All 3 entries tagged Financial

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September 27, 2008

Short Selling

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As per my basic finance knowledge, "short selling" is defined as selling a security, already being traded in any of the organised exchanges across the globe, without effectively owning it (hence it is usually borrowed from a market-maker/stock-broker), in the hope that it will fall in value, thereby allowing one to buy it back at a lower price at a later date to return the borrowed security to the broker/market-maker. Thus effectively hedging oneself from expected dips in the stocks being traded on any organised exchanges across the globe. 

The possibility of selling a particular stock via such a mechanism adds to liquidity in the market of the particular stock, thereby artificially increasing the supply and further exhaserbating the downward spiral in the value of this particular security. This is why we see a control on such instruments in the financial markets nowadays:

As a result of the financial debacles in the west, we see that the the Securities and Exchange Commission temporarily banned "short-selling" in the stocks of 799 companies as highlighted in the press release on BBC [linked here]

Does this mean that even the SEC Chairman knows that short selling does more bad than good in the market?

September 22, 2008

Belief in Devine Guidance

The foremost belief around which all the Islamic concepts revolve is that the whole universe is created and controlled by One, the only One God. He has created man and appointed him as His vicegerent on the earth to fulfil certain objectives through obeying His commands. These commands are not restricted to some modes of worship or so-called religious rituals. They, on the contrary, cover a substantial area of almost every aspect of our life. These commands are neither so exhaustive that straiten the human activities within a narrow circle, leaving no role for human intellect to play, nor are they so little or ambiguous that they leave every sphere of life at the mercy of human perception and desire. Far from these two extremes, Islam has a balances approach to govern the human life. On the one hand, it has left a very wide area of human activities to man’s own rational judgement where he can take decisions on the basis on his reason, assessment of facts and expedience. On the other hand, Islam subjected human activities to a set of principles which have external applications and cannot be violated on a superficial grounds of expediency based on human assessment.

The fact behind this scheme is that human reason, despite its vast capabilities, cannot claim to have unlimited power to reach the truth. After all, it has some limits beyond which it either cannot properly work or may fall prey to errors. There are numerous domains of human life where ‘reason’ is often confused with ‘desires’ and where unhealthy instincts, under the disguise of rational arguments, misguide humanity to wrong and destructive decisions. All those theories of the past which are held today to be fallacious, claimed, in their respective times, to be ‘rational’ but it was after centuries that their fallacy was discovered and their absurdity was universally proved.

It is thus evident that the sphere of work delegated to human ‘reason’ by its Creator is not unlimited. There are areas in which human reason cannot give proper guidance or, at least, is susceptible to errors. It is these areas in which Allah Almighty, the Creator of the universe, has provided guidance through His revelations sent down to His prophets. On the basis of this approach it is the firm belief of every Muslim that the commands given by the divine revelations through the last messenger (May God Be Pleased With Him) are to be followed in letter and spirit and cannot be violated or ignored on the basis of one’s rational arguments or his inner desires. Therefore, all the human activities must always be subject to these commands and must work within the limits prescribed by them. Unlike other religions, Islam is not confined to some moral teachings, some rituals, or some modes of worship. It rather contains guidance in every sphere of life including socio-economic fields. The obedience from servants of Allah is required not only in worship, but also in their economic activities, even though it is at the price of some apparent benefits, because these apparent benefits may go against the collective interest of the society.

Extract from “An Introduction of Islamic Finance” by Muhammad Taqi Usmani

Some great words of Muhammad Taqi Usmani, one of the great scholars of our present day time, who has worked extensively in the field of Islamic Financing.

Thus the question then arises: even though we know that our rational reasoning may be affected by our desires, how do we control them?

September 19, 2008

Worst Week for Wall Street

This is perhaps the worst week that Wall Street's experienced since the Great Depression. We have seen 

1.      Lehman Brothers go bankrupt. The biggest bankruptcy ever! 

2.      Fannie Mae and Freddie Mac bailed out by US Treasury - Together Fannie, Freddie provide nearly 50% of mortgages in US (4 Trillion dollars of mortgages outstanding) 

3.      Merill Lynch forcefully merged with Bank of America

4.      AIG, the biggest insurance company in the world bailed out by US Treasury. 

5.      Washington Mutual on verge of bankruptcy

6.      Yields on the 3 month US Treasury are a mere 3 basis points practically nothing

7.      Morgan Stanley considering merging with Wachovia!

8.      Already we have seen Bear Stearns collapse

What does this all mean to us? Reduced liquidity in the markets. Distressed selling and perhaps reduced appetite for risk. A spill over effect is already on its way towards the GCC countries as the markets are showing early signs of loss of stocks most notably property companies that have fallen by 50% in the last few weeks (Emaar, Aldar, Sorouh etc).

What this effectively means is that the US dollar will suffer tremendously. US dollar did recover recently against all other currencies, but for a brief respite as these events will trigger another recessionary period for the US and most likely the World economoy because of its interconnectedness in the global sphere.

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  • nice info about forex thank you by forex forum on this entry
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