Abstract
Financial markets are important entities in the economy. They have a significant effect on the performance of the national economy, as well as the performance of companies whose shares are listed.
Financial markets are places where stocks are traded. Stocks may include company shares, government bonds, and other securities. Foreign currencies are also traded here. In Dubai, the major financial market is referred to as the Dubai Financial Market. It is among the largest financial markets in the UAE region. This article will focus the various aspects of the Dubai Financial Market.
Introduction
Financial markets are popular economic entities in every nation. These are markets where securities, fungible items, as well as commodities are traded. The prices at which these securities are traded are guided by the laws of demand and supply. Financial markets could either be general or specialized.
There is more than one item traded in the general market, unlike the specialized market that deals in a single commodity. Participants in these markets include individuals, companies, as well as government agencies. Financial markets are beneficial in a number of aspects. For instance, they help the organizations raise capital to expand their operations. Financial markets also facilitate risk transfer in what is referred to as derivative markets.
Almost each country has its own financial market. In Dubai, there is the Dubai Financial Market (DFM) that was founded in the year 2000 on March 26th. It is headquartered in Dubai, United Arab Emirates. Since its inception, there are over 60 companies that have been listed on the Dubai Financial Market. Most of these companies are domestic, with only a few foreign companies if any. It is important to note that most of the foreign companies listed on Dubai Financial Market are from the MENA region.
They are from countries such as Kuwait, Sudan, Oman, and Bahrain. However, most of these companies have foreign shareholders, among other domestic shareholders. The information regarding Dubai Financial Market will be focused on in this research paper. The history of Dubai Financial Market will be outlined, its functions and objectives, the requirements that a company should meet to be listed here, as well as the growth of companies listed on the market and growth of trading in Dubai Financial Market.
History of establishment of DFM
Dubai Financial Market was established on the 26th day of March the year 2000. This is the same day when the operations commenced in the market. However, trading of shares did not commence until Wednesday 7th March 2007. It was established as a public institution and it was to function as an independent corporate body. The financial market was established through a resolution that was passed by the Ministry of Economy of Dubai in the year 2000.
The resolution that led to the formation of Dubai Financial Market was referred to as the Resolution No. 14 of 2000. The organization operates as a secondary market where shares and other securities that have been issued by the public companies are traded. Federal government bonds are also traded here. In addition, the local government, as well as any other public institution has the right to trade its securities in the Dubai Financial Market (Dubai Financial Market, 2013).
Financial instruments, as well as local and foreign currencies are also traded. In the year 2005, the Executive Council Decree set up Dubai Financial Market as a Public Joint Company in the United Arab Emirates. The paid up capital for the company was AED 8billion. This amount was to be allotted over 8 billion shares.
The par value for every share was to be AED 1.6. Twenty per cent of the shares were issued to the public for public subscription. The response to this public initial offer was too positive, which led to a high level of oversubscription. The amount generated added up to AED 201billion, an amount well over the 8billion target. Since it was established, Dubai Financial Market has continued to grow and expand, as well as improve on its performance and services offering.
During its first year of operation, the organization had less than 20 listed companies. Some of the companies that were listed by the end of the year 2000 include: Dubai Islamic, Dubai National Insurance and Reinsurance, Emirates Bank, Mashreq, Dubai Insurance, Union Insurance, Union Properties and Agico (Arabian General Investment Corp, or Shuaa), Emaar, Dubai Investment, as well as Tabreed also known as the National General Cooling Company.
The company further had a total of 12 brokers who were accredited by the end of 2000. They included: “Al Sharhan, Commercial Bank International, Dubai International Securities, Dubai Islamic Bank, Dubex Securities International, Emirates Bank International, Emirates Commercial Centre, Mashreq, National Bank of Abu Dhabi, National Bank of Dubai, Shurooq, and Union National” (Gulfnews.com, 2001).
However, it recorded a consistent growth in its first three quarters of the year 2000. It started with 7.17 million shares, which then increased to 7.57 million shares in the second quarter and third quarters. By the fourth quarter, the company had about 9.15 million shares. The growth rate of Dubai Financial Market followed the same pattern as more shares continued to be listed and more companies joined the market.
Objectives and functions
Every successful organization should have objectives that are well stipulated in a clear and precise manner. All the activities carried out within an organization must be in line with its objectives. Dubai Financial Market was formed with the major aim of offering securities trading services.
The organization aims at providing innovative services in the securities market. It aims at increasing the level of efficiency and effectiveness in the market, as well as enhancing transparency. Creating a liquid environment is another objective of the organization. The financial markets usually have a significant effect on the general economy of the country in which they are operated. A good performance in the financial market is an indicator of a well performing economy (Dubai Financial Market, 2013).
On the other hand, if the financial market is performing poorly, then this will be an indicator of a poorly performing national economy. The leaders and managers of Dubai Financial Market are aware of the importance of security markets in an economy, thus they ensure maximum efficiency in the organization. Dubai Financial Market tries to enhance the utilization of the available resources to create an efficient marketplace for securities.
The company attempts to utilize the resources as effectively and efficiently as possible (Dubai Financial Market, 2013). Efficiency can also be enhanced by ensuring that investors are well armed with relevant information that will facilitate their decision making. Investors need to make decisions that are well informed; otherwise, they might end up losing their fortunes. Dubai Financial Market ensures that investors have the right and sufficient information to help them in their decision making.
In addition, the organization also tries to prevent investors from any form of unfair treatment or improper practices that might discourage them. In doing so, the Dubai Financial Market regulates all the activities that take place in the trading of securities. It ensures that the prices of securities are controlled by the forces of demand and supply and not by individuals or entities.
There is a possibility for individuals or entities that have large numbers of shares to control the market and become unfair to the rest of the investors. The Dubai Financial Market management ensures that this does not happen to ensure fairness and attract more investors.
The company offers investment opportunities to potential investors, a function that is said to have a positive influence on the growth of the national economy. People can save through the financial market and trade securities where they make profits. Dubai Financial Market also makes arrangements for the purchase and sale of securities. In doing so, it ensures that the investors are treated in a fair manner. The market further facilitates transfer of securities from one owner to another.
In doing so, it establishes a center where deposits transfer and settlements can be conducted. This is done in a system that is highly integrated to make the process speedy and accurate (Dubai Financial Market, 2013). It also ensures a high level of integrity among members and security brokers through establishment of a code of ethics. It provides training to its members to enhance integrity. The company has accredited brokers who help investors in conducting the securities trade.
There are some people who may not be aware of the processes and procedures followed in the market securities, thus they can get help from these brokers. Finally, Dubai Financial Market gathers any relevant data, as well as statistics regarding securities and prepares reports that are presented to its stakeholders. These reports are important in that they facilitate accurate and relevant decision making by the investors.
Listing requirements
The term listing refers to the shares of a company being traded on a stock exchange or others on the list of the shares to be traded. For the shares of a company to be listed, it has to apply for listing. However, there are some countries whereby the financial market or the stock exchanges can just list the shares of a company. For a company’s shares to be listed in the market without applying, the shares have to be traded through informal channels actively. The following are the requirements before listing on the Dubai Financial Market.
The company is required to give a brief description of its history and operations. The financial markets aim at listing companies that have a good performance to boost its chances of success. Investors will only want to buy shares of a company that have a healthy performance. Attracting more investors will increase the profitability of the Dubai Financial Market. It is for this reason that it only lists well performing companies.
The company is expected to show its financial statements for the past few years prior to its application (Aljifri & Hussainey, 2007). The financial statements are good indicators of a company’s performance. If the performance of the company is approved, it is then required to have a sufficient number of securities that are to be placed in the public. This is called a free float and should be possessed in absolute terms, as well as in the percentage of outstanding stock. The company should also be in possession of a prospectus.
The prospectus should meet all the requirements, including opinions given by independent assessors. The company should also be a public company. Once a company meets these general requirements, as well as any other special requirements as it may be required by the Dubai Financial Market, its application can be accepted and its shares start trading in the market.
The company is expected to maintain its market value or its share turnover above a certain level that is regarded as critical. If the value falls below this level, then the company can be delisted. When the shares of a company have been delisted, it means that they will no longer be available in the stock exchange and investors will no longer be able to trade them. In most cases, a company whose shares qualify to be delisted is normally performing poorly and its profitability is worryingly low (Aljifri & Hussainey, 2007).
The company might be declared bankrupt as a result of the poor performance, or it might cease business operations. Investors are no longer interested in buying such shares since they fear they might lose their money. The shares might also be delisted in an event that the company no longer meets the requirements and the rules of listing. It is important to note that people who trade in shares have a major objective of making profits from the business.
Another reason why a company might be delisted from the Dubai Financial Market is when it converts to a private company through an acquisition or a merger. When the shares of a company have been delisted, they can be traded over the counter in some countries. It is worth noting that the fact that the shares of a company have been delisted does not necessarily mean that the company has changed its strategy.
The growth of companies listed on DFM
When a company’s shares have been listed on the stock exchange, its chances of growth usually increase because it gets funds to expand its operations. The company is able to fund its production through embracing technology and innovation, investors get the chance to trade its shares, and the chances of its products or services being preferred by customers are usually higher. A company whose shares are listed on a financial market usually has an added advantage over its competitors. It has a competitive advantage and it can perform better.
One of the benefits that companies get from having their shares listed on the Dubai Financial Market is that they can be accessed by international investors. The Dubai Financial Market organizes events whereby international investors are targeted. This increases the diversity of these companies.
The listed companies are placed on higher radar and their growth chances are highly boosted. The companies that have been listed on the Dubai Financial Market have this advantage and their growth rate is relatively higher compared to other companies (Aljifri & Moustafa, 2007).
The events organized by this organization in Dubai give the companies a chance whereby they showcase their opportunities for growth, as well as their strategies for the future. Their strategies can be boosted by the foreign investors whereby they can be given relevant information, funding, and other forms of support that would enable them to grow at a higher rate than their competitors.
As mentioned earlier, the Dubai Financial Market offers innovative services to companies whose shares are listed on the market. The innovative services further facilitate the rate of growth of these companies.
In general, it can be concluded that the companies that are listed on the Dubai Financial Market are at an advantage compared to those that are not listed in terms of growth. Listed companies have better chances of growing and expanding. They are strategically positioned to realize a much better performance currently and in the future.
The information they get from the Dubai Financial Market reports facilitate their decision making. Consequently, they are able to make better decisions due to availability of sufficient information (Aljifri & Moustafa, 2007). Decision making is a very crucial activity in an organization. Wrong decisions will have a negative effect on the performance of the company and the growth rate will be retarded. The availability of information gives companies listed on the Dubai Financial Market a better chance to grow.
Growth of trading in DFM
DFM is one of the financial markets in the world that have had a consistent growth rate, despite the economic problems that hit most parts of the globe starting the year 2007. Most companies have had a poor performance since the recession started in the year 2007. C
ompanies have recorded losses and their performance in their respective financial markets has been poor as well. The number of shares traded in the Dubai Financial Market has increased consistently since its establishment in the year 2000. Only 11 companies were listed on the Dubai Financial Market at the end of the first year of its operations. Today, the company boasts of over 60 listed companies. This is an indicator of a very consistent and rapid growth.
Termed as one of the United Arab Emirates leading financial markets, the DFM has recorded nothing but growth since its inception. In the year 2013, for instance, the value of shares being traded in the market increased by a whopping 82.9 per cent hitting a high level of Dh 38 billion from Dh 20.8 billion in the previous quarter. The share index further increased from 1829.2 points to 2222.6 points, representing a percentage increase of 21.5% (GulfBankers.com, 2013).
The companies whose shares are listed on the DFM are at an advantage since the value of their shares is likely to increase. When a financial market performance is good and consistent, the chances of growth for companies whose shares are listed on the market are better. The companies are able to consistently get funds to finance their operations and expand.
The companies are also positioned in a better position to build their brand image and gain loyal customers. Brand image is very important for a company’s growth since it makes its marketing efforts easier and cheaper. A brand can even market itself and the marketing expenses are highly reduced.
Less expenses means higher profit and more funds to re-invest or expand operations. This further increases the growth chances of an organization. Companies trading in the Dubai Financial Market have been able to grow because they take the advantage of the market’s consistency.
Conclusion
Financial markets have a very significant effect on the national economy of a country. They give an indication of how the companies in the country are performing. A country that has financial markets that are dynamic is able to achieve an accelerated growth rate. Financial markets help the economy in that they save mobilization.
They obtain surplus money from the investors who could be individuals, companies, governments, as well as the public sector. They also facilitate industry growth, development of entrepreneurship, as well as the national growth. They avail the necessary financial resources to companies that are willing to expand their operations or capitalize on potential opportunities. In doing so, the financial markets enhance entrepreneurship.
Dubai has had one of the financial markets that are among the best in the UAE region. The Dubai Financial Market has registered a steady growth since its establishment. DFM was able to survive the global economic recession that hit most parts of the globe starting the year 2007.
The market has played a significant role in the growth and development of Dubai’s economy. The companies whose shares are listed in the market have benefited a lot from the market’s services and their performances have been highly boosted. It is important for the government of Dubai to continue supporting the Dubai Financial Market to continue accumulating the related benefits.
References
Aljifri, K., & Hussainey, K. (2007). The determinants of forward-looking information in annual reports of UAE companies. Managerial Auditing Journal, 22(9), 881 – 894.
Aljifri, K., & Moustafa, M. (2007). The impact of corporate governance mechanisms on the performance of UAE firms: an empirical analysis. Journal of Economic and Administrative Sciences, 23(2), 71–93.
Dubai Financial Market, (2013). Background. Web.
GulfBankers.com. (2013). DFM posts solid Q2 trading volumes growth. Web.
Gulfnews.com, (2001). Dubai Financial Market marks three quarters of growth. Web.