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PURVIEW: THE PHILIPPINE STOCK EXCHANGE AND BASIC STOCK INVESTING 101

KNOWING THE PHILIPPINE STOCK EXCHANGE


1. What is the Philippine Stock Exchange, Inc.? The Philippine Stock Exchange, Inc. (PSE or Exchange) is a private nonprofit 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 Philippine Stock Exchange was formed from the countrys two former stock exchanges, the Manila Stock Exchange (MSE), established on August 8, 1927, and the Makati Stock Exchange (MkSE), which was established on May 27, 1963.Although both the MSE and the MkSE traded the same stocks of the same companies, the bourses were separate stock exchanges for nearly 30 years until December 23, 1992, when both exchanges were unified to become the present-day Philippine Stock Exchange.In June 1998, the Securities and Exchange Commission (SEC) granted the PSE a "Self-Regulatory Organization" (SRO) status, which meant that the bourse can implement its own rules and establish penalties on erring trading participants (TPs) and listed companies.In 2001, one year after the enactment of the Securities Regulation Code, the PSE was transformed from a nonprofit, non-stock, member-governed organization into a shareholder-based, revenueearning corporation headed by a president and a board of directors. The PSE eventually listed its own shares on the exchange (traded under the ticker symbol PSE) by way of introduction on December 15, 2003. 2. What is the role of the PSE?

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The PSE bring together companies which aim to raise capital through the issue of new securities. Through the listing of their share in the stock exchange, companies can have easier access to funds. Raising new capital through an additional public offering is easier and less expensive when the company is already listed in the Exchange. Therefore, the PSE plays a vital role in the financing of productive enterprises that use the funds for growth and expansion of new jobs. It is therefore essential to the growth of the Philippine economy.Furthermore, the PSE facilitates the selling and buying of the issued stocks and warrants. It provides a suitable market for the trading of securities to individuals and organizations seeking to invest their saving or excess funds through the purchase of securities.Apart from these functions, the PSE has committed itself to (a) protecting the interest of the investing public; and (b) developing and maintaining an efficient, fair, orderly and transparent market.

Efficient This means that orders are executed and transactions are settled in the fastest possible way. Some reforms have been instituted or are being carried out by the PSE to make the market more efficient, such as: installation of fully automated trading system; installation of computer trading terminals in cities outside Metro Manila to encourage the entry of provincial investors; and creation of a central cleaning and depository system to mobilized stock certificates and allow transfer of shares and funds by book entry.

Fair This means that the PSE assures that no investor will have an undue advantage over another ,market player in trading by manipulating prices and engaging into insider trading. Insider trading is the act of buying or selling a particular stock based on certain privileged information which is not available to the public. As such it is considered as illegal and prohibited by the PSE.

Market Transparency Transparency proceeds from the assumption that the investor can only make informed and intelligent information about the particular sock he wants to buy. The PSE requires listed companies to disclose timely, complete and accurate material information to the Exchange and the public on a regular basis. Such information would include stock price information, corporate conditions and developments which tend to affect stock prices like dividend, mergers and joint ventures, and the like.

3. How did the PSE begin?

The Philippine Stock Exchange began 70 years ago, on August 8, 1927. Five Manila based businessmen, namely W. Eric Little, Gordon W. Mackay, John J. Russell, Frank W. Wakefield and W.P.G. Elliot felt that increasing trading activity would stimulate the business atmosphere. They got together, put their plan into action and founded the Manila Stock Exchange, the first Stock Exchange in the Philippines and one of the oldest in the Far East. It was originally located in downtown Manila, transferred in1970 to its own three-story building in Binondo, and then moved to Pasig in 1992.On May 27, 1963, the Makati Stock Exchange was organized by five other businessmen. These were Hermenegildo B. Reyes, Bernard Gaberman, Eduardo Ortigas, Aristeo Lat and Miguel

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Campos. It started it operations on November 16, 1965 and was located in Makati, then emerging center for finance.So, for about thirty years the Philippines had toe stock exchanges, the Manila Stock Exchange (MSE) and the Makita Stock Exchange (MKSE). Although the two exchanges remained as separate entities, they basically were trading the same listed issues.The existence of two stock exchanges in one country caused confusion among (prospective) investors because the two bourses had different policies, different members and, last but not the least, different stock prices for the same listed stocks.The idea to unite the two exchanges and have it managed by a professional group emerged and was attained when the Philippine Stock Exchange, Inc. was incorporated on July 14, 1992. To further consolidate logistics and to hasten the development of a more efficient capital market, the leaders of both bourses agreed to unify on December 23, 1993 under the PSE. On March 4, 1994 the Securities and Exchange Commission granted the Philippine Stock Exchange, Inc. its license to operate as a securities exchange in the country stating that a unified Stock Exchange is vital in developing a strong capital market and a sustainable economic growth. It simultaneously canceled the licenses of the MSE and the MKSE.The Philippine Stock Exchange is currently the only organized exchange in the Philippines licensed for trading stocks and warrants.

4. How is the PSE managed? One of the non-broker members heads the Exchange, appointed by the Board as the President and Chief Executive Officer (CEO). The President, along with the professional management of the PSE, executes the policy determinations of the Board and ensures that the Exchange is operating efficiently. It carries out for the members, listed companies and exchange system to ensure that stock market operation in the Philippines is kept within the standards of fairness, transparency, professionalism, trust and integrity. Additionally, it sets the rules and regulations of the Exchange, monitors its implementation and ensures that the investing public is given protection in the transaction of their investments. The Exchange also ensures that all legal requirements under the Corporation Code and the Revised Securities Act are met. 5. How is the PSE organized?

The PSES organizational structure holds five (5) groups, namely: Listings & Disclosure Group, Compliance & Surveillance Group, Operations/Automated Trading Group, Finance and Investment Group and Business Development & Information Group along with the Office of the General Counsel, Membership Department and Human Resources Management Department, which reports directly to the Office of the President.The functional responsibilities of each department are as follows: Listings and Disclosure Group This group is composed of the following departments: Listing Processing, Legal Advisory and Corporate Disclosure. It processes and evaluates listing applications, conducts legal due diligence, and monitors

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compliance to continuing listing requirements including disclosure of listed companies. It also coordinates IPO (initial public offering) distribution.

Compliance and Surveillance Group This group acts as the police of the Exchange. It is composed of the Compliance Audit Department, Special Investigation Department, Market Surveillance Department and Legal Section. Te group conducts legal audit and review aside from auditing of member-brokers books and operations. It also monitors the members compliance to set rules and regulations and enforces appropriate sanctions to violators or erring member-brokers. It takes responsibility in the operation of the surveillance activity, to ascertain that there are no illegal postings and dealings made in any of the issues listed in the Exchange. Operations/Automated Trading Group Placed under this group are the Computer Operations Unit, Systems Development Unit and Systems Integration and technical Support Unit along with the Trading & Settlement Department, Administration Department and PSE Plaza Operations Department to function as one group. It is considered as one of the most critical responsibility areas in the organization since it handles the operation of the automated trading and clearing and settlement activities for stock operations.The Automated Trading Group examines and controls the monitoring, logging and analysis of computer system resource utilization; the maintenance of network connections of all workstations at the trading floor and remote offices; managing of database of off-floor installed sites; and the implementation and integration of the different components of the trading and office systems.On the other hand, the Trading and Settlement Department monitors compliance of member-brokers to the clearing and settlement requirements of the settlement banks and central depository. It coordinates with these agencies and the custodian banks, both local and foreign, any trading discrepancies, irregularities or settlement concerns of the memberbrokers and investing public.The Administration Department and the PSE Plaza Operations Department handles the building maintenance, security and administration as well as the procurement management and utilization of supplies and equipment including the daily administrative requirements of the Exchange. It is also responsible for the daily dissemination of all the listed companies corporate announcements along with the foreign quotation report.

Finance and Investment Group The group is responsible for the management of the companys financial resources. It is composed of the Accounting Department, Treasury Department, Payroll and Budget Section and Investments Monitoring Section which handles the maintenance of book of accounts, preparation of financial statements and budget, management and placement of PSE funds, monitoring of accounts receivables and billing of accounts.
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Business Development and Information Group This group is comprised of the following: Product Development Department, Market Development Department, Research and Public Information Department, Corporate communications Department, PSE Training Institute and PSE Rule Book/Task Force Quality Unit.

The Product Development Department is in charge of the expansion, development and packaging of domestic and foreign financial products, equity-related securities, debt-related securities and other forms of securities and derivatives. It coordinates with private businesses, government agencies and associations in the overall development and packaging of the securities, derivatives and trading facilities.The Market Development Department handles the expansion, development and monitoring of the investor base for both domestic and foreign market on an individual and institutional level. It looks at the PSE trading operations presence and positioning in the domestic, regional, and international markets including the expansion and development of market intermediation services and facilities covering secondary, over-the-counter (OTC) and third markets. The research and Public Information Department is composed of the Research Services Sections, Information and Publications Section and the Public Information and Assistance Center (PIAC). It conceptualizes, processes, consolidates and handles multimedia dissemination of statistical and analytical information and studies related to the business requirements of members. It conducts research and provides information support to the expansion and development of the Exchange trading operations and its markets. It also maintains, develops and disseminates information through manual or electronic libraries and documentation. The department produces regular publications Weekly Report, Monthly Reports, and Fact Book that provide market users with a review of the markets performance along with historical and current data on stock trading activities and listed companies. The Department also acts as the liaison of the Exchange through the sharing of data and information with foreign individuals, organizations and institutions.Under the Research and Public Information Department is PIAC which implement the Exchanges continual public assistance program by covering information promotion and facilitation along with complaints mediation in the physical center at the principal offices of the PSE. It also manages the operation of the PSE Souvenir Shop. The Corporate Communications Department manages all forms of media and public relation through press releases, information and educational campaigns. It is in charge of managing and developing business promotional and marketing exposure requirements of the PSE including the production and dissemination of corporate internal bulletin and other forms of information materials.The PSE Training Institute is responsible for the development of programs/curricula along with providing lectures, trainings and seminars about securities market participants. Aside from in-house seminars, it conducts road shows to investors in the provinces. The Institute also provides logistics support to all training-related activities of the departments in the PSE. In the future, the Institute plans to conduct activities such as the Certified Securities

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Representative (CSR) seminars and the technical and fundamental analysis seminars in the coordination with other intuitions.The PSE Rile Book/Task Force Quality is responsible for the codification and the manualization of the PSEs rules, guidelines, procedures and other legislative materials coming from government agencies, into a consolidated and comprehensive Manual of Rules of the Exchange.The PSE Rule Book consists of five (5) volumes which are: (1) Corporate Rules, (2) Membership Rules, (3) Listing and Disclosure Rules, (4) Trading and Settlement Rules, and (5) Compliance and Surveillance Rules.

Membership Department This department manages, implements and coordinates members requirements, planned activities and projects with the end in view of assisting PSE management in the expansion, consolidation and development of its membership. It also processes membership applications and various corporate changes of memberbrokers for approval by the Membership Committee. It is in charge of circular preparations concerning membership, and the monitoring of financial statements of brokers and SEC licenses of its stock traders. In coordination with the Membership Committee, it facilitates memberships arbitration. Further, the Membership Department organizes and prepares social activities for all members.

Human Resources Management Department This department, under the Office of the President, handles employee career management, administration of employee compensation and benefits, management of corporate culture and organization development, implementation of the companys performance management system and formulation and enforcement of company policies. To ensure continuing organization and employee development, this department integrates the organizational structure/processes and workforce issues into the business equation and evaluates group processes and dynamics to tailor-fit results with a corporate staff training and management development program.

Office of the General Counsel The Office of the General Counsel renders corporate legal services and serves as the primary legal advisor to the Board of Governors, the President, the Chief Operating Officer, the various departments, officers and employees of the Exchange. It also coordinates with the external legal consultants on matters referred by the exchange; represents the Exchange before judicial and administrative/quasi-judicial bodies; and, attend legislative and administrative hearings or meeting as well as draft position papers and/or comments to pending legislation and administrative issuances.

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6. Where is the PSE located?

The PSE has two trading centers located at the PSE Centre in Ortigas, Pasig where its executive officers are situated and at the PSE Plaza in Makati City.

BASIC STOCK INVESTING


HOW TO INVEST IN THE PHILIPPINE STOCK MARKET

1. What are stocks and equities?

A share of stock is evidence of a fractional ownership in a corporation. Buying a share of common stock is in fact buying a share of a business. An individual who owns shares in, say, Petron or PLDT has an ownership interest in that company and is called a stockholder or shareholder. This ownership is also referred to as having equity in a company, hence, stocks are also called equities or equity securities. The percentage or proportion of ownership depends on how many of the companys share one owns.For example, 1,000 shares of common stock in a corporation that has 100,000 outstanding shares represent 1,000/100,000 ownership interest. This means you have one percent (1%) ownership interest I the companys plant, its building, its inventories and other assets.

2. What are stock certificates?

Ownership of a business is represented by stock certificates. When an individual becomes a stockholder of any corporation, he receives a stock certificate a written evidence of ownership certified to the corporation. The certificate indicates the investors name, total number of shares purchased, the certificate number, the par value and the name of the issuing corporation.When shares are purchased, the stock certificates will be issued either in street name or in the investors name. The

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difference is important to know since without notice form the investors all stock certificates will be issued in street name, i.e. in the name of the brokerage firm. In this way, the brokerage firm and NOT the investor will be the holder of the stock certificates. Only when the investor specifically asks for it will the stock certificates be issued in the investors name.Stock certificates that are in the street name facilitate the transactions by brokers. When the investor decides to sell his shares, the street certificate simply be endorsed by the stockbroker. If it were in the investors name, the process would be lengthier since it is the investor who needs to endorse it at the back of the certificate. When shares are bought and sold frequently, it is advisable to have them issued in street name since it will facilitate the quick transfer of ownership.

3. What type of stocks can you buy or sell?

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There are different types of stocks that you can buy or sell at the Philippine Stock Exchange (PSE): common stock, preferred stock, cumulative preferred stock and convertible preferred stock. The difference depends on the right and privileges which you receive as a stockholder.The majority of securities traded in the PSE are common stocks. Common stocks are usually purchased for participation in the profits and control of ownership and the management of the company they have voting rights. Common stock holders are entitled to an equal pro rata division of profits without preference or advantage over another stockholder. However, they have the last claim on dividends and are the last to collect in case of liquidation. Common shares can be classified into class A and class B shares. Class A shares are reserved to Filipino investors, while Class B shares are open to foreign investors as well as Filipinos. Thus, Filipinos can own both classes while foreigners can only avail of Class B shares. Both classes have the same privileges and rights, and receive the same amount of dividends.Preferred stocks are another type of securities issued by corporations. Its name is derived from the preference given to the holders of this stock over holders of common stocks. Holders of the preferred stocks are entitled to receive a fixed minimum amount of dividends (expressed either in pesos or as percentage of the stocks par value), to the extent declared by the companys Board and if there are sufficient retained earnings, before any dividends are paid to the holders of common stocks.Cumulative preferred stocks are special preferred stocks that accumulate unpaid dividends for future payment. Cumulative preferred stock has prior rights to dividends over common stock; therefore the omitted cumulative preferred dividends must be paid before the

common stock dividends can be paid. Convertible preferred stocks are preferred stocks which are exchangeable into common stocks at the option of the holder under specified terms and conditions. The conversion ratio specifies the number of shares the holder receives upon surrender while the conversion price is effective price paid for the common stock when conversion occurs. 4. What are warrants?

Warrants are another type of investment which you can buy or sell in the stock market. By definition, a warrant is a security which grants the holder the right but not the obligation to buy (in the case of a call warrant) or sell (in the case of a put warrant), a stated number of underlying shares of stock at a specified price during a specified period of time.

Underlying shares are the shares, unissued or issued as the case may be, of a corporation which may subscribed to or purchased by the warrant holder upon the exercise of the right granted under the warrants. The number of underlying shares a warrant holder is entitled to buy or sell for every warrant he holds is known as the conversion ratio. The exercise period specifies the life of a warrant while the expiration date is the date at which the warrant expires. The exercise price is the stipulated stock price at which the holder can buy or sell the underlying. Warrants can be issued in a number of ways: (a) as part of an initial public offering; (b) attached to a rights issue; (c) attached to bonds; or (d) as stand alone. In the case of debt or equity offerings, warrants are used as sweeteners to enhance marketability of the issuances. Under the SEC Rules Governing Warrants, Issuers or warrants may be the issuer of the underlying shares or an entity other than the company underlying the warrants and may be in the form of:

a)

Subscription Warrant a warrant which grants the right to subscribe to the new or unissued shares of stock of the Issuer;

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b) Covered Warrant a warrant which is issued by a party other than the Issuer of the underlying shares and whose performance of obligation is secured by the deposit of the underlying shares for the Covered Warrant with an independent Trustee which is a reputable commercial bank;

c) Non-collateralized Warrant a warrant issued by a party other than the Issuer of the underlying shares and whose performance of obligation is not secured by a deposit of the underlying shares. Instead, the Issuer normally adopts hedging strategies to provide for its obligations during the life of the Non-collateralized Warrant.

Even if the trading of warrants is relatively new in the Philippine stock market, it has gained some popularity. Currently, there are eight (8) warrants listed at the PSE. The warrant holder has the chance to have the same exposure in the market, as with buying the stock itself, using lesser amounts of money and the advantage of having more time, i.e. exercise period, in which to raise money to purchase more shares (the underlying stock). Also, the investor is protected from the downside risk of the underlying stocks price depreciation since the exposure of their money is limited to only the price of the warrants.

5. Where can you buy or sell stocks?

The stock market is the place where shares of stock are traded while the stock exchange is the organization that provides the facilities for the buying and selling of securities. The trading floor is the place where member-brokers trade daily. The Philippine Stock Exchange (PSE) is the only operating stock exchange in the Philippines and has two trading floors located at the PSE Centre in Pasig City and at the PSE Plaza in Makati City.Trading at the two trading floors or PSE is electronically linked by a computerized trading system, the MakTrade System, which uses the single-order-book system where all the orders are posted and matched in one computer. All trade orders entered by brokers in behalf of their clients are matched with the best bid/best offer (BBO) regardless of which floor orders originate.

6. When can you buy or sell stocks?

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Trading at the PSE is from 9:30 a.m. to 12:00 noon in a continuous session daily, except Saturdays and Sundays, legal holidays and days when the Banko Sentral ng Pilipinas (BSP) Clearing Office is closed.

7. Who can buy or sell stocks?

As the organization that facilitates stock trading, the PSE is not directly involved in the buying and selling of securities. It is the Members (also known as memberbroker or member-firms) who can buy or sell stocks for the investors since they are authorized and licensed by the Securities and Exchange Commission (SEC) to transact business as a broker and/or dealer or securities.A stockbroker acts as an agent or middleman between the investor and other buyers/sellers. As an intermediary, the stockbroker executes orders for clients, purchasing or selling the stocks on the stock exchange. On the other hand, a dealer acts as the principal rather than an agent buying and selling for his/her own account.An individual or corporation is considered a PSE Member once they have acquired a membership seat and have met all the set requirements for membership. Each Member is entitled to one seat which can be bought from an existing Member or from the Exchange.

8. How can you buy or sell stocks? a) Choose a stockbroker. In choosing a broker, you must also see to it that the broker (person or corporation) is a member of good standing at the Philippine Stock Exchange. A complete listing of the PSE member-brokers can be found in various publications or from the PSE Membership Department. It is important that you trust your broker and that you are satisfied with the services it is giving you. Broker services include market reports, advice regarding stock selection and timing of purchases and sales, trade executions, on time delivery of important documents such as confirmation receipts and other trading-related activities that the client may require.

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b) Open a brokerage account. Once the investor has chosen his brokerage firm, a brokerage account has to be opened. This account allows the client to perform

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stock transactions (buy and sell shares) any time similar to bank account which enables you to deposit, transfer and withdraw money.

Opening a brokerage account is relatively easy to accomplish and takes not longer than opening a bank account. A specimen signature card needs to be filled out, containing the: name, address (professional and private), telephone number(s), and most importantly, the clients signature. Frequently, bank and professional references have to be submitted.

Once an account has been opened, the client may buy or sell immediately according to the trading instructions between the investor and broker. Trading instruction can vary depending on the investors objective whether it is short-term or long-term, minimum or maximum value of trades (trading limit), etc. All transactions are handled confidentially and the broker will not reveal to any person the details of any purchases or sales done for his client.

c) Place your order with your broker. After opening the account, a trader will be assigned to the investor. A trader is a licensed salesman who is authorized to buy and sell securities at the PSE. The assigned trader will be your contact person for all the transactions. He/she will receive your order, most likely by telephone (unless arrangements are made), and will execute the order through the trading terminal connected to the main system of the Exchange.

Thus, when placing an order to buy or sell, you have to call your trader and give the details of your order. The trader need to know the following specifications: buy or sell order, which stock to buy or sell, the number of shares to buy or sell, and preferably also the bid price (when buying) or asked price (when selling).

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d) Settle your transaction. Buying and selling transactions are settled by book-entry. This means the ownership of shares and cash is transferred electronically to the brokerage account, without the stock certificates and cash being

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handed over physically. The account is credited when buying shares, and debited in the case of selling shares.

The paperless or scripless trading, now in place, has eliminated the physical handover of stock certificates when buying or selling. The system replaced the scripbased system where stock certificates are handed over for transfer for the next owner, which may take more then 3 to 4 weeks. Instead, stock certificates are simply immobilized and kept in a safe place the Philippine Central Depository, Inc. The book-entry system clearly advantages over the paper-based system. It has dramatically reduced paper work, facilitated the trading and eliminated the loss or forgery of shares.Currently the PSE settles trades on T+4, i.e., four (4) days after the transaction date. Therefore, payments and/or securities must be delivered to your broker on or before 1:00 p.m. of the fourth trading day following the sale. Be sure to always verify the settlement deadline with your broker for future developments.

9. What is the minimum amount you can invest in the stock market?

The minimum amount of money needed to invest in the stock market depends on the minimum amount of shares to be traded for the stock. This minimum amount will be determined by the prevailing market price of a particular stock. For each stock the minimum amount of shares to be traded is fixed and depends on the price range of the stock, as shown in the table below (otherwise known as the Board Lot Table). To determine the minimum amount of shares, the investor takes the market price of the wanted stock, looks for the price range in the table below reads the minimum amount of shares in the same row.For example, an investor wishes to buy a
stock whose market price is P100.00. This price is in the P50.50 to P100.00 price range; consequently, the minimum number of shares to be bought at a regular transaction is 100 shares. In this case, the minimum amount of the investor needs is just about P10, 000.00 (100 shares x P100.00 share price) exclusive of other charges for buying stocks. For shares

in the lowest range (from P0.001 to P0.0024) a minimum of P1, 000,000 shares have be bought. If the share price is P0.001, the minimum capital outlay is P1, 000.00 (P0.001 x 1,000,000 shares).

10. What charges will you incur in buying and selling stocks?

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Brokerage commission. When buying and selling listed securities, the brokerage firm always acts as an agent between you, the buyers and sellers. His function is to execute the clients order and to give advice when required. For the services rendered, the brokerage firm charges its clients a commission. When you buy stock, the brokerage firm adds the commission to the value of the shares bought. When you sell shares, the commission is deducted from the proceeds that you receive. The maximum fee is 1.5% of the gross value of the transaction (i.e., the number of shares multiplies by the price) plus 10% value added tax (VAT). This means that 10% is added to the brokerage commission to be paid with a maximum of 1.65% (1.5% + 10%).

Transfer fee. A transfer fee of P100.00 plus 10% VAT is charged to the buyer by the transfer agent for every security traded. The transfer agent maintains the ledgers for each issuer the company showing the details about each registered stockholder. It also has the responsibility to cancel the old certificates and change the name when the shares have been sold.

Cancellation fee. Sales transaction and/or direct transfers are subject to a cancellation fee of P20.00 per bearer certificate plus 10% VAT.

Philippine Central Depository (PCD) fees. For the book-entry-settlement system, buying and selling transactions are subject to an ad valorem rate of 0.00009174 (inclusive of VAT), without any maximum or minimum amount, in lieu of transfer fee and cancellation fee. If the client buys a PCD-eligible issue and still wants a stock certificate issued to his name, he must pay the PCD ad valorem charge, a P25.00 upliftment/withdrawal fee per request and transfer fee. Also, if a client sells a PCD-eligible issue and still has the stock certificate for delivery to the broker, he is charged with the PCD ad valorem rate and a cancellation fee.

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Documentary stamp tax. The documentary stamp tax is charged to the buyer on every purchase transaction at the rate of P1.50 for every P200.00 par value of the stock being transferred or a fraction thereof.

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Stock transaction tax. The stock transaction tax is charged to the seller for every sale of stocks listed and traded on the Exchange at the rate or of 1% of the value of transaction, in lieu of the capital gains tax.

11. What are your rights as a stockholder?

As part owner of the corporation, stockholders are granted several rights.

Rights to receive dividends When dividends are declared by the companys Board of Directors, shareholders are entitled to these dividends, but in proportion to the number of shares held. However, shareholders cannot claim dividends when the company decides not to declare any.

Voting rights The common stockholders have the right to vote and to decide on a broad range of corporate issues, e.g. reorganizations, mergers, issuance of new stock and, last but not the least, the election of the companys Board of Directors at the stockholders meetings.

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Pre-emptive right This is the right given to existing stockholders to purchase additional shares before they are offered in the general public, usually at a lower price. For example, a corporation decides to issue additional shares to the public and gives the right to all of its stockholders to subscribe to the new shares at the ratio of 1:2. For every 2 shares owned, present shareholders have the option to buy one additional share, if they so desire.

Limited liability and last claim to the companys assets liquidation If the company in which you own stocks goes bankrupt your total loss as a stockholder is limited to the amount that you paid for the security. You have the claim against the companys remaining assets; however, your is the last behind all other creditors, such as suppliers, employees and bondholders. The biggest risk you face is the loss of capital that you have invested because the companys stock becomes worthless. Neither the corporation, the banks from which it borrowed money, nor the bondholders to which it owes money have any claims on your personal assets.

12. How can you make money in the stock market?

As owner of a corporations share of stock or stockholder, your return can come from either dividends or capital gains.

Dividends are periodic payments made by the company to its shareholders from its current and past profits. It is paid in either of two ways. The first and most common method is cash; the second method is known as stock dividend.

Cash dividend This income is computed by multiplying the number of shares held by the cash dividend rate declared. For example, if a company declares a P0.25 per share cash dividend to tits shareholders, a stockholder with 10,000 shares of stock will receive a cash dividend income of P2,500 (P0.25 x 10,000).

Stock dividends This dividend is given to shareholders in the form of additional stocks, instead of cash. For example, a company with one million outstanding shares declares a 25% stock dividend. A stockholder who owns 10,000 shares will receive an additional 2,500 shares (355% of 10,000) for free as a stock dividend. This stockholder now owns 12,500 shares.
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Dividend payments are not automatic. All dividends must be declared by the companys Board of Directors, but it is the decision of the company whether to declare dividends or not, the amount and when it will be paid. Usually, the higher the companys profit, the higher the dividends paid to the stockholders. But if the Board decides not to declare a dividend, the common stockholders receive nothing. Common stockholders cannot demand dividend payments even if the company is profitable.

Capital gains This results form capital appreciation, or an increase in the market value of the stock you own. For example, an investor buys 10,000 shares of stock at P2.00 per share. After several weeks, the market price of the stock increases to P3.00. If the investor decides to sell all his shares, he will be getting a total value of P30, 000 which represents a 50% capital gain form his purchasing value of P20, 000. Thus, capital gains are profit made due to an increase in the market price of a stock form the purchase price.

13. How do you collect information about stocks?

Having placed an initial amount in stocks, the next step is to keep track of the stock price and to follow closely the developments of the company. It would not be wise to put your stock certificates in a safe and have them locked away for years. There have been too many cases of companies that performed badly for years, or even worse got bankrupt. It would be too bad for an investor to discover after years that the shares have little or no value anymore.A wise investor always keep track, on a regular basis, of the sock price and the companys performance. This way, an investor is able to foresee possible consistent poor performance and low profits as well as consequently low stock prices. One of the most important factors influencing the amount of success achieved by an investor is the quality of information used to make investment decisions. Investors should therefore spend some time and effort in studying their investment and keeping up-to-date with the developments in the company, the industry and the economy.

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Stock market information For price and other stock market information, investors can rely on the following sources: stockbrokers, Philippine Stock Exchange, media (newspapers, television and radio), and information service companies (i.e., Bloomberg, Reuters, Technistock, etc.)

Daily quotation of stock prices can be obtained from your stockbroker. Investors can call their broker any time to inquire about the status of the stock market which includes stock process, closing and opening prices, bid and asked prices, and traded volumes. Usually brokers can also provide you with reports on the company and industry analyses which give you an in-depth look into the performance of a particular corporation, industry or sector that will lead to an advice to buy, hold or sell.Stock price information can likewise be obtained from the Philippine Stock Exchange. It also keeps a copy if all corporate statements that have to be disclosed to the public and the PSE as part of its disclosure requirements. Annual, semi-annual and quarterly reports have to be submitted to the PSE on a regular basis by every listed company. These reports and other financial statements are kept in the PSE library and are available to the public.In addition, the PSE Research and Public Information Department issues statistical Weekly and Monthly reports and Fact Book in a regular basis. These contain among others, trading statistics, the composite index and sectoral indices, market capitalization of listed companies, volume and value traded. These publications are available at the PSE Library. The Library is open daily form 8:00 a.m. to 12:00 noon and from 1:00 p.m. to 5:00 p.m., except Saturdays, Sundays, and legal holidays. Also, these publications are on sale at he Public Information and Assistance Center in Pasig City.Most leading daily newspapers cover the stock market and publish the previous days closing prices and traded volume.For more in-depth news about the stock market, investors can turn to TV programs which gives updates about the company, the various industries and particular companies while stock price information is shown simultaneously. Stock market Live on Channel 21 (Sky cable) covers the stock market every morning during trading hours.Those who have a computer can access the World Wide Web for the latest stock market information. Numerous brokerage houses provide closing prices as well as the composite index and the indices of the different sectors. And give background information about the stock market along with the market recommendations. You can visit the PSE at http://www.pse.org.ph.

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Information about a listed company Apart from keeping track of the stock prices and other indicators, the investor should likewise monitor closely the

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companies he/she invested in. The financial performance, dividend declarations, future outlook, the management of the company, corporate developments, development plans in short, anything that could affect stock process should be looked into. The following sources of information can be consulted for company analysis:

Corporate annual reports. The annual reports of a corporation are probably the best source for facts about a company. The most valuable information contained in these reports are the financial statements, the company overview, the achievements and developments, and future prospects.

Prospectus. When a corporation wants to issue new shares to the public, it must prepare a complete report about he companys activities and development plans, called a prospectus. Particularly, the prospectus must mention how the raised funds will be used and attributed, This report is generally detailed and contains accurate information since it has to be approved by the Securities and Exchange Commission before the company is allowed to issue the shares. 14. What do you need to do before you invest?

Before making any investment, you must first evaluate your current and potential means, and determine the goal or purpose of making the investment. Every investor should ask himself the following questions before making the first purchase:How much money do I have to invest and can I afford to invest without adversely affecting my life-style?What you want to invest may be quite different from what you have to invest. It is true that the bigger your investment, the bigger the possible capital gains. Consider an annual rate of return of 20%. If you had invested P100,000 you would have gained a profit of P20,000. But an investment of P500,000 would have yielded P100,000. Therefore, it might be tempting to put as much money as possible in the stock market to get rich quickly. Butt investors should only invest extra money; they should not borrow to be able to purchase more shares. Remember that stock investment carries a certain risk. Stock priced can very substantially from day to day. Borrowing money acts as leverage: if stock prices are increasing, the profits realized will be higher due to a bigger initial investment. But what if stock prices are declining and you are incurring a capital loss? There might not be enough money left to repay the borrowed money in the

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stock market money in excess of that required for their living expenses, savings, the necessary insurance coverage and cash reserves for emergencies. Determining your capital available for investing should be considered first.

What is the purpose of my investment? To generate cash immediately or to build capital? For receiving dividends or for capital appreciation? For a childs education or your retirement? For short-term benefits or long-term gains? How much return would you accept as reasonable for your investment? Be realistic about the returns the stock market can give you. Dont expect extraordinary returns. How much risk am I willing to accept? Stated differently: How much money are you able and willing to risk. Each individual should set a limit and be prepared to get out of his stock when the limit is reached. These are the questions you must answer before making any investment. Based on the answers, a particular investment strategy has to be designed to achieve those goals. More specifically, investments instruments have to be chosen stocks, debt securities and deposits that will give you the expected return at the desired moment, and with their specific risk characteristics. These are the questions that your broker will ask in order to create your financial profile. It becomes part of the information he or she considers when making investment recommendations and selecting specific financial assets.

15. What are some investment tips which can help you while investing?

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Investigate before investing. Investors should spend some time ____________________________________ and particular stocks to invest in. It is not advisable to put your money into any stock without first looking at the corporation. Issues that have to be looked into are: market share and sectoral importance, the financial performance of the company as shown in the annual and other financial reports, the management, development plans, growth opportunities, etc. Please ask your broker for assistance in selecting the stocks.Diversify your portfolio. Diversification is the opposite of putting all your eggs in one basket, a practice that is as risky as putting all your funds in one stock. Although

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temptation of putting everything into one stock might be very great, especially when the price is moving upward, it should be avoided. It is one of the basic rules in stock market investing. Diversification, on the other hand, is the investment strategy of investing in different industry sectors and if possible, different stocks from different reduce your risk considerably.

Dont rely on rumors. Frequently, rumors circulate in the stock market, especially when there is heavy trading. At such times, people launch rumors as to where the stock price will go, often to make money out of it. Rumors and hearsay should be carefully checked and verified by the investor. Consider the source and the motive behind the launching of the information and never act on the basis of a rumor that cannot be verified.

Monitor your investments. As discussed in number 13, having placed an initial amount in stocks, an investor should now keep track of the stock price and the companys performance on a regular basis. Only in this way you are able to foresee possible consistent poor company performance which will be reflected in low stock prices. Investors should therefore keep up-to-date with the developments in the company, the industry and the economy.

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Dont be greedy. The principle of making a profit in the stock market is simple: buy low sell high or buy when the stock is inexpensive and wait till its price increases to sell. But investors should not try to buy at the bottom or sell at the top. It is difficult to foresee when the stock price has reached its bottom or top. Even trained experts with the best tools cannot accomplish this feat frequently. Instead, investors should set objectives in terms of expected return and profit and act accordingly. When the stock is still rising and the investor feels that the price has reached the desired level yielding the expected profit, it is time to start selling. He should not cling onto his shares for that extra bit of profit. For at the peak many investors will get nervous and start selling, pulling down prices sharply and quickly. When this happens, it may be difficult to sell, resulting in a lower-than-expected gain or profit. Greed in this case, will cause much disappointment. Investors should therefore sell according to the previously set profit objective and not wait for the very last moment. Simple: dont be greedy.

Limit your risk. Remember that stock investments are subject to risk. Very few people like to sell at loss and, consequently, hold on their shares, even when the stock price keeps falling. A better attitude would be to limit and manage your risk. A maximum level of loss should be set (e.g. 20% stock price decrease) and get out of the stock when this level has been reached. In that way, a further loss of capital is prevented, which can be used for other investment opportunities.

16. What are the risks involved in stock market investing?

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All financial assets carry some risk the risk that the actual return might be lower than expected or promised. However, the risk characteristics are distinct depending on the type of investment instrument.Fixed-income securities, such as bonds, preferred stocks and convertible securities, generally carry a low level of risk. The buyer of these assets know in advance how much interest payment he will receive at the end of each month. This is true for treasury bills, savings, and time deposits, and to lesser extent, also dollar deposits. The risk is related to the failure of the financial institution bank, private company or government to pay the promised interest at regular intervals. When a bank goes bankrupt, its assets might not be sufficient to pay all the debts, including the interest to the account holders. They will receive less, or nothing at all. Likewise, when the governments deficit becomes too large, it might not be able to pay the holders of treasury bills the promised interest. Fortunately, private and government organizations have generally proven to be able to hold their promises and repay the money they borrowed.The returns from stocks, however, are less predictable. Remember that stock provides potential income in the form of cash dividends and capital gains when the stock price appreciates. As outlined earlier, cash dividend payments are not fixed. It depends on the Board of Directors of the company if dividends will be paid out, the amount of it and the time. Therefore a stockholder is never sure of the cash dividend he will receive. This is the first type of risk he encounters when buying stock.Secondly, the capital gains an investor is entitled to depend on the price movement of the stock. Since stock process can be very volatile, i.e. can vary substantially from one day to another, the increase in the market value of the shares held varies too. As history has shown, stock prices can speed up, but can also take a sharp dive. As stock prices go down, the capital gains decrease, or even result in capital loss. Thus, this type of risk refers to the volatility of the capital gains. Together, the variability of the cash dividends and of the capital gains constitutes the total risk of stockholder. To summarize, stocks are by far the most risky of financial instruments, but also the most profitable. On the long term,

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they have proven to substantially outperform other financial assets, and be the best hedge against inflation and loss of buying power. Fixed-income securities generally provide less than half the return on stocks but exhibit substantially less risk.

*FROM THE Investors Primer III: Investing in the Philippine Stock Market AND Investors Primer II: The Philippine Stock Exchange BY:

JOSE LUIS U. YULO JR.

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