This paper discusses stocks; traded on the Dubai Financial Market, and their importance to the company. The article also discusses at length different financing methods and differences between market value and book value. Further, this paper analyzes a company listed on the Dubai Financial Market and its market value.
Stocks are a financial instrument that proves your claim on a company’s assets. One share represents part ownership of a company. They are traded on the stock market, e.g., Dubai Financial Market, the main stock market in my country; U.A.E.
DUBAI STOCK MARKET
Dubai Financial Market (DFM) is one of the three stock exchanges of U.A.E. Other exchanges are the Nasdaq Dubai and the Abu Dhabi Securities Exchange.
Of these, the Securities and Commodities Authority governs the Dubai Financial Market and the ADX while, Nasdaq Dubai is governed by international laws and, by Dubai Financial Services Authority (DFSA), an independent organization.
I will discuss only the Dubai Financial Market in this article. DFM has a total of 61 companies listed in the following sector; banks, investment companies, insurance companies, real estate developers, transport operators, food, and service companies.
The DFM, established in 2000, is still considered a small market; this might be because the companies listed as well as volume is quite small; the volume on an ordinary day is, 174,710,488.
FINANCING METHODS AND THEIR IMPORTANCE
A company issues shares on the stock market to finance its activities, this is known as Equity Financing. Equity financing provides fractional ownership of the business to individuals as well as the opportunity to receive dividends annually. However, it noteworthy that the company retains the right not to pay dividends if it needs cash for itself.
The other way to finance a company is through debt financing. It is the process of a business raising money for capital expenditure by selling bonds to investors. When an individual buys these financial instruments, he becomes a creditor and is promised his investment will be repaid to him along with interest.
Debt financing is preferred because it provides funding at a lower rate. Though, it should be noted that piling up debt raises the cost of capital and thus, reduces the company’s market value.
The shareholders, who trade in the company’s shares or bought them at the IPOs, do so because of its market value. Market value is the price an asset would fetch in the market.
BOOK VALUE VS MARKET VALUE
The market value is a clear indicator of the investor’s perception of the company’s performance.
It should be noted; there is a difference between market value and book value of a company. While market value proves the shareholder’s perception of a company, the book value is the value of the enterprise according to the auditors.
The book value is total assets minus total liabilities, and while the market value is a product of the company’s total outstanding shares and, the market price of its share. Both of them cannot equal each other because of the difference in their formula and can they give a clear picture of a company’s real value.
Weatherford International has a share price of USD 4.18 with 989 million outstanding shares, while it has a book value of USD 9 billion. It shows that the market perceives it more valuable than its book value. This analysis might help the company attract more investment in the future from the public.
(What are the benefits for a company using equity financing vs. debt financing?)
(Introduction to Managerial Finance)
(Market Value vs Book Value)
(Weathorford Annual Report, 2013)