Financial Markets and the Investment Banking Process

1. Financial Markets andthe Investment Banking Process Chapter 3 Chapter 3

2. Financial Markets • A system comprised of individuals and institutions, instruments, and procedures that bring together borrowers and savers.

3. Financial Markets • Individuals, government agencies, firms , foreign entities and others trade financial securities such as bonds, common stocks, CDs and commodities such as oil of prices that reflect supply and demand. • Financial markets facilitate: • The raising of capital (in the capital markets) • The transfer of risk (in the derivatives markets) • Price discovery • Global transactions with integration of financial markets • The transfer of liquidity (in the money markets) • International trade (in the currency markets)

4. Flow of Funds 1. Direct Transfer business sells its stock directly to investors 2. Indirect Transfer through Investment Bankers investment banker acts as middleman and facilitates issuance of securities by reselling the securities to savers 3. Indirect Transfer through financial intermediary bank or mutual fund obtains funds from savers and uses the money to lend or purchase securities

5. Market Efficiency • Information Efficiency • Prices of investments reflect existing information and adjust quickly when new information enters the market • Three categories • Weak-form efficiency • all information contained in past price movements is fully reflected in current market prices • Semistrong-form efficiency • current market prices reflect all publicly available information • financial analysis is of no use for finding mispriced securities • Strong-form efficiency • current market prices reflect all pertinent information, whether publicly available or privately held

6. Types of Financial Markets • Money Markets • instruments traded mature in one year or less • Capital Markets • includes instruments with maturities greater than one year • Debt Markets • treasury, corporate, mortgage-backed, money market, municipal, etc... • Equity Markets • stock markets • Primary • corporations raise funds by issuing new securities • Secondary • securities are traded among investors after they have been issued • Derivatives Markets Options, futures and swaps are securities whose value is determined, or derived directly from other assets

7. Types of Stock Market Transactions • Secondary market • trading existing stocks • Primary market • existing firm issues additional shares • Initial Public Offering (IPO) • privately held company offers stock to the public for the first time • called “going public”

8. U.S Stocks: Dow, Nasdaq, S&P

9. The Physical Stock Exchanges • Physical exchanges • New York Stock Exchange (NYSE) • American Stock Exchange (AMEX) • Chicago Stock Exchange (CHX) • Philadelphia Stock Exchange (PHLX) • National Association of Securities Dealers NASD Quotation System (NASDAQ)

10. The UAE Capital and Financial Markets

11. NYSE Members • Commission brokers • Independent brokers • Competitive traders • Specialists

12. Electronic Communications Networks (ECN) • Electronic systems that transfer information about securities transactions to facilitate the execution of orders • Automatically matches buy and sell orders for a large number of transactions

13. Regulation of Securities Markets • Securities and Exchange Commission (SEC) • U.S. government agency regulates the issuance and trading of stocks and bonds • to ensure investors receive fair financial disclosures • to discourage fraud and misleading stock manipulation

14. SEC Regulation • Jurisdiction over interstate offerings of new securities to the general public in amounts of $1.5 million or more • Regulates national securities exchanges, and listed companies must file annual reports • Control stock trades by corporate insiders • Prohibit manipulation of securities prices by pools or wash sales

15. UAE Financial Markets Securities and Commodities Authority The Securities & Commodities Authority (SCA) has been founded based on the Federal Law no. (4) of 2000, that has stipulated on establishing the Emirates Securities & Commodities Authority & Market Strategic Goals: - First: Developing a supervisory system of work at the SCA in accordance with the best international practices. - Second: Developing legislations that regulate business activities in the UAE capital markets. - Third: Excellence and creativity in providing services to all parties in the capital markets. - Fourth: Developing and providing the central/non-central administrative services with utmost transparency and efficiency.

16. UAE Financial Markets Financial Market under the authority of Securities and Commodities Authority (SCA) Abu Dhabi Securities Exchange ADX Dubai Financial Market DFM Dubai Gold & Commodities Exchange

17. Securities and Commodities Authority ( Legal Body) UAE Financial Markets Dubai Gold & Commodities Exchange (Derivative market) Dubai Financial Market DFM (Financial Market) Abu Dhabi Securities Exchange ADX (Financial Market) Emirates Securities Market ESM (live-market-watch screens) NASDAQ Dubai (International Market)

18. UAE Financial Markets Abu Dhabi Securities Exchange (ADX) Founded on 15 November 2000 to trade shares of UAE companies. There are trading locations in Abu Dhabi, Al Ain, Fujeirah, Sharjah, and Ras Al Khaimah including 67 corporations in 4 sectors Banking sector Insurance sector Services sector Industry and Hotels sector http://adx.ae/English/Pages/default.aspx

19. UAE Financial Markets

20. UAE Financial Markets Dubai Financial Market Is a stock exchange located in Dubai, United Arab Emirates. It was founded on March 26, 2000. There are about 61 companies listed (as of May 2012) on DFM, most of them are UAE-based companies and a few dual listings for companies based in other MENA region countries. Foreign companies are from the following countries: Kuwait, Bahrain, Oman, and Sudan. Many companies allow foreigners to own their shares.

21. UAE Financial Markets Dubai Financial Market sectors Banks Investment & Financial Services Insurance Real Estate and Construction Transportation Building Materials Consumer Staples Telecommunications Utilities http://www.dfm.ae/Default.aspx

22. UAE Financial Markets Dubai Financial Market DFM was a fully owned by Dubai government till November 2006 when it turned into a public joint stock company through an IPO, which led to sell 20% of its shares to public and 80% were subscribed by Borse Dubai, which is owned by Dubai government. As a matter of fact, DFM’s IPO has been oversubscribed by 118 times.

23. UAE Financial Markets

24. UAE Financial Markets

25. UAE Financial Markets

26. UAE Financial Markets

27. UAE Financial Markets Dubai Gold & Commodities Exchange Products DGCX trades in a wide range of derivatives contracts: The DGCX Gold Futures DGCX launched the world’s first Rupee Futures contract world’s first steel rebar futures contract (2007); the MENA region’s first Copper Futures contract (2012), and the region’s first WTI and Brent Oil futures contracts

28. UAE Financial Markets Financial intermediaries Financial intermediaries also known as financial institutions have evolved to bring lenders and borrowers together, issue their own securities to raise funds to purchase the securities of other companies, so they provide indirect method for corporations to acquire funds. Financial intermediaries include banks, investment companies, insurance companies, loan associations, credit unions, mutual funds, and pension funds

29. UAE V.s USA Financial Markets Market Structure Quota-driven markets like in the USA Order-driven markets like in Australiaand the UAE Trading Stocks through Order-driven market is more risky than Quota-driven markets, why?

30. UAE V.s USA Financial Markets Market Structure Quota-driven markets only displays the bid and asks offers of designated market makers, dealers or specialist. These market makers will post the bid and ask price that they are willing to accept at that time. The specialist role is to prevent panic in specific stock he or she represents in the market, to bring another advantage in quote-driven markets that the prices are intrinsically more stable than in an order-driven markets.

31. UAE V.s USA Financial Markets Market Structure Order-driven markets displays all of the bids and asks. All orders of both buyers and sellers are displayed with a detail price listing at which they are willing to buy or sell a security and the amount of the security that they are willing to buy or sell at that price. The drawback is that in an order driven- market, there is no guarantee of order execution, as first come first service. Intermediaries (brokers) have no role in the execution process.