FIN2001 - FINANCIAL MARKETS

AND INSTITUTIONS

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 Chapter 4
EQUITY MARKET

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 Content
▪ Overview of equity market
• Overview of joint stock companies and stocks
• Functions of equity markets
• Equity Market Participants
• Organizing equity secondary markets
▪ Stocks: definition, features and types of stocks
• Common stocks
• Preferred stocks
• Convertible securities
▪ Equity markets
• Primary market
• Secondary markets
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• Vietnam Stock Markets
 Readings
▪ Chapter 10: Madura (2013), Financial Markets and
Institutions. South-Western Cengage Learning.
▪ Chapter 13: Mishkin and Eakins (2017), Financial Markets
and Institutions. Pearson.

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 4.1. Overview of Equity Market
4.1.1. Overview of joint stock companies
and stocks
▪ A joint stock company or corporation is a form of business
organisation where its charter capital is divided into shares or
stocks. Joint stock companies facilitate raising capital by issuing
shares or stocks to both individual (retail) investors and
institutional investors.
▪ Stocks (or equity securities), are financial instruments that
represent partial ownership in the corporations that issue them.
▪ Investors can earn a return from stock in one of two ways:
• The price of the stock rises over time.
• The firm pays the stockholder dividends. 5
 4.1. Overview of Equity Market
4.1.1. Role of equity market

▪ Capital formation: Equity markets enables companies to raise capital

by selling shares to investors.
▪ Provide a secure and regulated investment environment for market
participants.
▪ Stock liquidity: shareholders can easily buy stocks and sell their
shares to convert their investment into cash on the stock exchange.
▪ Pricing of stocks on the basis of demand and supply factors.
→ promoting corporate governance.
▪ Economic indicators: Policymakers closely monitor equity market
trends to assess overall economic health and implement policies to
regulate the economic activities. 6
 4.1. Overview of Equity Market
4.1.2. Equity market participants

▪ Issuing firms
▪ Underwriting groups
▪ Stock Exchanges
▪ Financial intermediaries
▪ Investors: Individuals and institutions

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 4.1. Overview of Equity Market
4.1.3. Organizing equity secondary markets
▪ Organized Stock Exchanges
Buying Stock Selling
investors Exchange investors
Trading
Securities firm Securities firm
Information
announcement

Securities
depository center
Clearing House

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 4.1. Overview of Equity Market
4.1.3. Organizing equity secondary markets

◼ Over-the-counter (OTC) market: Stocks not listed on the

organized exchanges are traded in the over-the-counter (OTC)
market. Unlike the organized exchanges, the OTC market does
not have a trading floor. Instead, the buy and sell orders are
completed through a telecommunications network.

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 4.2. Types of stocks

Joint-stock company

Common Preferred Convertible

stocks stocks securities

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 4.2. Types of stocks
4.2.1. Common Stocks

▪ The most prevalent type of equity securities by far is

common stock. A share of common stock in a firm
represents an ownership interest in that firm.
▪ Buyers of common stocks become common stockholders.
▪ Common stock is the fundamental ownership claim in a
public corporation.

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 4.2. Types of stocks
4.2.1. Common Stocks
▪ Features of common stocks:
• Stocks do not mature and do not guarantee the payment of
funds.
• Stockholders enjoy limited liability, meaning that their losses
are limited to the original amount of their investment.
• Ownership of common stocks gives the stockholders residual
claims against the firm’s cash flows or assets: dividends are not
guaranteed (depends on firms’ net income and dividend
policy); stockholders have a claim on all assets and income left
over after all other claimants have been satisfied.
• Common stockholders have the right to vote on certain key
matters concerning the firm. 12
 4.2. Types of stocks
4.2.2. Preferred Stocks
▪ Preferred stocks also represents ownership in the
corporation.
▪ Buyers of preferred stocks become preferred stockholders.
▪ Preferred stock is often described as a hybrid security that has
features of both common stocks and bonds.

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 4.2. Types of stocks
4.2.2. Preferred Stocks
▪ Features of preferred stocks:
• Stocks do not mature and do not guarantee the payment of
funds. just have the responsibility to the firm have the right of debt (?)

• Stockholders enjoy limited liability.

• Owners of preferred stock usually receive preferential treatment
over common stockholders with respect to dividend payments
and the claim against the firm’s assets in the event of
bankruptcy or liquidation.
• Preferred stock usually does not allow for significant voting
rights.
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 4.2. Overview of public equity
4.2.2. Preferred Stocks

▪ Companies may customize other “classes” of preferred

stock.
• Participating preferred stock C PHIU U ÃI THAM D CHIA PHN

• Cumulative preferred stock C PHIU U ÃI TÍCH LY

• Convertible preferred stock C PHIU U ÃI CHUYN I

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 4.2. Overview of public equity
4.2.2. Preferred Stocks
▪ Customized preferred stocks
▪ Participating preferred stock: is a type of stock that gives
its holders the right to receive additional dividends beyond
the fixed dividend rate with common stockholders if the
company's earnings surpass a predetermined threshold.
This is contrast to nonparticipating preferred stock which
means that the preferred stock dividend is fixed – it doesn’t
change regardless of how profitable (or unprofitable) the
firm may become. 16
 4.2. Overview of public equity
4.2.2. Preferred Stocks
▪ Customized preferred stocks
▪ Cumulative preferred stock: Firms can decide not to pay
the dividends on preferred stock without going into
default. However, the cumulative feature of preferred
stock means that the firm cannot pay a dividend to its
common stockholders until it has paid any dividends it
skipped to the preferred stockholders.

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 4.2. Overview of public equity
4.2.2. Preferred Stocks
▪ Customized preferred stocks
▪ Convertible preferred stock: can be converted into
common stock at a predetermined ratio (such as two
shares of common for each share of preferred stock).

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 4.2. Overview of public equity
4.2.3. Convertible securities
▪ The owners of preferred stock normally do not participate in the
profits of the firm beyond the stated fixed dividend. All profits
above those needed to pay dividends on preferred stock belong to
the owners of common stock. In good times, preferred shareholders
do not benefit from increased dividends or share price.
→ Convertible preferred stock can be converted into common stock
at a predetermined ratio. By buying such stock, an investor can obtain
a good dividend return plus the possibility that, if the price of the
common stock increases, the value of the convertible stock will also
increase.
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 4.2. Overview of public equity
4.2.3. Convertible securities
▪ Bonds usually provide bondholders with fixed income (coupon).
▪ Convertible bonds are bonds that can be exchanged for shares of
common stock. Convertible bonds both increase in value with rising
stock prices and provide the fixed income and security of bonds.
▪ Until conversion, convertible bonds are corporate debt, thus their
interest and principal payments are contractual obligations of the
firm and must be made or the corporation will default.
▪ Convertible bondholders have lower-ranking claims than most other
debt holders, although their claims rank ahead of stockholders in
the event of bankruptcy or liquidation.
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 4.3. Structure of equity market
4.3.1. Primary Markets
▪ Public offerings:
• Initial public offering (IPO): a first-time offering of shares by a
specific firm to the public. IPO requires the Securities and
Exchange Commission (SEC) approval.
• Secondary stock offering: a new stock offering by a specific
firm whose stock is already publicly traded.
▪ Private Placement: the sale of a new security issue directly to an
investor or group of investors.
▪ New issues of equity securities may be sold directly to investors
by the issuing corporation, but they are usually distributed by an
investment banker in an underwritten offering. 21
 4.3. Structure of equity market
4.3.1. Primary Markets
▪ Public offerings requirements:
• These offerings must comply with certain legal and
regulatory requirements to protect investors and ensure
transparency in the capital markets (ex: a minimum charter
capital, a minimum level of earnings over a recent period,
ownership commitment,…)
• A firm planning on going public must hires an investment
bank or a securities firm that serves as the lead underwriter
for the public offerings.
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 4.3. Structure of equity market
4.3.1. Primary Markets
▪ Public offerings process:

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 4.3. Structure of equity market
4.3.2. Secondary Markets
▪ Any shares of stock that have been issued as a result of an
IPO or a secondary offering can be traded by investors in the
secondary market. Stock trading between investors occurs on
the organized stock exchanges and the over-the-counter
(OTC) market.
▪ In Vietnam, stock trading between investors occurs on the
organized stock exchanges (HSX, HNX) and the OTC market
(UPCOM).

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 4.3. Structure of equity market
4.3.2. Secondary Markets
▪ Each organized exchange has a trading platform that
facilitates regular buying and selling of the listed shares.
• Corporations must meet specific legal and regulatory
requirements to have their stock listed on the stock
exchange to protect investors and ensure transparency in
the capital markets (ex: a minimum charter capital, a
minimum level of earnings over a recent period,
ownership commitment,…)
• As time passes, new listings are added and some firms are
delisted when they no longer meet the requirements. 25
 4.3. Structure of equity market
4.3.2. Secondary Markets
▪ Like the organized exchanges, the OTC market also
facilitates secondary market transactions.
• Stocks not listed on the organized exchanges are traded in
the over-the-counter (OTC) markets.
• Unlike the organized exchanges that have trading floor
and trade stocks in an auction format, the OTC markets
does not have a trading floor. Instead, they trade on an
telecommunications network where bid and ask prices are
set by the market makers.
• The OTC stock market is primarily a dealer market. 26
4.3. Structure of equity market
4.3.3. Vietnam Stock exchanges (HSX)

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4.3. Structure of equity market
4.3.3. Vietnam Stock exchanges (HSX)

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 4.3. Structure of equity market
4.3.3. Vietnam Stock exchanges

▪ Structure of the stock markets

▪ Law and regulations of stock trading: tickers, trading
volume size, trading and settlement process, trading
schedules, price quotes, price variance, price ceilings, price
floors, reference price,…
▪ Reading a stock price board

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 4.3. Structure of equity market
4.3.3. Vietnam Stock exchanges

▪ Trading and settlement process

• Auction format: periodic auction and instantaneous
auction, how orders are executed and stock prices are set.
• Direct negotiations
▪ Stock transactions – Place an order: An At-the-Opening
order (ATO), An At-the-Close order (ATC), A limit order
(LO), A market order, A Post Limit order (PLO).
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 4.3. Structure of equity market
4.3.2. Vietnam stock exchanges
▪ Stock transactions – Place an order
• An At-the-Opening order (ATO) is an order to buy or sell
stocks at the price available at the very beginning of the trading
day.
• An At-the-Close order (ATC) is an order to trade stocks at the
price available at the end of the trading day.
• A limit order (LO) is an order to buy or sell at a designated
price or at any better price. Here, buy orders specify a
maximum acceptable price, and sell orders specify a minimum
acceptable price. 31
 4.3. Structure of equity market
4.3.2. Vietnam stock exchanges
▪ Stock transactions – Place an order
• A market order to buy or sell a stock means to execute the
transaction at the best possible price available at the time the order
reaches the exchange. The buy order will be executed against the
lowest ask price, and a sell order will be executed against the
highest bid price. Variants of market orders include a market
price order (MP), a Market-to-Limit order (MTL), a Match-
or-Kill order (MOK), a Match-and-Kill order (MAK).
• A Post Limit order (PLO) is an order to trade stocks at the
closing price after the close time.
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