Chapter 1

1.1
 Nature of investment:

Before we start investing in any type of assets, it will always be better to start investing with
our own money so that we do not get credit from the bank, because when we talk about
investing there is risk and here to reduce the risk as much as possible it would be better to
start saving, by taking credit from the bank you will face double risk because if you take
credit from the bank and invest if you lose your money in that investment, you are still liable
for paying the money back to the bank.
To saving what should we do first, we have to reduce our consumption for greater future
consumption so we can make compromises in our current consumption in hope to save
money and later to invest that saving on the financial market to generate the profit in the
future.

1.2
 Different type of assets (we have 2 main group of assets):

1. Real Assets:

Real assets are tangible assets; they are considered a productive capacity which means we can
use them to produce goods and services. we can use the land for agriculture purposes and
then use the real state to offer housing services and use the cars to provide transportation
services. So, when we're talking about real assets we're talking about production of items or
services. It’s not limited by only one markets we can even buy and sell them online, whether
you inside or outside UAE

2. Financial Assets:

Financial assets are exclusively available on the financial markets, we only buy and sell on
the financial markets. the financial assets is dependent on the real assets, we can’t have
financial assets if we don’t have real assets (Claims on real assets).

 Major Classes of Financial Assets or Securities

1- Fixed-income securities

1. Money market instruments (Short term investments).

• Bank certificates of deposit, T-bills, commercial paper, etc.
2. Bonds.
3. Preferred stock: issued only by the companies, and its optional to issue.

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 Bonds Common Stock

Debt security. Ownership Security (instruments)

Not consider as owner, you will consider as
lender – (the company consider the
investment as bank -rather than take loan).
Time limit (Maturity).
Fixed Coupon (You know how much you will
receive each year).
major shareholder– you have the right to vote.
Have no right to vote.
Variable Dividend (it may go up as it may go
down it depend on the profit generate by the
company)
Unlimited time depends on the financial
objective.
If you own more than 5% you consider a

2- Common stock (equity)

 Ownership stake in entity, residual cash flow.

Preferred stocks Common Stock

More expensive Cheaper than preferred stock

Issue when they need cash (obligation to

Issue once (optional to issue)
issue)
Wait till the end of the year to know how
Fixed dividend
much dividend you will get.

Have the priority to pay to stockholders.

Sharing the profit as will the loss.
They need to pay the preferred the dividend,
even as cumulative the next year.

- The preferred stock: can’t convert to common stock.

- The bonds: can convert the common stock when they can’t pay.

3- Derivative securities
 Contract, value derived from underlying market condition. (Value of derivative depend
in something else) - ‫القيمة المستمدة من حالة السوق األساسية‬.

o If the Buyer contacts the seller first (option to buy) – CALL.

o If the seller contacts the Buyer first (option to sell) – PUT.

*( the sequence of payment the dividend is bonds, preferred stock, common stock)

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 If the Buyer contacts the seller first (option to buy) – Signed CALL Option.

Example:
Seller: (Farmer) - Corn Buyer: (Company) -
Cornflakes
Quantity: 100 kg
Strike / Exercise: $2 per kg. (Maximum)
Duration: 6 months

Scenario 1 Scenario 2
- Market $1 < $2 seller - Market $3 > $2 seller
- No exercise. - Exercise.
- Right to cancel the option and buy from
other suppliers.
- The company pay premier or fees to the
farmer in the beginning.

From the company (the buyer) perspective:

- Scenario 1:
- The company will observe the corn market during 6 months and they will buy from
farmer only when the price is lower than the market. Or they have the right to cancel the
option and buy from other suppliers, and there will be no exercise (which mean they don’t
need the option). – compare the price available in the market to the price in the contract.

- Scenario 2:
- If the price of the contract is always less than the market, there will be exercise (which
mean the company will stick to the option).

From the company (the Seller) perspective:

- If the company (Buyer) can’t buy during the duration or can’t finish the deal, the
company obligated to find and sell the call to other company on the same industry to buy
the corn, (they need to agree about the price and condition in the market separately).

- If they don't stick to the duration the agreement will be cancelled.

 If the seller contacts the Buyer first (option to sell) – Signed PUT Option.

Scenario 1 Scenario 2
- $1 sell (Minimum) - $3 sell
- Exercise. - No Exercise.

- They will sign the put option when the price is lower.

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1.3
The Advantage of the Financial market:
1- Informational Role of Financial Markets

- Its mean that financial markets are providing us with a lot of information, for
instance if I would like to know information about Ammer or about Etisalat about any
other company I don’t need to go to the company itself to get information, website of
financial market where the company its listed.

2- Consumption Timing

- when current basic needs are met, shift consumption through time by investing surplus
(delay little bit for your consumption for the future because you will be able to generate
profit).

or
- Refers to how investor manage their income and expenses, by timing when their income
is earned and when their expenses are incurred. This allows investor to maximize the
amount of their income that can be used for consumption and minimize the amount of
their income that is saved or invested.
‫ يتيح‬.‫ من خالل التوقيت الذي يحصل فيه على دخله ومتى يتم تكبد نفقاته‬،‫يشير إلى كيفية إدارة المستثمر لدخله ونفقاته‬ -
.‫ذلك للمستثمر زيادة مقدار دخله الذي يمكن استخدامه لالستهالك وتقليل مقدار دخله الذي يتم توفيره أو استثماره‬

3- Risk Allocation

- Investors can choose desired risk level; it depends on the investor and the financial
objective is different. Some investors have long term objective and others have short term
objective, also how can they afford the risk, and in the financial market we have many
alternative and it will be different from one investor to another and how much they
willing to take risk.
- Save investment: Bond (fixed income) – risk averse investment.
- Risky investor: stock.
- Risk-and-return trade-off (which mean high return high risk / low return low risk).

4- Separation of Ownership and Management

- Large size of firms requires separate principals and agents. Because the relationship
between the mangers and stockholders not always perfect, some time they have conflict
of interest what is called by Agency Problem So, they need to implement control system
which is called (corporate governance). The UAE has required all the listed companies in
the financial market to disclose to publish to corporate governance report, to improve the
transparency in the financial market.

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Some Mitigating Factors for the agency problem
- Performance-based compensation (the more you will do for the company the higher
your salary).
- The importance of boards of directors:
o The boards of directors may fire managers.
o Should at least 3 external members in boards of director to increase the
transparency and to have independent decisions.
o All the company should have one woman in the board of director.
- Threat of takeovers: if the minor shareholders dose not like the owner, they sell their
shares to the competitor when the competitors own more than 51%, he can be the CEO
and takeover the company and the company will disappear from the market and will
transfer to the new company. (Take a place overnight without agreement of company)
- A merger involves the mutual decision of two companies to combine and become one
entity; it can be seen as a decision made by two "equals."
- Acquisition is usually the purchase of a smaller company by a larger one.

5- Corporate Governance and Corporate Ethics

- Include all the control system that will implement by the company to reduce the
problems.
- All the company should respect all the law and regulation.

1.4
The investment process:
1- Asset Allocation

You must split you your money to different major class.

In which group I want to make investment in stock and bond, or I want to combine between
them its up to the risk I want to take. It’s up to your preference, your risk appetite and
financial objective – short or long term. (For example, if I want to be riskier, I can go 100%
with stock, if I want to be less risky, I can combine between bons and stock)
Exp: Percentage of fund in asset classes
- Stocks 60% (short term)
- Bonds 30% (long term)
- Alternative assets 6% (Derivative)
- Money market securities 4% (Bank certificates of deposit, T-bills, commercial paper)

2- Security selection (‫)تنويع االختيار‬

The process of determining which asset class is included in a specific portfolio.

3- Analysis

Keep following in the performance in the market.

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1.5
Markets Are Competitive (Concepts)
Risk Return Trade-Off:

Higher risk is associated with greater probability of higher return and lower risk with a
greater probability of smaller return. This trade off which an investor faces between risk and
return while considering investment decisions.
What Type of risk and how diversification affect risk:
Systematic: General risk (covid / earthquake / natural disaster) -> undiversifiable.
Specific (unsystematic): (crisis / financial failure / bankruptcy / ethical filiation) ->
diversifiable.
Efficient Markets
- when we are investor in the same market, we get all information at the same time
(there no favour will be given over the others), that we the UAE financial regulator
has banned insider trading.
- Securities should not be underpriced or overpriced on average; the price should reflect
all information available to investors.

We have two Investment strategy:

1- Active management (inefficient markets)
- Finding undervalued securities (security selection) – its better to buy undervalued
stock because the price will increase later.
- Market timing (asset allocation)

2- Passive Management (efficient markets) – long term

- No attempt to find undervalued securities – all the stock are fairly priced.
- No attempt to time – doesn’t care about time.
- Holding a diversified portfolio
o Indexing; constructing “efficient” portfolio. (Create portfolio with same
weight as the overall market).

1.6
The players
1- Business Firms – Corporations (borrowers and saver) – only in the beginning they
consider as borrowers when they will list in the financial market, they will be also
saver.
2- Households (net savers) – individual investors – consider as suppliers they provide
cash.

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 3- Governments (can be both borrowers and saver) – can be demander for cash when
the issue T-bills and as supplier of cash when they are being investor and buying
stock.
4- Financial Intermediaries (connectors of borrowers and lenders)
• Commercial banks: manage your portfolio.
• Investment companies: mutual funds (give your money to mutual fund, they
will invest the money collected from different investors in the financial
market, your relationship direct with mutual fund not the financial market)
• Insurance companies: use your money to use it on financial market.

Chapter 2
2.1
 Money market instruments (Short term investments).

1- Treasury Bills: a short-term government security, yielding no interest but issued at a

discount. (The price you pay at the beginning and the price you collect later will be
higher). / only the government has the right to issue T-bills, the Maturity of T-bills is
90 days – they will get their money back with profit)
2- Certificates of Deposit: a secure form of time deposit, where money must stay in the
bank for a certain length of time to earn a return. (Block your money for certain of
time less than year, (3month - 6month - 12month), you can’t take your money before
the end of the certificate or there will be high penalty).
3- Commercial Paper: a debt securities issue by any company, the company is
promising the payment after certain number of days less than year. (If the company
need there money back the company can transfer the commercial paper to another
company with lower price).
4- Bankers’ Acceptances: A commercial bank draft requiring the bank to pay the holder
of the instrument a specified amount on a specified date. (Asking the bank to pay on
behalf of the company in specific year and amount, but the company should be client
to the bank and have a good credit history in the bank, and there will be high fee to be
paid to the bank).

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2.2
 Capital market instruments (Fixed-Income Instruments).

1- Bond market
- Government Issues—U.S. Treasury Bonds and Notes
- Corporate Bonds – for example (Emaar)
- Mortgage-Backed Securities (MBS)
 Backed by pool of mortgages with “pass-through” of monthly payments; covers
defaults.
Listed of Buyers want to buy house so they take mortgages from commercial bank for
example 1 million for each and we know that duration of mortgages can go up to 20 years,
and the bank can’t ask the customer to pay before the end of maturity. And the bank need
money, so the bank can sell the MBS to investment bank, and if the buyers will not be able to
finish all his payment to the bank investment bank has the authority to takeover the house to
sell it and to receive cash and to give it as revenue to the investors.

2- Stock Market
- Common stock
- Preferred stock

2.5
 Derivative Markets
Options Futures
Call (Buy) Long (Buy) - the buyer obligates to purchase a
specific asset at contract expiration for set price. (If
the price of market increase you buy in the set price)
Put (sell) Short (sell) - seller to sell and deliver that asset, at a
specific future date.
specified exercise or strike price Delivery date – to sell / buy in the specific date not
before.
specified expiration date – any time Deliverable item – to deliver in the specific date not

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before or in expiration day before.