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what is a public limited company plc | a public limited company plc is a public company in the united kingdom plc is the equivalent of a u s publicly traded company that carries the inc or corporation designation the use of the phrase public limited company or the plc abbreviation after the name of a company is mandatory and communicates to investors and to anyone dealing with the company that it is a publicly traded corporation 1 | |
how a public limited company plc works | a plc designates a company that has offered shares of stock to the general public the buyers of those shares have limited liability meaning that they cannot be held responsible for any business losses in excess of the amount they paid for the shares 2in the u k a plc operates along similar lines as a public corporation in the u s its operations are regulated and they are required to publish periodic reports to shareholders and prospective shareholders on its true financial health 3requirements for a plcu k company law says that a plc must have the plc or public limited company designation after the company name and minimum share capital of 50 000 45 like a publicly traded company in the u s plcs offer various types of shares such as ordinary and cumulative preference shares ordinary shares of a plc are similar to common stock issued by u s corporations cumulative preference shares are akin to preferred stock in the u s other key requirements for a plc include offering shares appointing directors and adhering to registration requirements 6the largest plcs make up the financial times stock exchange 100 index known as the footsie advantages and disadvantages of a plcthe biggest advantage of forming a public limited company plc is that it grants the ability to raise capital by issuing public shares a listing on a public stock exchange attracts interest from hedge funds mutual funds and professional traders as well as individual investors that tends to lead to increased access to capital for investment in the company than a private limited company can amass on the other hand there s much more regulation for a plc in the u k than there is for a public corporation in the u s they are required to hold annual general meetings open to all shareholders and are held to higher standards of transparency in accounting 7 because they re public they re also vulnerable to pressure from shareholders and takeover bids from rivals by becoming a plc the company is given greater access to capital and shareholders are offered liquidity these are similar benefits of a company in the u s going public on the downside becoming a plc means more scrutiny and required reporting the company will have more shareholders and the value of the company could become more volatile as it is determined by the financial markets u k companies can raise more capital by being a plc becoming a plc allows shareholders liquidity increased ability to raise future capital and make acquisitions by offering shares to target companies increased scrutiny and regulationlarger number of shareholders to be accountable tovolatility in valuation increases as the company is beholden to financial markets public limited company plc vs private limited company ltd a plc is a public company in the u k meanwhile there are private limited companies ltds which are private companies in the u k shares of a private limited company are not offered to the general public 8private companies are still incorporated generally with the companies house these companies are still required to have legal documents to form the business private companies must have at least one director to raise capital via a public investment in the u k the company must be a plc plcs are like ltds except they are publicly traded with shares that can be freely sold and traded on a stock exchange meanwhile plcs must have at least two directors and hold annual shareholder meetings 910 | |
how to invest in a plc | as public companies any retail investor in the united kingdom can buy shares in a plc the simplest way to do so is through a brokerage the investor can simply create an account transfer money and buy shares of the company it is also to buy shares through a retirement account so some people may own plc shares without even knowing about it this may be more complicated for investors outside the united kingdom many u s brokerages allow their clients to directly buy shares in foreign markets exchanging dollars into local currency to make the purchase in addition many u k companies are tradable in american markets in the form of american depositary receipts the downside is that the investor would assume an additional level of currency risk examples of plcsall of the companies listed on the london stock exchange are by definition plcs the fashion retailer burberry is burberry group plc rolls royce is rolls royce holdings plc the 100 largest plcs on the london stock exchange are grouped together in an index called the financial times stock exchange 100 ftse 100 or colloquially the footsie the companies in this group are representative of the united kingdom s economy as a whole the footsie is comparable to the dow jones industrial average djia in the u s the biggest plcs by market capitalization in the footsie as of april 2024 included shell hsbc and astrazeneca 11the formal names of all of these companies include the plc designation not all plcs are listed on a stock exchange a company may choose not to list on an exchange or may not meet the requirements for listing | |
what does it mean to be a public limited company plc | a plc is a publicly traded company in the u k these companies must have plc or the words public limited company after their name for example the oil and gas company bp plc is a u k publicly traded company that s headquartered in london england who is a public limited company owned by like publicly traded companies headquartered in the u s plcs are owned by shareholders these companies are traded on exchanges where shares can be openly bought or sold by individuals companies and mutual funds this listing contrasts with the limited ltd listing which does not trade publicly and has limitations on shares and shareholders | |
what are the main features of a plc | the key feature of a plc is that it s based in the u k and is publicly traded the company must also have the plc or public limited company designation after its name | |
what is the difference between a public and private limited company | a plc is a publicly traded company while a private limited company is also a u k company except it is private there are other notable differences between the two such as the fact that a private limited company only has to have one director while a plc must have two the bottom linea plc is the equivalent of an inc or corp company that trades in the u s stock market plcs are publicly traded companies in the u k many famous u k based companies are publicly traded and have the plc designation after their name such as consumer goods company unilever plc and drugmaker astrazeneca plc | |
what are public private partnerships | public private partnerships involve collaboration between a government agency and a private sector company that can be used to finance build and operate projects such as public transportation networks parks and convention centers financing a project through a public private partnership can allow a project to be completed sooner or make it a possibility in the first place public private partnerships often involve concessions of tax or other operating revenue protection from liability or partial ownership rights over nominally public services and property to private sector for profit entities | |
how public private partnerships work | a city government for example might be heavily indebted and unable to undertake a capital intensive building project however a private enterprise might be interested in funding its construction in exchange for receiving the operating profits once the project is complete public private partnerships typically have contract periods of 20 to 30 years or longer financing comes partly from the private sector but requires payments from the public sector and or users over the project s lifetime the private partner participates in designing completing implementing and funding the project while the public partner focuses on defining and monitoring compliance with the objectives public private partnerships are typically found in transport and municipal or environmental infrastructure and public service accommodations risks are distributed between the public and private partners through a process of negotiation ideally though not always according to the ability of each to assess control and cope with them although public works and services may be paid for through a fee from the public authority s revenue budget such as with hospital projects concessions may involve the right to direct users payments for example with toll highways in cases such as shadow tolls for highways payments are based on actual usage of the service when wastewater treatment is involved payment is made with fees collected from users advantages and disadvantages of public private partnershipspartnerships between private companies and governments provide advantages to both parties private sector technology and innovation for example can help improve the operational efficiency of providing public services the public sector for its part provides incentives for the private sector to deliver projects on time and within budget in addition creating economic diversification makes the country more competitive in facilitating its infrastructure base and boosting associated construction equipment support services and other businesses there are downsides too the private partner may face special risks from engaging in a public private partnership physical infrastructure such as roads or railways involves construction risks if the product is not delivered on time exceeds cost estimates or has technical defects the private partner typically bears the burden in addition the private partner faces availability risk if it cannot provide the service promised a company may not meet safety or other relevant quality standards for example when running a prison hospital or school demand risk occurs when there are fewer users than expected for the service or infrastructure such as toll roads bridges or tunnels however this risk can be shifted to the public partner if the public partner agrees to pay a minimum fee no matter the demand public private partnerships also create risks from the general public s and taxpayers point of view private operators partnership with the government may insulate them from accountability to the users of the public service for cutting too many corners providing substandard service or even violating peoples civil or constitutional rights at the same time the private partner may enjoy a position to raise tolls rates and fees for captive consumers who may be compelled by law or geographic natural monopoly to pay for their services lastly as with any situation where ownership and decision rights are separated public private partnerships can create complex principal agent problems this may facilitate corrupt dealings pay offs to political cronies and general rent seeking activity this would happen by attenuating the link between the private parties who make important decisions over a project from which they stand to benefit and accountability to the taxpayers who foot at least part of the bill and who may be left holding the bag in terms of ultimate liability for the project s outcome examples of public private partnershipspublic private partnerships are typically found in transport infrastructure such as highways airports railroads bridges and tunnels examples of municipal and environmental infrastructure include water and wastewater facilities public service accommodations include school buildings prisons student dormitories and entertainment or sports facilities | |
what is an example of a public private partnership | public private partnerships can be found in infrastructure projects such as in building toll roads and highways one example is canada s 407 express toll route 407 etr this 67 mile stretch of highway was a ppp between the provincial government of ontario and a private consortium that was responsible for the design construction financing and maintenance of the highway with a lease term of 99 years during which time they are permitted to collect tolls from users of the roadway however traffic levels and toll revenues were not guaranteed by the government 1 | |
what is revenue risk in a public private partnership | revenue risk is the chance that the private party to a ppp will not be able to recover its costs or ongoing expenses from operating a piece of infrastructure for a toll road this may be due to lower than expected traffic or limits set on toll rates extensive studies should be conducted ahead of time to avoid this risk and plan for contingencies | |
what are some types of public private partnerships | public private partnerships can be arranged in several ways here are just a few the bottom linegovernments use public private partnerships to collaborate with private sector companies in order to finance projects while there are benefits and drawbacks to these types of partnerships governments still use them frequently to finance transportation municipal and environmental infrastructure as well as public service projects | |
what is a pullback | a pullback is a pause or moderate drop in a stock or commodities pricing chart from recent peaks that occur within a continuing uptrend a pullback is very similar to retracement or consolidation and the terms are sometimes used interchangeably the term pullback is usually applied to pricing drops that are relatively short in duration for example a few consecutive sessions before the uptrend resumes | |
what does a pullback tell you | pullbacks are widely seen as buying opportunities after a security has experienced a large upward price movement for example a stock may experience a significant rise following a positive earnings announcement and then experience a pullback as traders with existing positions take the profit off the table i e selling some or all of their long positions the positive earnings however are a fundamental signal that suggests that the stock will resume its uptrend 1most pullbacks involve a security s price moving down to an area of technical support such as a moving average pivot point or fibonacci retracement level before resuming the uptrend traders should carefully watch these key areas of support because a breakdown from them could signal a reversal rather than simply a pullback example of how to use a pullbackpullbacks typically don t change the underlying fundamental narrative that is driving the price action on a chart they are usually profit taking opportunities following a strong run up in a security s price for example a company may report blow out earnings and see shares jump 20 the stock may experience a pullback the next day as short term traders lock in profits by selling some of their long positions however the strong earnings report suggests that the business underlying the stock is doing something right buy and hold traders and investors will likely be attracted to the stock by the strong earnings reports supporting a sustained uptrend in the near term every stock chart has examples of pullbacks within the context of a prolonged uptrend while these pullbacks are easy to spot in retrospect they can be harder to assess for investors holding a security that s losing value image by sabrina jiang investopedia 2022in the example above the spdr s p 500 etf spy experiences four pullbacks within the context of a prolonged trend higher these pullbacks typically involved a move to near the 50 day moving average where there was technical support before a rebound higher traders should be sure to use several different technical indicators when assessing pullbacks to ensure that they don t turn into longer term reversals the difference between a reversal and a pullbackpullbacks and reversals both involve a security moving off its highs but pullbacks are temporary and reversals are longer term so how can traders distinguish between the two most reversals involve some change in a security s underlying fundamentals that force the market to re evaluate its worth for example a company may report disastrous earnings that make investors recalculate a stock s net present value similarly it could be a negative settlement a new competitor releasing a product or some other event that will have a long term impact on the company underlying the stock these events while happening outside the chart so to speak will appear over several sessions and initially will seem much like a pullback traders use moving averages trendlines and trading bands to flag when a pullback keeps going and is at risk of entering reversal territory limitations in trading pullbacksthe biggest limitation of trading pullbacks is that a pullback could be the start of a true reversal being that both pullbacks and reversals happen on a range of timeframes including intraday if you want to go granular one trader s multisession pullback is actually a reversal for a day trader looking at the same chart if the price action breaks the trendline for your time frame then you may be looking at a reversal rather than a pullback in this case it is not the time to enter a bullish position of course adding other technical indicators and fundamental data scans to the mix will increase a trader s confidence in distinguishing pullbacks from true reversals | |
how can i tell if a decline in an uptrend is just a pullback or something more | the first place to look is at the fundamental story behind the uptrend has fresh negative news hit the particular security and precipitated the pullback or is the pullback part of an overall general market decline e g wall street had a bad day you can also monitor key technical support levels to see if they hold in case they fail you might be looking at a more significant correction or even a reversal | |
how can traders take advantage of a pullback to enter at a cheaper level | first look at the fundamental story underpinning the uptrend if nothing serious in the way of bad news has hit the security you re likely looking at just a mild pullback in this case traders can use a variety of orders to establish long positions at relatively cheaper levels traders can enter immediately with a buy market order or wait for lower levels with a limit buy order in case the pullback ends and prices begin to move higher traders can use a stop buy entry order at a level above the current market | |
how can i tell if an uptrend is ending or simply undergoing a pullback | double check to make sure nothing has changed in the fundamental picture of the underlying security next take a look at trend and momentum indicators e g relative strength index or rsi average directional index or adx moving average convergence divergence or macd to see if they re turning lower potentially signaling a more significant decline is at hand if either of these conditions is met take a step back and consider whether the uptrend has hit a significant high and tighten up your stop loss sell order to minimize potential further losses the bottom linepullbacks are a normal part of any sustained uptrend they can be triggered by profit taking after a sudden surge higher in the price of a security or some minor negative news about the underlying security trend following traders frequently use pullbacks to get in on the dominant uptrend or to add to existing longs they can do this through buy limit orders stop buy entry orders or just a plain market order if they want to jump right in pullbacks usually stabilize or find a near term bottom at consequential technical levels such as a daily moving average a bollinger band or a fibonacci retracement to name just a few technical support levels it is important to note that if these support levels fail you may be looking at a bigger correction or even a total reversal traders should look at other indicators such as momentum oscillators like the rsi to see if there are any bearish divergences that may signal a deeper correction but if the fundamental picture for a company or currency has not changed significantly it increases the likelihood that it s just a normal pullback that should stabilize over a few sessions and offer buyers a chance to get in on the primary uptrend at a cheaper price | |
what is pump and dump | pump and dump is a manipulative scheme that attempts to boost the price of a stock or security through fake recommendations these recommendations are based on false misleading or greatly exaggerated statements the perpetrators of a pump and dump scheme already have an established position in the company s stock and will sell their positions after the hype has led to a higher share price this practice is illegal based on securities law and can lead to heavy fines the burgeoning popularity of cryptocurrencies has resulted in the proliferation of pump and dump schemes within the industry 1the basics of pump and dumppump and dump schemes were traditionally conducted through cold calling the advent of the internet has shifted most of this activity online fraudsters can now blast hundreds of thousands of email messages to unsuspecting targets or post messages online enticing investors to buy a stock quickly these messages typically claim to have inside information about an imminent development that will lead to a dramatic upswing in the share s price once buyers jump in and the stock has moved up significantly the perpetrators of the pump and dump scheme sell their shares in these instances the volume of the sales of these shares is usually substantial causing the stock price to drop dramatically in the end many investors experience huge losses pump and dump schemes generally target micro and small cap stocks on over the counter exchanges that are less regulated than traditional exchanges micro cap stocks and occasionally small cap stocks are favored for this type of abusive activity because they are easier to manipulate 2 micro cap stocks generally have a small float low trading volumes and limited corporate information as a result it does not take a lot of new buyers to push a stock much higher pump and dump 2 0the same scheme can be perpetrated by anyone with access to an online trading account and the ability to convince other investors to buy a stock that is supposedly ready to take off the schemer can get the action going by buying heavily into a stock that trades on low volume which usually pumps up the price the price action induces other investors to buy heavily pumping the share price even higher at any point when the perpetrator feels the buying pressure is ready to fall off they can dump their shares for a big profit 3pump and dump in pop culturethe pump and dump scheme formed the central theme of two popular movies boiler room and the wolf of wall street both of these movies featured a warehouse full of telemarketing stockbrokers pitching penny stocks in each case the brokerage firm was a market maker and held a large volume of shares in companies with highly questionable prospects the firms leaders incentivized their brokers with high commissions and bonuses for placing the stock in as many customer accounts as possible in doing so the brokers were pumping up the price through huge volume selling once the selling volume reached critical mass with no more buyers the firm dumped its shares for a huge profit this drove the stock price down often below the original selling price resulting in big losses for the customers because they could not sell their shares in time avoiding pump and dump schemesthe securities and exchange commission sec has some tips to help avoid becoming a victim of a pump and dump scheme here are some points to keep in mind exercise extreme caution if you receive an unsolicited communication regarding an investment opportunity the plethora of avenues for virtual communication means that such dubious investment pitches can reach you in any number of ways by way of an email a comment or post on your social media page a direct message or a call or voicemail on your cellphone ignore such messages acting on them may result in significant losses rather than the massive gains promised by the scammers 3 | |
does the purported investment sound too good to be true does it promise huge guaranteed returns are you pressured to buy right now before the stock takes off these are all common tactics used by stock touts and unscrupulous promoters and should be viewed as red flags by investors 3 | affinity fraud refers to investment scams that prey upon members of identifiable groups such as religious or ethnic communities aging adults or professional groups an investment pitch from a member of a group that you are affiliated with may lead you to believe in its credibility the problem is that the member may have been unwittingly fooled into believing that an investment is legitimate when in reality it is just a scam 3before you invest your hard earned money conduct your own research and due diligence it is fairly easy to obtain a wealth of information online about legitimate companies from their business prospects and management to their financial statements the lack of such information can often be a red flag in itself 3pump and dump 3 0the cryptocurrency market has become the newest arena for pump and dump schemes the massive gains made by bitcoin and ethereum have kindled tremendous interest in cryptocurrencies of every stripe unfortunately cryptocurrencies are particularly well suited for pump and dump schemes because of the lack of regulation in the cryptocurrency market its opaqueness and the technical complexity of cryptocurrencies a study conducted in 2018 examined the prevalence of pump and dump schemes in the cryptocurrency market researchers identified more than 3 400 such schemes over the course of just six months observing two group messaging platforms popular with cryptocurrency investors 4in march 2021 the u s commodity futures trading commission cftc advised customers to avoid pump and dump schemes that can occur in thinly traded or new cryptocurrencies the cftc also unveiled a program that would make any whistleblower eligible for a monetary reward of between 10 and 30 as long as they reveal original enforcement action that leads to monetary sanctions of 1 million or more against a pump and dump scheme 5 | |
what is pump priming | pump priming is a type of action taken to stimulate an economy usually during a recessionary period such as through government spending or reductions in interest rates and taxes the term pump priming is derived from the operation of literal pumps which had to be primed with water so in order to function properly pump priming assumes that the economy too must be primed to function properly once again in this regard government spending is assumed to stimulate private spending which in turn should lead to economic expansion pump priming effectpump priming involves introducing government funds into a depressed economy in order to spur growth increased purchasing power can then prompt higher demand for goods and services the increase in demand experienced through pump priming in turn leads to increased profitability in the private sector which assists with overall economic recovery pump priming relates to the keynesian economic theory named after noted economist john maynard keynes which states that government intervention within the economy aimed at increasing aggregate demand can result in a positive shift within the economy this is based on the cyclic nature of money within an economy in which one person s spending directly relates to another person s earnings and that increase in earnings leads to a subsequent increase in spending the use of pump priming in the united statesthe phrase pump priming originated from president herbert hoover s creation of the reconstruction finance corporation rfc in 1932 which was designed to make loans to banks and industry this was taken one step further in 1933 when president franklin roosevelt felt that pump priming would be the only way for the economy to recover from the great depression through the rfc and other public works organizations billions of dollars were spent priming the pump to encourage economic growth the phrase was rarely used in economic policy discussions after world war ii even though programs developed and used since then such as unemployment insurance and tax cuts may be considered forms of automatic pump primers however during the financial crisis of 2007 the term came back into use as interest rate reduction and infrastructure spending were considered the best path to economic recovery along with tax rebates issued as part of the economic stimulus act of 2008 at the onset of the covid 19 pandemic the u s government adopted a number of fiscal and monetary measures that can be seen as a form of pump priming this included cuts to interest rates and the implementation of various relief programs which distributed stimulus money to individuals businesses affected sectors among others pump priming in the japanese economysimilar to activities used within the united states japan s prime minister shinzo abe and his associated cabinet approved a stimulus package in 2015 equivalent to 29 1 billion in hopes of invigorating the strained economy the goal was to increase the gross domestic product gdp of japan by 0 7 by the end of the year 2016 as in the u s the japanese government engaged in activities that can be seen as pump priming during the covid 19 pandemic this included quantitiative easing measures the issuance of zero interest loans and funding for relief programs | |
is pump priming a fiscal policy | pump priming can refer to both monetary and fiscal policies when a central bank like the u s federal reserve chooses to cut interest rates to stimulate spending this is both a form of pump priming and a monetary policy on the other hand if congress chooses to set money aside to fund stimulus checks this would be an example of pump priming that is also a fiscal policy | |
what is another term for pump priming | pump priming is a commonly used metaphor for government spending aimed at stimulating the economy it is related to ideas like deficit spending and expansionary policy | |
what are the disadvantages of pump priming | pump priming comes with a few drawbacks and risks over the long term spending can cause a budgetary deficit which may then require cuts to critical public programs budget deficits may also cause interest rates to rise increasing the cost of borrowing money the bottom linepump priming is any government expenditure taken to stimulate economic activity this usually occurs during recessionary periods examples of such activity include cutting taxes or interest rates or issuing stimulus payments to businesses and individuals pump priming typically increases purchasing power which can spur spending and encourage recovery and growth | |
what is a purchase annual percentage rate apr | a purchase annual percentage rate apr is the interest rate that your credit card issuer will charge you on purchases when you carry a balance on your card in addition to purchase aprs credit cards can have different aprs for cash advances and balance transfers they may also have introductory aprs for a certain period after you sign up and penalty aprs for missing payments 1 | |
how purchase aprs work | the apr on a credit card is an annualized percentage rate that is applied monthly if the advertised apr on a credit card is 19 for example then an interest rate of 1 58 will be imposed on the outstanding balance each month if you pay the balance in full no later than the due date you can avoid paying interest on any purchases that you ve made the time between the end of a monthly billing cycle and your card s payment due date is known as the card s grace period it s only when you carry a balance after the due date that you will have to pay interest on your purchases 2as mentioned any given credit card may come with several different aprs attached the apr on cash advances for example is typically higher than that for purchases in addition the interest on cash advances begins accruing immediately unlike the interest on purchases introductory aprs sometimes referred to as teaser rates are lower than the regular purchase apr sometimes as low as 0 for a period of time | |
when you sign up for a credit card its purchase apr and other aprs will be shown in your credit card agreement | those rates can change over time for several reasons for example the credit card issuer is allowed to change the rate if it gives you 45 days notice and states a reason for doing so the reason might be a late payment that you made or a recent drop in your credit score any new purchases you make with the card more than 14 days after you ve received the advance notice will be subject to the new rate 3however credit card companies are prohibited from increasing interest rates on new transactions during the first year after an account is opened 3many cards also impose a penalty or default apr that is triggered if a payment is late or you have exceeded the card s credit limit the penalty apr always applies to future purchases after such an event but it can also be applied to the existing balance if a payment is more than 60 days late 3your purchase apr can also change if your card charges a variable rather than a fixed rate as noted above no apr is totally fixed since it can be changed by the card issuer with 45 days notice with a variable rate card however the issuer is free to change it quarterly or monthly based on the movement of a particular index such as the prime rate and isn t required to give you advance notice 4 your new rate would be the prime rate or other benchmark index plus some set percentage your credit card agreement should indicate how much the apr can change over time 5 | |
what is a good apr | as of june 2023 the median credit card interest rate for all credit cards in the investopedia database was 23 74 however rates varied widely even for any given issuer for example the aprs on bank of america credit cards ranged from 17 74 on the low end to 26 99 at the high end those differences can be due to a number of factors including the type of card for example rewards cards tend to carry higher interest rates and the creditworthiness of the individual cardholder the lowest rates tend to be available to cardholders with the highest credit scores 6before their full rate kicks in some cards offer introductory purchase aprs for a limited period which may range from several months to a year or more if you carry a balance after the promotional period ends the card will begin to charge its full purchase apr on that balance | |
what s the difference between an interest rate and an annual percentage rate | in the case of credit cards interest rates must be stated as an annual percentage rate or apr so they are basically the same thing with other types of loans such as mortgages or car loans the interest rate and apr can be different because the apr will include both the basic interest rate and any additional fees | |
how do balance transfer credit cards work | balance transfer credit cards allow you to move some or all of your balance on an existing credit card to a new card typically one with a low introductory interest rate for a certain period of time balance transfer cards can save you money in that way but they typically charge fees equal to a percentage of the amount you re transferring such as 3 to 5 so there are costs to weigh the bottom linethe purchase apr on your credit card is important to consider if you expect to carry a balance on the card rather than paying it off in full each month aprs can vary widely from card to card and some cards offer low or even 0 aprs for a limited period of time | |
what is the purchasing managers index pmi | the purchasing managers index pmi is an indicator of the prevailing direction of economic trends in the manufacturing and service sectors the indicator is compiled and released monthly by the institute for supply management ism a nonprofit supply management organization it is a diffusion index that summarizes whether market conditions are expanding staying the same or contracting as viewed by purchasing managers the purpose of the pmi is to provide information about current and future business conditions to company decision makers analysts and investors investopedia zoe hansenformula and calculation of the purchasing managers index pmi the pmi is calculated as follows | |
where | the survey based indicator is compiled and released each month by ism other companies also produce pmi numbers including ihs markit group which puts out the pmi for various countries outside the u s | |
how the pmi works | the pmi is a key economic tool and is among the most reliable leading indicators of the u s economy the index is reported by manufacturing and services the index sheds insight into the business environment and also helps companies get a grasp on where the economy is headed the pmi is calculated based on responses to a survey sent to senior executives at more than 400 companies in 19 primary industries which are weighted by their contribution to u s gross domestic product gdp the surveys include questions about business conditions whether or not they are changing and whether they are improving or deteriorating the pmi is based on five major survey areas each of which is weighted equally the headline pmi is a number from 0 to 100 a pmi above 50 represents an expansion when compared with the previous month a pmi reading under 50 represents a contraction while a reading at 50 indicates no change the further away from 50 the greater the level of change the pmi results are released on the first monday of every month using the pmithe pmi and relevant data produced from the monthly surveys by the ism are critical decision making tools for a variety of areas including management suppliers and investors management can use the monthly pmi results to make key decisions about their own businesses for instance an automobile manufacturer makes production decisions based on the new orders it expects from customers in future months those new orders drive the purchasing decisions of its leadership about dozens of component parts and raw materials such as steel and plastic existing inventory balances also drive the amount of production the manufacturer needs to complete to fill new orders and to keep some inventory on hand at the end of the month suppliers also make decisions based on the pmi a parts supplier for a manufacturer follows the pmi to estimate the amount of future demand for its products the supplier also wants to know how much inventory its customers have on hand which also affects the amount of production its clients must generate pmi information about supply and demand affects the prices that suppliers can charge so if the manufacturer s new orders are growing it may raise customer prices and accept price increases from its suppliers on the other hand when new orders decline the manufacturer may have to lower its prices and demand a lower cost for the parts it purchases a company can use the pmi to help plan its annual budget manage staffing levels and forecast cash flow investors can also use the pmi to their advantage because it is a leading indicator of economic conditions the direction of the trend in the pmi tends to precede changes in the trend in major estimates of economic activity and output such as the gdp industrial production and employment paying attention to the value and movements in the pmi can yield profitable foresight into developing trends in the overall economy | |
what are the results of the current purchasing managers index | the manufacturing pmi registered at 49 2 in april 2024 which was a drop from the 50 3 reported in march 2024 | |
what is the global pmi | the global pmi is an economic indicator that is derived from questionnaires sent to manufacturing and services companies in more than 40 different countries the survey gets responses from roughly 28 000 global companies and represents 89 of global gdp | |
what does a high pmi reading indicate | the purchasing managers index reading can range between 0 and 100 if the index reading is higher than 50 then it indicates an economic expansion this means that the closer the reading is to 100 the higher the degree of positive economic growth a reading below 50 indicates an economic contraction with readings closer to 0 indicating a higher degree of contraction a reading of 50 indicates no change in the economic environment the bottom lineinvestors economists and analysts have a wealth of information to help them gauge where the economy is headed one leading indicator is the pmi released every month it is derived from a survey sent out by the institute for supply management to more than 400 companies in various sectors responses are compiled and a reading is reported based on how these companies feel about the current economic climate a high reading indicates positive growth while a low one points to a contraction | |
what is a purchase money security interest pmsi | purchase money security interest pmsi refers to a legal claim that allows a lender to either repossess property financed with its loan or to demand repayment in cash if the borrower defaults it gives the lender priority over claims made by other creditors in simpler terms a psmi gives initial claims on property to entities that finance purchases made by a consumer or other debtor understanding purchase money security interestlenders have several options to protect their financial interests if debtors fail to live up to their financial obligations financial companies may be able to pursue consumers who stop making payments on their debts by sending them to collections taking legal action enforcing liens or taking out special interests such as purchase money security interests this interest gives a specific lender a right to property or its full cash value before any other creditor as long as that lender s money was used to finance the purchase a pmsi is used by some commercial lenders and credit card issuers as well as by retailers who offer financing options it effectively gives them collateral to confiscate if a borrower defaults on payment for a large purchase it also is used in business to business b2b transactions the option of obtaining a pmsi encourages companies to increase sales by directly financing new equipment or inventory purchases a purchase money security interest is valid in most jurisdictions once the buyer agrees to it in writing and the lender files a financing statement the procedure is outlined in article 9 of the uniform commercial code ucc the standardized business regulations adopted by most states these regulations were adopted to make it easier for corporations to conduct business with others across state lines article 9 is the section of the code that outlines the treatment of secured transactions including how security interests are created and enforced 1the protection provided by a pmsi is one reason for the growth of point of sale financing in which a retailer offers buyers direct financing for major purchases if the purchaser defaults the retailer may repossess the items purchased and may do so before any other creditors are satisfied the procedures permitting enforcement of a pmsi are strict and outlined in the uniform commercial code ucc purchase money security interest rulespmsi rules vary based on the type of collateral obtained using loan proceeds in general the broadest rule is that pmsi is granted to the first creditor who filed a financing statement or perfected its security interest in the collateral below are the specific rules for inventory and non inventory collateral although there are specific rules for other types of goods as well section 9 324 b outlines the rules to perfect pmsi in inventory first the pmsi must be perfected when the borrower takes possession of the inventory second the secured party must provide notification to conflicting security holders before perfection third the secured party must notify other security holders that it expects to acquire a pmsi in the borrower s inventory 2to perfect a pmsi in inventory the secured party must file a ucc 1 that identifies the goods sold as collateral this filing provides notice to other interested parties that the secured party is in the process of obtaining a pmsi on the borrower s personal property in addition the written notice delivered to other security notices must be distributed no more than five years before the borrower receives inventory 1the rules for securing a pmsi for non inventory collateral are often less rigid the secured party must be able to demonstrate that the credit they extended to the borrower was used to purchase the collateral the secured party must also file a financing statement covering the collateral within 20 days of the borrower receiving possession of the collateral 1similar to inventory pmsis a secured party must file a ucc 1 to perfect a pmsi for non inventory collateral this must be filed before the borrower takes possession of the collateral or within the first 20 days of possession if the filing takes place after these 20 days the secured party won t have pmsi priority and will be prioritized after other perfected security interests the financing statement for non inventory collateral can be pre filed before the borrower takes possession of the goods in addition keep copies of every delivery document as a pmsi claim may be vulnerable to disqualification if the date of possession is in question establishing security interest as the sellerat the core of pmsi the party attempting to gain the secured interest must demonstrate that the credit they extended was used to acquire the collateral for this reason a company may want to intentionally structure an order of payments or series of contracts for goods not yet manufactured for example if a consumer arranged to buy a custom made sofa on credit from a furniture retailer the retailer would put through an order with the manufacturer and pay for the sofa before finalizing the financing agreement in this case the retailer is the owner selling the sofa not the manufacturer in legal terms the retailer has a security interest in the property just sold and can obtain and enforce a pmsi for the same reason if the buyer puts down a security deposit on the sofa the retailer may insist that the buyer pays for it in full before the security deposit is returned this establishes the full dollar value that the lender is entitled to demand in case of default court rulings regarding pmsi claims have established the lender s right to demand reimbursement of other costs related to the purchase such as freight charges and sales taxes | |
how do i get a purchase money security interest pmsi | a pmsi is obtained when a creditor lends money to a borrower and the borrower uses that money to buy goods in return the borrower grants the creditor a security interest in those goods should they default on their loan different types of collateral or goods have different rules but the broadest requirements state the secured party must file a ucc 1 to publicly communicate their intention to gain a secured interest in a good the secured party also may be required to notify other potential secured parties | |
what is a purchase money security interest under the ucc | a pmsi under the uniform commercial code is an exception to the first in time creditor prioritization rule the ucc states that creditor priority for secured interests is often dictated by who was the first secured creditor or the timing of when their interest occurred the pmsi exception allows for creditors who may not be first to still secure an interest in collateral should they meet filing requirements | |
does a purchase money security interest trump a blanket lien | yes a pmsi can receive priority status over a previously perfected blanket lien the pmsi must have been perfected within statutory requirements for example the pmsi receives priority status only if it is filed before or within the first 20 days of the borrower s possession of the goods | |
what is an example of a pmsi | a car loan can be an example of a pmsi situation a financial institution may agree to lend money to a borrower to finance the purchase of a new car the bank can register its interest in the car as a pmsi because the loan funds are being directly used to buy the property it wants a secured interest in the bottom linecreditors are often prioritized in terms of timing the pmsi exception allows credits that may not be first in line to still get a secured interest in collateral to gain this secured interest the lender must be sure its loan funds were used to buy the goods file a ucc 1 and follow other regulatory rules based on the type of collateral | |
what is a purchase money mortgage | a purchase money mortgage is a mortgage issued to the borrower by the seller of a home as part of the purchase transaction also known as a seller or owner financing this is usually done in situations where the buyer cannot qualify for a mortgage through traditional lending channels a purchase money mortgage can be used in situations where the buyer is assuming the seller s mortgage and the difference between the balance on the assumed mortgage and the sales price of the property is made up of seller financing the basics of a purchase money mortgagea purchase money mortgage is unlike a traditional mortgage rather than obtaining a mortgage through a bank the buyer provides the seller with a down payment and gives a financing instrument as evidence of the loan the security instrument is typically recorded in public records protecting both parties from future disputes whether the property has an existing mortgage is relevant only if the lender accelerates the loan upon sale due to an alienation clause if the seller has a clear title the buyer and seller agree on an interest rate monthly payment and loan term the buyer pays the seller for the seller s equity on an installment basis types of purchase money mortgagesland contracts do not pass legal title to the buyer but give the buyer equitable title the buyer makes payments to the seller for a set time period after the final payment or a refinance the buyer receives the deed 1a lease purchase agreement means the seller gives the buyer equitable title and leases the property to the buyer after fulfilling the lease purchase agreement the buyer receives the title and credit for part or all of the rental payments toward the purchase price and then typically obtains a loan for paying the seller 2purchase money mortgage benefits for buyerseven if the seller requests a credit report on the buyer the seller s criteria for the buyer s qualifications are typically more flexible than those of conventional lenders buyers may choose from payment options such as interest only fixed rate amortization less than interest or a balloon payment payments may mix or match and interest rates may periodically adjust or remain constant depending on a borrower s needs and seller s discretion down payments are negotiable if a seller requests a larger down payment than the buyer possesses the seller may let the buyer make periodic lump sum payments toward a down payment closing costs are lower as well without an institutional lender there are no loan or discount points or fees for origination processing administration or other categories lenders routinely charge also because buyers are not waiting on lenders for financing buyers may close faster and receive possession earlier than with a conventional loan purchase money mortgage benefits for sellersthe seller may receive full list price or higher for a home when providing a purchase money mortgage the seller may also pay less in taxes on an installment sale 3 payments from the buyer may increase the seller s monthly cash flow providing spendable income sellers may also carry a higher interest rate than in a money market account or other low risk investments | |
what is the purchase price | the purchase price is the price an investor pays for an investment and the price becomes the investor s cost basis for calculating gain or loss when selling the investment the purchase price includes any commission or sales charges paid for the investment and the weighted average cost is used for multiple purchases of the same security understanding purchase priceassume for example an investor buys 100 shares of ford common stock on three different dates over a five year period including 100 shares purchased at a market price of 40 60 and 80 per share to determine the cost basis of the purchases the investor needs to calculate the weighted average cost which is the total dollar amount of the purchases divided by the number of shares purchased at 100 shares each the dollar amounts of ford stock purchases are 4 000 6 000 and 8 000 or a total of 18 000 and the purchase total is divided by 300 shares to equal 60 per share if the investor adds to the stock position they can calculate a new weighted average price by adding the dollar amount of the new purchases and the additional shares to the calculation the formula can also be adjusted for stock sales if the investor only sells a portion of the holdings with commission costs added the investor s weighted average cost might approximate 62 per share the differences between realized and unrealized gainsinvestors use the purchase price of an investment to calculate realized gains or losses for tax purposes and they report that activity on schedule d of irs form 1040 an investor reports a realized gain if they sell some or all of their investment holdings if they sell no securities the investor has an unrealized gain or loss which is not reported for tax purposes assume for example an investor sells 100 shares of ford stock at a sale price of 80 per share and uses the weighted average cost of 62 to calculate a realized gain of 18 per share the investor reports the number of shares along with the weighted average cost and the sale price per share on schedule d the total realized gain of 1 800 is long term because the investor held the shares for over one year the 1 800 long term capital gain is offset by any capital losses and the net gain is taxable using capital gains tax rates | |
what is purchasing power | purchasing power is the value of a currency expressed in terms of the number of goods or services that one unit of money can buy it can weaken over time due to inflation that s because rising prices effectively decrease the number of goods or services that one unit of money can buy purchasing power is also known as a currency s buying power in investment terms purchasing or buying power is the dollar amount of credit available to a customer based on the existing marginable securities in the customer s brokerage account investopedia julie bangunderstanding purchasing powerpurchasing power affects every aspect of economics from consumers buying goods to investors buying stock to a country s economic prosperity inflation reduces a currency s purchasing power similarly loss of purchasing power has the same effect of an increase in prices to measure purchasing power in the traditional economic sense you could compare the price of a good or service against a price index such as the consumer price index cpi one way to understand purchasing power is to imagine that you worked the same job that your grandfather worked 40 years ago today you would need a much higher salary to maintain the same quality of living by the same token a homebuyer looking for homes 10 years ago in the 300 000 to 350 000 price range had more and better options to consider than people have now in the same price range | |
when a currency s purchasing power decreases due to excessive inflation serious negative economic consequences can arise these can include a higher cost of living higher interest rates that affect the global market and falling credit ratings all of these factors can contribute to an economic crisis | governments institute policies and regulations to protect a currency s purchasing power and keep an economy healthy they also monitor economic data to stay on top of changing conditions for example the u s bureau of labor statistics bls measures price changes and announces those changes with cpi cpi is one of the measures of inflation and purchasing power it calculates the change in the weighted average of prices of consumer goods and services and in particular transportation food and medical care at a given time cpi can point to changes in the cost of living as well as deflation the cpi is just one official measure of purchasing power in the u s a concept related to purchasing power is purchasing price parity ppp ppp is an economic theory that estimates the amount by which an item should be adjusted for parity given two countries exchange rates ppp can be used to compare countries economic activity income levels and other relevant data concerning the cost of living or possible rates of inflation and deflation the world bank s international comparison program releases data on purchasing power parities between different countries 1purchasing power loss or gain refers to the decrease or increase in how much consumers can buy with a given amount of money consumers lose purchasing power when prices increase they gain purchasing power when prices decrease causes of purchasing power loss can include government regulations inflation and natural and human made disasters causes of purchasing power gain include deflation and technological innovation one example of purchasing power gain would be if laptop computers that cost 1 000 two years ago cost 500 today in the absence of inflation 1 000 will now buy a laptop plus an additional 500 worth of goods the great inflation of the 1970s to early 1980s devastated the purchasing power and standard of living of americans the rate of inflation skyrocketed to 14 2examples of purchasing power losshistorical examples of severe inflation and hyperinflation which can destroy a currency s purchasing power show us the various causes and effects of such phenomena sometimes expensive and devastating wars will cause an economic collapse in particular for the losing country this happened to germany after world war i wwi in the aftermath of wwi during the 1920s germany experienced extreme economic hardship and almost unprecedented hyperinflation due in part to the enormous amount of reparations germany had to pay unable to pay these reparations with the suspect german mark germany printed paper notes to buy foreign currencies resulting in high inflation rates that rendered the german mark valueless with a nonexistent purchasing power 3the effects of the loss of purchasing power in the aftermaths of the 2008 global financial crisis and the european sovereign debt crisis are remembered to this day due to increased globalization and the introduction of the euro currencies are inextricably linked and economic trouble can cross geographic boundaries as a result governments worldwide institute policies to control inflation protect purchasing power and prevent recessions for example in 2008 the u s federal reserve kept interest rates near zero and instituted a plan called quantitative easing qe quantitative easing initially controversial saw the u s federal reserve system fed buy government and other market securities to increase the money supply and lower interest rates the increase in capital spurred increased lending and created more liquidity the u s stopped its policy of quantitative easing once the economy stabilized the european central bank ecb also pursued quantitative easing to help stop deflation in the eurozone after the european sovereign debt crisis and bolster the euro s purchasing power the european economic and monetary union established strict regulations in the eurozone related to accurately reporting sovereign debt inflation and other financial data as a general rule countries attempt to keep inflation fixed at a rate of 2 moderate levels of inflation are acceptable high levels of deflation can lead to economic stagnation special considerationsretirees can be particularly aware of purchasing power loss since many of them live off of a fixed amount of money they must make sure that their investments earn a rate of return equal to or greater than the rate of inflation so that the value of their nest egg does not decrease each year debt securities and investments with fixed rates of returns are the most susceptible to purchasing power risk or inflation fixed annuities certificates of deposit cds and treasury bonds all fall into this category for instance a long term bond with a low fixed rate of return might fail to increase your investment during periods of inflation some investments or investing strategies can help protect investors against purchasing power risk for example treasury inflation protected securities tips adjust to keep up with rising prices commodities such as oil and metals may maintain pricing power during periods of inflation | |
what s purchasing power | purchasing power refers to how much you can buy with your money as prices rise your money can buy less as prices drop your money can buy more | |
how does inflation erode purchasing power | inflation is the gradual rise in the prices of a broad range of products and services if inflation persists at a high level or gets out of control it can eat away purchasing power what you can buy with the money you have the same product that cost 2 six months ago might now cost 4 due to inflation this rise in prices in turn can erode people s savings and consequently their standard of living | |
what is the consumer price index cpi | cpi measures the prices of certain consumer goods and services over time to discern changes in prices that indicate inflation the prices for those goods and services are obtained from american consumers by way of the consumer expenditure survey conducted by the census bureau for the bureau of labor statistics which publishes cpi data the bottom linelong time investors know that loss of purchasing power can greatly impact their investments rising inflation affects purchasing power by decreasing the number of goods or services you can purchase with your money investors must look for ways to make a return higher than the current rate of inflation more advanced investors may track international economies for the potential effect on their long term investments | |
what is a pure play | a pure play is a company that focuses solely on one type of product or service some investors prefer investing in pure plays because they are easier to analyze and give maximum exposure to a particular market segment a pure play can be contrasted with multi divisional corporations or conglomerates which instead offer many products and services across various industries an investor who wants exposure to u s banking stocks for example might prefer buying shares of bank of america bac as compared to berkshire hathaway brk b because the latter is involved not only in banking but also in many other industries and sectors understanding pure playspure play companies are popular with certain types of active investors who want to make specific bets on particular products or industry segments for these investors buying a company with several diversified business lines forces them to take unnecessary risks in industries in which they do not want to invest for analysts pure plays represent an opportunity to obtain more accurate data for a comparable company analysis or peer analysis these reports are a vital source of information for investment analysis and the basis for relative valuations relative valuations make use of metrics such as the price to book p b ratio the price to earnings p e ratio the price to sales p s ratio and the price to cash flow p cf ratio each of these values can help the investment analyst calculate the relative value of a company and to evaluate whether the company is overvalued or undervalued pure play companies are helpful inputs into these analyses because they are much more directly comparable with each other conglomerates on the other hand are not readily comparable because their results reflect numerous industry sectors realistically the term pure play is always used as an approximation since corporations today almost always have some amount of cross industry exposure this is particularly true when looking at large publicly traded companies real world example of a pure playa trader is conducting an analysis of the u s banking sector specifically they want to evaluate the relative attractiveness of various u s banking stocks based on pb and pe ratios a list of the following stocks is compiled for analysis although every business is complex and unique this analysis reveals that these four banking stocks are relatively comparable to one another since regional banking is a core focus of their business models this is to be expected as such they may be viewed as pure plays for the banking sector by contrast this same trader was tempted to include berkshire hathaway in the list due to its significant role in the financial sector however this was decided against because of berkshire s numerous non banking activities that made it too difficult to compare directly with the banking pure plays due to their dependence on one sector of the economy one product or one investing strategy pure plays are often accompanied by higher specific risk this can be mitigated through diversification | |
what is pure risk | pure risk is a category of risk that cannot be controlled and has two outcomes complete loss or no loss at all there are no opportunities for gain or profit when pure risk is involved pure risk is generally prevalent in situations such as natural disasters fires or death these situations cannot be predicted and are beyond anyone s control pure risk is also referred to as absolute risk understanding pure riskthere are no measurable benefits when it comes to pure risk instead there are two possibilities on the one hand there is a chance that nothing will happen or no loss at all on the other there may be the likelihood of total loss pure risks can be divided into three different categories personal property and liability there are four ways to mitigate pure risk reduction avoidance acceptance and transference the most common method of dealing with pure risk is to transfer it to an insurance company by purchasing an insurance policy many instances of pure risk are insurable for example an insurance company insures a policyholder s automobile against theft if the car is stolen the insurance company has to bear a loss however if it isn t stolen the company doesn t make any gain pure risk stands in direct contrast to speculative risk which investors make a conscious choice to participate in and can result in a loss or gain pure risks can be insured because insurers are able to predict what their losses may be types of pure riskpersonal risks directly affect an individual and may involve the loss of earnings and assets or an increase in expenses for example unemployment may create financial burdens from the loss of income and employment benefits identity theft may result in damaged credit and poor health may result in substantial medical bills as well as the loss of earning power and the depletion of savings property risks involve property damaged due to uncontrollable forces such as fire lightning hurricanes tornados or hail liability risks may involve litigation due to real or perceived injustice for example a person injured after slipping on someone else s icy driveway may sue for medical expenses lost income and other associated damages unlike most speculative risks pure risks are typically insurable through commercial personal or liability insurance policies individuals transfer part of a pure risk to an insurer for example homeowners purchase home insurance to protect against perils that cause damage or loss the insurer now shares the potential risk with the homeowner pure risks are insurable partly because the law of large numbers applies more readily than to speculative risks insurers are more capable of predicting loss figures in advance and will not extend themselves into a market if they see it as unprofitable unlike pure risk speculative risk has opportunities for loss or gain and requires the consideration of all potential risks before choosing an action for example investors purchase securities believing they will increase in value but the opportunity for loss is always present businesses venture into new markets purchase new equipment and diversify existing product lines because they recognize the potential gain surpasses the potential loss | |
what is pushdown accounting | pushdown accounting is a bookkeeping method used by companies to record the purchase of another company the acquirer s accounting basis is used to prepare the financial statements of the purchased entity in the process the assets and liabilities of the target company are updated to reflect the purchase cost rather than the historical cost this method of accounting is an option under u s generally accepted accounting principles gaap but is not accepted under the international financial reporting standards ifrs accounting standards 1 | |
when a company buys another company accountants must record the transaction in detail including the value of the assets and liabilities of the company that have been purchased in pushdown accounting the target company s assets and liabilities are written up or down to reflect the purchase price | according to the u s financial accounting standards board fasb the total amount that is paid to purchase the target becomes the target s new book value on its financial statements any gains and losses associated with the new book value are pushed down from the acquirer s to the acquired company s income statement and balance sheet if the purchase price exceeds fair value the excess is recognized as goodwill which is an intangible asset 2 3 in pushdown accounting the costs incurred to acquire a company appear on the separate financial statements of the target rather than the acquirer it can be helpful to think of pushdown accounting as a new company that is created using borrowed money both the debt and the assets acquired are recorded as part of the new subsidiary example of pushdown accountingsay company abc decides to purchase its rival company xyz which is valued at 9 million abc is purchasing the company for 12 million which translates to a premium to finance its acquisition abc gives xyz s shareholders 8 million worth of abc shares and a 4 million cash payment which it raises through a debt offering even though it is abc that borrows the money the debt is recognized on xyz s balance sheet under the liabilities account in addition the interest paid on the debt is recorded as an expense to the acquired company s balance sheet in this case xyz s net assets that is assets minus liabilities must equal 12 million and goodwill will be recognized as 12 million 9 million 3 million under revised guidance in effect since late 2014 fasb has eliminated the percentage ownership rule this means companies have the option to use pushdown accounting regardless of the size of their ownership stake pushdown accounting requirementspushdown accounting was formerly mandatory when the parent acquired at least 95 ownership of another company if the stake ranged between 80 to 95 pushdown accounting was an option if the stake was smaller it was not permitted this has changed under new guidance in effect since late 2014 fasb has eliminated the percentage ownership rule this means companies have the option to use pushdown accounting regardless of the size of their ownership stake 4 the securities and exchange commission sec changed its own rules to match the fasb guidance meaning public companies as well as private companies have the option but not the requirement to use pushdown accounting regardless of the ownership stake of the company purchased 5 advantages and disadvantages of pushdown accountingfrom a managerial perspective keeping the debt on the subsidiary s books helps in judging the profitability of the acquisition from a tax and reporting perspective the advantages or disadvantages of pushdown accounting will depend on the details of the acquisition as well as the jurisdictions involved | |
what is a put | a put is an options contract that gives the owner the right but not the obligation to sell a certain amount of the underlying asset at a set price within a specific time the buyer of a put option believes that the underlying stock will drop below the exercise price before the expiration date the exercise price is the price that the underlying asset must reach for the put option contract to hold value a put can be contrasted with a call option which gives the holder to buy the underlying asset at a specified price on or before expiration 1the basics of put optionsputs are traded on various underlying assets which can include stocks currencies commodities and indexes the buyer of a put option may sell or exercise the underlying asset at a specified strike price put options are traded on various underlying assets including stocks currencies bonds commodities futures and indexes they are key to understanding when choosing whether to perform a straddle or a strangle the value of a put option appreciates as the price of the underlying stock depreciates relative to the strike price on the flip side the value of a put option decreases as the underlying stock increases a put option s value also decreases as its expiration date approaches conversely a put option loses its value as the underlying stock increases because put options when exercised provide a short position in the underlying asset they are used for hedging purposes or to speculate on downside price action investors often use put options in a risk management strategy known as a protective put this strategy is used as a form of investment insurance to ensure that losses in the underlying asset do not exceed a certain amount namely the strike price in general the value of a put option decreases as its time to expiration approaches due to time decay because the probability of the stock falling below the specified strike price decreases when an option loses its time value the intrinsic value is left over which is equivalent to the difference between the strike price less the underlying stock price if an option has intrinsic value it is in the money itm out of the money otm and at the money atm put options have no intrinsic value because there would be no benefit of exercising the option investors could short sell the stock at the current higher market price rather than exercising an out of the money put option at an undesirable strike price 2the possible payoff for a holder of a put is illustrated in the following diagram puts vs callsderivatives are financial instruments that derive value from price movements in their underlying assets which can be a commodity such as gold or stock derivatives are largely used as insurance products to hedge against the risk that a particular event may occur the two main types of derivatives used for stocks are put and call options a call option gives the holder the right but not the obligation to buy a stock at a certain price in the future when an investor buys a call they expect the value of the underlying asset to go up a put option gives the holder the right but not the obligation to sell a stock at a certain price in the future when an investor purchases a put they expect the underlying asset to decline in price they may sell the option and gain a profit an investor can also write a put option for another investor to buy in which case they would not expect the stock s price to drop below the exercise price example how does a put option work an investor purchases one put option contract on abc company for 100 each option contract covers 100 shares the exercise price of the shares is 10 and the current abc share price is 12 this put option contract has given the investor the right but not the obligation to sell 100 shares of abc at 10 3if abc shares drop to 8 the investor s put option is in the money itm which means that the strike price is below the market price of the underlying asset and they can close their option position by selling the contract on the open market on the other hand they can purchase 100 shares of abc at the existing market price of 8 and then exercise their contract to sell the shares for 10 disregarding commissions the profit for this position is 200 or 100 x 10 8 remember that the investor paid a 100 premium for the put option giving them the right to sell their shares at the exercise price factoring in this initial cost their total profit is 200 100 100 as another way of working a put option as a hedge if the investor in the previous example already owns 100 shares of abc company that position would be called a married put and could serve as a hedge against a decline in the share price | |
what is put call parity | put call parity is a foundational principle in options pricing theory it states that the price of a call option implies a specific fair price for the corresponding put option with the same strike price and expiration date and vice versa if market prices diverge from this relationship it signals a mispricing that shrewd traders know to exploit for profit however in general modern trading systems make it so that these rarely occur 1put call parity which only applies to european options can be determined by a set equation we ll break down the precise definition and formula illustrate step by step how it works and walk through concrete examples by the end you ll grasp this core options pricing principle and how to apply it in real world trading scenarios investopedia laura porterunderstanding put call parityput call parity is a fundamental principle in options pricing that defines the relationship between the price of a european call option and a european put option with the same underlying asset strike price and expiration date in essence it states that holding a portfolio of a long call option and a short put option or vice versa should yield the same return as having one share of the underlying stock assuming certain conditions are met alternatively it also means that simultaneously holding a short european put and long european call of the same class will deliver the same return as holding one forward contract on the same underlying asset with the same expiration and a forward price equal to the option s strike price 2the equation that expresses put call parity is as follows 3c p v x p s where c price of the european call option p v x present value of the strike price x discounted from the value on the expiration date at the risk free rate p price of the european put s spot price or the current market value of the underlying asset begin aligned c pv x p s textbf where c text price of the european call option pv x text present value of the strike price x text discounted from the value on the expiration text date at the risk free rate p text price of the european put s text spot price or the current market value text of the underlying asset end aligned c pv x p swhere c price of the european call optionpv x present value of the strike price x discounted from the value on the expirationdate at the risk free ratep price of the european puts spot price or the current market valueof the underlying asset economist hans r stoll introduced the put call parity concept in his 1969 paper the relationship between put and call option prices published in the journal of finance 4if this equation holds the options market is in equilibrium with no arbitrage prospects available however if the prices of the put and call options diverge from the value predicted by put call parity one exists traders can exploit this mispricing by simultaneously buying the underpriced option and selling the overpriced option locking in a risk free profit put call parity plays a crucial role in options pricing and risk management market makers and traders rely on put call parity models to identify mispricing and maintain efficient markets sophisticated trading algorithms and pricing models use put call parity as a fundamental building block this also means most developed markets see few chances for trading on related arbitrage situations however real world factors like transaction costs taxes dividend risks and liquidity constraints can cause option prices to deviate slightly from the theoretical values predicted by put call parity empirical studies have found that while put call parity generally holds in most markets there can be brief periods of disequilibrium especially during times of high market volatility or illiquidity 15for individual investors understanding put call parity is important for making informed decisions about options trading strategies investors can identify potential mispricings and trading prospects by monitoring the relationship between put and call prices however individual investors should be cautious about relying only on put call parity as the transaction costs of executing an arbitrage trade can often outweigh the potential profits example of put call parityassume that we want to know if the price of a six month european 55 strike put option on xyz stock at 7 46 is correct given the following information plugging these into the equation above therefore the price of the six month european put option on xyz stock should be 7 46 according to the put call parity principle since it is parity is in place in this situation | |
what about a mismatch in put call prices | in the above we can see that the put call parity equation is satisfied as the prices of the call option put option underlying stock and the present value of the strike price are in equilibrium the equation shows no arbitrage chances are available because the relationship between the prices is balanced however if there were a mismatch in the equation it would suggest an arbitrage opportunity for instance let s say the market price of the put option p is actually 8 00 instead of 7 46 in this case the equation would look like 3 54 46 8 50 57 46 58this means the put option is overpriced relative to the call option and the underlying stock an arbitrageur could exploit this mispricing by selling the put option for 8 buying the call option for 3 and shorting the underlying stock at 50 this would result in an immediate cash inflow of 5 8 3 at expiration the arbitrageur would have a guaranteed profit of 0 54 57 46 57 because the short stock position would cancel out the exercise of either the put or call option put call parity and arbitrageas we ve seen when one side of the put call parity equation is greater than the other this is an arbitrage opportunity you can sell the more expensive side of the equation and buy the cheaper side to make for all intents and purposes a risk free profit 6in practice this means selling a put shorting the stock buying a call and buying a risk free asset tips for example in reality prospects for arbitrage are short lived and difficult to find in addition their margins may be so thin that an enormous amount of capital is required to take advantage of them investopedia sabrina jiangin the graph above the y axis represents the value of the portfolio the prices of european put and call options are ultimately governed by put call parity 6 in a theoretical perfectly efficient market the prices for european put and call options would be governed by the equation above c p v x p s begin aligned c pv x p s end aligned c pv x p s let s say that the risk free rate is 4 and that tckr stock trades at 10 let s ignore transaction fees and assume tckr doesn t pay dividends for tckr options expiring in one year with a strike price of 15 we have as follows c 15 1 04 p 10 4 42 p c begin aligned c 15 div 1 04 p 10 4 42 p c end aligned c 15 1 04 p 104 42 p c tckr would trade at a 4 42 premium to their corresponding calls in this hypothetical market with tckr trading at just 67 of the strike price the bullish call seems to have the longer odds which makes intuitive sense let s say this is not the case and for whatever reason the puts are trading at 12 the calls at 7 suppose you purchase a european call option for tckr stock the expiration date is one year from now the strike price is 15 and buying the call costs you 5 this contract gives you the right but not the obligation to acquire tckr stock on the expiration date for 15 whatever the market price if one year from now tckr trades at 10 you won t exercise the option however if tckr is trading at 20 per share you will exercise the option buy tckr at 15 and break even since you paid 5 for the option any amount tckr rises above 20 is pure profit assuming there aren t any transaction fees 7 14 42 12 10 21 42 fiduciary call 22 protected put begin aligned 7 14 42 12 10 21 42 text fiduciary call 22 text protected put end aligned 7 14 42 12 1021 42 fiduciary call 22 protected put another way to imagine put call parity is to compare the performance of a protective put and a fiduciary call of the same class a protective put is a long stock position combined with a long put which limits the potential downside of holding the stock investopedia sabrina jianga fiduciary call is an investment strategy combining a long call option position with a risk free asset such as a treasury bill or cash to ensure the investor has enough funds to exercise the call option at expiration the amount of the risk free asset is equal to the present value of the strike price adjusted for the discount rate over the option s lifetime let s continue with the example assuming that the tckr puts and calls with a strike price of 15 expire in one year trade for free you could create a fiduciary call by holding the following suppose the risk free interest rate is 5 a year the present value of the 15 strike price can be calculated as follows present value future value 1 discount rate timepresent value 15 1 0 05 1 14 29in this case you would hold the long call option and 14 29 in cash at expiration if the stock price is above 15 you will use the 14 29 in cash to exercise the call option and buy the stock at 15 if the stock price is below 15 the call option will expire worthless and you ll keep the 14 29 in cash the fiduciary call strategy ensures investors have enough funds to exercise the call option at expiration eliminating the need to provide additional cash or sell other assets this strategy is like holding the underlying stock outright but limits the downside risk to the present value of the strike price however it s essential to note that in reality call options are not traded for free and the cost of the option premium must be considered when implementing this strategy investopedia sabrina jiangcan put call parity be used with american options put call parity is most straightforward with european options because they can only be exercised at expiration however while american options can be exercised at any time before expiration the put call parity relationship still holds under certain conditions the primary difference is that the flexibility of early exercise in american options can create scenarios where the parity relationship needs adjustments to account for potential dividends and the early exercise premium despite these complexities the fundamental principle of put call parity is a foundation for understanding the relationship between puts calls and the underlying asset 4 | |
how do dividends and interest rates affect put call parity | dividends and interest rates can significantly affect the relationship for assets that pay dividends the expected dividend payments must be factored into the parity equation because they affect the underlying asset s price generally dividends reduce the value of call options and increase the value of put options interest rates also play a role higher interest rates usually increase call option prices and decrease put option prices as the cost of carrying the underlying asset influences option premiums 2 | |
how are options priced | an option s price is the sum of its intrinsic value which is the difference between the underlying asset s price and the option s strike price and time value which is directly related to the time left until that option s expiry an option s price is determined using mathematical models like the well known black scholes merton model after inputting the strike price of an option the cost of the underlying instrument time to expiration risk free rate and volatility this model will spit out the option s fair market value 7the bottom linein options trading put call parity defines the relationship between the price of a european call option and a european put option with the same strike price and expiration date when both options are written on the same underlying asset this principle states that the value of a portfolio consisting of a long position in a call option and a short position in a put option should be equal to the value of a single forward contract with the same strike price and expiration date if the prices of the call and put options diverge from the put call parity relationship an arbitrage opportunity may exist however given today s algorithmic trading these arbitrage opportunities are rare | |
what is a put option | a put option or put is a contract giving the option buyer the right but not the obligation to sell or sell short a specified amount of an underlying security at a predetermined price within a specified time frame this predetermined price at which the buyer of the put option can sell the underlying security is called the strike price put options are traded on various underlying assets including stocks currencies bonds commodities futures and indexes a put option can be contrasted with a call option which gives the holder the right to buy the underlying security at a specified price either on or before the expiration date of the option contract investopedia theresa chiechi | |
how a put option works | a put option becomes more valuable as the price of the underlying stock or security decreases conversely a put option loses its value as the price of the underlying stock increases as a result they are typically used for hedging purposes or to speculate on downside price action investors often use put options in a risk management strategy known as a protective put which is used as a form of investment insurance or hedge to ensure that losses in the underlying asset do not exceed a certain amount in this strategy the investor buys a put option to hedge downside risk in a stock held in the portfolio if and when the option is exercised the investor would sell the stock at the put s strike price if the investor does not hold the underlying stock and exercises a put option this would create a short position in the stock in general the value of a put option decreases as its time to expiration approaches because of the impact of time decay time decay accelerates as an option s time to expiration draws closer since there s less time to realize a profit from the trade when an option loses its time value the intrinsic value is left over an option s intrinsic value is equivalent to the difference between the strike price and the underlying stock price if an option has intrinsic value it is referred to as in the money itm option intrinsic value difference between market price of underlying security and option strike price for put option iv strike price minus market price of underlying security for call option iv market price of underlying security minus strike price out of the money otm and at the money atm put options have no intrinsic value because there is no benefit in exercising the option investors have the option of short selling the stock at the current higher market price rather than exercising an out of the money put option at an undesirable strike price however outside of a bear market short selling is typically riskier than buying put options time value or extrinsic value is reflected in the premium of the option if the strike price of a put option is 20 and the underlying is stock is currently trading at 19 there is 1 of intrinsic value in the option but the put option may trade for 1 35 the extra 0 35 is time value since the underlying stock price could change before the option expires different put options on the same underlying asset may be combined to form put spreads there are several factors to keep in mind when it comes to selling put options it s important to understand an option contract s value and profitability when considering a trade or else you risk the stock falling past the point of profitability the payoff of a put option at expiration is depicted in the image below | |
where to trade options | put options as well as many other types of options are traded through brokerages some brokers have specialized features and benefits for options traders for those who have an interest in options trading there are many brokers that specialize in options trading it s important to identify a broker that is a good match for your investment needs alternatives to exercising a put optionthe buyer of a put option does not need to hold an option until expiration as the underlying stock price moves the premium of the option will change to reflect the recent underlying price movements the option buyer can sell their option and either minimize loss or realize a profit depending on how the price of the option has changed since they bought it similarly the option writer can do the same thing if the underlying price is above the strike price they may do nothing this is because the option may expire at no value and this allows them to keep the whole premium but if the underlying price is approaching or dropping below the strike price then to avoid a big loss the option writer may simply buy the option back which gets them out of the position the profit or loss is the difference between the premium collected and the premium paid to get out of the position example of a put optionassume an investor buys one put option on the spdr s p 500 etf spy which was trading at 445 january 2022 with a strike price of 425 expiring in one month for this option they paid a premium of 2 80 or 280 2 80 100 shares or units if units of spy fall to 415 prior to expiration the 425 put will be in the money and will trade at a minimum of 10 which is the put option s intrinsic value i e 425 415 the exact price for the put would depend on a number of factors the most important of which is the time remaining to expiration assume that the 425 put is trading at 10 50 since the put option is now in the money the investor has to decide whether to a exercise the option which would confer the right to sell 100 shares of spy at the strike price of 425 or b sell the put option and pocket the profit we consider two cases i the investor already holds 100 units of spy and ii the investor does not hold any spy units the calculations below ignore commission costs to keep things simple let s say the investor exercises the put option if the investor already holds 100 units of spy assume they were purchased at 400 in their portfolio and the put was bought to hedge downside risk i e it was a protective put then the investor s broker would sell the 100 spy shares at the strike price of 425 the net profit on this trade can be calculated as spy sell price spy purchase price put purchase price number of shares or unitsprofit 425 400 2 80 100 2 220 | |
what if the investor did not own the spy units and the put option was purchased purely as a speculative trade in this case exercising the put option would result in a short sale of 100 spy units at the 425 strike price the investor could then buy back the 100 spy units at the current market price of 415 to close out the short position | the net profit on this trade can be calculated as spy short sell price spy purchase price put purchase price number of shares or unitsprofit 425 415 2 80 100 720exercising the option short selling the shares and then buying them back sounds like a fairly complicated endeavor not to mention added costs in the form of commissions since there are multiple transactions and margin interest for the short sale but the investor actually has an easier option for lack of a better word simply sell the put option at its current price and make a tidy profit the profit calculation in this case is put sell price put purchase price number of shares or units 10 50 2 80 100 770there s a key point to note here selling the option rather than going through the relatively convoluted process of option exercise actually results in a profit of 770 which is 50 more than the 720 made by exercising the option why the difference because selling the option enables the time value of 0 50 per share 0 50 100 shares 50 to be captured as well thus most long option positions that have value prior to expiration are sold rather than exercised for a put option buyer the maximum loss on the option position is limited to the premium paid for the put the maximum gain on the option position would occur if the underlying stock price fell to zero the majority of long option positions that have value prior to expiration are closed out by selling rather than exercising since exercising an option will result in loss of time value higher transaction costs and additional margin requirements writing put optionsin the previous section we discussed put options from the perspective of the buyer or an investor who has a long put position we now turn our attention to the other side of the option trade the put option seller or the put option writer who has a short put position contrary to a long put option a short or written put option obligates an investor to take delivery or purchase shares of the underlying stock at the strike price specified in the option contract assume an investor is bullish on spy which is currently trading at 445 and does not believe it will fall below 430 over the next month the investor could collect a premium of 3 45 per share 100 shares or 345 by writing one put option on spy with a strike price of 430 if spy stays above the 430 strike price over the next month the investor would keep the premium collected 345 since the options would expire out of the money and be worthless this is the maximum profit on the trade 345 or the premium collected conversely if spy moves below 430 before option expiration in one month the investor is on the hook for purchasing 100 shares at 430 even if spy falls to 400 or 350 or even lower no matter how far the stock falls the put option writer is liable for purchasing the shares at the strike price of 430 meaning they face a theoretical risk of 430 per share or 43 000 per contract 430 100 shares if the underlying stock falls to zero for a put writer the maximum gain is limited to the premium collected while the maximum loss would occur if the underlying stock price fell to zero the gain loss profiles for the put buyer and put writer are thus diametrically opposite | |
is buying a put similar to short selling | buying puts and short selling are both bearish strategies but there are some important differences between the two a put buyer s maximum loss is limited to the premium paid for the put while buying puts does not require a margin account and can be done with limited amounts of capital short selling on the other hand has theoretically unlimited risk and is significantly more expensive because of costs such as stock borrowing charges and margin interest short selling generally needs a margin account short selling is therefore considered to be much riskier than buying puts | |
should i buy in the money itm or out of the money otm puts | it really depends on factors such as your trading objective risk appetite amount of capital etc the dollar outlay for in the money itm puts is higher than for out of the money otm puts because they give you the right to sell the underlying security at a higher price but the lower price for otm puts is offset by the fact that they also have a lower probability of being profitable by expiration if you don t want to spend too much for protective puts and are willing to accept the risk of a modest decline in your portfolio then otm puts might be the way to go can i lose the entire amount of the premium paid for my put option yes you can lose the entire amount of premium paid for your put if the price of the underlying security does not trade below the strike price by option expiry i m new to options and have limited capital should i consider writing puts put writing is an advanced option strategy meant for experienced traders and investors strategies such as writing cash secured puts also need a significant amount of capital if you re new to options and have limited capital put writing would be a risky endeavor and not a recommended one the bottom lineput options allow the holder to sell a security at a guaranteed price even if the market price for that security has fallen lower that makes them useful for hedging strategies as well as for speculative traders along with call options puts are among the most basic derivative contracts | |
what is q as a ticker symbol | the letter q used to be part of the ticker symbols for a stock trading on the nasdaq specifying that a particular company was in bankruptcy proceedings if the letter q appeared as the final letter of a nasdaq symbol it meant bankrupt issuer has filed for bankruptcy as the nasdaq put it 1understanding qall companies traded on the nasdaq have four lettered ticker symbols which are representative of the actual company for example apple trades as aapl microsoft as msft and so on however in some cases a ticker symbol on the nasdaq will have five letters and the fifth letter is an identifier symbol that tells market participants something about the company before the system changed nasdaq added a q onto a company s ticker to tell investors the company filed for bankruptcy nasdaq now uses the financial status indicator which marks key issues beyond just bankruptcy filings including a failure to meet nasdaq listing requirements other markets and exchanges may still use q to indicate a bankruptcy filing however 1q is one of two letters that the nasdaq no longer uses as an identifier with the other being e 1each trading day nasdaq publishes a list of companies that in one way or another don t meet the listing standards according to nasdaq a company is added to the list five business days after nasdaq notifies the company about its noncompliance and is removed from the list one business day after nasdaq determines that the company has regained compliance or no longer trades on nasdaq 2investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal | |
what is the q ratio or tobin s q | the q ratio also known as tobin s q measures the relationship between market valuation and intrinsic value in other words it estimates whether a business or market is overvalued or undervalued the q ratio is calculated by dividing the market value of a company by its assets replacement cost thus equilibrium is when market value equals replacement cost formula and calculation of the q ratiothe q ratio is calculated as the market value of a company divided by the replacement value of the firm s assets since the replacement cost of total assets is difficult to estimate another version of the formula is often used by analysts to estimate tobin s q ratio it is as follows often the assumption is made the market value of liabilities and the book value of a company s liabilities are equivalent since market value typically does not account for a firm s liabilities this provides a simplified version of the tobin s q ratio as the following | |
what the q ratio can tell you | the tobin s q ratio is a quotient popularized by james tobin of yale university nobel laureate in economics who hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs while tobin is often attributed as its creator this ratio was first proposed in an academic publication by economist nicholas kaldor in 1966 in earlier texts the ratio is sometimes referred to as kaldor s v 1a low q ratio between 0 and 1 means that the cost to replace a firm s assets is greater than the value of its stock this implies that the stock is undervalued conversely a high q greater than 1 implies that a firm s stock is more expensive than the replacement cost of its assets which implies that the stock is overvalued this measure of stock valuation is the driving factor behind investment decisions in tobin s q ratio when applied to the market as a whole we can gauge whether an entire market is relatively overbought or undervalued we can represent this relationship as follows for either a firm or a market a ratio greater than one would theoretically indicate that the market or company is overvalued a ratio that is less than one would imply that it is undervalued underlying these simple equations is an equally simple intuition regarding the relationship between price and value in essence tobin s q ratio asserts that a business or a market is worth what it costs to replace the cost necessary to replace the business or market is its replacement value it might seem logical that fair market value would be a q ratio of 1 0 but that has not historically been the case prior to 1995 for data as far back as 1945 the u s q ratio never reached 1 0 during the first quarter of 2000 the q ratio hit 2 15 while in the first quarter of 2009 it was 0 66 as of the second quarter of 2020 the q ratio was 2 12 2the q ratio for the entire u s stock market as of march 31 2024 in other words the market value of all public companies is 73 greater than the replacement cost of all their assets 3replacement value or replacement cost refers to the cost of replacing an existing asset based on its current market price for example the replacement value of a one terabyte hard drive might be just 50 today even if we paid 500 for the same storage space a few years ago in this scenario ascertaining the replacement value would be easy because there is a robust market for hard drives from which to examine prices to determine what a one terabyte hard drive is worth we would simply need to determine what it would cost to buy a one terabyte hard drive of comparable quality and specifications from one of the many different suppliers on the market in many cases however the replacement value of assets can prove much more elusive than this for instance consider a business that owns complicated software tailor made for its operations because of its highly specialized nature there may not be any comparable alternatives available on the market unlike our previous example we could not simply check to see how much similar software is selling for because sufficiently similar software would not exist it would thus be difficult if not impossible to render an objective estimate of the software s replacement value similar circumstances present themselves in a variety of business contexts from complex industrial machinery and obscure financial assets to intangible assets such as goodwill due to the inherent difficulty of determining the replacement value of these and similar assets many investors do not regard tobin s q ratio to be a reliable tool for valuing individual companies example of how to use the q ratiothe formula for tobin s q ratio takes the total market value of the firm and divides it by the total asset value of the firm for example assume that a company has 35 million in assets it also has 10 million shares outstanding that are trading for 4 a share in this example the tobin s q ratio would be since the ratio is greater than 1 0 the market value exceeds the replacement value and so we could say the firm is overvalued and might be a sale an undervalued company one with a ratio of less than one would be attractive to corporate raiders or potential purchasers as they may want to purchase the firm instead of creating a similar company this would likely result in increased interest in the company which would increase its stock price which in turn increase its tobin s q ratio as for overvalued companies those with a ratio higher than one they may see increased competition a ratio higher than one indicates that a firm is earning a rate higher than its replacement cost which would cause individuals or other companies to create similar types of businesses to capture some of the profits this would lower the existing firm s market shares reduce its market price and cause its tobin s q ratio to fall limitations of using the q ratiotobin s q is still used in practice but others have since found that fundamentals predict investment results much better than the q ratio including the rate of profit either for a company or the average rate of profit for a nation s economy others like doug henwood in his book wall street how it works and for whom find that the q ratio fails to accurately predict investment outcomes over an important time period 4 the data for tobin s original 1977 paper covered the years 1960 to 1974 a period for which q seemed to explain investment pretty well but looking at other time periods the q fails to predict over or undervalued markets or firms while the q and the investment seemed to move together for the first half of the 1970s the q collapsed during the bearish stock markets of the late 1970s even as investment in assets rose | |
what is the current value of tobin s q ratio | tobin s q ratio had a value of 1 730 as of march 31 2024 when calculated for the entire u s stock market in other words the combined market capitalization of all public companies is 73 greater than the cost of replacing all of the assets of those companies 3 | |
what are the problems with tobin s q ratio | some analysts believe that tobin s q ratio does not accurately forecast the value of an investment at least compared with other analytical techniques like fundamental analysis moreover many corporate assets are intangible such as goodwill brand recognition and intellectual property the difficulty of pricing these assets makes it difficult to calculate the q ratio for those companies | |
when calculated for the entire stock market the q ratio shows whether the aggregate market is relatively over or under valued | the bottom linetobin s q ratio measures the relationship between a company s market price and the cost of its assets a high q ratio means that a company s stock price is well above the value of its assets and that company may be overvalued a low q ratio means that the company may be undervalued when calculated for the market as a whole the q ratio may indicate that the market itself is overvalued or undervalued | |
what is the qatar investment authority qia | the qatar investment authority qia is a government owned entity charged with managing the sovereign wealth fund swf of qatar qia s mission is to invest manage and grow qatar s reserves in order to support the development of qatar s economy though qatar s population is relatively small its sovereign wealth fund is among the largest in the world and it has among the world s lowest unemployment understanding the qatar investment authority qia the qatar investment authority was established in 2005 and is based in doha qatar qia strives to invest and manage funds assigned to it by the supreme council for economic affairs and investment sceai 1 the qia is owned by the government of qatar but reports to the sceai additionally it is managed by a board of directors qatar s state audit bureau is responsible for auditing the financial operations of the qia the qia does not have any mandated limitations on its investment universe and is able to invest in both domestic and foreign marketable securities real property real estate alternative assets private equity funds and credit and fixed income securities 1 the qia also employs derivatives in its investment strategy most of qia s investments are outside of qatar the qia states that it is guided by five principal values integrity mission focus entrepreneurialism excellence and respect for people the authority follows a strict four stage approach to each investment which is broken down into origination evaluation execution and active portfolio management the qia also claims that risk management is at the core of its investment strategy qia s investment strategyqia s portfolio managers employ a patient approach with long time horizons 2 the fund uses a 4 step process to choose investments origination is the term the qia uses to find potential investments often leveraging co investors such as global banks or other sovereign wealth funds evaluation is the next step where due diligence is employed execution involves entering the investment at the best available prices and without moving markets active management is the fourth step where positions are re evaluated and changes can be made including disposing of the position 3in 2020 the qia introduced a more formal top down portfolio asset allocation process to guide the medium and long term evolution of its portfolio qia s reference portfolio is designed to meet the long term return objectives subject to risk and liquidity limits set by the board the reference portfolio is then used to develop annual and medium term investment plans for each investment team 2qia actively trades its portfolio but are not activist towards invested companies the qia makes direct investments in projects related to real estate infrastructure financial institutions industry and investment funds it also invests in publicly traded securities including global equities fixed income and alternative investments as of mid 2022 qia s holdings were estimated to be around 360 billion down from a record 450 billion reached earlier in 2022 4history of the qiawho owns the qatar investment authority the qia is owned by the national government of the state of qatar it is run by a ceo and board of governors | |
where can i invest in qatar | foreign investors are allowed to own up to 100 of qatari companies however for most investors accessing such holdings is difficult instead u s investors can look to the ishares msci qatar etf qat which tracks the country s stock market 6 | |
how big is qatar s sovereign wealth fund | the qia portfolio is estimated to be worth around 360 billion as of mid 2022 this puts it at the bottom of the top 10 sovereign wealth funds in terms of total assets 7 | |
what is the qatari riyal qar | qar is the currency code for the qatari riyal the currency of the state of qatar which is located along the coast of the arabian peninsula the qatari riyal is made up of 100 dirhams the abbreviation for the currency is qr in english riyal is also frequently referred to as rial all qatar notes and coins are issued by the qatar central bank whose objectives include monetary stability and regulatory control of the currency understanding the qatari riyal qar the qatari riyal replaced the qatar and dubai riyal in 1973 when dubai entered the united arab emirates uae at this time qatar began to issue its riyal separately the qatar and dubai riyal came into force in 1966 at which time the previous currency the indian rupee was replaced due to india s devaluation of its currency 1the riyal is pegged to the u s dollar usd at 3 64 qar per one usd or usd qar 3 64 the peg became official in 2001 when it was written into law by royal decree per the law the currency will be maintained within a band between 3 6385 and 3 6415 riyals per usd 21because qatar s economy is heavily dependent on commodities such as oil and natural gas the pegging of its currency reduces potential economic shocks because these commodity prices are denominated in u s dollars the oil and gas industry represents the majority of qatar s gross domestic product gdp 3the qatari riyal has bill denominations of one five 10 50 100 and 500 riyals coins denominations are one five 10 25 and 50 dirhams 1currency fluctuationin 2017 the value of the riyal shifted in the offshore market after some foreign countries ceased dealing with qatari banks which created a liquidity shortfall pushing the value of the riyal to 3 81 in some foreign markets 4during this time and after the official peg rate of 3 64 stayed in effect within qatar this period referred to as the diplomatic crisis resulted from several countries cutting diplomatic ties and not allowing qatar to use their airspace or sea routes as it was alleged that qatar was supporting terrorism 5in jan 2021 saudi arabia egypt the united arab emirates uae and bahrain signed a solidarity and stability agreement towards ending the diplomatic rift trade ties and land sea and air blockade against qatar 6currency exchangeif traveling to qatar the pegged exchange rate is one usd to 3 64 qar unfortunately the live exchange is not the rate a traveler will get who wants qr cash banks and currency exchange services will typically charge a 3 to 5 service charge and work this into the exchange rate they offer a client therefore instead of getting qr3 64 for each one usd the traveler will likely get 3 46 which is almost 5 less the currency exchange makes the money on the difference between the two rates assume the traveler converts 1 000 at this rate receiving qr3 460 they spend some of this on their trip but not all of it when they come home to the u s they want to convert their remaining qr1 500 back into usd the gdp of qatar in 2021 as of aug 14 2022 7the official exchange rate of the usd qar is still 3 64 to find out what each qar is worth in usd divide one by 3 64 for a rate of 0 274725 this is the qar usd rate therefore the expected money the traveler will receive is 412 09 qr1 500 x 0 274725 but recall that banks and currency exchanges typically take a service fee and include that fee in the exchange rate therefore instead of getting 0 274725 for each qar the traveler will likely get a rate closer to 0 261 which is almost five percent less so instead of receiving 412 09 they receive 391 50 qr1 500 x 0 261 | |
is qatari currency pegged to another currency | qatari currency is pegged to the u s dollar at a fixed rate of 1 to qr3 64 | |
what was the currency of qatar before the riyal | the currency that qatar had before the riyal was the dubai riyal before that it was using the saudi riyal before the saudi riyal the main currency was the gulf rupee | |
which countries use riyals | countries that use the riyal include qatar saudi arabia iran oman yemen | |
what is the qatari riyal qar | qar is the currency code for the qatari riyal the currency of the state of qatar which is located along the coast of the arabian peninsula the qatari riyal is made up of 100 dirhams the abbreviation for the currency is qr in english riyal is also frequently referred to as rial all qatar notes and coins are issued by the qatar central bank whose objectives include monetary stability and regulatory control of the currency understanding the qatari riyal qar the qatari riyal replaced the qatar and dubai riyal in 1973 when dubai entered the united arab emirates uae at this time qatar began to issue its riyal separately the qatar and dubai riyal came into force in 1966 at which time the previous currency the indian rupee was replaced due to india s devaluation of its currency 1the riyal is pegged to the u s dollar usd at 3 64 qar per one usd or usd qar 3 64 the peg became official in 2001 when it was written into law by royal decree per the law the currency will be maintained within a band between 3 6385 and 3 6415 riyals per usd 21because qatar s economy is heavily dependent on commodities such as oil and natural gas the pegging of its currency reduces potential economic shocks because these commodity prices are denominated in u s dollars the oil and gas industry represents the majority of qatar s gross domestic product gdp 3the qatari riyal has bill denominations of one five 10 50 100 and 500 riyals coins denominations are one five 10 25 and 50 dirhams 1currency fluctuationin 2017 the value of the riyal shifted in the offshore market after some foreign countries ceased dealing with qatari banks which created a liquidity shortfall pushing the value of the riyal to 3 81 in some foreign markets 4during this time and after the official peg rate of 3 64 stayed in effect within qatar this period referred to as the diplomatic crisis resulted from several countries cutting diplomatic ties and not allowing qatar to use their airspace or sea routes as it was alleged that qatar was supporting terrorism 5in jan 2021 saudi arabia egypt the united arab emirates uae and bahrain signed a solidarity and stability agreement towards ending the diplomatic rift trade ties and land sea and air blockade against qatar 6currency exchangeif traveling to qatar the pegged exchange rate is one usd to 3 64 qar unfortunately the live exchange is not the rate a traveler will get who wants qr cash banks and currency exchange services will typically charge a 3 to 5 service charge and work this into the exchange rate they offer a client therefore instead of getting qr3 64 for each one usd the traveler will likely get 3 46 which is almost 5 less the currency exchange makes the money on the difference between the two rates assume the traveler converts 1 000 at this rate receiving qr3 460 they spend some of this on their trip but not all of it when they come home to the u s they want to convert their remaining qr1 500 back into usd the gdp of qatar in 2021 as of aug 14 2022 7the official exchange rate of the usd qar is still 3 64 to find out what each qar is worth in usd divide one by 3 64 for a rate of 0 274725 this is the qar usd rate therefore the expected money the traveler will receive is 412 09 qr1 500 x 0 274725 but recall that banks and currency exchanges typically take a service fee and include that fee in the exchange rate therefore instead of getting 0 274725 for each qar the traveler will likely get a rate closer to 0 261 which is almost five percent less so instead of receiving 412 09 they receive 391 50 qr1 500 x 0 261 | |
is qatari currency pegged to another currency | qatari currency is pegged to the u s dollar at a fixed rate of 1 to qr3 64 | |
what was the currency of qatar before the riyal | the currency that qatar had before the riyal was the dubai riyal before that it was using the saudi riyal before the saudi riyal the main currency was the gulf rupee | |
which countries use riyals | countries that use the riyal include qatar saudi arabia iran oman yemen | |
what is a qualified small employer health reimbursement arrangement qsehra | a qualified small employer health reimbursement arrangement qsehra also known as a small business hra allows businesses with fewer than 50 full time workers that don t provide group insurance coverage to help subsidize their employees health care costs any money reimbursed through the plan is tax free for employees and tax deductible for employers | |
how a qualified small employer health reimbursement arrangement qsehra works | small businesses that don t provide group health insurance coverage to their workers can still help defray their employees health care costs up to a maximum amount each year by setting up a qsehra the qsehra must be funded entirely by the employer with no salary reduction contributions on the part of the employee the employer must offer the same terms to all of its full time employees employers cannot offer both a qsehra and a flexible spending account fsa to cover health costs eligible employees may enroll during open enrollment season or after experiencing a qualifying life event such as a marriage or divorce to qualify employees and any eligible household members must have minimum essential health insurance coverage such as through the health insurance marketplace created under the affordable care act employees can use their reimbursements to pay the premiums for their health insurance coverage as well as for qualified out of pocket expenses including copayments for doctor s office visits prescriptions and lab work employers may narrow the list of eligible expenses but not expand it and employees must provide proof of their actual medical costs to receive reimbursement qualified small employer health reimbursement arrangement qsehra contribution limitsthe maximum amount that employers may contribute to their qsehra accounts can change from year to year based on the cost of living the irs publishes the latest limits when they become available in 2024 the limit is 6 150 per individual employee or 12 450 for an employee and their eligible household members employees not covered by a qsehra for a full year such as mid year hires can receive a prorated amount of the full year maximum reimbursement history of the qualified small employer health reimbursement arrangement qsehra then president barack obama signed the qsehra into law on dec 13 2016 as part of the 21st century cures act and the plans became available to employees on march 13 2017 the act corrected a problem for small businesses offering health reimbursement arrangements hras between 2014 and 2016 during this period small businesses could be hit with penalties of 100 per employee per day for being out of compliance with the requirements of the affordable care act aca qualified small employer health reimbursement arrangement qsehra eligibilityas mentioned above to qualify to sponsor a qsehra a business must have fewer than 50 full time employees provide the qsehra on the same terms to all full time workers and not have a group health plan or a flexible spending arrangement fsa a qsehra is not a group health plan medium and large companies may offer their own hras only as an option alongside group health insurance coverage such as a preferred provider organization ppo or health maintenance organization hmo plan qualified small employer health reimbursement arrangement qsehra complianceto comply with the law all employees covered by a qsehra must benefit from it equally so if the employer offers a qsehra to any full time employees it must cover all of them however employers are not required to include new part time or seasonal workers in the benefits they provide because the aca governs these arrangements participating employees must provide proof that they carry the minimum essential health coverage required by the aca under irs rules employers must report the amount of reimbursement an employee was entitled to receive for the calendar year just ended in box 12 of the employee s annual form w 2 wage and tax statement using code ff as the irs notes that figure may be different from the amount of reimbursement the employee actually received for example if your qsehra provides a permitted benefit of 3 000 and your employee receives reimbursements of 2 000 on form w 2 you would report a permitted benefit of 3 000 in box 12 as mentioned however the employee is not taxed on either amount qsehra plans are also subject to oversight under the employee retirement income security act erisa erisa regulations require that employers give employees a summary plan description that details their plan benefits finally should an employer decide to make group health insurance available it is no longer permitted to offer a qsehra plan | |
how much of their qsehra contributions can employers deduct | as long as they are eligible to offer qsehra benefits to their employees and they don t exceed the per employee or per family maximums the employer s contributions are fully deductible | |
what is the difference between a qsehra and an individual coverage hra | a major difference between qsehras and individual coverage hras is that qsehras are specifically for small businesses with fewer than 50 full time employees while individual coverage hras can be for businesses of any size as long as they have at least one employee who isn t the owner or their spouse employers can also offer an individual coverage hra to some employees and a group health insurance plan to others | |
what is an excepted benefit hra | an excepted benefit hra ebhra is a type of hra that employers can offer in conjunction with a group health plan however the employee is not required to enroll in the group plan in order to be eligible the bottom linequalified small employer health reimbursement arrangements qsehras allow small businesses to help defray their full time workers health costs without providing them with actual insurance as such a qsehra can be an affordable alternative for some businesses and a better than nothing benefit for employees and their families | |
what is the qstick indicator | the qstick indicator is a technical analysis indicator developed by tushar chande to numerically identify trends on a price chart it is calculated by taking an n period moving average of the difference between the open and closing prices a qstick value greater than zero means that the majority of the last n days have been up indicating that buying pressure has been increasing the qstick indicator is also called quick stick it is not widely available in trading and charting software the formula for the qstick indicator isqsi ema or sma of close open where ema exponential moving averagesma simple moving averageclose closing price for periodopen opening price for period begin aligned text qsi text ema or sma of text close text open textbf where text ema text exponential moving average text sma text simple moving average text close text closing price for period text open text opening price for period end aligned qsi ema or sma of close open where ema exponential moving averagesma simple moving averageclose closing price for periodopen opening price for period there is the option to add a simple moving average sma of the qstick indicator this creates a signal line | |
what does the qstick indicator tell you | the qstick is measuring buying and selling pressure taking an average of the difference between closing and opening prices when the price on average is closing lower than it opens the indicator moves lower when the price on average is closing higher than the open the indicator moves up transaction signals occur when the qstick crosses above the zero line crossing above zero is used as a buy signal because it is indicating that buying pressure is increasing while sell signals occur when the indicator moves below zero in addition an n period moving average of the qstick values can be drawn to act as a signal line transaction signals are then generated when the qstick value crosses through the trigger line three is a common n period for signal line | |
when the qsticks moves above the signal line it indicates that the price is starting to have more closes above the open and therefore price may be starting rise when the qstick crosses below the signal line it indicates price is starting have more closes below the open price may be starting to trend lower | the indicator may also highlight divergence when price is rising but the qstick is falling it shows that momentum may be waning when price is falling and qstick is rising this shows buying momentum in price may occur soon the indicator can produce anomalies though it does not account for gaps only intraday price action therefore if the price gaps higher but closes below the open this is still marked as bearish even though the price may have still closed higher than the prior close may could result in divergence which doesn t necessarily indicate a timely reversal in price example of how to use the qstick indicatorthe following chart shows an 20 period qstick applied to the spdr s p 500 etf spy image by sabrina jiang investopedia 2021 | |
when the price is choppy so are the buy and sell signals on the left side of the chart there are many zero line crossovers that did not generate profitable trade signals nor identified the trend conclusively | on the right side of the chart there were more trending periods in the price during this period the qstick did a better job of identifying the trend staying above zero when the price trend was up and staying below zero when the price trend was down the difference between the qstick indicator and rate of change roc qstick looks at the difference between open and closing prices and then takes an average of that difference the roc indicator looks at the difference between the current closing price and a closing price n periods ago that amount is then divided by the close n periods ago and then multiplied by 100 the indicators are similar but look at slightly different data are calculated differently so they will have slightly different trade signals limitations of using the qstick indicatorthe qstick indicator only looks at historical data and takes a moving average of it therefore it is not inherently predictive and its movements will typically lag behind the actual movements in price the qstick can produce anomalies when the price is gapping in one direction but the intraday price action moves the other this may cause divergences between the price and the indicator but may not necessarily indicate a timely reversal in price the trade signals may not necessarily be ideal and often need to be combined with some other filter in choppy conditions the price will whipsaw across the zero line and or signal line generating numerous losing trades | |
what is qtum | qtum is a cryptocurrency that combines ethereum s smart contract functionality with the security of bitcoin s unspent transaction output model utxo to create a platform that is suitable for adoption by large organizations 1 qtum was founded in 2016 by patrick dai jordan earls and neil mahl and its initial coin offering ico was held in march 2017 2as of august 2022 the coin was ranked 98 by overall market cap with the price hovering around 3 48 with a market cap of 363 15 million 3understanding qtumthe founders of qtum pronounced quantum sought to combine some of the best aspects of both bitcoin and ethereum with the goal of becoming a secure exchange for business focused decentralized applications dapps qtum hopes to disrupt the online transactions market and become an integral part of industries such as finance and social networking its currency is called a token 5one core element of qtum borrowed from bitcoin is the utxo model a sort of accounting system used by bitcoin that provides a high level of transactional security the uxto system provides a type of receipt for unspent coins after a transaction qtum copied and reworked bitcoin s utxo code for its own platform 5qtum borrowed smart contracts from ethereum smart contracts are blocks of self executing code that once verified on the blockchain carry out the terms of the deal making the contract irrevocable 5qtum bitcoin and ethereumwhile qtum borrowed from both bitcoin and ethereum it differs from both of its much bigger competitors in key ways to begin with qtum deployed what it calls the account abstraction layer aal the technology that enables the use of smart contracts in conjunction with the utxo model aal enables the utxo and smart contract models to interact 5qtum also uses a proof of stake pos consensus model rather than the proof of work model used by bitcoin 5 this makes it easier to mine new coins bitcoin s pow approach is resource intensive causing the computer networks mining its coins to consume more electricity annually than many entire countries a pos approach simplifies the process and results in much less power consumption 6with a pos system miners are chosen to verify blocks based on their own stakes in the system rather than who can solve a complex math problem the fastest the bigger the stake the greater the user s chance of being selected to verify the transactions investing in cryptocurrencies and other initial coin offerings icos is highly risky and speculative and this article is not a recommendation by investopedia or the writer to invest in cryptocurrencies or other icos since each individual s situation is unique a qualified professional should always be consulted before making any financial decisions investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein | |
what is quadrix | quadrix is a stock rating system that uses over 90 variables in seven major categories to determine the value of a stock the quadrix system is produced and maintained by horizon publishing company the seven major categories are momentum quality value financial strength earnings estimates performance and reversion the overall score for a particular stock is determined by a weighted average of all 90 variables the quadrix system was developed by horizon investment services chief investment officer rich moroney and has been publishing scores for stocks since the year 2000 | |
how quadrix works | quadrix is a stock evaluation tool that rates stocks based on variable scores that fall into one of seven categories the seven categories of variables used in quadrix are momentum quality value financial strength forecasted earnings performance and reversion the quadrix system can also be used as a tool for tracking industry group performance quadrix is a first stock screen for building portfolios the system looks at the given set of 90 variables in a universe of over 4 000 stocks 1 it is intended to narrow the universe of acceptable stocks under consideration by an investor it is not a risk based portfolio builder like some robo advisors examples and uses of quadrixquadrix is used in house by horizon publishing to screen stocks for clients and it is available for subscribers to horizon s newsletter products as mentioned above it is not a risk based portfolio builder and it does not rely on modern portfolio theory mpt to weight stocks or evaluate risk versus return for the investor | |
what is quadruple witching | quadruple witching refers to the simultaneous expiration four times a year of stock options index futures and index futures options derivatives contracts the fourth type of contract involved in quadruple witching single stock futures hasn t traded in the u s since 2020 and was never a major contributor to equity trading volumes 1 what is now effectively triple witching occurs on the third friday of march june september and december equity trading volume tends to rise on these days and is typically heaviest during the last hour of trading as traders adjust their portfolios investopedia mira norianquadruple witching datesthe financial markets have quadruple witching dates on the third friday of march june september and december on these days four types of financial contracts expire simultaneously stock index futures stock index options stock options and single stock futures here are the dates for 2024 here are the dates for 2025 here are the dates for 2026 during the last hour of trading on these days known as the quadruple witching hour market activity might increase as traders adjust positions and roll over contracts understanding quadruple witchingthe four derivatives contracts accounting for the quadruple in quadruple witching are stock index futures stock index options stock options and single stock futures while single stock futures now only trade outside the u s the quarterly expiration of index futures and index options coinciding with the monthly expiration of stock options produces a flurry of trading despite the evocative name what happens during what is now triple witching is not a supernatural phenomenon nor a mystery market makers who ve sold expiring stock and index options contracts close out the matched hedge positions boosting trading volume meanwhile the rolling of contracts ahead of expiration also increases turnover in the options and futures markets another factor is quarterly index rebalancing also known as reconstitution on the witching day that means portfolio managers tracking rebalancing indexes including those from s p dow jones in the u s and ftse in the u k may need to trade reflecting index changes types of contracts involved in quadruple witchingnow that you know what quadruple witchings are all about let s take a look at the four classes of contracts that can expire on these dates options are derivatives which means they derive their value from underlying securities such as stocks options contracts give a buyer the right but not the obligation to trade a set number of shares of the underlying security at a given strike price at any time before options expire there are two types of options monthly stock options contracts expire on the third friday of every month option buyers pay an upfront cost known as the option premium 2an index option works much like a stock options contract but derives its value from that of an equity index rather than a single stock s share price the value of the underlying index relative to the option contract s strike price is what determines an index option trade s profitability as with stock options index options don t confer an ownership interest 3unlike stock options index options are cash settled another important distinction is that index options are european style meaning they can only be exercised on expiration date while stock options may be exercised at any time before expiration 3futures contracts are legal agreements to buy or sell an asset at a determined price at a specified future date 4 futures contracts are standardized with fixed quantities and expiration dates futures trade on a futures exchange the buyer of a futures contract is obligated to buy the underlying asset at expiry while the seller is obligated to sell at expiry index futures cash settle at expiration at the specified price with the value of the index at the time determining the trade s profitability 5 like index options index futures can be used to hedge a portfolio of stocks limiting the damage from bear markets in a bear market a trade selling a futures contract earns a profit offsetting the stock portfolio s loss the goal is to minimize short term losses for long term holdings single stock futures are obligations to take delivery of shares of the underlying stock at the contract s expiration date at a specified price each contract represents 100 shares of stock holders of stock futures don t receive dividend payments 6 even when single stock futures traded in the u s they were a minor market segment relative to the trading flows in stock options and index options and futures market impact of quadruple witchingone reason the combination of monthly and quarterly derivatives expirations generates heavy trading volume is that in the money options contracts are subject to automatic exercise requiring the delivery of the underlying shares in the case of call options call options are profitable when the price of the underlying security is higher than the option s strike price put options are in the money when the stock is priced below the strike price in either case the expiration of in the money options results in increased trading volume as the underlying shares are bought or sold to close out the options trade 7despite the overall increase in trading volume quadruple witching days do not necessarily add to market volatility while quadruple witching takes place four times a year stock options contracts expire more frequently on the third friday of every month closing and rolling out futures contractsmuch of the action surrounding futures and options on quadruple witching days is focused on offsetting closing or rolling out positions a futures contract contains an agreement between the buyer and seller in which the underlying security is to be delivered to the buyer at the contract price at expiration for example one e mini s p 500 futures contract is worth 50 times the value of the s p 500 8 so the value of an e mini contract when the s p 500 is 2 100 at expiration is 105 000 this amount is delivered to the contract owner if it is left open at expiration contract owners don t have to take delivery on the expiration date instead they can close their contracts by booking an offsetting trade at the prevailing price by cash settling the gain or loss from the purchase and sale prices traders can also roll their contracts forward a process that extends the contract by offsetting the existing trade and simultaneously booking a new option or futures contract to be settled in the future the chicago mercantile exchange delisted standard sized s p 500 index and options futures contracts in september 2021 9arbitrage opportunitiesover the course of a quadruple witching day transactions involving large blocks of contracts can create price movements that may provide arbitrageurs the opportunity to profit on temporary price distortions arbitrage can rapidly escalate volume particularly when high volume round trips are repeated multiple times over the course of trading on quadruple witching days however just as activity can provide the potential for gains it can also lead to losses very quickly gives arbitrageurs the opportunity to profit on temporary price distortionsincreased trading activity and volume can lead to market gainsmarket gains tend to be fairly modestthe potential for losses can be equally as evident as the potential for gainsreal world example of quadruple witchingthere tends to be a lot of frenzy in the days leading up to a quadruple witching day but it s unclear whether the actual witching leads to increased market gains that s because it s impossible to separate any gains due to expiring options and futures from gains due to other factors such as earnings and economic events friday march 15 2019 was the first quadruple witching day of 2019 as with any other witching day there was hectic activity in the preceding week according to a reuters report trading volume on u s market exchanges on that day was 10 8 billion shares compared to the 7 5 billion average over the last 20 trading days 10frequently asked questions | |
what is witching and why is it quadruple | in folklore the late night witching hour was a time of supernatural and occult doings the appropriation of witching to denote the simultaneous expiration of stock and index options and futures contracts was meant to suggest the possibility of surprising market moves driven by the increased trading volumes associated with such quarterly events in practice single stock futures had minimal market impact given the prevalence of stock options since single stock futures no longer trade in the u s the quarterly derivatives expiration date is now often called triple witching | |
when does quadruple witching occur | stop options contracts expire monthly while index futures and options typically settle on the third friday of march june september and december 11 | |
what are some price abnormalities observed on quadruple witching | one interesting quirk is that the price of a security may artificially tend toward a strike price with large open interest as gamma hedging takes place a process known as pinning the strike pinning a strike imposes pin risk for options traders where they become uncertain whether or not options with strike prices near the market price will finish in the money and be exercised the bottom lineduring the last hour of trading on the third friday of march june september and december called the quadruple witching hour market activity can increase as traders adjust positions and rollover contracts investors should know this at a minimum to understand the reasons for increased trading at those times and plan accordingly | |
what is a qualification ratio | the term qualification ratio refers to the measure of a borrower s creditworthiness that helps lenders decide whether to extend them credit used in the underwriting process a qualification ratio calculates how likely it would be for a borrower to repay a loan lenders normally use one of two qualification ratios in their underwriting process the first is the monthly debt to income ratio dti while the second one is called the back end ratio which calculates the monthly debt payment to income qualification ratios also determine the terms of any credit application including repayment terms and interest rate understanding qualification ratiosconsumer credit applications provide lenders with a window into the personal and financial situation of applicants consumers are required to provide information such as their name address and financial information on these applications this information includes employment information income and debts lenders use this information in the underwriting process to determine whether or not to approve a consumer s credit application for most credit products especially loans and mortgages a borrower s housing expenses alone which include homeowners insurance taxes utilities and neighborhood or association fees cannot exceed 28 of a borrower s monthly gross income 1 another qualification ratio the borrower s dti includes housing expenses plus debt and generally cannot exceed 36 of monthly gross income 2higher ratios indicate an increased risk of default but some lenders may accept higher ratios in exchange for certain factors such as substantial down payments sizable savings and favorable credit scores for example a lender may offer a mortgage to a borrower with a high front end ratio if they pay half of the purchase price as a down payment lenders generally prefer a front end ratio of no more than 31 or less for federal housing administration fha loans 3as mentioned above lenders generally use one of two qualification ratios to determine the likelihood of repayment this is based on the information provided by the applicant as well as their credit report the first ratio involves the applicant s total monthly debt to total monthly income while the other calculates the total monthly debt payments versus the total monthly income these ratios take the total annual income of a household and divide it by 12 banks generally use the lower of the two numbers to determine how large a loan to offer you special considerationsqualification ratios are not rigid excellent credit history often mitigates a poor ratio for example in addition some borrowers who do not meet the standard qualifying ratios take advantage of special mortgage programs offered by some banks the added risk of default by these borrowers means that they generally pay higher interest rates versus mortgages that meet standard qualifying ratios credit card debt also counts toward your back end ratio but this is much more complicated lenders used to apply the minimum payment on a credit card balance and call that monthly debt but that system wasn t fair to credit card users who paid off their balance in full every month and used credit cards mainly for convenience and reward points most lenders now look at the borrower s total revolving balance and apply 5 of the total as monthly debt say you carry 10 000 in credit card debt in this case the bank tacks on 500 in monthly debt to your back end ratio example of a qualification ratiohere s a hypothetical example to show how qualification ratios work let s say you and your spouse earn a combined 96 000 a year your family s gross income would amount to 8 000 a month multiply 8 000 by the 28 threshold required by most lenders and you ll get the minimum housing expense that you can afford which lenders call the front or front end ratio in this case your family would be eligible for a loan if total monthly housing expenses do not exceed 2 240 note this expense figure includes property taxes homeowner s insurance private mortgage insurance pmi and charges such as condo fees now let s take a look at the back end ratio using the same example in this case take the 8 000 monthly income and multiply it by the minimum threshold of 36 this is effectively your debt to income ratio and you ll get a figure of 2 880 next deduct any monthly debt payments from that 2 880 let s assume these consist of a 300 monthly car payment and a 400 monthly student loan payment this leaves you with 2 180 for housing expenses note that this figure is typically lower than the front end ratio | |
what are qualified adoption expenses qae | qualified adoption expenses are the necessary costs paid to adopt a child younger than 18 years of age or any disabled person who requires care in the united states qualified adoption expenses qae are those expenses that the internal revenue service irs defines as reasonable and necessary and can be used to claim an adoption credit or exclusion that reduces the adopting parents taxable income 1understanding qualified adoption expenses qae the internal revenue service allows you to offset your tax bill with a credit for your qualified adoption expenses as long as you meet certain eligibility requirements to report your qualified adoption expenses you ll use irs form 8839 3eligible taxpayers use irs form 8839 to provide the information required to claim the adoption credit on their federal tax returns taxpayers must provide the adopted child s first and last names year of birth and identifying number they must also note whether the child has special needs or is foreign born 4the tax credit for qae phases out for taxpayers whose modified adjusted gross incomes exceed a certain threshold taxpayers may not claim the adoption credit for any fees paid or reimbursed by an employer or government program they also may not claim the credit when adopting a spouse s child 1if you paid qualified adoption expenses to adopt a child who is a u s resident or citizen then you may be eligible for the credit even if the adoption has not been finalized or was finalized in a different tax year you may also qualify for the credit if you paid expenses to adopt a foreign child 1the maximum credit amount allowable for adoption in 2023 2maximum qualified adoption expensesthe maximum credit amount allowed for adoptions is 14 890 per child for 2022 and 15 950 per child in 2023 2 in addition the adoption tax credit is no longer refundable meaning that to recognize the full benefit of the credit your total tax must be at least equal to the credit 1for example if your total tax for the year is only 10 000 but you spend 14 000 in qualified adoption expenses 10 000 is the most you can save in tax however if the entire credit is not used any remaining amount can be carried forward for up to five years 1for the tax year 2022 as long as your modified adjusted gross income is 223 410 or less you qualify for the full credit the credit phases out as your income increases and goes away completely when it exceeds 263 410 5for the tax year 2023 as long as your modified gross income is 239 230 or less you qualify for the full credit the credit phases out as your income increases and goes away completed when it exceeds 279 230 6taxpayers who adopt a child deemed to have special needs are generally eligible for the full credit in the year the adoption is finalized regardless of their expenses 7examples of qualified adoption expensesthe irs defines qualified adoption expenses under internal revenue code section 23 d 1 tax code explicitly states that qualified adoption expenses include 1these expenses may have been paid before an eligible child has been identified an eligible child is defined as an individual who is under the age of 18 or is physically or mentally incapable of self care 1keep track of potential qualified adoption expenses leading up to a potential adoption the irs allows costs incurred prior to an adoption to be considered for the credit 1the irs also strictly prohibits the inclusion of several types of expenses related to an adoption for consideration as a qualified adoption expense for example qualified adoption expenses explicitly do not include costs a taxpayer pays to adopt the child of the taxpayer s spouse 1there are also regulations surrounding the timing of when the credit may be taken based on the timing of when the expense occurs dollar limits are also in place for costs related to a singular adoption effort in which a credit has previously been claimed 1 | |
when can you claim an adopted child on your taxes | assuming they meet all qualifications needed to be claimed an adopted child can be claimed when the adoption has been legally finalized once legally adopted the irs treats the child the same as a biological child 1can i claim qualified adoption expenses for an adoptee older than 18 years old the irs explicitly states that an eligible child relating to qualified adoption expenses must be under the age of 18 the only exception to this age restriction is if the adoptee is physically or mentally incapable of self care 1can same sex couples claim qualified adoption expenses yes qualified adoption expenses include costs paid by a domestic partner who lives in a state that allows same sex parents 1 | |
are qualified adoption expenses different for special needs children | taxpayers who adopt a special needs child are usually eligible for the maximum amount of the credit in the year the adoption is finalized this maximum amount is still reduced by qualified adoption expenses claimed in prior years and is still subject to magi limitations 1the bottom line | |
what is a qualified annuity | a qualified annuity is a retirement savings plan that is funded with pre tax dollars a non qualified annuity is funded with post tax dollars to be clear the terminology comes from the internal revenue service irs contributions to qualified annuities are deducted from an investor s gross earnings and along with investments grow tax free neither is subject to federal taxes until after retirement when distributions are made contributions to a non qualified plan are made with after tax dollars understanding the qualified annuitya deposit into a qualified annuity is made without taxes being withheld that effectively reduces the taxpayer s income and taxes owed for that year no taxes will be owed on the money that accrues in the qualified account year after year as long as no withdrawals are made taxes on both the investor s contribution and the investment gains that have accrued will be owed after the investor retires and begins taking an annuity or any withdrawal from the account while distributions from a qualified annuity are taxed as ordinary income distributions from a non qualified annuity are not subject to any income tax on the contributions taxes may be owed on the investment gains which generally are a smaller portion of the account it is a matter of debate which is better the non qualified plan offers the prospect of tax free income after retirement however the qualified plan offers immediate tax savings and a smaller hit on take home pay during the person s working years no taxes are owed on money that accrues in a qualified account as long as no withdrawals are made types of qualified annuitiesqualified annuities are often set up by employers as part of a company sponsored retirement plan variations include the defined benefit plan the 401 k and 403 b retirement plan and the individual retirement account ira an annuity can be qualified if it meets certain irs criteria and follows its regulatory guidelines generally an annuity that is not used to fund a tax advantaged retirement plan is a non qualified annuity non qualified annuities purchased after aug 13 1982 are taxed under a last in first out protocol this means that the first withdrawals made by the investor will be taken from accrued interest which will be taxed as ordinary income 34 once that interest has been fully taxed the remaining principal or premium will be free of taxes all of the rules governing qualified annuities are covered in irs publication 575 pension and annuity income | |
what is a qualified vs non qualified annuuity | annuities can be purchased using either pre tax or after tax dollars a non qualified annuity is one that has been purchased with after tax dollars a qualified annuity is one that has been purchased with pre tax dollars other qualified plans include 401 k plans and 403 b plans only the earnings of a non qualified annuity are taxed at the time of withdrawal not the contributions as they are after tax money |
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