it can
pay its loans.
Higher risk but with possibility of higher Lower risk but lower yield
returns
Can be appropriate if the investment is for Can be appriate for retirees (because of the
the long term (10 guaranteed fixed income) or for those who
years or more). This can allow investors to need the money soon (because they cannot
wait for stock prices to increase if ever they
afford to take a chance at the stock market)
go low
Definition of Terms in Relation to Stocks
Stocks –share in the ownership of a company
Dividend – share in the company’s profit
Dividend Per Share –ratio of the dividends to the number of shares
Stock Market –a place where stocks can be bought or sold. The stock market in the Philippines
is governed by the Philippine Stock Exchange (PSE)
Market Value –the current price of a stock at which it can be sold
Stock Yield Ratio –ratio of the annual dividend per share and the market value per share. Also
called current stock yield.
1
Par Value –the per share amount as stated on the company certificate. Unlike market value, it
is determined by the company and remains stable over time
Example 1. A certain financial institution declared a ₱30,000,000 dividend for the common
stocks. If there are a total of 700,000 shares of common stock, how much is the dividend per
share?
Given: Total Dividend = ₱30,000,000 Total Shares = 700,000
Find: Dividend per Share
Solution.
Dividend per Share = Total Dividend
Total Shares
= 42.86
Therefore, the dividend per share is ₱42.86.
Example 2. A certain corporation declared a 3% dividend on a stock with a par value of ₱500.
Mrs Lingan owns 200 shares of stock with a par value of P500. How much is the dividend she
received?
Given: Dividend Percentage = 3%
Par Value = ₱500
Number of Shares = 200
Find: Dividend
Solution.
The dividend per share is: ₱500 x 0.03 = ₱15. Since there are 300 shares, the total dividend is:
₱15/share x 200 shares = P3,000
In summary,
Dividend = (Dividend Percentage)x(Par Value) x(No. of Shares)
= (0.03)(500)(200)
= 3,000
Thus, the dividend is P3,000.
Example 3. Corporation A, with a current market value of ₱52, gave a dividend of P8 per share
for its common stock. Corporation B, with a current market value of P95, gave a dividend of ₱12
per share. Use the stock yield ratio to measure how much dividends shareholders are getting
in relation to the amount invested.
Solution.
Given: Corporation A:
Dividend per share = ₱8
Market value = ₱52
Find: stock yield ratio
Stock yield ratio = Dividend per Share
Market Value
= 0.1538 or 15.48%
Corporation B:
Dividend per share = ₱12
Market value = ₱95
Find: stock yield ratio
Stock yield ratio = Dividend per Share
Market Value
= 0.1263 or 12.63%
Corporation A has a higher stock-yield-ratio than Corporation B. Thus, each peso would
earn you more if you invest in Corporation A than in Corporation B. If all other things are equal,
then it is wiser to invest in Corporation A.
2
As Example 3 shows, the stock yield ratio can be used to compare two or more
investments.
Definition of Terms in Relation to Bonds
Bond – interest-bearing security which promises to pay (1) a stated amount of money on the
maturity date, and (2) regular interest payments called coupons.
Coupon –periodic interest payment that the bondholder receives during the time between
purchase date and maturity date; usually received semiannually
Coupon Rate –the rate per coupon payment period; denoted by r
Price of a Bond –the price of the bond at purchase time; denoted by P
Par Value or Face Value - the amount payable on the maturity date; denoted by F.
If P = F, the bond is purchased at par.
If P < F, the bond is purchased at a discount.
If P > F, the bond is purchased at premium.
Term of a Bond – fixed period of time (in years) at which the bond is redeemable as stated in
the bond certificate; number of years from time of purchase to maturity date.
Fair Price of a Bond –present value of all cash inflows to the bondholder.
Example 4. Determine the amount of the semi-annual coupon for a bond with a face value of
P300,000 that pays 10%, payable semi-annually for its coupons.
Given: Face Value F = ₱300,000
Coupon rate r = 10%
Find: Amount of the semi-annual coupon
Solution.
Annual coupon amount: 300,000(0.10) = 30,000.
Semi-annual coupon amount:
Thus, the amount of the semi-annual coupon is ₱15,000.
Note: The coupon rate is used only for computing the coupon amount, usually paid semi-
annually. It is not the rate at which money grows. Instead current market conditions are
reflected by the market rate, and is used to compute the present value of future payments.
Stock Market Index
A stock market index is a measure of a portion of the stock market. One example is
the PSE Composite Index or PSEi. It is composed of 30 companies carefully selected to
represent the general movement of market prices. The up or down movement in percent
change over time can indicate how the index is performing.
Other indices are sector indices, each representing a particular sector (e.g., financial
institutions, industrial corporations, holding firms, service corporations, mining/oil, property).
The stock index can be a standard by which investors can compare the performance of their
stocks. A financial institution may want to compare its performance with those of others. This
can be done by comparing with the “financials” index.
Stock indices are reported in the business section of magazines or newspapers, as well
as online ([Link] The following table shows how a list
of index values is typically presented (values are hypothetical)
Index Val Chg %Chg
PSEi 7,523.93 –14.20 –0.19
Financials 4,037.83 6.58 0.16
Holding Firms 6,513.37 2.42 0.037
Industrial 11,741.55 125.08 1.07
Property 2,973.52 –9.85 –0.33
3
Services 1,622.64 –16.27 –1.00
Mining and 11,914.73 28.91 0.24
Oil
Val – value of the index
Chg – change of the index value from the previous trading day (i.e., value today
minus value yesterday)
%Chg – ratio of Chg to Val (i.e., Chg divided by Val)
Stock Tables
Various information about stock prices can be reported. The following table shows how
information about stocks can be presented (values are hypothetical).
52-WK 52-WK
HI LOW STOCK HI LO DIV VOL(100s) CLOSE NETCHG
94 44 AAA 60 35.5 .70 2050 57.29 0.10
88 25 BBB 45 32.7 .28 10700 45.70 –0.2
52-WK HI/LO – highest/ lowest selling price of the stock in the past 52 weeks
HI/LO – highest/ lowest selling price of the stock in the last trading day
STOCK – three-letter symbol the company is using for trading
DIV – dividend per share last year
VOL (100s) – number of shares (in hundreds) traded in the last trading day. In this case, stock
AAA sold 2,050 shares of 100 which is equal to 20,500 shares.
CLOSE- closing price on the last trading day.
NETCHG- net change between the two last trading days. In the case of AAA, the net change is
0.10. The closing price the day before the last trading day is P57.29 – P0.10 = P57.19.
Example: Consider the following listing on stocks and answer the questions that follow:
52 weeks
HI LO STOCK DIV YLD% VOL(100s) CLOSE NETCHG
120 105 GGG 3.5 2.8 4050 118.50 -0.50
16 12 HHH 0.9 1.1 1070 15.80 0.10
For Stocks GGG and HHH:
1. What was the lowest price of the stock for the last 52 weeks?
2. What was the dividend per share last year?
3. What was the annual percentage yield last year?
4. What was the closing price in the last trading day?
5. What was the closing price the day before the last trading day?
Answers:
For Stock GGG:
1. Lowest Price = P 105.00
2. Dividend per Share = P3.50
3. YLD% = 2.8%
4. Closing Price = P 118.50
4
5. Closing Price (the day before the last trading day) = P 118.50 +P 0.50 = P 119.00
For Stock HHH:
1. Lowest Price = P 12.00
2. Dividend per Share = P0.90
3. YLD% = 1.1%
4. Closing Price = P15.80
5. Closing Price (the day before the last trading day) = P15.80 - P 0.10 = P 15.70
Bond Market Indices
Definition: A bond market index is a measure of a portion of the bond market. The
main platform for bonds or fixed income securities in the Philippines is the Philippine Dealing
and Exchange Corporation (or PDEx). Unlike stock indices which are associated with virtually
every stock market in the world, bond market indices are far less common. In fact, other than
certain regional bond indices which have subindices covering the Philippines, our bond market
does not typically compute a bond market index. Instead, the market rates produced from the
bond market are interest rates which may be used as benchmarks for other financial
instruments.
