In the year 2000, the Dubai Financial Market was launched as a bourse in the United Arab Emirates. Over the years, the market has developed in market capitalization as well as the number of companies listed. Today, more than 61 companies are listed in the bourse. The unique feature of DFM stock exchange is the dual listing in the Middle East and Northern Africa. In addition, companies from foreign nations such as Kuwait, Oman and Sudan have been joining the stock exchange (Brealey 23).
Dubai Financial Market (DFM) Stock Exchange experienced growth in trades in 2004 as well as 2005, following increase in share prices of most companies listed. Nevertheless, some bubble burst in the subsequent year caused a drop of more than 60% in share prices. DFM is subject to regulations stipulated by the Securities and Commodities Authority (SCA). As such, companies that are listed on DFM must comply with state laws and standards, which DFM ensures are followed in an effort to protect investors, brokers as well as listed companies (The DFSA Rulebook with Market Rules 25).
The Listing Requirements
Other than the requirements that companies should be undertaking legal business, they have to meet listing requirements set by the bourse as well as by the Securities and Commodities Authority (SCA). First, companies must be trading within the authorized market institution for example, within a listed fund. They should also endeavor to follow the listings of law according to the obligations set by the government body or the reporting entity (The DFSA Rulebook with Market Rules 202).
Majority of the listing rules are specifically security based, coupled with exclusive issuing of shares. Major listing rules are classified as principles to outline all regulations with regard to maintaining market confidence as well as fair transactions. The first principle requires the senior management and other staff members to comprehend and comply with the listing rules. The regulations ensure that applications to be incorporated attain validity of entering into transactions and that they follow the law (Brealey 54).
The most important rule is to have audited financial reports for a period of at least three years with regard to the reports to be consolidated. In addition, the audited financial statements have to comply with standards set by the international Audit and Assurance Standards Board (IAASB).
Once the incorporated company has met these conditions, as well as the minimum capital requirement, it presents its papers to the bourse for registration and subsequent filing. Sufficient working capital for a minimum period of one year and a clean working capital statement are required. Any individual who is considered sane and whose age qualifies to carry out a legal and sole transaction is considered fit to trade in stocks.
Mutual Fund Investment and Investing Recommendations
Purchase of ordinary shares in the secondary financial markets is appropriate since they can be repurchased any time. This provides optimistic speculation that such a mutual fund attracts the highest liquidity as well as returns. Investors value liquidity in an asset because greater liquidity implies lower costs when selling the asset to raise funds ( for example to buy a new car or take a vacation) or to invest in another asset. Therefore, if liquidity increases in the bonds market, people are more willing to hold bonds at any bond price thus increasing their demand. In addition, when expected returns on bonds increase, bonds become a more attractive investment. However, this is not the only change in the demand for bonds that occurs when expected returns rise. Bond demand is also affected by changes in expected returns on other assets.
Risks increase the value of common stocks. Low risk implies little returns from the value of common stock and the higher the risk, the higher the value of the common stock. Interest rates change with changes in various environmental risks within a market. More often, government bonds bring less interest and value because of less risks, but other bonds offered by companies which have higher risks have always been attached with higher interest rates and higher value.
It is possible to buy bonds and sell them the following day depending on price changes which occur as a result of fluctuation of interest rates in the market. In addition, information costs and risks associated with ordinary shareholders are little. This implies that in stable economies, it is less likely to experience inflation effects. Effects of inflation are only severe in countries whose economies are not stable.On the other hand, it is difficult for convertible notes, preference shares and bonds to earn profits within one month. Preference shares are not transferable while the maturity period for bonds is usually more than one year. Convertible bonds bring more complications in terms of profits earned. As a result, when the time limit of one month is considered, the limited capital of 5000 dollars makes investors comfortable to invest in ordinary shares (Brealey 13).
Financial ratios are used to evaluate the effectiveness with which companies use their assets to recoup sales. This is done by use of efficiency ratios mostly referred to as turnover ratios. Profitability indicated by financial ratios posts the efficiency and effectiveness of companies in channeling their assets to generate revenue. Again, the comparison of efficiency ratios of performance of companies in for example three year’s financial statements illustrates the distinction of efficiency and profitability during the fiscal period.
Other than investment in securities that yield high returns, it is important to consider those that improve economic conditions. Such securities earn increased capital investment, which favors liquidity and high returns. On the basis of prevailing financial situations, companies advance to reduce costs as a way of serving and developing the market. This means that with a cost minimization strategy, it is evident that retained earnings increase through an increased depreciation. Ultimately, such investment brings profits in the short-term as well as in the long-term.
The legality of Insider Trading
Insider trading is the buying and selling of securities as well as stocks based on information accessed by an individual but one that is not available to the public. Insider trading has elicited debates and arguments on whether it is right or wrong. In addition, the topic of ethics does not cut across commercial business as the question of its legality. In many nations, many corporate insiders take advantage of the non-public information to make huge profits while other traders struggle to evaluate financial statement reports, which barely bring any profits. Therefore, the question of whether insider trading is legal or illegal calls for an extensive and intensive consideration to determine the right position. This section of the paper endeavors to unveil significant determinants of the legality of insider trading.
According to bourse reports from many countries, insider trading is considered information available about key staff members, executive officers as well as big shareholders. In the same context, it is considered legal when investors make trades from non-public information but not taking advantage of the situation. This statement seems contradictory, but on a closer look, the fact that it dispels the opportunistic way of looking at the trader makes the trade legal. The main question therefore remains what qualifies the trade to be illegal. After all, it is the information that opens the opportunity.
On the other hand, insider trading is considered a breach of judiciary regulations making it illegal. This happens when an employee frequently makes references and trades from material containing non-public information. This is illegal because such conduct amounts to breach of trust and confidence in accessing non-public information of a company.
Such illegal conduct might be driven by the desire to avoid information costs. Normally, such information is very expensive in the market and few investors can afford it. The information costs investors must pay to evaluate assets affect their willingness to buy those assets. For example, availability of ratings of bonds released by rating agencies reduces investors’ information costs, making bonds more attractive than assets that have higher information costs. As a result, the demand curve of bonds shifts to the right, and the price of bonds rises. In the loanable funds market, lower information costs increase lenders’ willingness to lend at any interest rate. The supply curve for loanable funds shifts to the right, and the interÂest rate falls. As illustrated above, the right decision to make about the trend of the market increases when non-public information is available. As such, it becomes possible for investors to make informed choices.
Just like any product or service, financial information attracts some costs and prices depending on its value. In fact, many UAE bourses sell financial information that is significant to market trends and fluctuations. Therefore, purchase of information that is not available to the whole public with the aim of using it to invest in stocks and securities is legal.
The argument on the legality of insider trading is backed by economists who reject any proposition that insider trading is illegal. In the same tone, economists such as Thomas Sowell claim that insider trading is legal since the inside information is supposed to benefit stakeholders of companies. At the same time, availability of information definitely benefits the market immediately it is released. According to Friedman, who won the Nobel Prize, many people look for the benefits associated with insider trading. The non-public information consists of company deficiencies as well as incentives which traders are not required to release to the public but instead are expected to make their judgment.
Nevertheless, other advocates question insider trading because having information that others do not have is a component of a legal market. In real estate industry as well as the stock market, knowledge of the unknown always puts investors in the forefront. Having such information is how the financial market works. A historical example of insider trading that was considered illegal is that of Barry Switzer, who was prosecuted in 1981 following his decision of purchasing shares of an oil company, Phoenix Resources, together with his friends.
References
The DFSA Rulebook with market rules. 2011. Web.
Brealey, Myers. Principles of Corporate Finance, 7th edn. New York: McGraw-Hill, 2003. Print.