In this project I try find out the object of UAE stock market and how they react to various economical situation. Economical activity in UAE is very diverse most of the thing round around the stock market of UAE, so I will study deeply into stock market to give out my suggestion and recommendation by my research. My research will include brief description all about stock market of UAE. I will give detail about stock market in UAE and explain about Abu Dhabi Security Exchange, Dubai Financial Market and NASDAQ Dubai. I will then analysis UAE stock market and current stock market trends. And finally conclude with recommendation and conclusion. Amsterdam stock market was first public stock market which was founded in 17th century and started the activity of buying and selling of the share of organization stocks. Now there are many stock market in many countries but majority are in developed countries. The leading stock markets are in USA, UK, Canada, China and Japan. (Kelsey, 2010) Stock market is also know as share market which is a public market for the reading of organization stocks and derivatives upon agreed prices, these are securities listed on stock exchange as well as for those who only trade privately. The size of the stock market in USA is about 36 trillion dollar in the start October 2008, and total world derivative market is about 791 trillion dollar nominal value which is equal to the eleven times of the whole world economy. (Stock Market, 2010) The stock markets in the United Arab Emirates are Abu Dhabi SecuritiesÂ Exchange (ADX) and Dubai Financial Market (DFM) which I would talk about more in detail later on.
Defining Stock Market Stock are called the shares of ownership in a company and dividend is part of organization profit that maybe given to or distributed to stock holder as cash or share of stocks. The stock market is the place where shares are issued and traded by exchange or over the counter market. (Investopedia ULC, 2010) Stock market is also know as equity market and it is very important part of economy as it provide organization with capital and investors with part of ownership in a organization, and potential and advantages growth based upon the organization performances. (Investopedia ULC, 2010) There are some advantages and disadvantage of issue stock for the organization. Advantages include: Owner of the organization never have to repay. There is no legal obligation to pay bonus to stockholder. By selling stocks an organization can improve its balance sheet. (Nickels, McHugh, & McHugh, 2008) Disadvantages include: Only the owners with potential stock have the right to vote for the organization board of directors Dividends are given and tax is not deductable. Management decisions are made to keep stockholder happy. (Nickels, McHugh, & McHugh, 2008) There are two different type of stock market in UAE:
Primary stock market It has a function in which securities are created. In this market the organization sells new stocks and bonds to the general people for first time. You can say that primary stock market is a place where initial public offering (IPO) takes place. (TradeWays Ltd, 2010) IPO happen when the private organizations sell its stock to the general public for the first time. (TradeWays Ltd, 2010) IPO can be very complicated because it involves different rules and regulations dedicated for processing of institutions. The important thing to keep in mind is that this stock market we purchase securities straight from the issuing organization. (TradeWays Ltd, 2010)
Secondary stock market The secondary stock market is the market which usually set by people referring the stock market which include different market such as Abu Dhabi SecuritiesÂ Exchange (ADX), Dubai Financial Market (DFM), Nasdaq and other exchange markets around the globe. The character by which the stock market is defined is that in secondary stock market investor trade between themselves. (TradeWays Ltd, 2010) In the secondary stock market investors trade earlier issued securities without the interference of the issuing organization. For instance if you buy Yahoo stock then you are dealing only an other investor who have shares in Yahoo. Yahoo as organization is by no way concerned in this transaction. (TradeWays Ltd, 2010)There are two sub type of secondary stock market which is auction market and dealer market. In auction market it involves the consent of bid and ask offer, and in dealer market there is no involvement of converge. (TradeWays Ltd, 2010) In order to make official stock market exchange in UAE and regulate informal market a momentum draft of federal stock exchange law was made by federal cabinet of UAE in 1999 off June. UAE has been working for many years for formal bourse, the draft made it possible to establish securities and commodities to be in Abu Dhabi and has a authority to license trading floor. The exchange is expected to have trading in Abu Dhabi and Dubai in electronic form. (Ministry of Finance and Industry - UAE)
Stock Market Volatility in UAE Â 1998 The informal stock market of UAE saw the stock market 26.74 percent rush in market money, making investor fared despaired volatility and prolonging downturn in 4th quarter. Market money on 1999 January first was 116.42 billion AED compare to 91.86 billion AED on 1998 January 1. In 1998 August it reached its peak of 182 billion AED at this point correction happened and consequent slide. (Ministry of Finance and Industry - UAE) 1997 investors had return of thirty percent, and 1996 investors had five percent dividend and twenty percent rush in market money. By 1999 May UNB market index fall 111.4 points and fourteen point five percent lower in start of 1999, despaired that organization result where good. Market money was 105.44 billion AED and stock began to recover in end of summer. UNB market index risen to 114.09 points and resulted in good stock market mood. (Ministry of Finance and Industry - UAE)
Stock BrokerageÂ Due to the law of cabinet upon stock exchange there was increase number of people who where looking for license for work as broker house operator. 34 applicant where sent to office concern with cabinet approval for stock exchange in one day. (Ministry of Finance and Industry - UAE) The Central Bank announced 20 brokers in start of 1999, with increase of total brokerages to 57. (Ministry of Finance and Industry - UAE) A Central Bank made decision for brokerages based upon how much market is able to take brokerages in stock market. (Ministry of Finance and Industry - UAE) In 1999 UAE Securities and Commodities Commission (SCC) allowed UAE banks to trade in stocks, many banks have operational trading divisions. Investors which are not from Abu Dhabi and Dubai can deal through banks given by SCC. (Ministry of Finance and Industry - UAE)
Stock market in UAE
Abu Dhabi Stock Market Abu Dhabi stock market is called Abu Dhabi Securities Exchange (ADX) which was build in fifteen November two thousand under law number three of two thousand. (Abu Dhabi Securities Exchange, 2010) The ADX has autonomous status and independent finance and management system which make necessary for supervisory power to exist. (Abu Dhabi Securities Exchange, 2010) There are different functions of supervisory which are: It provides opportunities in securities for benefit of UAE economy. Assurance of correct transaction and control of demand and supply for knowing the price. Protection of investors by principle and proper dealing with various investors. Having control over securities transaction so better conduct of procedure. Issuing studies and recommendation for development investment. To make sure that financial stability exist and security listed prices on market are stable. (Abu Dhabi Securities Exchange, 2010) ADX has power to make and establish branches outside of Abu Dhabi few branches of ADX in Fujairah, Ras al Khaimah, Sharjah and Zayed City (Abu Dhabi Securities Exchange, 2010) To have an economic prosperity and stability it needs successful and effective intuitions with operating and legally in sound commercial framework. Financial markets are the most important of financial institution as they agitate saving and mobilized the direct investment and relocation of investment for productive use. Stock market provide necessary and most needed platform for financial project. To have an investment opportunity it needs a link between saving and investing. (Abu Dhabi Securities Exchange, 2010) Abu Dhabi Securities Exchange (ADX) demands for fair and transparent market. It utilizes available means of communication to inform people, and publish news of the listed companies, and there financial statement with stock market information. Abu Dhabi Securities Exchange (ADX) knows the important of internet and it provides large amount of information in speedy and low cost method to general public. (Abu Dhabi Securities Exchange, 2010)
Dubai Financial Market Dubai financial market (DFM) was made public institution with independent corporate body for resolution from ministry of economy no fourteen of 2000. Dubai financial market (DFM) is a secondary market which issue public joins stock organizations and bonds given by federal government or local government and public institution of UAE. Dubai financial market (DFM) starts its operation in 2000 march 26. (Dubai Financial Market, 2005) On 2005 December 27 executive council decree made Dubai financial market (DFM) public joined stock company of UAE with capital of 8 billion AED with over 8 billion shares, per value 1 AED per share. It is important to know 20 percent of Dubai financial market (DFM) share offered the public subscription. Objective of Dubai financial market (DFM) are as following: Making securities investment such a way that it serve United Arab Emirates economy Regulating process and protecting investors Creating good liquidity and market place for equitable trading Organized transfer of securities Implementation of rules through professional ethics High quality staff Statistic and data with reports for information (Dubai Financial Market, 2005)
Â NASDAQ Dubai Dubai financial market (DFM) acquired NASDAQ Dubai by 121 million dollors, and it decided to develop operational ties in 2010 to improve access to NASDAQ Dubai securities from Dubai financial market (DFM) 600,000 retail investors. (NASDAQ Dubai Ltd., 2008) Dubai financial market (DFM) success is based upon retail investors but NASDAQ Dubai will depend on international connection and international regulations. Consolidation of stock market is important for Dubai capital because exchange can operate separately to fulfill regional leadership potential. NASDAQ Dubai is regulated by Dubai financial services authority (DFSA). (NASDAQ Dubai Ltd., 2008)
Business and stock market review In challenging period of global finance NASDAQ Dubai achieved success in many areas in 2009. It has strengthened its link with international and local investors and has record of expanding trade and capital market innovation. (NASDAQ Dubai Ltd., 2008) The number of brokers has increased with introduction of 5 new broker members and making equity volume above two thousand eight. The equity derivative market growth has been strong and there was also recognition of NASDAQ Dubai in FOW magazine. NASDAQ Dubai joins the club of giving sharia compliant gold security and sukuk on exchange. There was conference of successful investors in New York with Dubai Financial Market list organizations of both exchanges. Both Dubai Financial Market and NASDAQ Dubai made plan to integrate important market operational function. Both exchanges goals are creating powerful capital and hub for GCC and beyond GCC. (NASDAQ Dubai Ltd., 2008)
Importance of Stock Market in UAE
Function and purpose The stock market provide important source of money for the organization and the money can be raised accordingly to organization need. Organization trade to general people and raise money for more selling of share of ownership of the organization in the general people market. Raising money organization gains liquidity which provides investors ability to sell securities easily and timely. (Stock Market, 2008) If we see in the past we will notice that shares and other assets are very important for dynamic economic activities and they also provide guidelines or indications for economical social moods. For instance, if share price increase then the business investment will increase and if share price decrease then the business will decrease. (Stock Market, 2008) Central bank keep close eye on stock market so they can control the behavior of stock markets. In general central bank monitoring the stock market makes financial system work easily and so there in the market we can see the stability. (Stock Market, 2008) Stock exchanges do the job of clear house for transaction, it means that they assemble and distribute the shares on guarantee payment of cash to the seller of the security. The smooth function of the stock market activities facilitate economical growth and lower the growth of organizations. (Stock Market, 2008)
Stock market index Stock market index provide important information regarding stock market. It shows the movement of prices in stock market and it deliver what we call stock market indices which are many for instance S&P, FTSE and Euronext indices. (Stock Market, 2010) These indices are very important because they show market money potential and how much it weights, and the weight reflects the stock in the index. Index show the including or excluding of the share in the stock market and it also reflect the vibrant business environment. (Stock Market, 2010) Stock market index is the term which is different from stock market average. (Tallberg, 2010) A stock market average is reflection of entire market and stock market index is reflection statistical norms for particular part of market. A market index is valued based on number of factors which are arbitrary. (Tallberg, 2010) In UAE the main stock market index are called UANBGENL which have 183 points and six point forty eight percent for the last weeks. (Trading Economics, 2010) UANBGENL had 359 points last year and thirteen point sixty percent. (Trading Economics, 2010) UAE stock market index chart is shown below: Graph 1: UAE Stock Market Index Source: National Bank of Abu Dhabi Trading Economics. (2010, March). UAE Stock Market Index. Retrieved March 22, 2010, from Trading Economics Web Site: http://www.tradingeconomics.com/Economics/Stock-Market.aspx?Symbol=AED
Derivative instruments Financial innovation has been helpful to bring out new financial instrument which pay off depends on price of stock, some of them are exchange traded fund, stock option, single stock future and equity swaps. (Tatum, 2010) All of these product mentions above are derived from stock and they are considered to be traded in divertive market rather than stock market. Derivative instrument are type of financial securities which depend on underlined security to have some value. Derivative instrument are also issued to investors to acquire share of underline security. (Tatum, 2010) There is involvement of risk in derivative instrument, any happening or market movement can have bad impact on value of underlying security, which causes instrument loss in value. A competent broker is know as guru which can tell the strength and weaknesses with underlying securities and accurately advise investor what to expect of a derivative and what to purchase. (Tatum, 2010)
Global Stock Exchanges Globalization has changed every thing nowhere days we live in global world which has a global economy so different countries of the world provide investment opportunities. We have to notice the fact that stock exchange operates in different arena which is global and countries like Poland and Hungary also operates globally. (Nickels, McHugh, & McHugh, 2008) Ever expanding communication and relaxed legal system has enabled investors to buy securities from organization anywhere in the world. For example if you like a foreign organization which has great potential then you can have its shares from the broker which has access to foreign stock exchange. (Nickels, McHugh, & McHugh, 2008) Different organization can be registered to one stock exchange for example there are 470 foreign organizations from fifty one different countries are listed in NYSE. It is also important to know that US organizations are listed in foreign stock exchanges which are located in different places Paris, Sydney and Frankfurt. (Nickels, McHugh, & McHugh, 2008)
Stock Market & Investor Behavior Investors can move the stock market prices up and down and they follow a trend. Uptrend or positive is referred to bull market and down trend or negative referred to bear market. Reaction can be different due to the optimism and it can increase the price high and pessimism can make price low. Economist thinks that the stock market is not very efficient financially. (Stock Market, 2010) The stock market is like any other organizations which need experience and amateur can't survive. Amateur investor or business man rarely gets any assistance they needed to succeed in stock market. There are few interpretations which include Efficient Market Hypothesis (EMH) which involves change in the fundamental factors such as profit; dividend and margins in which random noise is exist. Such EMH happen in stock market crash in 1987 in Dow Jones index. (Stock Market, 2010)
Irrational Behavior Market behavior is sometimes unpredictable and it behaves irrationally to some economic or finance related news, if the new is also not relevant to technical or market situation. Sometimes, if the news is good and it has different effect on the market for example the market crashes. Therefore there is no permanent way to determine the effect on markets because the market has irrational behavior. Stock press release, rumors or mass panic has some effect on market and investors always try to gain from these irrational behaviors of markets. (Stock Market, 2010) Either the event or the news is short term or long term and it can develop some value then it can make the stock market slow or fast hence difficult to predict market behavior. Emotions can also effect the market for example the prices of share can go up and down and buying and selling of shares becomes unbalanced. Behaviorist say that investors also behave irrationally for making investment decisions so making incorrect price security which makes market inefficient by which in turn make opportunity of money. The irrationally of investors and markets makes stock market behave irrationally and unpredictably. (Stock Market, 2010) Source: UNCTAD (www.unctad.org/fdiprospects) United Nations. (2005). In World Investment Report: Transnational Corporations and the Internationalization of R&D (p. 35). New York and Geneva: United Nations Publication.
Understanding of Stock Market by UAE people People in UAE understand what is stock and how should they invest in stocks, this can be concluded from the development of the stock market of the UAE which is booming due to understanding of stock market by UAE people. There are different group of investors which follow some patterns one of the group which studies the stock and invest and the other group like to watch other people and do what other people do for investing in the stock market. The people of UAE who are not familiar with stock market can understand better the stock market by studying the stock on the websites of UAE such as Abu Dhabi Security Market - http://www.adx.ae and Dubai Financial Market http://www3.dfm.ae . They can have critical analysis by viewing different graph, company history, financial record and other material for good decision on making an investment.
Crashes Stock market crash is also called sharp dip in share prices of equities on stock exchange. In line with the economical factors the stock market crashes due to panic and by loss of investor's confidence. Stock market can crash on economical speculation and economic bubbles. (Stock Market, 2010) There are many popular stock market crashes are the globe where billions of dollar and wealth destruction is happen. The number of people involve in stock market is increased over the years especially by inclusion of social security and retirement plan link to stock market. There are number of famous stock market crashes for example the crash of 1929 of Wall Street, 1973 and 1974 stock market crash, 1987 black Monday, 2000 dotcom bubble crash, and recent crash of stock market in 2008. (Stock Market, 2010) Stock market in gulf especially in Dubai seven percent in 23 November 2009, the trading state the problem strike financial market around the world in this time. (2008 Stock Market Crash News , 2008) The index of Dubai financial market, the main stock market of emirate ended down by seven point three percent. The health of global financial systems made the investors very nervous and they become feared around the globe. On that day UAE the federation of seven emirates made emergency liquidity fund to prevent Dubai by default on its debts, following that Abu Dhabi also announce that it will provide aid to some banks of Dubai and financial institutions. (2008 Stock Market Crash News , 2008) On the same day major index in Europe remain under pressure for instance London, Frankfurt and Paris where down one percent in trading. (2008 Stock Market Crash News , 2008) 12th November 2008 Abu Dhabi securities exchange market hit a fifty two week low of 3190 points at the start of the week and it was hard day for local real estate investor but it was not the necessary the case, the stock market crash can be good for real estate investments. (AME Info FZ LLC, 2010) For example 2006 stock market crash of United Arab Emirates and the Dubai property, local stock was down and the real estate of Dubai was in booming state. (AME Info FZ LLC, 2010) The fact was investor took money from the stock market and invested in real estate market in Dubai and watching this people who where investing in stock decided to invest in real estate instead. Hence the property of Dubai real estate have double, tripled due to stock market crash of 2006. (AME Info FZ LLC, 2010)
Solution for stock market crashes In 1987 the crash made some problems and the news and events didn't give any predictions for devastation which was certain. The crashes of 1987 raised many questions such as question of modern economics basically the theory of rational human conduct, theory of market equilibrium and hypothesis of market efficiency. In that period of time the exchange world wide was stopped and exchange computers didn't do well due to large quantity of trade receive at one time. (Stock Market, 2010) This stopping of stock make Federal Reserve System and central banks of many countries made effective and active to control the speeding financial crisis. In United State of America SEC made ways to control the market and prevent the ways in which the black Monday was happened. Computer systems and other facilities where upgraded in stock exchange to meet the large need of trading volumes. SEC also customized the margin requirement to lower the instability in common stock and increase the possibilities of future market. A circuit breaker concept was introduce in Chicago mercantile exchange and New York stock exchange, which make stop of Dow and arranged the number of points to arranged amount of time. (Stock Market, 2010) It is important to note that number of investor in UAE is limited due to small portion of population and this is also true for other regional market. The small number of investors makes it difficult to have availability of required or much needed liquidity for the market. Hence need of overseas to invest in share is important to increase the liquidity in the market. It is highly need to have companies to list high percentage of share to public and to facilitate the splitting of theses shares at the point where the market price reach its high position. The potential for the development of highly dynamic and versatile in market UAE is highly possible and it will only require bare minimum regulation for its accomplishment. Financial market need to have some purpose and to achieve it must demonstrate some kind of efficiency. There are some major concern for stock market for instance if market price are rising before dying out then stock market have bubble which can lead to very savoir loses or perhaps market crash. There is need to have stronger policy and economical reforms in ADX and DFM as they are emerging markets they also need to closely monitor to have successful maturity level. Investors in stock market to remain themselves if there is heavy gain in stock market then there is also heavy loss in stock market. Central bank should take control for making active regulation and monitor abnormal behavior of stock or financial activity. To improve stock market of UAE they need to have transparent market with transparent report such as transparent organization financial report. It must also have accountability for private sector and should bring up organization accountability or auditing measures. Finally I would like to say that due to stock market of UAE we have achieved financially stronger economical country which is UAE and we must promote the stock market for more financial goals.