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how is proof of stake different from proof of work | both consensus mechanisms help blockchains synchronize data validate information and process transactions each method has proven successful at maintaining a blockchain although each has pros and cons however the two algorithms have very different approaches under pos block creators are called validators a validator checks transactions verifies activity votes on outcomes and maintains records under pow block creators are called miners miners work to solve a hashing problem to verify transactions in return for solving it they are rewarded with a coin to buy into the position of becoming a block creator you need to own enough coins or tokens to become a validator on a pos blockchain for pow miners must invest in processing equipment and incur hefty energy charges to power the machines attempting to solve the computations the equipment and energy costs under pow mechanisms are expensive limiting access to mining and strengthening the security of the blockchain pos blockchains reduce the amount of processing power needed to validate block information and transactions the mechanism also lowers network congestion and removes the rewards based incentive pow blockchains have goals of proof of stakeproof of stake is designed to reduce network congestion and address environmental sustainability concerns surrounding the proof of work pow protocol proof of work is a competitive approach to verifying transactions which naturally encourages people to look for ways to gain an advantage especially since monetary value is involved bitcoin miners earn bitcoin by verifying transactions and blocks however they pay their operating expenses such as electricity and rent with fiat currency so what s really happening is that miners exchange energy for cryptocurrency which causes pow mining to use as much energy as some small countries 4the pos mechanism seeks to solve these problems by effectively substituting staking for computational power whereby the network randomizes an individual s mining ability this means there should be a drastic reduction in energy consumption since miners can no longer rely on massive farms of single purpose hardware to gain an advantage for example ethereum s transition from pow to pos reduced the blockchain s energy consumption by 99 84 5the first cryptocurrency to adopt the pos method was peercoin several others followed soon after but ethereum was the blockchain where it made the biggest impact 6proof of stake securitylong touted as a threat to cryptocurrency fans the 51 attack is a concern when pos is used but it is doubtful it will occur under pow a 51 attack occurs when an entity controls more than 50 of the miners in a network and uses that majority to alter the blockchain in pos a group or individual would have to own 51 of the staked cryptocurrency it s very expensive to control 51 of staked cryptocurrency under ethereum s pos if a 51 attack occurred the honest validators in the network could vote to disregard the altered blockchain and burn the offender s staked eth this incentivizes validators to act in good faith to benefit the cryptocurrency and the network 1most other security features of pos are not advertised as this might create an opportunity to circumvent security measures however most pos systems have extra security features in place that add to the inherent security behind blockchains and pos mechanisms 1 | |
what is the difference between proof of stake and proof of work | proof of stake pos uses randomly selected validators to confirm transactions and create new blocks proof of work pow uses a competitive validation method to confirm transactions and add new blocks to the blockchain | |
what is proof of stake for dummies | proof of stake is a consensus mechanism where distributed cryptocurrency validator programs share the task of validating transactions | |
what are the disadvantages of proof of stake | under proof of stake pos consensus users must generally own a cryptocurrency before they can participate in consensus and earn more crypto to host a full validator node on ethereum a user needs to stake 32 eth which is very expensive another disadvantage of pos is that on blockchains with smaller networks a large minimum stake could lead to centralization | |
is ethereum a pos or pow | ethereum uses proof of stake as its consensus mechanic full validator nodes require a stake of 32 eth but other participants can take part in consensus by delegating their eth to a validator or participating in staking pools users can also stake small amounts of eth on their own but no rewards are earned the bottom lineproof of stake is a mechanism used to verify blockchain transactions it differs from proof of work significantly mainly in the fact that it incentivizes honest behavior by rewarding those who put their crypto up as collateral for a chance to earn more the comments opinions and analyses expressed on investopedia are for informational purposes online read our warranty and liability disclaimer for more info | |
what is proof of work pow | proof of work pow is a blockchain consensus mechanism that requires significant computing effort from a network of devices the concept was adapted from digital tokens by hal finney in 2004 through the idea of reusable proof of work using the 160 bit secure hash algorithm 1 sha 1 1following its introduction in 2009 bitcoin became the first widely adopted application of finney s pow idea finney was also the recipient of the first bitcoin transaction proof of work is also the mechanic used in many other cryptocurrencies understanding proof of workproof of work is a concept used in some public blockchains to demonstrate that a program did the work required to propose a new block for the chain it is commonly called a consensus mechanism because eventually network consensus is reached after there is proof the work was done honestly in this case honestly means there were no attempts to alter data proof of work is provided by sending the information in a block through a hashing algorithm then adjusting variable fields until a hexadecimal number is reached that has a lower value than the network s difficulty target this serves as proof that the program expended the computational effort to hash the block until a solution was reached proof of work and consensushere s a quick rundown of the proof of work process on the bitcoin blockchain first the worker which is called a miner creates a temporary file a block if it wins the competition to solve for a winning hash this file will be stored on the blockchain the block has the four following fields the block header contains the following fields the mining program assembles this block and places the transactions it has prioritized in the transaction field it continuously adjusts the nonce and the extra nonce which is part of the coinbase transaction in the merkle tree and sends the information in the block through a hashing algorithm it repeats this process until it finds a solution which is a value less than or equal to the difficulty target the difficulty target is set so that a certain number of hashes per second must be attempted before a solution is found for example on may 17 2024 block 843 900 had a difficulty target of 83 148t or 83 148 trillion attempts per second per miner the winning hash for that block was 000000000000000000033028b3c8296ed776653032030cd01290f4345f5a9b6ethis hash provided proof to the network that the miner did the work the block was added to the blockchain and the network began its process of reaching consensus consensus the attribute most commonly associated with blockchain proofs is reached after the block is closed and added to the chain while working on proposing new blocks and generating winning hashes each miner also validates each new block as it is added each miner broadcasts to the network that the block it confirmed is valid new blocks use the previous block s header hash creating a chain of proof which leads to network consensus this is why these proofs are called consensus mechanisms because they form the basis of how consensus is reached proof of work vs proof of stakethe two most popular consensus mechanisms are proof of work and proof of stake bitcoin s top competitor ethereum used proof of work on its blockchain until september 2022 when its highly anticipated transition to proof of stake was made here are some of the key differences between the two validation is done by a network of minersbitcoin paid as a reward and for transaction feescompetitive nature uses lots of energy and computational powervalidation is done by participants who offer ether as collateralether is paid for transaction fees onlyless computational power and energy usedconsensus is reached faster because there is no difficultyspecial considerationsproof of work mining is a competitive process with many participants hoping for a profitable outcome because minable cryptocurrency has market value businesses have emerged and overtaken most of the computational power used by proof of work blockchains for example on may 17 2024 foundrydigital had the most hashing power on the bitcoin network 175 exa hashes per second eh s out of a network total of 673 eh s 2 foundry digital is owned by digital currency group a venture firm that has funded or invested in hundreds of cryptocurrency projects 3bitcoin and other cryptocurrencies that use proof of work were designed to be used and hosted by individuals for their benefit however individuals have been pushed out of the processes by businesses that have centralized them for profit | |
what is the difference between proof of work and proof of stake | pow requires nodes on a network to provide evidence that they have expended computational power i e work to achieve consensus in a decentralized manner and to prevent bad actors from overtaking the network proof of stake requires collateral in the form of staked cryptocurrency to become a trusted participant | |
what is an example of proof of work in a blockchain | bitcoin cash and litecoin both use proof of work as consensus mechanisms | |
why do you need proof of work | current financial systems are built around a need for trust but when it comes to finances it has been the case time and again that some people cannot be trusted to do the right thing a proof removes the need to trust that others are acting honestly because it is code code is not tempted by money so if it is written with good intentions and cannot be altered it can replace our need to trust people we don t know the bottom lineproof of work is a consensus mechanism used by many cryptocurrencies to validate transactions on their blockchains and award tokens for participating in the network it is a competitive process that uses publicly available transaction information to attempt to generate a hexadecimal number less than the network target for that mining period the comments opinions and analyses expressed on investopedia are for informational purposes only read our warranty and liability disclaimer for more info as of the date this article was written the author owns btc | |
what is property | property is a term describing anything that a person or a business has legal title over affording owners certain enforceable rights over said items examples of property which may be tangible or intangible include automotive vehicles industrial equipment furniture and real estate the last of which is often referred to as real property most properties hold current or potential monetary value and are therefore considered to be assets but properties can simultaneously be liabilities in some situations case in point if a customer sustains an injury on a company s property the business owner may be legally responsible for paying the injured party s medical bills understanding propertyintangible property describes assets such as stock and bond certificates that represent current or potential value but don t carry intrinsic value while these items are merely pieces of paper they might represent significant amounts of money other types of intangible property such as a brand s reputation are more nebulous and cannot be signified by a paper document intangible properties like design concepts song lyrics books and screenplays are categorized as intellectual properties even though these are not physical in nature they may carry significant value examples of intellectual properties include nike s swoosh logo and the chemical formula for coca cola to enforce ownership of intangible properties individuals and businesses typically hire lawyers to legally protect their items from infringement types of propertyproperty in the broad sense describes anything that a person group of people or entity owns it includes real property personal property private property government owned property and more real property is one of the most familiar types of property it includes land buildings occupying the land and the rights to use and enjoy the land real property is the focal point of real estate which deals with transactions e g buying selling renting and managing involving land and buildings used for residential commercial and agricultural use just as there are various types of property there are different types of interests in property interests in real property include freehold estates and non freehold estates freehold estates are ownership interests that have no expiration and can be inherited non freehold estates or leasehold estates are not transferrable and have expirations such estates include leases and other rental agreements property law stipulates how real property can be used and the manner in which it can be legally transferred personal property is as well known as real property but differs in that it does not include real estate e g land and buildings attached to the land personal property is property that can be physically transferred and is not permanently attached to the land it includes clothing automobiles furniture tools and more personal property also includes intangible assets such as bank accounts patents and investments although they are not physically moveable rights remain with the person or entity listed as the legal owner making them personal property private property is any property owned by a natural person or private entity it includes personal real tangible and intangible assets including intellectual property private property is often categorized as real or personal however not all real or personal property is private property private property is not open to the public nor is owned by a government governments can however assume ownership of private property under certain circumstances such as eminent domain government owned property includes all property including real property resources and other tangible and intangible assets owned by a government body in contrast to private property most government owned properties are public for example libraries public schools and city parks are government owned property available to the public however all government owned property is not accessible to the public and some publicly accessed property is not always available to the public for instance a city park may have a curfew after which the public cannot access it a government owned property such as a military research facility or lab may not be accessible at all to the public sometimes private property can be escheated to a local government body rendering it temporarily or permanently government owned also in some cases the private property owner forfeits or sells their property rights to the government evaluating property assets | |
when auditors appraisers and analysts calculate the value of a business they factor all of its underlying property into the equation for example a manufacturer of small machine parts may gross just 80 000 per year but if it owns the factory in which it operates and that building is appraised at 1 million the overall value of the business would be substantially higher than profits alone suggest | furthermore if that same company holds a patent for a part it has the potential to generate substantial income by licensing the rights to manufacture that item to a larger business rather than producing the part in house in this way licensing deals may create lucrative revenue streams that significantly boost a company s overall value establishing net worth through propertyan individual s net worth may be determined by calculating the total value of the properties they own such as real estate cars jewelry stocks bonds and retirement savings and then subtracting any liabilities or debts from that figure for example if an individual s assets include a 100 000 home a 7 000 car and a 65 000 ira the tally of their property comes to 172 000 but if that same individual is saddled with a 20 000 student loan and a 3 000 credit card bill the total liabilities add up to 23 000 thus the total net worth would be 149 000 172 000 23 000 | |
how do you find out who owns a property | locating the owner of a property can be done through an online search on a county assessor s website with a court clerk by soliciting the help of a real estate broker or attorney or by a general online search | |
what are property taxes | property taxes also known as ad valorem taxes are tax assessments on the value of a property | |
how do you calculate property taxes | property taxes are determined by multiplying a tax rate determined by the local tax authority by the assessed value of the property if the value of a property is 100 000 and the tax rate is 4 the property taxes are 4 000 | |
what does a property appraiser do | a property appraiser is responsible for assessing the market value of a property for real estate transactions in contrast a property assessor assesses the value of a property for tax purposes the bottom lineproperty includes the tangible and intangible assets a person or entity has title to and rights to use there are various forms of property each carrying its own set of rules for classification and use often some assets may be classified as more than one type of property a house is both real property and private property in some instances a computer can be personal property and government owned it is important to understand the different types and the rights associated with them | |
what is property insurance | property insurance is a broad term for a series of policies that provide either property protection or liability coverage for property owners property insurance provides financial reimbursement to the owner or renter of a structure and its contents in case of damage or theft and to a person other than the owner or renter if that person is injured on the property | |
how property insurance works | property insurance can include a number of types of policies such as homeowners insurance renters insurance flood insurance and earthquake insurance both structural losses and personal property are usually included in a homeowners or renters insurance policy 1 the exception is personal property that is very high value and expensive which is usually covered by purchasing an addition to the policy called a rider if there s a claim the property insurance policy will reimburse the policyholder for the actual value of the damage or the replacement cost to fix the problem 2perils covered by property insurance typically include select weather related afflictions such as damage caused by fire smoke wind hail the impact of snow and ice and lightning property insurance also protects against vandalism and theft covering the structure and its contents this insurance also provides liability coverage in case someone other than the property owner or renter is injured while on the property and decides to sue most mortgage lenders require homeowners to have property insurance if there s an outstanding mortgage loan on the property property insurance policies normally exclude damage that results from a variety of events including tsunamis floods drain and sewer backups seeping groundwater standing water and a number of other sources of water mold is typically not covered nor is the damage from an earthquake in addition most policies will not cover extreme circumstances such as nuclear events acts of war or terrorism property insurance includes homeowners insurance renters insurance flood insurance earthquake insurance and other types of coverage understanding property insurancethere are three types of property insurance coverage replacement cost actual cash value and extended replacement costs 3special considerationshomeowners and tenant insurance policies typically include some basic levels of coverage however several types of policies exist that extend beyond basic packages to include more comprehensive coverage the greater the coverage the more expensive the premiums will be for the policy below are the most common types of homeowners policies ho and their coverage ho1 is the most basic bare bones homeowners insurance available while it does cover basic risks like fire lighting theft and vandalism its typically provides only minimal coverage and is seldom recommended most homeowners prefer to obtain the more comprensive coverages listed below 4ho2 or broad form coverage offers more extensive coverage that ho1 it typically the named perils listed for ho1 plus such risks as damages caused by falling objects water from plumbing problems and electrical issues also like ho1 ho2 is not typically recommended because it of its limited coverage 4most homeowners purchase this hybrid policy that compensates for physical loss or damage caused by 16 perils including fire vandalism and theft the ho3 also known as the special form policy still has certain conditions and exclusions such as earthquakes and floods that require separate insurance there is a predetermined limit on the coverage of certain valuables and collectibles including gold wedding rings and other jewelry furs cash firearms and similar items coverage is not usually provided in an ho3 for accidental breakage damage and mysterious disappearance lost misplaced of valuables including fine art and antiques 5ho5 homeowners coverage includes everything in an ho3 policy but is more geared toward the structure itself and the property within the home including furniture appliances clothing and other personal items an ho5 also doesn t cover earthquakes or floods ho5 insurance policies are available to homes that were either built in the last 30 years or renovated in the previous 40 years and they typically cover any damages at replacement cost 5ho4 property insurance also known as renters insurance covers tenants from loss of personal property and liability issues however it does not cover the actual house or apartment being rented which should be covered by the landlord s insurance policy 5also known as condominium insurance ho6 provides similar coverage to renters insurance with personal property unit improvements internal damage and liabiity protecton included ho6 does not cover external or structural damage to the building as the condo association typically insures its buildings 4note that none of these coverage levels reimburses the homeowner for property that breaks down or is damaged in more normal wear and tear situations such as a roof that begins to leak without damage from wind and hail that s where home warranties another way to protect your property can be helpful home warranties are essentially service contracts that cover named appliances and systems such as plumbing or hvac in your home 6 | |
what is the difference between homeowners insurance and property insurance | homeowners insurance typically provides financial coverage for liability claims and losses of property or personal belongings due to physical damage on the other hand property insurance is an umbrella term describing various types of policies that include coverage for floods earthquakes and hurricanes property and casualty insurance encompasses the property insurance classifications listed plus policies ranging from commercial general liability to mortgage insurance 7 | |
what are the main categories covered under a homeowners insurance policy | a standard homeowners insurance policy will cover damage to the physical structure damage or loss of personal property liability in case someone sues for getting injured on your property medical costs to the injured party and additional living expenses if you need to be out of the home while being repaired due to a covered event | |
what is not covered by property insurance | typically damage due to a home s age or normal wear and tear is not covered under property insurance depending on the policy mold and insect damage may also not be covered | |
is property insurance mandatory | there are no laws that require you to have property insurance however banks and other mortgage lenders typically require you to insure your property while your loan is outstanding still homeowners insurance is a good tool to protect yourself from potential financial losses if you own your home outright 8the bottom lineproperty insurance is a broad term that includes such policies as homeowners renters flood and earthquake insurance these coverages provide property owners with compensation for loss of personal belongings physical damage to structures and liability coverage property insurance can also provide financial reimbursement to renters in case of damage or theft | |
what is property management | property management is the daily oversight of residential commercial or industrial real estate by a third party contractor generally property managers take responsibility for day to day repairs and ongoing maintenance security and upkeep of properties they usually work for the owners of investment properties such as apartment and condominium complexes private home communities shopping centers and industrial parks their main roles are to manage routine tasks delegated to them by the owners and to preserve the value of the properties that they manage while generating income understanding property managementproperty developers generally want to move on to the next project as soon as each one is completed even if they continue to hold title to the property they prefer to delegate the day to day operations to an outside company the responsibilities of a property manager generally involve the following the companies must comply with any state and local landlord tenant laws and regulations owners pay property managers a fee or a percentage of the rent generated by a property while it is under their management types of property managementjust as property comes in many types so do property managers some firms are specialized in providing management for a particular type of property while others offer management services over a range of property types a huge range of property types can be managed residential property managers are typically hired for rental properties and they manage the rental process they can be hired to manage commercial property owners have different needs from those who own residential property commercial property management can apply to industrial properties that can benefit from management include there are also numerous types of property that don t fit neatly into the categories above but that require management nonetheless these include who needs a property manager several types of property owners can benefit from the services that property managers offer landlords for example hire property management firms for a variety of reasons some may have multiple rental properties in their portfolios and lack the time or expertise to maintain the properties and deal with individual tenants some owners only have an interest in owning rental properties and earning profits from them when this is the case they hire professional property managers absentee landlords also make use of property management services some property management companies cater to individual landlords who rent out a single property such as a vacation home property owners who participate in affordable housing programs tend to use property management services because their rental properties are subject to complex federal guidelines that require specialized expertise certain real estate brokers also operate as property managers for example a broker in a resort town may provide buyer and seller agent services as well as property management services when this is the case the real estate broker lists shows leases and maintains vacation rentals for a number of property owners property managers are different from community managers who deal with common areas rather than individual units and don t necessarily deal directly with landlords special property management considerationsproperty management licensing requirements vary by state 1 most states require property management companies to be licensed by the local real estate board so property owners need to make sure that the firms they hire are properly licensed for instance property managers in florida are required to have real estate broker s licenses to operate in the state 2 that s because some of their responsibilities are deemed real estate activity holding a real estate broker s license allows property managers to list rental properties in the multiple listing service mls and to market the properties by standard real estate marketing methods holding a real estate broker s license also allows the property management company to place a real estate board lockbox on a property s door so that other licensed agents can show the property florida also requires property managers to hold a broker s license if they deal with rentals or leases and receive a commission for their services however property managers who manage the properties that they own in the state don t need a license to do so 2managers in massachusetts don t require a broker s license 3 that s because certain duties considered to be real estate activities such as listing and leasing properties may be secondary to the main duties performed by the property manager | |
is a property manager worth it | it depends managing property can be costly and take a lot of time if the cost of a property manager is less than the opportunity cost of managing properties yourself it s probably a good investment however this is an equation that every investor will have to work through for themselves who benefits from hiring a property manager any property manager who doesn t want to deal with the day to day management of property can potentially benefit from property management this can include a residential property owner who doesn t want the headaches of dealing with tenants or commercial property owners who prefer others to source and manage tenants leases and maintenance | |
are property managers regulated | yes property management licensing requirements vary by state but most states require property management companies to be licensed by the local real estate board property owners should make sure that the firms they hire are properly licensed the bottom lineproperty management is the oversight of real estate by a third party normally a professional property manager or property management company property managers can manage many different types of property residential commercial industrial and property for special purposes property managers are generally responsible for the day to day operations of the real estate from screening tenants to arranging for repairs and maintenance and are paid via a fee or a percentage of the rent generated by the property every state has its own laws regulating the activities of property managers so it s important for property owners to check that potential property managers are properly licensed for their state | |
what is property plant and equipment pp e | property plant and equipment pp e are long term tangible assets vital to business operations these assets are not easily converted into cash the overall value of a company s pp e can range from very low to extremely high compared to its total assets investopedia julie bangtypes of assetsproperty plant and equipment are also called fixed assets they are physical assets that a company cannot easily liquidate or sell pp e assets are considered noncurrent assets or long term investments noncurrent assets like pp e have a useful life of at least one year 1types of pp e include noncurrent assets are the opposite of current assets current assets are short term assets like inventory and are likely to be converted into cash within one year accounting for pp epp e is recorded on a company s balance sheet pp e is measured using historical cost or the actual purchase cost when purchasing a building for retail operations the historical cost could include the purchase price transaction fees and any improvements made to the building to bring it to use the gross value of pp e is adjusted for use and depreciation depreciation allocates the cost of a tangible asset over its useful life and accounts for declines in value the total amount allocated to depreciation expense over time is called accumulated depreciation land assets are not depreciated because of their potential to appreciate and are always represented at their current market value the pp e account is remeasured every reporting period and after accounting for historical cost and depreciation is defined as book value this figure is reported on the balance sheet to calculate pp e add the gross property plant and equipment listed on the balance sheet to capital expenditures next subtract accumulated depreciation companies commonly list their net pp e on their balance sheet when reporting financial results net ppe gross ppe capital expenditures ad where ad accumulated depreciation begin aligned text net ppe text gross ppe text capital expenditures text ad textbf where text ad text accumulated depreciation end aligned net ppe gross ppe capital expenditures adwhere ad accumulated depreciation examplebelow is a portion of exxon mobil corporation s xom quarterly balance sheet from sept 30 2018 2 exxon recorded 249 153 billion in net property plant and equipment for the period ending sept 30 2018 compared to exxon s total assets of over 354 billion for the period pp e made up the vast majority of total assets 2 as a result exxon would be considered a capital intensive company some of the company s fixed assets include oil rigs and drilling equipment | |
what pp e value means | investment analysts and accountants use pp e to determine if a company is financially sound a company investing in pp e is a good sign for investors purchases often signal that management expects long term profitability of its company investment in pp e is also called a capital investment industries or businesses that require extensive fixed assets like pp e are described as capital intensive pp e may be liquidated when a company is experiencing financial difficulties selling property plant and equipment to fund business operations may signal financial trouble companies can also borrow from their pp e as a floating lien meaning the equipment can be used as collateral for a loan | |
why should investors pay attention to pp e | pp e assets help generate economic benefits and contribute to revenue purchases of pp e are a signal that management has faith in the long term outlook of its company although pp e are vital to the long term success of many companies they are also capital intensive companies sometimes sell assets to raise cash or net income analysts monitor a company s investments in pp e and any sale of its fixed assets to help assess financial difficulties | |
how do the values of tangible and intangible assets differ | since pp e are tangible assets pp e analysis doesn t include intangible assets such as a company s trademark for example coca cola s ko trademark and brand name represent sizable intangible assets if investors were to only look at coca cola s pp e they wouldn t see the true value of the company s assets pp e only represents one portion of a company s assets | |
what are noncurrent assets | pp e are noncurrent assets or long term assets noncurrent assets include intangible assets such as patents and copyrights they provide value to a company but cannot be readily converted to cash within a year long term investments such as bonds and notes are also considered noncurrent assets because a company usually holds these on its balance sheet for more than one fiscal year the bottom lineequipment machinery buildings and vehicles are commonly described as property plant and equipment pp e these items labeled are tangible fixed and not easy to liquidate pp e is listed on a company s balance sheet minus accumulated depreciation pp e represents assets that are key to the functionality of a business | |
what are property rights | property rights give the owner or right holder the ability to do with the property what they choose that includes holding on to it selling or renting it out for profit or transferring it to another party property rights define the theoretical and legal ownership of resources and how they can be used these resources can be both tangible or intangible and they can be owned by individuals businesses and governments individuals in many countries including the united states exercise private property rights to accumulate hold delegate rent or sell their property property rights in economics form the basis for all market exchanges the allocation of property rights in a society affects the efficiency of resource use understanding property rightsproperty is secured by laws that are clearly defined and enforced by governments these laws define ownership and any associated benefits that come with holding the property the term property is very expansive and the legal protections for certain kinds of property can vary between jurisdictions property is generally owned by individuals or by small groups of people the rights of property ownership can be extended by using patents and copyrights to protect other types of property such as communal or government property are legally owned by well defined groups these are typically deemed to be public property ownership is enforced by individuals in positions of political or cultural power acquiring rights to a propertyindividuals in a private property rights regime acquire and transfer property in mutually agreed upon transfers or through homesteading mutual transfers can include rents sales voluntary sharing inheritances gambling and charity an individual may acquire a previously unowned resource in homesteading by mixing their labor with the resource over some time examples of homesteading acts include plowing a field carving stones or domesticating a wild animal ownership and use of resources are allocated by force normally by the government in areas where property rights don t exist these resources are distributed based on political ends rather than economic ones governments determine who may interact with who can be excluded from or who may benefit from the use of the property no one owns or manages open access property such as waterways private property rights are one of the pillars of capitalist economies as well as many legal systems and moral philosophies individuals need the ability to exclude others from the uses and benefits of their property within a private property rights regime all privately owned resources are rivalrous only a single user may possess the title and legal claim to the property private property owners also have the exclusive right to use and benefit from the services or products private property owners may exchange the resource voluntarily special considerationsevery market price in a voluntary capitalist society originates through transfers of private property each transaction takes place between one property owner and someone who s interested in acquiring the property the value at which the property exchanges depends on how valuable it is to each party suppose an investor purchases 1 000 in shares of stock in apple they re able to do so because apple values that 1 000 more than it values the stock the investor has the opposite preference and values ownership of apple stock more than 1 000 | |
what is common property | ownership of common property is shared by more than one individual and or institution rights to its disposition and other factors are divided among the group no single individual or entity has absolute control this is commonly the case when you purchase a condominium or in a development with a homeowners association or if you own property with another individual as tenants in common 2 | |
does the federal government provide property rights | the fifth and fourteenth amendments of the american constitution grant certain property rights to citizens the fifth amendment prohibits the american government from taking control of any privately owned property without providing fair compensation in exchange the fourteenth amendment states nor shall any state deprive any person of life liberty or property without due process of law 3 | |
what is open access property | no individual business or even a government entity can claim property rights to open access property it s not owned by anyone or anything no one or nothing can claim that the atlantic ocean belongs to them anyone can fish there dive there or build a floating home on its surface 4the bottom lineproperty rights are a form of legal ownership that allows the owner of a property to do anything they like with it they can sell it rent it out or give it away this doesn t apply just to real estate but to anything you own outright as well such as your furniture automobile or financial accounts ownership can become murkier and include additional clauses if you have a co owner or co tenant on a deed always check into your property rights to any asset before you dispose of it or otherwise do anything to affect its value | |
what is property tax | a property tax is an annual or semiannual charge levied by a local government and paid by the owners of real estate within its jurisdiction property tax is an ad valorem tax meaning the amount owed is a percentage of the assessed value of the real estate property tax receipts are the main source of revenue for most local governments in the u s they are used to fund schools police and fire departments road construction and repair libraries water and sewer departments and other local services that benefit the community in common usage property tax refers to a tax on immovable possessions like structures or land some local jurisdictions also assess property taxes on moveable property such as vehicles and industrial equipment investopedia dennis madambaunderstanding property taxproperty tax is paid by individuals or legal entities such as corporations that own real estate a tax is assessed on an individual s primary residence second home rental property and other real estate they may own such as commercial property property tax is not assessed to renters in homes apartments or condos it is characterized as a regressive tax that is the same rate of taxation is applied regardless of the taxpayer s income the burden falls disproportionately on lower income taxpayers 12the tax is usually based on the value of the owned property including land and structures many jurisdictions also tax tangible personal property such as cars and boats property tax rates and the types of properties taxed vary by jurisdiction in most organization for economic co operation and development oecd countries immovable property tax represents a low proportion of federal revenue when compared to income taxes and value added taxes the average rate in the united states is substantially higher than in many european countries 3 many empiricists and pundits have called for an increase in property tax rates in developed economies they argue that the predictability and market correcting character of the tax encourage stability the state with the lowest effective real estate tax rate i the u s at 0 29 alabama and colorado round up the list of lowest rates 4calculating property taxthe amount owners owe in property tax is determined by multiplying the property tax rate by the current market value of the property most taxing authorities recalculate the tax rate annually almost all property taxes are levied on real property which is legally defined and classified by the state real property generally includes land structures and other fixed buildings 56ultimately property owners are subject to the rates determined by the municipal government the municipality appoints or elects a tax assessor who evaluates local property and calculates property taxes based on current fair market values this value becomes the assessed value of the home in almost all local property tax codes the owner has the right to formally contest the rate assessed when property taxes are unpaid the taxing authority may assign a lien against the property property tax vs real estate taxpeople often use the terms property tax and real estate tax interchangeably in fact not all property taxes are real estate taxes many jurisdictions also levy property taxes against tangible personal property according to a report by the tax foundation 43 states tax tangible personal property 7both types of property can be deducted from federal taxes however since the tax cuts and jobs act of 2017 the deduction has been capped at 10 000 per year for married couples and single taxpayers 8so here s the difference real estate taxes are taxes on real property only property taxes can include both real property and tangible personal property | |
why are property taxes so high in the u s | according to the lincoln institute of land policy four key factors explain why property taxes are relatively high in the u s and why they vary so greatly by state property tax reliance home values local spending and classification 9 | |
what is the property tax deduction | state and local property taxes are generally eligible to be deducted from the property owner s federal income taxes deductible real estate taxes include any state local or foreign taxes that are levied for the general public welfare they do not include taxes charged for home renovations or for services like trash collection 1as noted below the tax cuts and jobs act tcja capped the property tax deduction along with other state and local taxes starting with 2018 taxes the law capped the deduction for state and local taxes including property taxes at 10 000 5 000 if married filing separately previously there was no limit on the deduction 2understanding the property tax deductionthe owner of a property must pay taxes assessed annually by a state and or local government on the value of the property a property owner can claim a tax deduction on some or all of the property taxes paid if they use the property for personal use and itemize deductions on their federal tax return 1the real estate taxes that can be deducted include taxes paid at closing when buying or selling a home and taxes paid to a county or town s tax assessor on the assessed value of the real property 3 real property according to the internal revenue service irs may include a taxpayer s main home vacation home land or foreign property 5special considerationstaxes paid on rental or commercial property and on property not owned by the taxpayer can not be deducted 4 in addition a homebuyer who pays the seller s delinquent taxes from an earlier year at the time the sale was closed cannot deduct these tax payments on their tax return this delinquent tax payment is instead treated as part of the cost of buying the home 3also a property owner s tax bill includes miscellaneous items that are not allowed to be deducted for tax purposes some of these items include payments for improvements made to a local residential area such as sidewalks and fees for service delivery such as trash collection 1 to understand what portion of a tax bill qualifies for the deduction refer to form 1098 which is reported by the bank or lender to the irs and sent to the property owner 6 | |
how to claim a property tax deduction | to claim a property tax deduction the tax must apply only to the value of the personal property owned and be charged on an annual basis irrespective of when the government collects it from you 1 therefore if the state tax was only charged at the time the property was purchased then it does not meet the irs definition of a deductible personal property tax as stated earlier property tax can only be deducted if the owner chooses to itemize deductions 3 it makes sense for a taxpayer to itemize deductions if the sum of all their eligible itemized expenses is greater than the standard deduction allowed in a given tax year pros and cons of the property tax deductionfrom time to time there is talk of eliminating the property tax deduction one of the arguments for doing so is that the deduction along with the federal mortgage interest deduction discriminates against renters and encourages people to take on more debt proponents of retaining the property tax deduction say that it promotes homeownership the tax cuts and jobs act tcja of 2017 capped the deduction for state and local taxes including property taxes at a total of 10 000 5 000 if married filing separately starting in 2018 previously there was no limit on the deduction 2in addition under the new law homeowners who deduct mortgage interest are limited to the amount they pay on 750 000 worth of debt down from 1 million interest on homes bought before dec 16 2017 is guaranteed as a special exception at the previous rate 7because the standard deduction doubled in 2018 the predictions are that fewer homeowners will itemize their deductions 8 thus fewer property owners will claim the property tax deduction the standard deduction is revised every year for tax year 2022 the standard deduction for couples is 25 900 and the deduction for single filers is 12 950 9 for tax year 2023 the standard deduction for single filers is 13 850 and 27 700 for married couples filing jointly heads of household can deduct 20 800 10 | |
what is a proportional tax | a proportional tax is sometimes referred to as a flat tax it is an income tax system that levies the same percentage tax to everyone regardless of income a proportional tax is the same for low middle and high income taxpayers in contrast a progressive or marginal tax system adjusts tax rates progressively by income low income earners are taxed at a lower rate than high income earners understanding proportional taxationa proportional tax allows people to be taxed at the same percentage of their annual income supporters of a proportional tax propose that it gives taxpayers an incentive to earn more because they are not penalized with a higher tax bracket flat tax systems make filing easier critics of flat taxes argue the system places an unfair burden on low wage earners in exchange for lowering tax rates on the wealthy a sales tax can be considered a type of proportional tax since all consumers regardless of earnings must pay the same fixed rate the sales tax rate applies to goods and services and the income of the purchaser is not a part of the equation other examples include poll taxes and the capped portion of the federal insurance contributions act fica payroll deductions 1greenland imposes a 45 flat tax one of the world s highest rates 2example of proportional taxesthe united states imposes a progressive or marginal income tax system on its taxpayers income is taxed on a graduated scale at rates that range from 10 to 37 3countries such as mongolia and kazakhstan impose flat taxes of 10 and bolivia and russia have a 13 flat tax rate 2 a citizen in bolivia subject to a 13 flat tax rate who earns the equivalent of 50 000 per year would pay 6 500 in taxes a person who earns the equivalent of 1 million would pay 130 000 although the federal government and most states in the u s impose a progressive tax system 11 states levy a flat tax on wage and salary income as of 2023 4pros and cons of proportional taxesproportional taxes are a type of regressive tax because the tax rate does not increase as the amount of income subject to taxation rises placing a higher financial burden on low income individuals a tax is regressive if it has an inverse association where the average tax carries less impact on higher income individuals or businesses opponents of the proportional tax argue that higher income earners should pay a higher percentage than taxpayers with lower incomes they claim that a flat tax system places a more significant burden on middle income earners to carry a large portion of government spending while the percentage is the same the after tax effect on low income earners is more burdensome than for high income earners however if a system has generous deductions then low income earners may be exempt from tax thus eliminating at least in part the regressive aspects of the tax variations of the proportional tax include allowing mortgage deductions and setting lower income levels | |
why do countries impose a marginal tax rate over a proportional tax rate | developed countries tend to use a graduated or marginal tax system where those with lower incomes pay a smaller percentage of their income in taxes the common argument for a marginal tax system is that those who have low incomes need most to all of their income to provide for basic needs such as food and shelter 2 | |
is sales tax considered a proportional tax | sales tax is considered proportional because all consumers regardless of their income pay the same fixed rate | |
what is the difference between a progressive tax and a regressive tax | a regressive tax system is where the tax rate decreases as the taxpayer s income increases a progressive tax system also known as ability to pay taxation is one in which the tax rate increases as the taxpayer s income increases the bottom linea proportional tax is commonly called a flat tax which assesses the same tax rate on everyone regardless of income proponents of proportional taxes argue they encourage consumers to spend more because there is no tax penalty for higher earnings critics argue the system places an unfair burden on low wage earners | |
what is proprietary trading | proprietary trading refers to a financial firm or commercial bank that invests for direct market gain rather than earning commission dollars by trading on behalf of clients also known as prop trading this type of trading activity occurs when a financial firm chooses to profit from market activities rather than thin margin commissions obtained through client trading activity proprietary trading may involve the trading of stocks bonds commodities currencies or other instruments financial firms or commercial banks that engage in proprietary trading believe they have a competitive advantage that will enable them to earn an annual return that exceeds index investing bond yield appreciation or other investment styles investopedia michela buttignol | |
how does proprietary trading work | proprietary trading which is also known as prop trading occurs when a trading desk at a financial institution brokerage firm investment bank hedge fund or other liquidity source uses the firm s capital and balance sheet to conduct self promoting financial transactions these trades are usually speculative in nature executed through a variety of derivatives or other complex investment vehicles benefits of proprietary tradingproprietary trading provides many benefits to a financial institution or commercial bank most notably higher quarterly and annual profits when a brokerage firm or investment bank trades on behalf of clients it earns revenues in the form of commissions and fees this income can represent a very small percentage of the total amount invested or the gains generated but the proprietary trading process allows an institution to realize 100 of the gains earned from an investment the second benefit is that the institution is able to stockpile an inventory of securities this helps in two ways first any speculative inventory allows the institution to offer an unexpected advantage to clients second it helps these institutions prepare for down or illiquid markets when it becomes harder to purchase or sell securities on the open market the final benefit is associated with the second benefit proprietary trading allows a financial institution to become an influential market maker by providing liquidity on a specific security or group of securities an example of a proprietary trading deskin order for proprietary trading to be effective and also keep the institution s clients in mind the proprietary trading desk is normally roped off from other trading desks this desk is responsible for a portion of the financial institution s revenues unrelated to client work while acting autonomously however proprietary trading desks can also function as market makers as outlined above this situation arises when a client wants to trade a large amount of a single security or trade a highly illiquid security since there aren t many buyers or sellers for this type of trade a proprietary trading desk will act as the buyer or seller initiating the other side of the client trade | |
how does proprietary trading work | proprietary trading occurs when a financial institution trades financial instruments using its own money rather than client funds this allows the firm to maintain the full amount of any gains earned on the investment potentially providing a significant boost to the firm s profits proprietary trading desks are generally roped off from client focused trading desks helping them to remain autonomous and ensuring that the financial institution is acting in the interest of its clients | |
why do firms engage in proprietary trading | financial institutions engage in proprietary trading as a way of benefitting from perceived competitive advantages and maximizing their profits since proprietary trading uses the firm s own money rather than funds belonging to its clients prop traders can take on greater levels of risk without having to answer to clients can banks engage in proprietary trading the volcker rule implemented in response to the 2007 2008 financial crisis places restrictions against large banks using their own accounts for short term proprietary trading of securities derivatives and commodity futures along with options on these instruments the rule is designed to shield customers by preventing banks from making the types of speculative investments that contributed to the great recession the bottom lineproprietary trading occurs when a financial institution carries out transactions using its own capital rather than trading on behalf of its clients the practice allows financial firms to maximize their profits as they are able to keep 100 of the investment earnings generated by proprietary trades institutions such as brokerage firms investment banks and hedge funds frequently have proprietary trading desks however there are restrictions against large banks engaging in prop trading designed to limit the speculative investments that contributed the 2007 2008 financial crisis | |
what is proration | proration is a type of corporate action that may arise during an event such as an acquisition where a company splits its original cash and equity offer in response to shareholder preferences in certain situations the acquiring firm will offer a combination of cash and equity and shareholders of the firm being acquired can elect to take either if available cash or shares are not sufficient to satisfy the offers that shareholders tender the remaining stock is prorated the company grants a proportion of both cash and shares for each offer tendered so that everyone gets their fair share of the deal proration should not be confused with pro rata which indicates some proportional allocation or distribution understanding prorationproration supports shareholders by ensuring that a company holds to its initial target and does not favor some investors over others e g giving a percentage of shareholders the cash they wanted while delivering shares to the rest while this means that every investor might not receive their initial election it ensures that all receive the same value other situations in which the need for proration might occur include bankruptcy or liquidation special dividends stock splits and spinoffs while these corporate actions must be approved by shareholders and a company will typically list them on a firm s proxy statement in advance of its annual meeting shareholders must occasionally sacrifice to maximize wealth for all shareholders proration and merger considerationsmergers occur for several reasons including to gain market share through a horizontal merger reduce the costs of operations through a vertical merger expand to new markets or unite common products through a congeneric merger after a merger shares of the new company are distributed to existing shareholders of both original businesses | |
when deciding to merge in addition to how both companies will reward shareholders it is important to take into consideration the federal trade commission s guidelines on keeping the industry competitive and avoiding the creation of monopolies | it is important to ask whether a proposed merger will create or enhance market power or not an antitrust concern arises particularly with proposed horizontal mergers between direct competitors example of prorationsuppose a company decides to acquire a rival for 100 million which consists of 75 cash and 25 equity the cash equity split might undergo a revision if a majority of investors of the company being acquired elect to be paid in cash in that case the acquiring company will change its accounting figures in order to accommodate the demand for cash this will result in each investor of the acquired company receiving less cash than originally planned a firm for example may have to revise an original offer to buy back stock and reduce it by a factor of say two thirds in order to balance investor demand and its stock price at that time | |
what is a proporation factor | the proration factor refers to the fraction of equity shares accepted by an acquiring company needed for the target company s shareholders to participate in a takeover offer proration factor may also refer to the amount of pension eligibility a plan participant is entitled to | |
why does proration happen | proration can occur if a corporate action is planned but there is not enough cash available to complete the transaction instead equity shares are used as a form of payment either in full or in part | |
what is proration in accounting | in business accounting proration can refer to the logical allocation of over and under utilized resources e g finished inventories vs works in progress that a firm has in order to settle the books at the end of an accounting period | |
what is the prospect theory | prospect theory assumes that losses and gains are valued differently and thus individuals make decisions based on perceived gains instead of perceived losses also known as the loss aversion theory the general concept is that if two choices are put before an individual both equal with one presented in terms of potential gains and the other in terms of possible losses the former option will be chosen | |
how the prospect theory works | prospect theory belongs to the behavioral economic subgroup describing how individuals make a choice between probabilistic alternatives where risk is involved and the probability of different outcomes is unknown this theory was formulated in 1979 and further developed in 1992 by amos tversky and daniel kahneman deeming it more psychologically accurate of how decisions are made when compared to the expected utility theory 12the underlying explanation for an individual s behavior under prospect theory is that because the choices are independent and singular the probability of a gain or a loss is reasonably assumed as being 50 50 instead of the probability that is actually presented essentially the probability of a gain is generally perceived as greater tversky and kahneman proposed that losses cause a greater emotional impact on an individual than does an equivalent amount of gain so given choices presented two ways with both offering the same result an individual will pick the option offering perceived gains for example assume that the end result of receiving 25 one option is being given 25 outright the other option is being given 50 and then having to give back 25 the utility of the 25 is exactly the same in both options however individuals are most likely to choose to receive straight cash because a single gain is generally observed as more favorable than initially having more cash and then suffering a loss 3phases of prospect theoryprospect theory asserts that decisions are made through a two stage process instead of considering all available information and possible options which would be impossible humans use a two step process to narrow down the most important information these steps are described as the editing phase and the evaluation phase the editing phase is where people decide which information will be used in the evaluation stage decision makers will use mental shortcuts to assess which information is important and what options are available they also decide which outcomes are most desirable and even rank their priorities the editing phase is important because it can introduce biases that emerge later in the decision process if an individual does not consider certain unlikely outcomes or makes an incorrect assessment of that outcome s probability they may end up making sub optimal decisions later on 4this is the stage where people make their final decisions based on the assessments made in the editing phase people weigh the probability of each outcome and take actions based on the perceived likelihood and desirability of each outcome it is important to note that these decisions are not necessarily based on rational calculations prospect theory posits that people tend to be risk averse when the stakes are high and risk accepting when the stakes are low in other words they tend to make choices that minimize losses rather than maximize expected gains 5characteristics of prospect theoryprospect theory suggests that humans tend to prefer certainties over probabilities for example suppose that you have a choice between being given 50 and a 50 chance of winning 100 most people will take the 50 even though the expected value of the two options is exactly the same prospect theory also asserts that people underestimate or even ignore outcomes with a low probability consequently they also tend to overestimate the probability of likely events resulting in a bias that neglects improbable outcomes this is particularly relevant to investors who must consider the possibility of unforeseen black swan events 36although there is no difference in the actual gains or losses of a certain product the prospect theory says investors will choose the product that offers the most perceived gains | |
how to overcome biases | understanding prospect theory can help individuals overcome their biases and make more rational choices for example an investor who is aware of their bias towards high probability events can compensate by giving extra consideration to low probability ones it also helps to reframe possible outcomes in a way that reduces the impact of cognitive biases instead of thinking in terms of gain or loss you can instead think in terms of the value of expected outcomes without using the present as a reference point this can reduce one s loss aversion bias outcomesaccording to tversky and kahneman the certainty effect is exhibited when people prefer certain outcomes and underweigh outcomes that are only probable the certainty effect leads to individuals avoiding risk when there is a prospect of a sure gain it also contributes to individuals seeking risk when one of their options is a sure loss the isolation effect occurs when people have presented two options with the same outcome but different routes to the outcome in this case people are likely to cancel out similar information to lighten the cognitive load and their conclusions will vary depending on how the options are framed 7example of prospect theoryconsider an investor who is given two pitches for the same mutual fund the first advisor presents the fund to sam highlighting that it has an average return of 10 for the last three years meanwhile a second advisor tells the investor that the fund has had above average returns over the last decade but has been in decline for the last three years prospect theory says that although the investor has been pitched the exact same mutual fund they are likely to buy from the first advisor that is the investor is more likely to buy the fund from the advisor that expresses the fund s rate of return in terms of only gains while the second advisor presented the fund as having high returns but also losses | |
what does prospect theory mean | prospect theory says that investors value gains and losses differently that is if an investor is presented an investment option based on potential gains and another based on potential losses the investor will choose an investment where potential gains are presented | |
why is prospect theory important | it s useful for investors to understand their biases where losses tend to cause greater emotional impact than the equivalent gain the prospect theory helps describe how decisions are made by investors | |
what are the main components of prospect theory | prospect theory is part of the behavioral economic subgroup it describes how individuals make decisions between alternatives where risk is involved and the probability of different outcomes is unknown there is a certainty effect exhibited in the prospect theory where people seek certain outcomes underweighting only probable outcomes who proposed prospect theory prospect theory was first introduced in 1979 by amos tversky and daniel kahneman who later developed the idea in 1992 the pair said that the prospect theory was better at accurately describing how decisions are made compared to the expected utility theory | |
what did kahneman and tversky do | kahneman and tversky proposed that losses have a greater emotional impact than a gain of the same amount they said that given choices presented two ways with both offering the same result an individual will pick the option offering perceived gains the bottom lineprospect theory says that individuals will accept an investment when the gains are presented versus the losses that is investors weigh potential gains more than potential losses | |
what is a prospectus | a prospectus is a formal document required by and filed with the securities and exchange commission sec that provides details about an investment offering to the public a prospectus is filed for offerings of stocks bonds and mutual funds the prospectus can help investors make more informed investment decisions because it contains a host of relevant information about the investment or security in areas other than investing a prospectus is a printed document that advertises or describes an offering such as a school commercial enterprise forthcoming book etc all forms of prospectus exist to attract or inform clients members buyers or investors investopedia julie bangunderstanding the prospectuscompanies that wish to offer bonds or stock for sale to the public must file a prospectus with the securities and exchange commission as part of the registration process 1 companies must file a preliminary and a final prospectus and the sec has specific guidelines as to what s listed in the prospectus for various securities the preliminary prospectus is the first offering document provided by a security issuer and includes most of the details of the business and transaction however the preliminary prospectus doesn t contain the number of shares to be issued or price information typically the preliminary prospectus is used to gauge interest in the market for the security being proposed 2the final prospectus contains the complete details of the investment offering to the public the final prospectus includes any finalized background information as well as the number of shares or certificates to be issued and the offering price 3a prospectus includes some of the following information some companies are allowed to file an abridged prospectus which is a document that contains some of the same information as the final prospectus another reason a prospectus is issued is to inform investors of the risks involved with investing in the security or fund although a company might be raising capital through stock or bond issuance investors should study the financials of the company to ensure the company is financially viable enough to honor its commitments risks are typically disclosed early in the prospectus and described in more detail later the age of the company management experience management s involvement in the business and capitalization of the stock issuer are also described the prospectus information also guards the issuing company against claims that pertinent information was not fully disclosed 3prospectus examplein the case of mutual funds a prospectus contains details on the fund s objectives investment strategies risks performance distribution policy fees expenses and fund management because the fees that mutual funds charge take away from investors returns the fees are listed in a table near the beginning of the prospectus fees for purchases sales and moving among funds are also included which simplifies the process of comparing the costs of various mutual funds 4typically high cost funds charge fees of about 1 5 whereas low cost funds charge less than 1 5as an example of a prospectus for an offering pnc financial pnc filed a prospectus with the securities and exchange commission in 2019 requesting a new issuance of debt the senior note being offered to the public is a bond or a promissory note to pay a specific yield by maturity for review senior notes are debt securities or bonds that take precedence over other unsecured notes in the event of bankruptcy senior notes must be paid first if assets are available in the event of company liquidation a senior note pays a lower coupon rate of interest compared to junior unsecured bonds since the senior debt has a higher level of security and a reduced risk of default 6below is a portion of the prospectus from the table of contents which provides basic information about the offering we can see the following information listed | |
why is a prospectus useful for investors | an sec required prospectus provides important details about an investment offering to investors it provides information to the public regarding investment risk and consolidates valuable information about the investment as well as the company being invested in knowing the type and amount of risk involved is an important consideration for investors such that those details are typically disclosed early in the prospectus and later in detail the financial condition of the company behind the investment is also important since investors want to ensure the company is financially viable enough to honor its commitments | |
what information is normally in a prospectus | a prospectus includes pertinent information such as a brief summary of the company s background and financial information the name of the company and its principals age of the company management experience and management s involvement in the business furthermore the number of shares being issued the type of securities being offered whether an offering is public or private and the names of the banks or financial companies performing the underwriting are also listed 3 | |
what s the difference between a preliminary and a final prospectus | the preliminary prospectus is the first offering document provided by a security issuer and includes most of the details of the business and transaction however the preliminary prospectus doesn t contain the number of shares to be issued or price information typically the preliminary prospectus is used to gauge interest in the market for the security being proposed the final prospectus contains the complete details of the investment offering to the public the final prospectus includes any finalized background information as well as the number of shares or certificates to be issued and the offering price 3the bottom linein general a prospectus is a document that provides details about an offering made available to the public more commonly a prospectus is a formal document required by and filed with the securities and exchange commission sec that provides details about an investment offering to the public investors use a prospectus to learn details about a company and its stock much like an employer uses a resume to learn details about a candidate for a job topics covered in a prospectus include risk financial history a description of the management team the security s value and amount whether the offering is public or private number of shares offered and how investment proceeds will be used | |
what is protectionism | protectionism refers to government policies that restrict international trade to help domestic industries protectionist policies are usually implemented with the goal of improving economic activity within a domestic economy but can also be implemented for safety or quality concerns investopedia jiaqi zhouunderstanding protectionismprotectionist policies are typically focused on imports but may also involve other aspects of international trade such as product standards and government subsidies the merits of protectionism are the subject of fierce debate critics argue that over the long term protectionism often hurts the people and entities it is intended to protect by slowing economic growth and increasing price inflation making free trade a better alternative proponents of protectionism argue that the policies can help to create domestic jobs increase gross domestic product gdp and make a domestic economy more competitive globally types of protectionist toolsimport tariffs are one of the top tools a government uses when seeking to enact protectionist policies there are three main countervailing import tariff concepts that can be theorized for protective measures in general all forms of import tariffs are charged to the importing country and documented at government customs import tariffs raise the price of imports for a country scientific tariffs are import tariffs imposed on an item by item basis raising the price of goods for the importer and passing on higher prices to the end buyer peril point import tariffs are focused on a specific industry these tariffs involve the calculation of the levels at which point tariff decreases or increases would cause significant harm to an industry overall potentially leading to the jeopardy of closure due to an inability to compete retaliatory tariffs are tariffs enacted primarily as a response to excessive duties being charged by trading partners import quotas are nontariff barriers that are put in place to limit the number of products that can be imported over a set period of time the purpose of quotas is to limit the supply of specified products provided by an exporter to an importer this is typically a less drastic action that has a marginal effect on prices and leads to higher demand for domestic businesses to cover the shortfall quotas may also be put in place to prevent dumping which occurs when foreign producers export products at prices lower than production costs an embargo in which the importation of designated products is completely prohibited is the most severe type of quota product safety and low quality products or materials are typically top concerns when enacting product standards product standard protectionism can be a barrier that limits imports based on a country s internal controls some countries may have lower regulatory standards in the areas of food preparation intellectual property enforcement or materials production this can lead to a product standard requirement or a blockage of certain imports due to regulatory enforcement overall restricting imports through the implementation of product standards can often lead to a higher volume of production domestically for example consider french cheeses made with raw instead of pasteurized milk which must be aged for at least 60 days before being imported to the u s because the process for producing many french cheeses involves aging for 50 days or less some of the most popular french cheeses are banned from the u s providing an advantage for u s producers 1government subsidies can come in various forms generally they may be direct or indirect direct subsidies provide businesses with cash payments indirect subsidies come in the form of special savings such as interest free loans and tax breaks | |
what are examples of protectionism | common examples of protectionism or tools that are used to implement a policy of protectionism include tariffs quotas and subsidies all of these tools are meant to promote domestic companies by making foreign goods more expensive or scarce | |
is protectionism left wing or right wing politics | traditionally protectionism is a left wing policy right wing politics generally support free trade which is the opposite of a protectionist stance left wing politics support economic populism of which protectionism is a part | |
what are the arguments for protectionism | lawmakers who favor protectionist trade policies believe that they protect jobs at home help support and grow small companies and industries and provide a layer of security to the nation the bottom lineby implementing protectionist policies such as quotas and tariffs governments seek to protect domestic businesses from foreign competition while this can help domestic businesses it can hurt consumers in the form of higher prices it can also lead to tense political relations between nations | |
what is a protective put | a protective put is a risk management strategy using options contracts that investors employ to guard against the loss of owning a stock or asset the hedging strategy involves an investor buying a put option for a fee called a premium puts by themselves are a bearish strategy where the trader believes the price of the asset will decline in the future however a protective put is typically used when an investor is still bullish on a stock but wishes to hedge against potential losses and uncertainty protective puts may be placed on stocks currencies commodities and indexes and give some protection to the downside a protective put acts as an insurance policy by providing downside protection in the event the price of the asset declines | |
how a protective put works | protective puts are commonly utilized when an investor is long or purchases shares of stock or other assets that they intend to hold in their portfolio typically an investor who owns stock has the risk of taking a loss on the investment if the stock price declines below the purchase price by purchasing a put option any losses on the stock are limited or capped the protective put sets a known floor price below which the investor will not continue to lose any added money even as the underlying asset s price continues to fall a put option is a contract that gives the owner the ability to sell a specific amount of the underlying security at a set price before or by a specified date unlike futures contracts the options contract does not obligate the holder to sell the asset and only allows them to sell if they should choose to do so the set price of the contract is known as the strike price and the specified date is the expiration date or expiry one option contract equates to 100 shares of the underlying asset also just like all things in life put options are not free the fee on an option contract is known as the premium this price has a basis on several factors including the current price of the underlying asset the time until expiration and the implied volatility iv how likely the price is going to change of the asset strike prices and premiumsa protective put option contract can be bought at any time some investors will buy these at the same time and when they purchase the stock others may wait and buy the contract at a later date whenever they buy the option the relationship between the price of the underlying asset and the strike price can place the contract into one of three categories known as the moneyness these categories include investors looking to hedge losses on a holding primarily focus on the atm and otm option offerings | |
should the price of the asset and the strike price be the same the contract is considered at the money atm an at the money put option provides an investor with 100 protection until the option expires many times a protective put will be at the money if it was bought at the same time the underlying asset is purchased | an investor can also buy an out of the money otm put option out of the money happens when the strike price is below the price of the stock or asset an otm put option does not provide 100 protection on the downside but instead caps the losses to the difference between the purchased stock price and the strike price investors use out of the money options to lower the cost of the premium since they are willing to take a certain amount of a loss also the further below the market value the strike is the less the premium will become for example an investor could determine they re unwilling to take losses beyond a 5 decline in the stock an investor could buy a put option with a strike price that is 5 lower than the stock price thus creating a worst case scenario of a 5 loss if the stock declines different strike prices and expiration dates are available for options giving investors the ability to tailor the protection and the premium fee a protective put is also known as a married put when the options contracts are matched one for one with shares of stock owned potential scenarios with protective putsa protective put keeps downside losses limited while preserving unlimited potential gains to the upside however the strategy involves being long the underlying stock if the stock keeps rising the long stock position benefits and the bought put option is not needed and will expire worthlessly all that will be lost is the premium paid to buy the put option in this scenario where the original put expired the investor will buy another protective put again protecting their holdings protective puts can cover a portion of an investor s long position or their entire holdings when the ratio of protective put coverage is equal to the amount of long stock the strategy is known as a married put married puts are commonly used when investors want to buy a stock and immediately purchase the put to protect the position however an investor can buy the protective put option at any time as long as they own the stock the maximum loss of a protective put strategy is limited to the cost of buying the underlying stock along with any commissions less the strike price of the put option plus the premium and any commissions paid to buy the option the strike price of the put option acts as a barrier where losses in the underlying stock stop the ideal situation in a protective put is for the stock price to increase significantly as the investor would benefit from the long stock position in this case the put option will expire worthlessly the investor will have paid the premium but the stock will have increased in value for the cost of the premium protective puts provide downside protection from an asset s price declines protective puts allow investors to remain long a stock offering the potential for gains if an investor buys a put and the stock price rises the cost of the premium reduces the profits on the trade if the stock declines in price and a put has been purchased the premium adds to the losses on the trade real world example of a protective putlet s say an investor purchased 100 shares of general electric company ge stock for 10 per share the price of the stock then increased to 20 giving the investor 10 per share in unrealized gains unrealized because it has not been sold yet the investor does not want to sell their ge holdings because the stock might appreciate further they also do not want to lose the 10 in unrealized gains the investor can purchase a put option for the stock to protect a portion of the gains for as long as the option contract is in force the investor buys a put option with a strike price of 15 for 75 cents which creates a worst case scenario of selling the stock for 15 per share the put option expires in three months if the stock falls back to 10 or below the investor gains on the put option from 15 and below on a dollar for dollar basis in short anywhere below 15 the investor is hedged until the option expires the option premium cost is 75 0 75 x 100 shares as a result the investor has locked in a minimum profit equal to 425 15 strike price 10 purchase price 5 0 75 premium 4 25 x 100 shares 425 to put it another way if the stock declined back to the 10 price point unwinding the position would yield a profit of 4 25 per share because the investor earned 5 in profit the 15 strike less 10 initial purchase price minus the 0 75 cents premium if the investor didn t buy the put option and the stock fell back to 10 there would be no profit on the other hand if the investor bought the put and the stock rose to 30 per share there would be a 20 gain on the trade the 20 per share gain would pay the investor 2 000 30 10 initial purchase x 100 shares 2000 the investor must then deduct the 75 premium paid for the option and would walk away with a net profit of 1925 of course the investor would also need to consider the commission they paid for the initial order and any charges incurred when they sell their shares for the cost of the premium the investor has protected some of the profit from the trade until the option s expiry while still being able to participate in further price increases finally the investor should realize that the 75 premium for the put is essentially the cost of insurance on the position one could argue that they would have been better off not buying the put at all if it remains above 10 however as with all insurance it provides peace of mind and protection in the case of an adverse event | |
what is a provident fund | a provident fund is a government managed retirement savings scheme used primarily in asia and africa 1 in some ways these funds resemble a hybrid of 401 k plans and social security in the u s they also share some traits with pension funds workers give a portion of their salaries to the provident fund employers also contribute on behalf of their employees contributions may be compulsory the money in the fund is held and managed by the government and eventually withdrawn by retirees or in certain cases their surviving families in some cases the fund also pays out to people who cannot work due to disability investopedia michela buttignolcontributions and withdrawalseach national provident fund sets its own minimum and maximum contribution levels for workers and employers minimum contributions can vary depending on a worker s age some funds allow individuals to contribute extra to their benefit accounts and for employers to also do so to further benefit their workers governments set the age limit at which penalty free withdrawals are allowed to begin some pre retirement withdrawals may be allowed under special circumstances such as medical emergencies additionally in south africa provident fund payouts can be claimed at any age if the person has been a non resident for three uninterrupted years 2in many countries those who work past the minimum retirement age may face restricted withdrawals until full retirement if a worker dies before receiving benefits the surviving spouse and children may be able to receive survivors benefits provident funds differ from another state owned vehicle the sovereign wealth fund provident fund vs social security vs 401 k as is the case with social security in the u s the money in provident funds is held by the government not by private financial institutions meanwhile social security benefits are paid with taxes via two trust funds the old age and survivors insurance trust fund and the disability insurance trust fund in the u s department of the treasury 34 in 2023 the estimated effective interest rate earned by the two trust funds combined was 2 4 5 | |
what exactly is a provident fund | a provident fund is a government managed retirement savings plan that helps employees prepare for retirement employees and their employers contribute to the plan | |
what is the difference between a provident fund and a retirement annuity | a provident fund is a government managed plan whereas a retirement annuity is a private insurance product both can help you prepare for and sustain a financially healthy retirement but each come with their own pros and cons with an annuity for example you may have access to a wider range of investment options but you will likely face higher fees the bottom linethough the money held in private savings accounts across the world continues to grow for many it s not enough to provide a comfortable life in retirement the challenge of retirement has been further deepened by social change and changing family structures in some societies for example aging adults were provided for by their extended families but declining birth rates widely dispersed family members and longer life expectancies have made it more difficult to sustain this traditional safety net 7for these reasons and more governments have stepped in to provide long term financial support to retirees and people with disabilities a provident fund finances such support in a way that readily scales payouts to the available balance and enlists employers and workers to help cover the cost if you have questions about your provident fund plan talk to your plan administrator | |
what is a contract provision | a contract provision is a stipulation within a contract legal document or a law a contract provision often requires action by a specific date or within a specified period of time contract provisions are intended to protect the interests of one or both parties in a contract | |
how a contract provision works | contract provisions can be found in a country s laws in loan documents and in contract agreements they also can be found in the fine print accompanying purchases of some stocks for example an anti greenmail provision is a type of contract provision that is contained in some companies charters that prevents the board of directors from paying a premium to a corporate raider to drop a hostile takeover bid in loan documents a loan loss provision is a type of contract provision that details an expense set aside to allow for uncollected loans or loan payments this provision is used to cover a number of factors associated with potential loan losses special considerationsmany laws are written with a sunset provision that automatically repeals them on a specific date unless legislators reenact them a sunset provision provides for a repeal of the entire law or sections of the law once a specific date is reached sunset clauses can help the general public in a few ways what may be the most common is when a government body writes a provision into law that benefits the public during a certain period of time usually during a period of specific party power when the power dynamic shifts the clause may not be in the best interest of the public anymore and will be triggered and may free the public from unwanted repercussions from a power shift such as a tax increase or regulation for example the national security agency s nsa authority to collect bulk telephone metadata under the usa patriot act expired at midnight on june 1 2015 any investigations started before the sunset date was allowed to be completed many sunsetted portions of the patriot act were extended through 2019 with the usa freedom act however the provision allowing the collection of massive phone data by government agencies was replaced with a new provision that this data must be held by phone providers this practice of sunsetting has its parallel in business for example a sunset provision in an insurance policy limits a claimant s time to submit a claim for a covered risk if the claimant does not act within the defined period the right to make the claim is forfeited example of a contract provisionone of the most familiar uses of a contract provision is a bond s call provision a bond s call provision refers to a specific date after this date the company may recall and retire the bond the bond investor can turn it in for payment of the face amount or the face amount plus a premium for example a 12 year bond issue can be called after five years that first five year period has a hard call protection investors are guaranteed to earn interest until at least the first call date when an investor buys a bond the broker typically provides the yield to call as well as the yield to maturity these two yields show the bond s investment potential if a bond has a soft call provision the procedure will go into effect after the hard call provision period passes soft call protection is typically a premium to face value that the issuer pays for calling the bond before maturity for example after the call date is reached the issuer might pay a 3 premium for calling the bonds for the next year a 2 premium the following year and a 1 premium for calling the bonds more than two years after the hard call expires | |
what are some typical contract provisions | while all contracts will vary depending on the particular circumstance around what the contract is for and who is involved nearly all will have at least some of the following basic provisions | |
what is the difference between a contract provision and clause | a provision in a contract stipulates a condition or requirement a clause is a section or subsection written into a contract which may contain one or more provisions within it | |
what are sunrise and sunset provisions | a sunset provision automatically allows for a contract or parts of it to be phased out or automatically terminated at some point in the future a sunrise provision extends coverage to events occurring before the contract was signed allowing the insured to keep a level of affordable coverage | |
what does provision for credit losses mean | the provision for credit losses pcl is an estimation of potential losses that a company might experience due to credit risk the provision for credit losses is treated as an expense on the company s financial statements they are expected losses from delinquent and bad debt or other credit that is likely to default or become unrecoverable if for example the company calculates that accounts over 90 days past due have a recovery rate of 40 it will make a provision for credit losses based on 40 of the balance of these accounts understanding provision for credit losses pcl because accounts receivable ar is expected to turn to cash within one year or an operating cycle it is reported as a current asset on a company s balance sheet however since accounts receivable may be overstated if a portion is not collectible the company s working capital and stockholders equity may be overstated as well to guard against overstatement a business may estimate how much of its accounts receivable will most likely not be collected the estimate is reported in a balance sheet contra asset account called provision for credit losses increases to the account are also recorded in the income statement account uncollectible accounts expense example of provision for credit lossescompany a s ar has a debit balance of 100 000 on june 30 approximately 2 000 is expected to not turn to cash as a result a credit balance of 2 000 is reported as a provision for credit losses the accounting entry for adjusting the balance in the allowance account involves the income statement account uncollectible accounts expense because june was company a s first month in business its provision for credit losses account began the month with a zero balance as of june 30 when it issues its first balance sheet and income statement its provision for credit losses will have a credit balance of 2 000 because the provision for credit losses is reporting a credit balance of 2 000 and ar is reporting a debit balance of 100 000 the balance sheet reports a net amount of 98 000 as the net amount will likely turn into cash it is called the net realizable value of the ar company a s uncollectible accounts expense reports credit losses of 2 000 on its june income statement even though none of the ar was due in june the expense is reported since terms are net 30 days company a is attempting to follow the matching principle by matching the bad debts expense to the accounting period in which the credit sales occurred | |
what is a proxy | a proxy is an agent legally authorized to act on behalf of another party or a format that allows an investor to vote without being physically present at the meeting shareholders not attending a company s annual general meeting agm may vote their shares by proxy by allowing someone else to cast votes on their behalf or they may vote by mail | |
how does a proxy work | while proxy voting is often an option management encourages shareholders to vote in person if the shareholder cannot attend voting by proxy is another option for a person to act as a proxy for an individual formal documentation may be required that outlines the extent to which the proxy can speak on the individual s behalf a formal power of attorney document may be required to provide the permissions to complete certain actions the shareholder signs a power of attorney and extends official authorization to the designated individual to vote on behalf of the stated shareholder at the annual meeting meetings are often held in the spring during proxy season a proxy cannot vote if the shareholder arrives late and decides to vote for their own self proxy statementsbefore the annual shareholder meeting all shareholders receive a packet of information containing the proxy statement the proxy documents provide shareholders with the information necessary to make informed votes on issues important to the company s performance a proxy statement offers shareholders and prospective investors insight into a company s governance and management operations the proxy discloses important information on agenda items for the annual meeting lists the qualifications of management and board members serves as a ballot for elections to the board of directors lists the largest shareholders of a company s stock and provides detailed information about executive compensation there are also proposals from management and shareholders 1proxy statements must be filed with regulatory authorities such as the securities and exchange commission sec in the united states on an annual basis before the company s annual meeting 2 | |
when voting by proxy remotely shareholders may be eligible to vote by mail phone or internet shareholders use the information in the proxy statements to aid in the decision making process | anyone can look up a public company s proxy statement via the sec website under the name def 14a benefits of proxymanagement ensures that ownership interests are fully represented by encouraging shareholders that are unable to attend annual meetings to vote by proxy before the annual meeting each shareholder is issued a proxy card allowing them to state their votes in writing or designate a third party to vote on their behalf proxy voting allows shareholders to vote on the composition of the company s board the compensation of its officers and the company s accounting firm it also allows voting on shareholder proposals during corporate elections the board of elections will recommend their preferred candidates or choices but the final decision is up to each voter real world example of a proxybelow is a portion of the proxy statement for tesla inc in 2022 3 it lists the date and time of the company s annual general meeting and has instructions for shareholders who wish to participate in the meeting virtually it also lists the company officers and shareholder proposals that are to be voted on in the meeting along with the board s recommendations below is the proxy card showing the specific board members that were to be voted on as well as some of the proposals by management if the shareholder wanted to vote the proxy card could be mailed to the corporation securities and exchange commission | |
when does a proxy statement need to be filed | public companies must file a proxy statement before any meeting where the management submits proposals for a shareholder vote this can include the election of directors votes on shareholder proposals or other corporate decision making 4 | |
what is in a proxy statement | a typical proxy statement states the date and location of the next shareholder assembly along with instructions for shareholders who cannot attend in person it will also include a detailed agenda for the meeting including elections of directors and shareholder proposals | |
where can you find a proxy statement | public companies will send their proxy statements to the shareholders of record either through the mail or electronically you can usually find proxy statements on the company s website in addition public companies are also required to file their proxy statements with the securities and exchange commission or the equivalent regulator in the country where the company is domiciled the bottom linein business a proxy allows shareholders to participate in corporate governance even if they cannot be physically present at the general meeting proxies are essential in the global economy where an individual investor might own shares in many companies around the world | |
what is a proxy fight | a proxy fight refers to the act of a group of shareholders joining forces and attempting to gather enough shareholder proxy votes to win a corporate vote sometimes referred to as a proxy battle this action is mainly used in corporate takeovers in the process of a corporate takeover particularly a hostile takeover outside acquirers may attempt to convince existing shareholders to vote out some or all of a company s senior management to make it easier to seize control over the organization | |
how proxy fights work | shareholders may appeal to a company s board of directors if they re dissatisfied with a specific management decision but if board members refuse to listen disgruntled shareholders may attempt to persuade other shareholders to let them use their proxy votes in a campaign to replace unyielding board members with candidates more receptive to implementing the shareholders proposed changes in this scenario the acquirer and the target company typically use various solicitation methods to influence shareholder votes for replacement board members shareholders may be sent a form def 14a also called a proxy statement which contains financial information and other data on the target company if the proxy fight involves the sale of the company the proxy statement will also include a more granular version of the proposed acquisition the acquiring company usually contacts shareholders through a third party proxy solicitor who compiles a list of stakeholders in a further attempt to influence their voting positions the proxy solicitor may reach out to each stakeholder individually and state the acquirer s case if shares are registered in the names of stock brokerage firms proxy solicitors consult with shareholders of that firm in order to influence their voting positions in either case individual shareholders or stock brokerages then submit their votes to a designated entity such as a stock transfer agent who aggregates the information in most cases proxy solicitors may scrutinize or challenge unclear votes and they may flag situations where shareholders voted multiple times or neglected to sign their votes the acquiring company then forwards the results to the target company s corporate secretary before the shareholders meeting finally prospective board members are approved or rejected based on the final vote count special considerationssometimes shareholders are uninterested or apathetic about reviewing options for new senior management positions and it can be difficult to arouse their interest in these matters shareholders often absently go along with the recommendations mailed to them without examining the potential director s qualifications or the takeover s key underlying issues while the same level of disinterest often applies to acquisition votes a proxy fight may favor the acquirer if the target company s poor financial results negatively impact shareholders especially if the acquirer has strong ideas for making the company profitable to shareholders for example the acquirer may propose selling off some of the business underperforming assets or increasing stock dividends example of a proxy fightin february 2008 microsoft corporation made an unsolicited offer to buy yahoo for 31 per share the board of directors at yahoo believed the offer by microsoft under valued the company and consequently the board stalled any negotiations between microsoft and yahoo executives on may 3 2008 microsoft withdrew its offer and less than two weeks later billionaire carl icahn launched an effort to replace yahoo s board of directors through a proxy contest | |
what is a proxy statement | a proxy statement is a document containing the information the securities and exchange commission sec requires companies to provide to shareholders so they can make informed decisions about matters that will be brought up at an annual or special stockholder meeting issues covered in a proxy statement can include proposals for new additions to the board of directors information on directors salaries information on bonus and options plans for directors and any declarations made by the company s management 1understanding proxy statementsa proxy statement must be filed by a publicly traded company before shareholder meetings and it discloses material matters of the company relevant for soliciting shareholder votes and final approval of nominated directors proxy statements are filed with the sec as form def 14a or definitive proxy statement and can be found using the sec s database known as the electronic data gathering analysis and retrieval system edgar | |
what s in a proxy statement | proxy statements must disclose the company s voting procedure nominated candidates for its board of directors and compensation of directors and executives the proxy statement must disclose executives and directors compensation including salaries bonuses equity awards and any deferred compensation proxy statements can also shed light on any other perks used by executives such as the use of a company s aircraft travel and other material expenses covered by the company because the election of directors is the most important part of shareholders meetings a proxy statement goes into great detail about directors their background information and how much they had been paid in the past several years additionally a proxy statement discloses any potential conflict of interest between the company and its directors executives and auditors specifically proxy statements must list any related party transactions that occurred in the past between the company and its key personnel the statement also provides information about the company s audit committee as well as audit and non audit fees paid to its external public accountant a proxy statement indicates persons with material ownership of the company s common stock including its executive officers and directors benefits of proxy statementswhile a proxy statement is most relevant for shareholders preparing for a company s special or annual meeting this document can aid potential investors in assessing the qualifications and compensation of its management team and board of directors a finding that chief officers of an underperforming company are paid compensation significantly above those of peers may raise a red flag of excessive spending and weigh on an investor s decision of undertaking an investment also frequent and material related party transactions between the company and its executives or directors may pose a risk the company s resources are being misused and warrant further investigation proxy votingwith a proxy vote a shareholder or firm delegates the right to vote on certain company issues to a representative either because the shareholder cannot physically attend the meeting or because the representative is seen as more informed on the issue ahead of annual meetings eligible shareholders might receive a proxy ballot in the mail or digitally as well as an information booklet containing proxy materials called a proxy statement that describes what issues are up for vote shareholders most commonly vote to elect board members to approve executive compensation to approve mergers or acquisitions or to approve stock compensation plans investors who own applicable voting shares in the company as of the record date may be eligible to vote on these issues since most shareholders can t attend the company meeting they will often designate someone such as a member of the company s management team to vote for them this person is referred to as a proxy and can cast a proxy vote as per the shareholder s wishes written on their proxy card proxy votes are cast online by phone or by mail ahead of the cutoff time typically 24 hours before the shareholder meeting special considerationssometimes companies are at the mercy of what is called a proxy fight or proxy battle this occurs when a group of shareholders band together so they will have enough power to win a vote this is usually put in play in corporate takeovers 2 | |
when a corporate takeover is particularly contentious to the point that it has become a hostile takeover the acquiring group may try to convince shareholders to vote out some or all of a company s senior management so as to make it easier to take control of the organization | proxy statement faqsforeign companies that offer sec registered securities in the united states have to file forms with the sec in a similar way to u s companies so as to give investors accurate and timely information all such forms can be found using edgar the sec s database companies that are not registered with the sec must post disclosures in english on the internet as per sec rules 3a public company that cannot file quarterly financial results proxy statements or other key filings with the sec on time must file sec form 12b 25 also known as the notification of late filing filing this form may enable a company to avoid certain fees that it would otherwise owe as a result of the late filing the company filing the late form must give a reason for the late filing and state whether it expects to divulge any big surprises relative to its prior year s filing of the required form 4a proxy agreement is a written agreement that one person can act legally on behalf of another in the case of shareholder votes the proxy agreement states that a proxy can vote on behalf of the principal that is different from a proxy statement filed with the sec which is a document provided by public companies and filed with the sec that discloses material matters related to a company s voting procedures candidates for its board of directors and executive compensation the bottom linea proxy statement is a document containing information that the securities and exchange commission requires public companies to disclose to shareholders when requesting votes ahead of an annual meeting | |
what is a proxy vote | the term proxy vote refers to a ballot cast by a single person or firm on behalf of a corporation s shareholder who may not be able to attend a shareholder meeting or who may not choose to vote on a particular issue shareholders receive a proxy ballot in the mail along with an information booklet called a proxy statement which describes the issues to be voted on during the meeting shareholders vote on a variety of issues including the election of board members merger or acquisition approvals or approving a stock compensation plan registered investment management companies may also cast proxy votes on behalf of mutual fund shareholders or high net worth investors in separately managed accounts | |
how a proxy vote works | publicly traded companies report their activities to shareholders through their annual meetings before those meetings shareholders receive information on topics to be voted on at the meeting such as share ownership the structure of the board of directors bod and executive salary and benefits investors who own applicable voting shares in the company as of the company s record date may be eligible to vote on these issues the company may make proxy materials available online which typically includes an annual report a proxy statement describing the issues to be voted on and a proxy card with voting instructions materials may also be sent in the mail to investors who are eligible to vote at the annual general meeting agm often these agms are held in the spring during proxy season rather than physically attending the shareholder meeting investors may elect someone else such as a member of the company s management team to vote in their place this person is designated as a proxy and will cast a proxy vote in line with the shareholder s directions as written on their proxy card proxy votes may be cast by mail phone or online before the cutoff time this is typically 24 hours before the shareholder meeting responses may include for against abstain or not voted for issues involving topics other than electing directors such as voting on shareholder proposals a majority of the votes is what typically leads to approval of the issue special considerationssometimes a plurality vote applies when a company elects its board of directors the winning candidate simply needs more votes than their competitor in a plurality vote therefore an unopposed director only needs one vote to be elected if shareholders are opposed to the candidate they may withhold their voting rights in some instances the decision is made based on a majority voting system when a majority vote applies directors need to receive a majority of the votes in order to be elected because abstaining from voting can impact whether or not a director is elected the company s proxy statement must detail how abstained or withheld votes will affect the voting results example of a proxy voteon nov 25 2019 kirkland lake gold kl announced that it intended to acquire detour gold in an all stock deal 1 the two companies would become one company with kirkland lake gold shareholders owning roughly 73 of the resulting company leaving 27 for shareholders of detour gold although the board members of each company unanimously approved the deal shareholders were still eligible to vote on the acquisition all eligible shareholders received voting and proxy information and per the instructions shareholders were informed that they could cast their own ballot or appoint someone else to do it for them the deal was completed in january 2020 2 as a result of the deal detour gold shares delisted in february 2020 as the company became a subsidiary of kirkland gold 2 | |
what is a public company | a public company is a corporation whose shareholders have a claim to part of the company s assets and profits it s also called a publicly traded company this type of company is called a public limited company plc in the united kingdom ownership of a public company is distributed among general public shareholders through the free trade of shares of stock on stock exchanges or over the counter otc markets a public company is required to disclose its financial and business information regularly to the public in addition to its securities trading on public exchanges a company is considered a public company by the u s securities and exchange commission sec if it has public reporting requirements 1understanding a public companymost public companies were once private companies that were owned by their founders management or a group of private investors private companies don t have any public reporting requirements a company is required to conform to public reporting requirements when it meets any of certain criteria an ipo is the process by which a private company begins to offer shares to the public in a new stock issuance a company is considered to be private before completing an ipo issuing shares to the public through an ipo is very important for a company because it provides it with a source of capital to fund growth examples of public companies include chevron corporation mcdonald s and the procter gamble company 2a company must meet certain requirements to complete an ipo both regulations set forth by the regulators of the stock exchange where it hopes to list its shares and those set forth by the sec a company usually hires an investment bank to market its ipo determine the price of its shares and set the date of its stock issuance a company typically offers its current private investors share premiums when it undergoes an ipo as a way of rewarding them for their prior private investment in the company the u s securities and exchange commission sec states that any company in the u s with 2 000 or more shareholders or 500 or more shareholders that are not accredited investors must register with the sec as a public company and adhere to its reporting standards and regulations 3advantages of public companiespublic companies have certain advantages over private companies they have access to the financial markets and can raise money for expansion and other projects by selling stock or bonds a stock is a security that represents a fraction of ownership in a corporation selling stocks allows the founders or upper management of a company to liquidate some of their equity in the company a corporate bond is a type of loan issued by a company to raise capital an investor who purchases a corporate bond is effectively lending money to the corporation in return for a series of interest payments these bonds may also actively trade on the secondary market in some cases there s some clout attached to being a publicly traded company and having your stocks trade on a major market like the new york stock exchange because a company must have achieved a certain level of operational and financial size and success to transition to being publicly traded disadvantages of public companiesthe ability to access the public capital markets also comes with increased regulatory scrutiny administrative and financial reporting obligations and corporate governance bylaws with which public companies must comply this results in less control for the majority owners and founders of the corporation there are also substantial costs to conducting an ipo as well as the ongoing legal accounting and marketing costs of maintaining a public company public companies must meet mandatory reporting standards regulated by government entities and they must file reports with the sec on an ongoing basis the sec sets stringent reporting requirements these include the public disclosure of financial statements and an annual financial report called a form 10 k that gives a comprehensive summary of a company s financial performance companies must also file quarterly financial reports called forms 10 q and current reports on form 8 k to report when certain events occur these events include the election of new directors or the completion of an acquisition these reporting requirements were established by the sarbanes oxley act a set of reforms intended to prevent fraudulent reporting 3 qualified shareholders are also entitled to specific documents and notifications about the corporation s business activities a company must answer to its shareholders when it s public shareholders elect a board of directors who oversee the company s operations on their behalf certain activities such as mergers and acquisitions and some corporate structure changes and amendments must be brought up for shareholder approval this effectively means that shareholders can control many of the company s decisions special considerationsthere may be some situations where a public company no longer wants to operate within the business model required of a public company there are many reasons why a public company may decide to go private it may decide that it doesn t want to have to comply with the costly and time consuming regulatory requirements of being a public company or it might want to free up its resources to devote to research and development r d capital expenditures and funding pension plans for its employees a take private transaction is necessary when a company transitions to private a private equity firm or a consortium of private equity firms either purchases or acquires all the outstanding stock of the publicly listed company this sometimes requires the private equity firm to secure additional financing from an investment bank or another type of lender that can provide enough loans to help finance the deal the company will be delisted from its associated stock exchanges and will return to private operations when the purchase of all the outstanding shares is complete | |
is an exchange traded fund etf a publicly traded company | an etf is similar to a publicly traded company in that its shares are traded on stock exchanges and the market determines their value you can buy etf shares just as you would buy shares of a publicly traded company through a brokerage account or a broker 4 | |
what is a reporting company | reporting company is essentially another name for a public company these companies must meet the same reporting requirements with the sec as public companies a reporting company does not necessarily have to undergo an ipo however it can register its class of securities with the sec instead 5 | |
what is a beneficial owner | a beneficial owner is someone who controls or owns 25 or more of a reporting or public company and who has significant control over the company companies must report their beneficial owners and provide certain information about them 6the bottom lineyou probably own stock in a public company if you ve invested in a mutual fund or a pension plan because many plans and funds make use of this type of investment you can invest directly in such a company as well if you choose to do so in either case you and the other shareholders have an ownership stake in the company proportional to the amount of stock you ve purchased | |
what is the public company accounting oversight board pcaob | the public company accounting oversight board pcaob is a non profit organization that regulates auditors of publicly traded companies the purpose of pcaob is to minimize audit risk in particular the pcaob oversees the audits of public companies brokers and dealers registered with the u s securities and exchange commission sec understanding the public company accounting oversight boardthe public company accounting oversight board pcaob was established with the passage of the sarbanes oxley act of 2002 the act was passed in response to various accounting scandals of the late 1990s the board protects investors and other stakeholders of public companies by ensuring that the auditor of a company s financial statements has followed a set of strict guidelines the pcaob is overseen by the securities and exchange commission and since 2010 the pcaob has overseen the audits of sec registered brokers and dealers pcaob advisory groupsthe pcaob has two advisory groups the standing advisory group and the investor advisory group the role of these two groups is to provide advice and insight to the board the standing advisory group meets semi annually to discuss data and technology cybersecurity corporate culture communications on pcaob standards the governance and leadership of quality control systems current or emerging issues affecting audits or auditors and implementation of the new auditor s report the investor advisory group meets once a year to discuss the group s strategic plan quality control standards implementation of the new auditor s report and implementation of form ap the pcaob board has developed a five step strategic plan which is laid out in its annual report the five step plan is composed of the following 1the number of pcaob registered firms in the united states as of 2021 according to the pcaob annual report 2the pcaob todayfirms that audit public companies brokers and dealers must register with the pcaob registered firms are subject to inspection of the audits they have performed pcaob is involved in setting standards aimed at improving the reliability of audits and may also enforce standards by imposing penalties for infractions in 2020 pcaob sanctioned 13 firms and 18 individuals resulting from 219 audit inspections 3 in 2021 those numbers were 14 firms and 15 individuals sanctioned following 191 inspections 2 | |
what is a public good | a public good is a commodity or service that every member of a society can use without reducing its availability to all others typically a public good is provided by a government and funded through taxes examples of a public good include a town road park or school national defense is a public good a public good may also be a basic need such as access to clean air and drinking water | |
how public goods work | the main criteria that distinguish a public good are that it must be non rivalrous and non excludable non rivalrous means that the goods do not dwindle in supply as more people consume them non excludability means that the good is available to all citizens the point of contention is called the free rider problem a public good is available to all people regardless of whether they have paid for it some members of society use the good but are unable or unwilling to help pay for it people who do not pay taxes are essentially taking a free ride provided by those who do pay taxes national defense law enforcement and clean air and water are all examples of public goods private goods vs public goodsthe opposite of a public good is a private good which is both excludable and rivalrous private goods can only be used by one person at a time a piece of jewelry for example in some cases they are destroyed in the act of using them such as when a slice of pizza is eaten private goods generally cost money most of the goods and services that we consume or use in our everyday lives are private goods although they are not subject to the free rider problem they are also not available to everyone since not everyone can afford to purchase them in some cases public goods are not fully non rivalrous and non excludable for example a town swimming pool is a public good since it can be used by any resident but using it might involve a nominal fee similarly some goods are described as quasi public goods because although they are made available to all their value can diminish as more people use them for example a country s road system may be available to all its citizens but the value of those roads declines when they become congested during rush hour public goods around the worldevery nation makes its own decisions on which goods and services should be considered public goods and this is reflected in their national budgets for example many argue that national defense is an important public good because the security of the nation benefits all of its citizens to that end many countries invest heavily in their militaries financing army upkeep weapons purchases and research and development r d through public taxation in the united states for example the department of defense dod has a budget of 1 52 trillion equal to 12 8 of the total federal budget for fy 2023 1many countries treat essential services such as healthcare and education as a type of public good taxpayer funded healthcare is provided by nations including canada mexico the united kingdom france germany italy israel and china 2government investments in public education have grown tremendously since the 1950s according to our world in data the percentage of the world s population that has received at least some basic education has grown from about 49 in 1950 to more than 86 in 2020 the most recently available data 34advocates for this kind of government spending argue that its economic and social benefits significantly outweigh its costs pointing to outcomes such as improved workforce participation higher skilled domestic industries and reduced rates of poverty over the medium to long term critics argue that it poses a burden on taxpayers and that goods can be more efficiently provided by the private sector | |
what counts as a public good | a public good is any product or service that is available to all residents of a society such as national defense police and fire services clean air and drinking water | |
what are the main differences between private and public goods | a private good is consumed exclusively by one person most often there is a cost associated with it that prohibits its use by some others a private good is available to all one person s use of it does not prevent others from using it | |
what is a quasi public good | quasi public goods have elements of both public and private goods a public bridge is available to all but loses some of its value when it becomes congested during rush hour a public museum is open to all and may even receive some public funds but it may still charge an entrance fee to adequately finance its operation the bottom linea public good is a commodity or service that every member of a society can use without exhausting the supply of it that is available to others national defense effective policing clean air and public education are all examples of public goods private goods unlike public goods are inherently scarce and become more scarce as people consume them |
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