Chapter 3
Financial Markets and
the Investment Banking Process
Chapter 3
Financial Markets
• A system comprised of individuals and
institutions, instruments, and procedures that
bring together borrowers and savers.
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:
1. The raising of capital (in the capital markets)
2. The transfer of risk (in the derivatives markets)
3. Price discovery
4. Global transactions with integration of financial markets
5. The transfer of liquidity (in the money markets)
6. International trade (in the currency markets)
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
Market Efficiency
• Information Efficiency
– Prices of investments reflect existing information
and adjust quickly when new information enters
the market
– Three categories
1.
Weak-form efficiency
–
2.
Semistrong-form efficiency
–
–
3.
all information contained in past price movements is fully
reflected in current market prices
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
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
Types of Stock Market Transactions
1. Secondary market
– trading existing stocks
2. Primary market
– existing firm issues additional shares
3. Initial Public Offering (IPO)
– privately held company offers stock to the
public for the first time
– called “going public”
• U.S Stocks:
Dow, Nasdaq, S&P
Stock Sectors
3 Month % Change ( 4/1/2014)
Communications
-6.48%
Consumer Durables
-3.00%
Consumer Non-Durables
-5.14%
Commercial Services
+2.12%
Electronic Technology
+2.51%
Energy Minerals
-3.54%
Finance
+1.42%
Health Services
+3.60%
Retail Trade
-6.39%
Technology Services
+6.07%
Transportation
+3.85%
Utilities
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)
The UAE Capital and Financial Markets
NYSE Members
1.
2.
3.
4.
Commission brokers
Independent brokers
Competitive traders
Specialists
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
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
SEC Regulation
1. Jurisdiction over interstate offerings of new
securities to the general public in amounts of
$1.5 million or more
2. Regulates national securities exchanges, and
listed companies must file annual reports
3. Control stock trades by corporate insiders
4. Prohibit manipulation of securities prices by
pools or wash sales
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.
UAE Financial Markets
Financial Market under the authority of
Securities and Commodities Authority (SCA)
1. Abu Dhabi Securities Exchange ADX
2. Dubai Financial Market DFM
3. Dubai Gold & Commodities Exchange
UAE Financial Markets
Securities and Commodities Authority
( Legal Body)
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)
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
1. Banking sector
2. Insurance sector
3. Services sector
4. Industry and Hotels sector
http://adx.ae/English/Pages/default.aspx
UAE Financial Markets
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.
UAE Financial Markets
Dubai Financial Market sectors
1. Banks
2. Investment & Financial Services
3. Insurance
4. Real Estate and Construction
5. Transportation
6. Building Materials
7. Consumer Staples
8. Telecommunications
9. Utilities
http://www.dfm.ae/Default.aspx
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.
UAE Financial Markets
UAE Financial Markets
UAE Financial Markets
UAE Financial Markets
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
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
UAE V.s USA Financial Markets
Market Structure
1. Quota-driven markets like in the USA
2. Order-driven markets like in Australia and
the UAE
Trading Stocks through Order-driven market is
more risky than Quota-driven markets, why?
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.
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.