Markets - Business Finance - ثاني ثانوي

4.1 Markets Key Terms Stocks Bonds Sukuk Market maker Bid and ask prices Spread At its most basic economic definition, a market is the means through which goods and services are exchanged by buyers and sellers. A seller brings something to the market and bids a sales price. The buyer asks for a price from the seller. The buyer and the seller can negotiate directly or use an intermediary called a broker to arrange and negotiate the deal. Link to dijital lesson www.n.edu.sa 4.1a Securities Markets Every day, trillions in Riyal are traded in stock exchanges around the world. These buyers and sellers never meet; instead, the securities markets are intermediaries, impersonally transferring the stocks, bonds, and sukuk from the sellers to the buyers. The transfers typically occur on an organized exchange such as the Saudi Exchange. The world's largest exchange is in the United States at the New York Stock Exchange (NYSE). There certainly is no question that investing in securities involves the potential for loss. Without the possibility of loss, there would be no possibility of gain. Of all the financial institutions, the stock market may be the best known, but its purpose is often misunderstood. The primary function of a stock market is not to raise funds for firms, but to transfer securities from sellers to buyers. There is no net change in the number of securities in existence; no funds are transferred to firms. All that occurs is a transfer of ownership from the seller to the buyer. The Saudi Stock Market started in 1932 with the first joint-stock company in the Kingdom of Saudi Arabia, the Arab Automobile Company. The Saudi Stock Market Exchange was established in 1985. A financial market exchange allows for the trading of securities. In 1990, the Saudi exchange started using an electronic system for the exchange of stock. Stocks The capital raised by a firm through the issue of shares which also gives their holders ownership of the company Bonds A debt obligation issued by enuties such as governments and businesses Seluk A Shanah compliant bono-like motrument used in Islamic finance representing a direct asser owners pinterest وزارة التعليم 931-1085 CHAPTER 4 An Introduction to Financial Markets 143

4.1 Markets

Key Terms Stocks

4.1a Securities Markets

Stocks

Bonds

Sukuk

P 144 Business Finance In 2001, an advanced system of trading, settlement and clearing mechanisms (finalizing sales), the Saudi Tadawul exchange system, was introduced. Tadawul was restructured in 2007 as a joint stock company in accordance with Article 20 of the Capital Market Law where the exchange is the sole entity in Saudi Arabia authorized to act as a securities exchange. The vision of the Saudi Exchange is to be an integrated financial exchange that fosters the development of a diverse Saudi Arabian capital market and competes internationally. The Saudi Exchange's mission is to offer sound, efficient and attractive capital market products and services that deliver superior value to market participants and stakeholders. The Saudi Exchange, or Tadawul, operates under the authority of the Saudi Arabian Capital Market Authority (CMA). The CMA sets rules for corporations that want to list on Saudi Arabian exchanges. In the United States, the Securities and Exchange Commission sets rules for companies in that country. Exchanges enforce rules for companies that want to trade on their exchanges. The CMA regulates the Saudi Capital Market by issuing required rules and regulations to implement provisions of Capital Market Law. The CMA regulations create an investment environment that boosts confidence of investors, reinforces transparency and disclosure standards in all listed companies, and protects investors and dealers from illegal acts in the market. Many countries allow for over-the-counter (OTC) exchange markets. This allows smaller companies that may not meet major exchange requirements to sell securities, such as stocks, directly from a broker-dealer network instead of an investor purchasing from a centralized exchange. A broker does not actually sell stock but acts as an agent connecting sellers and buyers. Saudi Arabia has set up the Nomu Parallel Market providing an additional source of funding for issuers of security to access capital. Companies listed in the Nomu Parallel Market have modified and less stringent applications submitted to the Saudi Capital Market Authority (CMA) and the Saudi Exchange. This allows for a simpler and more flexible offering and listing process. While there are organizational differences between the exchanges from the perspective of a potential investor, they work in essentially the same way.

4.1 Markets

In 2001, an advanced system of trading, settlement and

Saudi Vision 2030 has set goals for developing an advanced financial and capital market open to the world. This will allow greater funding opportunities in Saudi Arabia which will stimulate economic growth. To reach this goal, the Saudi Exchange system facilitates access to investing and trading in securities markets, easing the process of listing private Saudi Arabian companies and state-owned enterprises. Improvements in the exchange market have added liquidity (funding) to capital markets, strengthened debt markets, and opened additional investment opportunities. A6898 AFLL How has automation changed the 45645 ▼ 23.51 stock market? WILL 45.55 ▼98.8 ▲8156 19.98 ▼60.98 TR.12 A23.97 العليم 2073-1 Stock Market ▲ 35.21 Stock Market Stock Marke 145 ▼69.05

4.1 Markets

Saudi Vision 2030 has set goals for developing an advanced financial

How has automation changed the stock market?

Pl F 146 Business Finance 2921-1879 4.1b Major Types of Traded Securities It is important for both investors and financial managers to understand the major types of traded securities. Financial managers need to obtain capital from investors, while investors need to know where to place their investments to obtain the highest return given their risk tolerance. There are two major types of traded securities, stocks, and bonds: 1. Stocks, or equity ownership through the holding of shares, have stock markets which are secondary markets that facilitate the transfer of existing securities among investors. 2. A bond is a debt obligation issued by entities such as governments and businesses. 2.1 2.2 Governments issue bonds to finance their operations. Corporations issue corporate bonds to obtain assets. Investors who buy bonds are making a loan to the entity issuing the bonds. These entities make a legal commitment to pay interest on the principal, or amount loaned, and in most cases return the principal when the bond comes due, or matures, at a specific date. Bonds can be discounted instead of paying interest. A discounted bond will sell for less than face value, or the money's actual value, but at maturity pays a specified return on investment. A bond's return is based on the entity's risk. Government bonds are considered to be the most secure, so have a lower required return, Businesses can have a bond rating. A business considered to be low risk will have a lower required return than a business considered to be higher risk. Figure 4.1 shows the relationship between risk and return.

4.1 Markets

4.1b Major Types of Traded Securities

easing risk Retur and rafm Gimene Corporations Risk Stocks The Saudi Exchange has a market for bonds and sukuk. A sukuk is a Shariah-compliant bond-like instrument used in Islamic finance. Bonds are typically an interest-bearing debt obligation. A sukuk is a direct asset ownership interest in the issuer of the sukuk. Like other investments, sukuk are traded in secondary markets. Do you think smaller investors are more likely to buy stocks or bonds? Why? FIGURE 4.1 The Relationship between Risk and Retur 147

4.1 Markets

FIGURE 4.1 The Relationship between Risk and Return

Do you think smaller investors are more likely to buy stocks or bonds? Why?

Transferability of securities is extremely important Financial managers want their securities in a secondary market where securities may be sold and converted into cash. This increases the willingness of investors to buy and hold stocks, bonds, and sukuk and thus increases the ability of firms to issue securities and raise capital. Without secondary markets, investors would be reluctant to buy the securities when a firm initially issued them. Understanding exchange markets is vital for financial managers and investors New business start-ups may want to offer stock through an initial public offering (IPO). Existing corporations may want to issue additional shares of stock, buy back shares of stock, issue bonds, or issue sukuk. Both businesses and individuals invest in markets to obtain the highest returns on their investments. Why might a bond be issued and why might an investor purchase it?

4.1 Markets

Transferability of securities is extremely important

Understanding exchange markets is vital for financial managers and investors

Why might a bond be issued, and why might an investor purchase it?

4.1c Market Makers Financial markets may have market makers (the securities dealer). Assume a seller wanted to sell a stock or other security, but no buyers want to buy that day. How low should the bid sales price go? Should it go to zero SAR? This would disrupt the market. Stock market makers help to ensure that a stock price remains in a range by buying and selling stocks and "making the market." A market maker is a dealer who engages in the business of buying and selling securities for their own account. Market makers work in a variety of equity markets including the bond markets. In most cases, market makers are dealers in large investment banks or other specialized trading companies. A "designated market maker, or DMM, supervises trading in a company's stock to ensure that trading (buying and selling) goes smoothly. If trading for that stock becomes volatile, the DMM would step in and buy or sell the securities for their own account. In effect, DMMs offer to buy securities from sellers and sell securities to buyers. Because they make a market in the security, an investor is able to buy and sell stocks and bonds. The Saudi Stock Exchange has set rules for Saudi market maker dealers to participate in the exchange. A dealer who engages in the bumes of lying and selling secures for their own account EXAMPLE For example, a market maker may be willing to purchase a stock at SAR 200 a share and sell it at SAR 210. The security is then quoted 200-210, which are the bid and ask prices. The market maker is willing to purchase at the bid price of a stock from a seller at SAR 200 and to sell, or ask, at SAR 210 a share for the stock to a buyer. Bid and pric Prices quoted by market makers at which they are willing to buy and sell secanities Market makers set specified prices at which they will buy and sell the security. The difference between the bid and the ask is the spread. The spread, like brokerage commissions (or the fee paid to the broker for carrying out the transaction), is part of the cost of investing. When someone wants to buy a security, the value of security offer is the bid price, but the price requested from a buyer is the ask price. The difference between the bid and the ask is a cost of obtaining the security. In some markets, Spread The difference between the bid and ask prices وزارة التعليم 2024-19 CHAPTER 4 An Introduction to Financial Markets 149

4.1 Markets

4.1c Market Makers

Market maker

Bid and ask prices

Spread

P 150 Business Finance if there are several market makers for a particular security, this spread will be smaller due to competition between market makers. If there are only one or two market makers, the spread may be larger as a percentage of the bid price. For example, if a corporation had a bond issue, they may have multiple investment banks participate in the sales. These investment bank market makers would then compete for the sale of the bonds shrinking the spread. The spread is also affected by the volume of transactions in the security and the number of outstanding shares the firm has. If there is a large volume of transactions or the number of outstanding shares is large, then there is usually a larger number of market makers. This increased competition reduces the spread between the bid and the ask. If the number of outstanding shares is small, the spread is usually larger. The New York Stock Exchange (NYSE), like many exchanges, has both a physical auction managed by human DMMS and completely automated auctions that include algorithmic computer-based quotes from DMMs and other market participants. Some exchanges, such as the Saudi Exchange, use only computer-based trading engines to determine an equilibrium price. All possible bid and ask matching orders are executed at the end of the auction day. The execution price is an auction-based bid and ask price at the market close and becomes the next day's reference, or starting, price. Automated exchanges like the Saudi Exchange and NASDAQ use their auction engines to settle prices This has greatly reduced the spread and therefore the retail commissions for market makers. At the same time, this has greatly increased the total amount of stock trades. Figure 4.2 illustrates the exchange process. A buyer places a purchase order with a broker who is registered to buy and sell securities on an exchange. The broker places the ask price and number of shares to the exchange. The exchange market maker matches this ask request with a seller who has a bid price delivered through their broker. The bid-ask process will arrive at a settled price for the exchange of the securities.

4.1 Markets

if there are several market makers for a particular security,

Seller Electronic Exchange FIGURE 4.2 Market Order Market The Exchange Process Broker bril Broxerk" Order Market Maker Broker Broker Marker Maker Mariel Make ask Price Designated Markel Muker This mile The spread is one source of the market makers' profits as they turn over the securities in their portfolios. As illustrated in Figure 4.2, the spread for electronic exchanges is much smaller than for exchanges that use DMMs. Market makers also profit when the prices of the securities rise, because the value of their inventory of securities also rises. Market makers also bear the risk if the value of any securities they hold were to fall. These profits are a necessary facet of securities markets, for the profits induce the market makers to serve the crucial function of buying and selling securities. These market makers guarantee to buy and sell at the prices they quote. Therefore, investors know what the securities are worth at a point in time and that there is a place to sell current security holdings or to purchase additional securities. For this service the market makers must be compensated, and this compensation is generated primarily through the spread between the bid and the ask Why are market makers importalit A running of the stock market! ع العلام 2023-144 151

4.1 Markets

FIGURE 4.2 The Exchange Process

Why are market makers important to the running of the stock market?

152 Business Finance . Exercises Choose the correct answer. 1. The primary function of a stock market is to raise funds for firms. True/False 2. Organized securities markets are, a. examples of commercial bank. b. transferring money from savers to borrowers. c. secondary markets. d. not subject to regulation. 3. Under Saudi Capital Market Law, Tadawul is the sole entity in the KSA authorized to act as a securities exchange. True/False 4. Tadawul sets rules for corporations that want to list on Saudi Arabian exchanges. True/False

4.1 Markets

The primary function of a stock market is to raise funds for firms.

Organized securities markets are:

Under Saudi Capital Market Law, Tadawul is the sole entity

Tadawul sets rules for corporations that want to list on Saudi