What is capital market?
Google says it is the part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments.
Table A shows Osingat Corporation taps the Capital Market to fund its various activities
In simple borrowing of funds, Osingat Corporation may borrow money from domestic, foreign or government financial institutions. However, when the amount of borrowing is of significant sum of money to fund business expansion, to pay maturing long term payable and for other purposes, Osingat Corporation may tap the capital market thru either the equity market (Philippine Stock Market) or the bond market thru corporate issuance or asset backed securities. In a simple bank loan transaction, the money that Osingat Corporation borrows comes from the bank which primarily came from bank depositors. However, in the capital market, the money that will be gathered by the corporation comes from individual investors like you and me.
A. What happens when Osingat Corporation Pursue the Capital Market Transaction Thru:
- Equity Market: Philippine Stock Exchange (PSE)
- Before we go to that, Osingat Corporation, if he chooses not to go Public thru PSE, he can actually issue shares of stocks to new stockholders (konting tao lang). However, if he pursue to go public via Initial Public Offering (IPO) in the stock market, then Osingat Corporation is actually letting investors of significant volume to have ownership to the corporation. When Osingat Corporation go public, the shareholders minimize the risk of capital loss in times of bankruptcy, however, it will negatively result to dilution of their earnings from the corporation brought about by the entry of new stockholders. Ikaw yung new entry (new stockholder), if you buy stock of Osingat Corporation in the stock market thru whatever platform that you might have used.
- In case of bankruptcy (Dead end) of Osingat Corporation, you as stockholder may incur capital loss because we have the so called order of priority in settlement of claims which is as follows:
- External Creditors (dito papasok yung may investment sa bonds);
- Internal creditors;
- Preference shareholders; and
- Common shareholders (dito ka papasok as stock investor)
Since you (as stockholder) are last in the settlement hierarchy, there really is a chance to lose capital investment. Kaya you need to be aware sa news of what happens to your corporation, whether it has healthy financial ratios or not, whether it has a pending lawsuit, good financial performance as reflected in the financial reports, a good income projection and others.
2. Bonds Market: Philippine Dealing Exchange
If Osingat Corporation instead issued bonds than an IPO, then the corporation has become a borrower of funds from many bondholder investors in which case in times of bankruptcy, bond holders are the number 1 priority in the settlement hierarchy. They are the first to be settled from the assets of Osingat Corporation. That is the reason why, investing in bonds are somewhat less risky as compared to that of the stocks in the stock market. Ok?
B. Point of view of Osingat Corporation: Cost of Money
- Domestic, Foreign or Government Financial Institutions (GFIs)
If Osingat Corporation borrowed money from the above institutions, he incurs payment of interest until the maturity of the obligation. Upon maturity, the corporation will have to pay for the lump sum (whole) amount of the loan.
2. Capital Market transaction
1. Stock Market Thru IPO
The cost of money here is the payment of dividends in the form of cash, property dividend in the form of shares of stock of another corporation and properties, script dividends, liquidating dividends and other form of dividends to the shareholders.
2. Corporate Bonds Issuance
The cost of money is the payment of interest rate and payment of the principal at the maturity. Same as a bank loan.
Table B shows the Composition of Osingat Corporation
Why do Corporation tap the capital market?
Because they need money!
Corporations, as juridical entities, have assets which include cash, accounts receivable from customers, inventories, investment properties, property plant and equipment, prepaid expenses and intangible assets. Osingat Corporation’s assets are partially funded by liabilities and the remainder of which come from the capital contribution of incorporators[1].
The rule of thumb in borrowing money (loans or thru bonds) for corporations and for individuals (Tayo) is that no more than half of our assets should be funded by liabilities except for capital intensive corporations which caters to capital intensive undertaking or by the nature of the business transaction as that being a fiduciary of funds. You read more about the concept of leverage.
Prior to investing in Osingat Corporation, you as an investor should have a learning knowledge of the business that he is doing. You should be concern at his capacity to operate in perpetuity, going concern principle[2]. You are also concern of whether he can return your investment and can give you income for giving your money for the corporation’s use. You should also be concerned of any lawsuits that the company is facing. Your primary concern is the preservation of your capital investment and of course earning money.
A. How do Osingat Corporation check their Financials (Fundamental Analysis)
- Financial Reports
1. Statement of Financial Position or Balance Sheet. This report gives the financial position of the corporation. The reflected accounts here are called real accounts[3] for they are permanent. The data reflected here indicates whether the company has the power to exist in the long run.
2. Statement of Financial Performance or Income Statement. This report gives the picture of financial performance of the corporation. The accounts here are called nominal accounts[4] for they are closed at the end of the accounting period. The data here gives you an idea of the performance of the corporation in terms of revenues or loses incurred during the calendar year.
3. Statement of Cash Flows. This report indicates the usage of cash during the period covered. Cash usage is classified as either operating cash flows, investing cash flows or financing cash flows.
2. Financial Ratios
1. Current Ratio. It is computed by dividing current assets over current liabilities. This indicates the capacity of Osingat Corporation to settle short term obligations using current assets.
2. Earnings per share (EPS). Earnings per share is calculated by subtracting preferred dividends from net income and dividing by the common shares outstanding.
3. Price Earnings ratio (PER). It is computed by dividing market price per share by EPS. PER is used as a reference in order to determine the profitability of a certain corporation. The lower the PER the better the company’s performance
4. Earnings to price ratio (EPR) (My favorite) You must learn this to your advantage. It is computed by dividing the EPS by Market price per share. The percentage computed is the comparable with the returns or interest rates offered by the banking institutions or any other investment vehicles.
In my discussion of Analysis of Publicly Listed Corporation, we computed for the return for the period lapse as indicated in the graphs, while the computation of EPR is the actual rate of return for the corporation in the short term basis.
You need not worry about computing these ratios. These data are readily available online. You can check by using these links:
investigrams.com
tradingeconomics.com
Wall Street Journal: http://www.wsj.com.asia
The question now: Which is better, stock investor or bond investor?
- Your point of view as “Investor”
- In terms of Income
- In the United States (US) the average annual return of bonds is 2.8% while for period 1871 to 2006, the return in the stock market is 6.8% that is inflation adjusted already. If we add 4% inflation rate, the return is about 10.8% per annum. That only means that the return of stocks is higher as compared to that of the bonds. Source: My online course at coursera.com Financial Markets course by Yale University.
- For the Philippines made an analysis of the PSEI return which is about 7% for investments made in PSEI in 1986 or a 30 year period. However, that return should have been higher, I was a bit sleepy when I computed that so I entered the wrong value at 1986. If I corrected that computation, the return would be closed to that of the US stocks return. See my discussion on the “Background of Philippine Stocks Exchange”.
- In terms of Income
Just to share, you can beef up your knowledge by enrolling to free online courses. I am using these websites:
- coursera.org
- edx.org
- khanacademy.org; and
- alison.com
2. Risks involved in your investment
The concept of risk that you should never forget is that “The higher the risks, the higher the returns”.
Well, the riskier investment is the investment in stocks, because as we discussed earlier, stock investors are the last persons to be settled in times of corporate bankruptcy.
Bond holders on the other hand are the first in line when it comes to settlement during bankruptcy.
Your Sources of Income: Passive Income
- Day Job
- I would like to make a separate discussion about this. A day job is a usual 8AM to 5PM daily routine every day and for some BPO employees, a distorted working hours. You will feel that you are oblige to do the same routine everyday. If you cannot decode it by yourself, let me tell it to you that you are being a slave of money, you are working for money. Read the book Rich Dad, Poor Dad by Sir Robert Kiyosaki.
2. Passive Income such as making diversified investments
1. Passive income is making your money work for you. You are earning money even if you are not working at all. This is being smart. You should master earning passive incomes.
2. Income from investment in mutual funds (MF), unit investment trust fund (UITF), exchange traded funds (ETFs), bonds, treasury bonds and bills, real estate, foreign currency trading and others.
Osingat Corporation’s Decision Point?
The Corporation, with the wisdom of management and the right decision making of the Board of Directors, try to make the best possible action plan for the corporation of whether to issue bonds or pursue an IPO. Every facet of the corporation should be taken into consideration.
Supposing Osingat Corporation Pursued Initial Public Offering
If that is the case, then the stocks of Osingat Corporation will be for grabs for all the stock traders in the stock market. Well, as investor again, you got to do some research. You need to understand the fundamental analysis. Example: you have to determine if Osingat Corporation has undervalued assets or a competitive product line if that is the case, buy and hold it in the long run. You’ll be millionaire by holding it long enough.
Table C: Overall Picture of PSE as a Passive Income Tool
The above table shows you the whole picture on how you can tap the Stock Market as an investment tool for your passive income. That is literally making your money work for you! Warren Buffet is the best investment guru that does investing in the stock market. He started at age 11. His recent transaction is the purchase of Apple stocks calendar year 2016. Ikaw? Ilang taon ka na? I’m 25 years old (cy 2016). Yes! Late na tayo, pero may kasabihan nga tayo. It is better to be late than never. May masabi lang:)
Now, this is the exciting part. This is the part wherein we consolidate all the discussion above.
I hope you now see the whole picture of it!
You, as stock investor can buy directly the stock of Osingat Corporation thru your online platforms which may include COL Financials, BPI Trade, Philstocks and U-Trade. You can also purchase Osingat Corporation when it is included in the portfolio of the investments of the mutual funds, unit investment trust fund, and variable universal life insurance. If that is the case, invest!
Well, that is Osingat Corporation. Now, choose your desired Company to invest in and “THINK”. Apply what you learned here and in the successive analysis tools that I shared in Background of Stock Market and Analysis of Publicly Listed Stock Corporations.
Having that knowledge, hindi ka na kakabahan sa market fluctuations. As long as you know where you are going, you are doing just fine.
Kumusta? You ok?
If you learn something from me, kindly share this to your friends list sa social media i.e facebook, twitter, instagram, linkedin. Share the information to those who are willing to learn something new.
Appreciate that if you do. Thank you!
You can reach me out in the following social media:
Youtube: https://m.youtube.com/channel/UCKqeiculsmSURMNuMkV7eSg
Linked-in: https://www.linkedin.com/in/efraimosingat/
FB Page: https://www.facebook.com/EfPrimeFinancials
Website: https://efprimefinancials.com
Make an appointment here: https://tinyurl.com/Set-Up-Free-Appointment
#HealthIsWealth
#InvestmentGuide #NewNormalPhilippines
Notes
[1] The original investors that have the #Balls to start the corporation.
[2] That corporations exist in perpetuity. #MayForever
[3] Google mo nalang.
[4] Google mo nalang din.
Disclaimer:
The Author is advising readers to consult with your respective financial advisors before venturing in any investments. Investing your money is dependent to your goals and your risk tolerance. You should know the risks and rewards of investing before you actually do the same. The illustrations above are for educational purposes only and any risks or losses that you may incur are imputable to your respective decisions.
Financial Literacy Evolution 