Security

- is defined broadly to include a wide array of investments, such as stocks, bonds, notes,
debentures, limited partnership interests, oil and gas interests, and investment contracts.
- refers to a fungible, negotiable financial instrument that holds some type of monetary value. A
security can represent ownership in a corporation in the form of stock, a creditor relationship
with a governmental body or a corporation represented by owning that entity's bond; or rights to
ownership as represented by an option.

Types of Securities

Equity Securities
An equity security represents ownership interest held by shareholders in an entity (a company,
partnership, or trust), realized in the form of shares of capital stock, which includes shares of
both common and preferred stock.

Debt Securities
A debt security represents borrowed money that must be repaid, with terms that stipulate the
size of the loan, interest rate, and maturity or renewal date.

Hybrid Securities
- as the name suggests, combine some of the characteristics of both debt and equity
securities. Examples of hybrid securities include equity warrants (options issued by the
company itself that give shareholders the right to purchase stock within a certain
timeframe and at a specific price), convertible bonds (bonds that can be converted into
shares of common stock in the issuing company), and preference shares (company
stocks whose payments of interest, dividends, or other returns of capital can be
prioritized over those of other stockholders).

Derivative Securities
A derivative is a type of financial contract whose price is determined by the value of some
underlying asset, such as a stock, bond, or commodity. Among the most commonly traded
derivatives are call options, which gain value if the underlying asset appreciates, and put
options, which gain value when the underlying asset loses value.

Asset-Backed Securities
An asset-backed security represents a part of a large basket of similar assets, such as loans,
leases, credit card debts, mortgages, or anything else that generates income. Over time, the
cash flow from these assets is pooled and distributed among the different investors.

The secondary market is less liquid for privately placed securities since they are not publicly
tradable and can only be transferred among qualified investors.

Investing in Securities
The entity that creates the securities for sale is known as the issuer, and those who buy them
are, of course, investors. Generally, securities represent an investment and a means by which
municipalities, companies, and other commercial enterprises can raise new capital. Companies
can generate a lot of money when they go public, selling stock in an initial public offering (IPO),
for example.
City, state, or county governments can raise funds for a particular project by floating a municipal
bond issue. Depending on an institution's market demand or pricing structure, raising capital
through securities can be a preferred alternative to financing through a bank loan.

On the other hand, purchasing securities with borrowed money, an act known as buying on a
margin is a popular investment technique. In essence, a company may deliver property rights, in
the form of cash or other securities, either at inception or in default, to pay its debt or other
obligation to another entity. These collateral arrangements have been growing of late, especially
among institutional investors.

Regulation of Securities
Section 28. Registration of Brokers, Dealers, Salesmen and Associated Persons. – 28.1. No
person shall engage in the business of buying or selling securities in the Philippine as a broker
or dealer, or act as a salesman, or an associated person of any broker or dealer unless
registered as such with the Commission.

Residual Securities
Residual securities are a type of convertible security—that is, they can be changed into another
form, usually that of common stock. A convertible bond, for example, is a residual security
because it allows the bondholder to convert the security into common shares. Preferred stock
may also have a convertible feature. Corporations may offer residual securities to attract
investment capital when competition for funds is intense.

Other Types of Securities

Certificated Securities
Certificated securities are those represented in physical, paper form. Securities may also be
held in the direct registration system, which records shares of stock in book-entry form. In other
words, a transfer agent maintains the shares on the company's behalf without the need for
physical certificates.

Bearer Securities
Bearer securities are those that are negotiable and entitle the shareholder to the rights under
the security. They are transferred from investor to investor, in certain cases by endorsement
and delivery. In terms of proprietary nature, pre-electronic bearer securities were always
divided, meaning each security constituted a separate asset, legally distinct from others in the
same issue.

Depending on market practice, divided security assets can be fungible or (less commonly) non-
fungible, meaning that upon lending, the borrower can return assets equivalent either to the
original asset or to a specific identical asset at the end of the loan. In some cases, bearer
securities may be used to aid tax evasion, and thus can sometimes be viewed negatively by
issuers, shareholders, and fiscal regulatory bodies alike.

Registered Securities
Registered securities bear the name of the holder and other necessary details maintained in a
register by the issuer. Transfers of registered securities occur through amendments to the
register. Registered debt securities are always undivided, meaning the entire issue makes up
one single asset, with each security being a part of the whole. Undivided securities are fungible
by nature. Secondary market shares are also always undivided.
Letter Securities
Letter securities are not registered with the SEC and cannot be sold publicly in the marketplace.
Letter security—also known as restricted security, letter stock, or letter bond—is sold directly by
the issuer to the investor. The term is derived from the SEC requirement for an "investment
letter" from the purchaser, stating that the purchase is for investment purposes and is not
intended for resale.

Cabinet Securities
Cabinet securities are listed under a major financial exchange, such as the Exchange market in
the Philippines, but are not actively traded. Held by an inactive investment crowd, they are more
likely to be a bond than a stock. The "cabinet" refers to the physical place where bond orders
were historically stored off of the trading floor. The cabinets would typically hold limit orders, and
the orders were kept on hand until they expired or were executed.

A marketable security is any type of stock, bond, or other security that can easily be bought or
sold on a public exchange. For example, the shares of public companies can be traded on a
stock exchange, and treasury bonds can be bought and sold on the bond market.

In contrast, a non-marketable security is one that cannot be legally sold to the public. For
example, shares in non-public companies can only be bought or sold in very limited
circumstances.

Treasury Securities
Treasury securities are debt securities issued by the Government. Treasury department to raise
money for the government. Since they are backed by the government, these bonds are
considered very low-risk and highly desirable for risk-averse investors.

Investment banking
- 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.
- is a type of banking that organizes large, complex financial transactions such as mergers
or initial public offering (IPO) underwriting. These banks may raise money for companies
in a variety of ways, including underwriting the issuance of new securities for a
corporation, municipality, or other institution. They may manage a corporation's IPO.
Investment banks also provide advice in mergers, acquisitions, and reorganizations.

Initial Public Offering (IPO) Underwriting

- Essentially, investment banks serve as middlemen between a company and investors
when the company wants to issue stock or bonds. The investment bank assists with
pricing financial instruments to maximize revenue and with navigating regulatory
requirements.

Example of Investment Banking

Suppose that Pete's Paints Co., a chain supplying paints and other hardware, wants to go
public. Pete, the owner, gets in touch with José, an investment banker working for a larger
investment banking firm. Pete and José strike a deal wherein José (on behalf of his firm) agrees
to buy 100,000 shares of Pete's Paints for the company's IPO at the price of 24 per share, a
price at which the investment bank's analysts arrived after careful consideration.
The investment bank pays 2.4 million for the 100,000 shares and, after filing the appropriate
paperwork, begins selling the stock for 26 per share. However, the investment bank is unable to
sell more than 20% of the shares at this price and is forced to reduce the price to 23 per share
to sell the remaining shares.

For the IPO deal with Pete's Paints, then, the investment bank has made 2.36 million [(20,000 ×
26) + (80,000 × 23) = 520,000 + 1,840,000 = 2,360,000]. In other words, José's firm has lost
$40,000 on the deal because it overvalued Pete's Paints.

What Do Investment Banks Do?

Broadly speaking, investment banks assist in large, complicated financial transactions. They
may provide advice on how much a company is worth and how best to structure a deal if the
investment banker's client is considering an acquisition, merger, or sale. Essentially, their
services include underwriting new debt and equity securities for all types of corporations,
providing aid in the sale of securities, and helping to facilitate mergers and acquisitions,
reorganizations, and broker trades for both institutions and private investors.

What Is an Initial Public Offering (IPO)?

An initial public offering (IPO) refers to the process of offering shares of a private corporation to
the public in a new stock issuance. Public share issuance allows a company to raise capital
from public investors. Companies must meet requirements set by exchanges and the SEC to
hold an IPO. Companies hire investment banks to underwrite their IPOs. The underwriters are
involved in every aspect of the IPO due diligence, document preparation, filing, marketing, and
issuance.

Trading securities are securities purchased by a company for the purpose of realizing a short-
term profit. Companies do not intend to hold such securities for a long period of time; thus, they
will only invest if they believe they have a good chance of being compensated for the risk they
are taking.

"Trading participant" refers to Financial Instruments Business Operators (securities

companies), Transaction-at-Exchange Operators, Registered Financial Institutions and
Commodity Derivatives Business Operators, etc.

Foreign exchange, or forex, is the conversion of one country's currency into another. In a free
economy, a country's currency is valued according to the laws of supply and demand. In other
words, a currency's value can be pegged to another country's currency, such as the U.S. dollar,
or even to a basket of currencies.

Factors Affecting Currency Value

The value of any particular currency is determined by market forces based on trade, investment,
tourism, and geopolitical risk. Every time a tourist visits a country, for example, they must pay
for goods and services using the currency of the host country. Therefore, a tourist must
exchange the currency of their home country for the local currency. Currency exchange of this
kind is one of the demand factors for a particular currency.
Securities and Exchange Commission (SEC) is an independent federal government
regulatory agency responsible for protecting investors, maintaining fair and orderly functioning
of the securities markets, and facilitating capital formation. It was created by Congress in 1934
as the first federal regulator of the securities markets.

The SEC's primary function is to oversee organizations and individuals in the securities
markets, including securities exchanges, brokerage firms, dealers, investment advisors, and
investment funds. Through established securities rules and regulations, the SEC promotes
disclosure and sharing of market-related information, fair dealing, and protection against fraud.

The five divisions and their respective roles are:

 Division of Corporate Finance: Ensures investors are provided with material

information (that is, information relevant to a company's financial prospects or stock
price) in order to make informed investment decisions.

 Division of Enforcement: In charge of enforcing SEC regulations by investigating

cases and prosecuting civil suits and administrative proceedings.

 Division of Investment Management: Regulates investment companies, variable

insurance products, and federally registered investment advisors.

 Division of Economic and Risk Analysis: Integrates economics and data analytics
into the core mission of the SEC.

 Division of Trading and Markets: Establishes and maintains standards for fair, orderly,
and efficient markets

In civil suits, the SEC seeks two main sanctions:

1. Injunctions, which are orders that prohibit future violations. A person or company that
ignores an injunction is subject to fines or imprisonment for contempt.

2. Civil money penalties and the disgorgement of illegal profits. In certain cases, the SEC
may also seek a court order barring or suspending individuals from acting as corporate
officers or directors. The SEC may also bring a variety of administrative proceedings,
which are heard by internal officers and the commission. Common proceedings include
cease and desist orders, revoking or suspending registration, and imposing bars or
suspensions of employment.