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Technical analysis refers to a methodology used to analyze securities especially when there is need to estimate the movement of market prices (Tharp, 2008). In order to carry out a conclusive technical analysis, reference must be given to the volume of sales, the basic price that dominates a given market and patterns of the past market data. There are a number of analytical tools used in a quantitative analysis and behavioral economics. However, slight differences and theoretical conflicts have been noted between the modern portfolio theory and active management theory (Tharp, 2008).
Trading rules and models can also be used as part and parcel of mechanisms during the process of technical analysis. Nonetheless, volume transformations and trading principles are attached to the price of stocks. It is pertinent to mention that the identification of chart patterns, various cycles experienced in the stock market, business cycles, links between different price ceilings adopted by a market and regressions are vital parameters that ought to be put into consideration. In addition, moving averages as well as the relative strength index are crucial mechanisms that can be used to demonstrate financial technical analysis.
The point and figure chart methodology is employed in technical analysis. Since time and price cannot be plotted against each other, it makes the charting process unique. For instance, a stock being traded is exchanged at $30, with a reverse box of 3 units and a one dollar measurement. If the value of the stock is increased to $ 25, the closing level of the stock is anticipated to drop down to $26 and later to $ 21 as shown below:
$ 26 X
$ 23 X
The Dubai Financial Market Company in the UAE makes it possible for stock traders to draw price overlays. The latter is achieved by choosing the technical indicators option. Bollinger Bands, Exponential Moving Averages and Simple Moving Averages are some of the technical indicators utilized in most UAE stock markets.
When stocks are bought using inadequate money, the purchasing style is referred to as margin trading. Stocks can be bought using an institutionalized method even in cases where capital resources are inadequate (Fox, 2009). Most exchanges often allow margin trading.
In terms of mechanism, it is vital to mention that margin trading may be quite logical in some cases even if investors invest in future outcomes. Margin funding can also be another option unless the future list contains the required stock.
Margin trading can be more viable in cases where the client is patient enough bearing in mind that future stock can hardly be availed from 4 to 8 weeks (Fox, 2009). The future market may also witness low interest rates occasioned by brokers.
Margin calls are made by brokers if the buying price is lower than the value of shares. The latter is applicable in margin trading and future market.
If 3000 shares are bought from company X which exchanges at $200 per share, a buyer requires $600,000. However, if company’s future contract is purchased by a buyer, only fifteen percent should be paid out. Margin trading can also be used to execute the same operation.
The United Arab Emirates (UAE) stock brokers enjoyed impressive profits through margin trading in 2012. After projecting the impending good performance of UAE stock market, the brokers made attempt to avail margin trading services to their customers. The local stocks in the UAE have witnessed renewed interest since 2012 when margin trading proved to be profitable. The rush for brokerage services also explains why several brokerage firms seek accreditation in the UAE. Once the brokerage firms have been accredited, the trust level from customers has also improved significantly.
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Securities can either be borrowed or possessed by a seller. When such securities are sold out, the process is referred to as short selling. The main motivating factor behind short selling is the anticipated fall in the price of securities. During a decline in the price of stocks, traders can purchase and later sell the same stocks at a higher market price. The intention is to make as much profit as possible (Sloan, 2009).
One of the common mechanisms of short selling is speculation of the market. In some instances, individuals who trade in stocks may decide to minimize the risk of the market for stocks before gaining significant rise in price. It is theoretically infinite for short sales to undergo the risk of loss (Sloan, 2009). Hence, experienced traders who are well versed with both the short and the long term risks can reap the optimum benefit from short selling.
A numerical example can be demonstrated as follows. A buyer may speculate that a given stock which is trading at $80 will soon experience a drop in price. As a result, the trader borrows 200 shares that he/she later sells to prospective buyers. This causes a deficit of 200 shares that belong to the lender. It was only through borrowing of the shares that the seller managed to make the transaction. In any case, the borrowed shares may be returned back to the owner in future. The stock then declines to $60. The trader purchases 200 shares at a low price and makes a profit, even after refunding the lender the borrowed shares, plus the commission.
In 2012, short selling and lending regulations for securities were approved by UAE authorities. After a meeting among the Board of Directors, money-maker and short selling of securities alongside other regulations were put in place in order to streamline the operations of the stock market.
Fox, J. (2009). The Myth of the Rational Market. London: HarperCollins.
Sloan, R (2009). Don’t Blame the Shorts: Why Short Sellers Are Always Blamed for Market Crashes and Why History Is Repeating Itself. New York: McGraw-Hill Professional,
Tharp, V.K. (2008). Definitive Guide to Position Sizing. New York: International Institute of Trading Mastery.