Financial Markets and the Investment Banking Process

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

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

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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

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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

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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

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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

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• U.S Stocks
• Dow, Nasdaq, SP

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
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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)

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The UAE Capital and Financial Markets
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NYSE Members

1. Commission brokers
2. Independent brokers
3. Competitive traders
4. Specialists

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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

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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

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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

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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.

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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

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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)
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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

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UAE Financial Markets
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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.

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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

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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, DFMs IPO
  has been oversubscribed by 118 times.

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UAE Financial Markets
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UAE Financial Markets
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UAE Financial Markets
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UAE Financial Markets
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UAE Financial Markets

• Dubai Gold Commodities Exchange Products
• DGCX trades in a wide range of derivatives
  contracts
• The DGCX Gold Futures
• DGCX launched the worlds first Rupee Futures
  contract
• worlds first steel rebar futures contract
  (2007) the MENA regions first Copper Futures
  contract (2012), and the regions first WTI and
  Brent Oil futures contracts

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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

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UAE V.s USA Financial Markets

• Market Structure
• Quota-driven markets like in the USA
• Order-driven markets like in Australia and the
  UAE
• Trading Stocks through Order-driven market is
  more risky than Quota-driven markets, why?

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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.

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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.