Investment Banks: Roles & Functions

• An investment bank serves as an intermediary between investors (capital sources) and businesses (capital users) by marketing financial instruments.
• Investment banks act as creditors, investors, agents, or consultants.
• Investment bankers are financial specialists who facilitate the flow of savings to raise funds, working within investment banking firms or houses.

Investment Houses 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 vs. Negotiated Distribution

• New security issues are marketed through formal negotiations or competitive bidding.
• Issuers often prefer negotiating with investment houses they trust.
• Negotiations can involve a single investment banker or a syndicate.
• The "originator" conducts preliminary arrangements with the issuer.

Three Functions of Investment Banker

• Underwriting involves assuming the risk of selling a security issue at a profitable price.
• A syndicate is a group of investment bankers that help buy and resell the issue.
• An underwriting agreement is on a "firm basis" if the investment house purchases the entire issue, ensuring cash payment for the issuing company and taking all disposal risks.
• In a "stand-by" agreement, the investment banker buys any unsold portion of an issue after the offering period, often used in stock issues with preemptive rights.
• Investment bankers determine their gross profit or "spread."

Distribution of Securities

• Syndicates act as wholesalers, while dealers are retailers of securities.
• A prospectus contains detailed descriptions and factual information about the issuing company.
• The offering period begins once SEC registration is approved.

Advising

• Investment bankers advise firms on the proper timing of issues to avoid higher yields.
• They analyze capital structure and recommend appropriate capital sources and may sit with the board of directors to make regular recommendations.

Variations in the Underwriting Syndicate

• In a "bought deal" the debt securities manager offers a firm bid to purchase the securities with a specified interest and maturity.
• The issuer has a limited time to accept or reject the bid, and if accepted, the underwriter resells the securities.

Auction Process

• Bidders indicate the price and amount they're willing to buy - securities allotted based on highest bid price until the entire issue is allocated.

Preemptive Rights Offering

• Grants existing shareholders the right to buy new shares at a below-market price, maintaining their proportionate equity interest.
• The "subscription price" is the price at which new shares can be purchased.

Auction Sale Example

• Bidders A, B, C, and D receive their full bid amounts due to having the lowest yield bids.
• Bidders E and F receive a proportionate amount of their bids if the total bid exceeds the remaining amount.

Secondary Market Importance

• Secondary market provides regular information to the issuer about the value of securities.
• It allows original buyers to reverse their investment for cash and enables investors to shift between financial assets.

Securities and Exchange Commission (SEC)

• An independent government agency overseeing the securities market and the PSE, ensuring compliance with securities laws.
• Also issues rules and regulations subject to Monetary Board approval.

Functions of the SEC

• The responsibilities include registration of securities, analysis of registered securities, evaluation of the financial condition, and operations of security issuers.

Philippine Stock Exchange (PSE)

• A self-regulatory organization that polices its members through the Compliance and Surveillance Group (CSG).
• Non-profit and non-stock organization that provides and maintains a fair, efficient, transparent, and orderly market for the purchase and sale of securities.

Role of the PSE

• The PSE facilitates capital raising for companies through new security issues and IPOs.
• The PSE facilitates buying and selling of issued stocks and warrants - committed to protecting the investing public.

Efficient Market

• Is where orders are executed, and transactions are settled quickly using automated machines.

Fair Market

• Assures no investor has undue advantage, and insider trading is prohibited.

Market Transparency

• Investors make informed decisions based on timely, complete, and accurate information.

Unit Trading (Board Lot)

• Standardized quantity of shares for trading, varying based on price ranges.
• For example, a board lot is 20,000 shares for stocks priced from P0.01 to P0.024, and 10 shares for stocks priced from P50 to P100.

Buying and Selling Orders

• Can be at market price or a limit order (specifying a maximum or minimum price).
• Trading is a continuous auction, with the PSE open Monday-Friday but with less liquidity mid-day.

Bid and Asked Prices

• The bid price is the price a buyer is willing to pay.
• The asked price is the price at which a security is offered for sale.
• Exchanges do not fix prices; market price is dictated by supply and demand, with PSE controlling price behavior by imposing minimum fluctuations.
• Quotations may not fall below nor rise beyond 20% of the last sales price.

Margin Trading

• Investors pay a portion of the purchase price, with the broker advancing the balance.
• The margin payment is expressed in percentage, with the broker charging interest on the advanced amount and holding the security as collateral.

Stop Loss Order

• Authorizes the broker to sell the security at a target price to protect against losses in a fluctuating market, although the broker has discretion in determining the best selling price.

Methods of Financial Market Funds Transfer

• Direct finance involves lending directly from ultimate lenders to borrowers without intermediaries.
• The Surplus Spending Unit (SSU) gives money to a Deficit Spending Unit (DSU) in exchange of financial claims.
• Claims issued by the DSU are called direct claims and are typically sold in direct credit markets such as the money or capital market.

Disadvantages of Direct Financing

• Few DSUs transact in the direct market due to large denominations.
• It is difficult to match SSU and DSU requirements.

Means of Direct Financing

• Private placements involve direct negotiation with investors.
• Brokers and dealers.
• Investment brokers.

Indirect Finance (Financial Intermediation)

• Lending by ultimate lenders to financial intermediaries (e.g., banks, insurance companies) who then relend to borrowers.

Classifications of Financial Markets

• Primary Market: New securities are traded for the first time.
• Secondary Market: Existing securities are traded.
• Capital Market: Securities with maturity of one year or more are traded.
• Bond Market: Operates through dealers using telecommunications networks.
• Stock Market: Common and preferred stocks are traded, including organized exchanges and over-the-counter markets.
• Mortgage Market: Loans for real estate are traded.
• Consumer Credit Market: Loans for consumer goods and services are traded.
• Auction Market: Trading is conducted by an independent third party matching prices.
• Negotiation Market: Buyers and sellers negotiate directly or through a broker/dealer.
• Organized Market: Fixed trading rules.
• Over-the-Counter Market: Trading in unlisted securities via electronic networks.
• Spot Market: Securities are traded for immediate delivery and payment.
• Futures Market: Contracts give the holder the right to buy something in the future at a specified price.
• Options Market: Stock options are traded.
• Foreign Exchange Market: Foreign currencies are bought and sold.