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Esoterica of the Stock Market

(Article published in the Mar 17, 2010 issue of Manila Standard Today)  

The stock market, at the time of this writing, appears to be perking up.  And, just in time for the Trust Consciousness Week next week, it may be useful to discuss in layman’s (and, since the housewives are likely to jump into the market anytime now, “laywoman’s”) terms some of the mysterious sounding words and phrases used by stock market players, both winners and losers.

The vital role that the Philippine Stock Exchange (PSE) plays in the economy is undeniable.  But although its operations are clearly in the public interest and its activities are of significance to the public, the PSE is nevertheless a private organization and not a government agency.  Essentially, as its website proclaims, it seeks to provide and ensure a fair, efficient, transparent and orderly market for the buying and selling of securities.

 This ought to be the first warning bell: the name is Philippine Stock Exchange, but it is a market for buying and selling “securities.”  Is “security” then the same as “stock”?  Certainly, not.

 “Stocks” are only one kind of “securities”.  Section 3 of the Securities Regulation Code mentions “stocks” as only one of five kinds of seven categories of “securities”.  This variance between the name of the market and the items available therein is in itself a warning to the innocent lambs that the PSE is both a wonderland and wanderland.
 










     

Because the PSE is private but impacts significantly on the public, it is subject to government regulation.  The government agency that regulates it is known as the Securities and Exchange Commission (SEC).  The name of the agency is truer to its mission, but not completely.  Thus, the “S” in SEC does not mean “Stocks”, but the more accurately, “Securities.”  However, the name talks only of one Exchange.  That is true today, but had not always been. 

 There was once a time when there was more than one exchange existing all at the same time.  There was the Manila Stock Exchange, founded in March 1927 in the City of Manila, which was the first stock exchange in the Philippines and was the oldest in Asia.  There was the Makati Stock Exchange that was established in Makati in May 1963 which was then a municipality in the big province of Rizal.  A third one did exist in the Greenhills area Quezon City and, north of the Pasig, but due to its short life and small business volume is hardly now worth remembering. 

 In a brief show of unity, the stockbrokers of Manila and Makati came together, not without any prior cajoling from the government authorities, and formed one exchange on December 23, 1992.  By then, the third exchange was nowhere to be found.  However, despite their separate exchanges being fused into one legal entity, the brokers could not totally get over their separate ways. 

 PSE up to now maintains two trading floors, one in Makati City and another in its head office in Pasig City. To affirm the idea of only one market in the Philippines, the PSE maintains a "one-price, one-market" system with  the use of technology, named the MakTrade System.  It does not now matter whether you are trading in Makati or in Pasig. A common computer tallies all orders and matches the best bid/best offer regardless of on which floor the orders were placed.

 Actually, it is myth that trading is done on the “floor”.  True, in some foreign TV footages, we see brokers jostling, and crowding like some mindless herd, shouting and screaming.  That is for the most part for show.  Real trading is done now by brokers sitting inside their cubicles clicking away at their keyboards.  Indeed, the sacrosanct trading floor currently looks more like the expanse of a call center than the holy temple of commerce that we are told the exchange actually is.

 The merchandise, in order to be in the store of items for sale at the PSE, must be “listed.”  The term recalls the old days when the names of the stocks were indeed listed on a blackboard.  Presently, “listing” means the admission of securities for trading and the inclusion in the official registry of the Exchange.  You would need an extremely huge board to sustain the illusion of “listing”, but the institution comes up with some token charade or another.

 Getting “listed” in the exchange, unlike getting listed in COMELEC’s party list roster, is ordinarily a laborious process.  It is like going through a meat grinder. You would have to bare your whole heart, and your whole soul, and your whole mind, to show that you have no intentions to steal from the investing public.  The presumption is that you list because you want to sell (i.e. invite the public into your company) and thus you need to be truthful, as, in literally, full of truth.

 But, sometimes, you may want to list for reasons other than inviting the public.  You may want to list because tax law favors companies with listed securities.

 For example, gains derived from the sale of shares of stock not disposed of through the stock exchange are taxed at 5% on the first P100,000 of net capital gains and 10%  on the excess over P100,000.  However, if you are a listed company, then the gain is tax free and you pay, in lieu of the tax on gains, a transaction tax of only one-half of one percent of the gross selling price.  To recoup the taxes “lost” when a closely-held corporation opens up for the first time to the public by listing and then offering their shares to the public for the first time, the law imposes the tax of only 4% if you offer to the public up to 25% of outstanding shares; 2% if the offering is over 25%  but not over 33 and 1/3%; and if over 33 and over 1/3%, then the tax is only 1%.

 Hence, wouldn’t it be loverly if one could list and eventually sell, through the stock exchange, without having to bare one’s soul?

 Yes, it is.  And the way to list is by the esoteric method of “listing by way of introduction.” Listing by way of introduction is listing of securities where no public offering will, presumably, be undertaken.   This occurs when the stock is of such amount and would be so widely held that their adequate marketability when listed can be assumed or when listing is mandated by law or by the Securities and Exchange Commission.

 So what happens if you are able to list by way of introduction and, through a bending of the rules, by hook or by crook, able to sell your shares in the market?  You will able to pull a caper that puts to shame the intelligence quotient of Bernie Madoff and enable you to run for President of the Republic of the Philippines. 

 Your campaign can then use these funds, in addition to those received from your secret supporters in government, which you are enabled to take from the pockets of other people and put into yours without you being called a thief.  Instead you are to be addressed as “Honorable.”
  

     

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