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what is the secondary market | the secondary market is where investors buy and sell securities trades take place on the secondary market between other investors and traders rather than from the companies that issue the securities people typically associate the secondary market with the stock market national exchanges such as the new york stock exchange nyse and the nasdaq are secondary markets the secondary market is where securities are traded after they are put up for sale on the primary market investopedia candra huff | |
how the secondary market works | as noted above securities are bought and sold by investors among one another on the secondary market after they are first sold on the primary market as such most people call the secondary market the stock market transactions that occur on the secondary market are termed secondary simply because they are one step removed from the transaction that originally created the securities in question for example a financial institution writes a mortgage for a consumer creating the mortgage security the bank can then sell it to fannie mae on the secondary market in a secondary transaction though stocks are one of the most commonly traded securities there are also other types of secondary markets for example investment banks and corporate and individual investors buy and sell mutual funds and bonds on secondary markets entities such as fannie mae and freddie mac also purchase mortgages on a secondary market 1secondary markets are important for several reasons first they provide liquidity to investors having a centralized location allows trades to take place with a large number of traders while ensuring that the value of securities isn t lost as investors buy and sell securities it also gives small traders a chance to participate in the market types of secondary marketsthe stock market is made up of centralized exchanges that allow buyers and sellers to come together to trade stocks and other assets there is no contact that takes place between each party physical or otherwise most trading takes place electronically traders must abide by the rules and regulations set forth by the appropriate regulatory bodies such as the securities and exchange commission sec in the united states examples of stock markets or secondary markets include the nyse and nasdaq in the u s as well as the london stock exchange lse the hong kong stock exchange the bombay stock exchange bse and the frankfurt stock exchange the over the counter otc market involves the trading of stocks bonds and other financial assets but rather than take place over a centralized exchange trades occur through broker dealer networks as such these assets aren t traded on an exchange stocks on the otc market are normally those of smaller companies that don t meet listing requirements otc markets include the the number of secondary markets that exist always increases as new financial products become available several secondary markets may exist in the case of assets such as mortgages bundles of mortgages are often repackaged into securities such as ginnie mae pools and resold to investors 4secondary market vs primary marketit is important to understand the distinction between the secondary market and the primary market when a company issues stock or bonds for the first time and sells those securities directly to investors that transaction occurs on the primary market some of the most common and well publicized primary market transactions are initial public offerings ipos during an ipo a primary market transaction occurs between the purchasing investor and the investment bank underwriting the ipo any proceeds from the sale of shares of stock on the primary market go to the company that issued the stock after accounting for the bank s administrative fees if these initial investors later decide to sell their stake in the company they can do so on the secondary market any transactions on the secondary market occur between investors and the proceeds of each sale go to the selling investor not to the company that issued the stock or to the underwriting bank primary market prices are often set beforehand while prices in the secondary market are determined by the basic forces of supply and demand if the majority of investors believe a stock will increase in value and rush to buy it the stock s price will typically rise if a company loses favor with investors or fails to post sufficient earnings its stock price declines as demand for that security dwindles 5 | |
are the secondary and stock market the same | most people consider the stock market to be the secondary market this is where securities are traded after they are issued for the first time on the primary market for instance company x would conduct its initial public offering on the primary market once complete its shares are available to trade on the secondary market major stock exchanges like the nyse and nasdaq are secondary markets who are the major players in the secondary market the key participants in the secondary market are the broker dealers who facilitate trades investors who initiate buy and sell activity as well as any intermediaries such as banks financial institutions and advisory service companies | |
why is the secondary market important | the secondary market is where securities are traded after they go through the primary market it is a key part of the financial system providing liquidity to the market it also allows traders with a centralized location where they can make trades investors who deal with large and small volumes of trades have the ability to participate in the market the bottom line | |
what is a 1035 exchange | a 1035 exchange is a provision in the internal revenue service irs code allowing for a tax free transfer of an existing annuity contract life insurance policy long term care product or endowment for another of like kind rules may vary by company but full and partial 1035 exchanges are allowed typically 1035 exchanges between products within the same company are not reportable for tax purposes as long as the exchange criteria are satisfied | |
how a 1035 exchange works | a 1035 exchange allows individuals to transfer life insurance annuities and endowments to a similar vehicle tax free these transfers must be between similar products such as life insurance for life insurance or a non qualified annuity for a non qualified annuity the 2006 pension protection act ppa modified irc section 1035 to include exchanges from life insurance policies and non qualified annuities into traditional and hybrid qualified long term care products 1under a 1035 exchange the contract or policy owner cannot take the funds and buy a new policy the money must be transferred directly 2 the annuitant or policyholder must also remain the same for example a 1035 exchange from an annuity owned by joe sample cannot be exchanged for an annuity owned by jane sample or a joint annuity owned by joe and jane sample 3 the exchange must be reported on the individual s annual tax return using form 1099 r 4a life insurance policy can be exchanged for a non qualified annuity but a non qualified annuity cannot be exchanged for a life insurance policy 3costs and benefitsthe primary benefit of a section 1035 exchange is that it lets the contract or policy owner trade one product for another without tax consequences outdated and underperforming products can be switched to newer products with more attractive features such as better investment options and less restrictive provisions despite the tax benefits 1035 exchanges do not absolve contract owners of their obligations under the original contract for example insurance companies typically don t waive surrender charges for 1035 exchanges however fees may be waived if the owner exchanges one product for another within the same company product owners should compare the features of each policy or contract subject to the exchange and conduct a cost benefit analysis the new policy should match an individual s investment goals owners should consider the administrative fees and transaction charges such as withdrawal or surrender charges the financial institution for the new policy must be assessed on how well it manages its assets liabilities and shareholder obligations if any the tax treatment differs for partial exchanges in that a portion of the cost basis is allocated to the new product rather than all of it 5example of a 1035 exchangejoe sample invested 100 000 the cost basis in a non qualified annuity joe took no loans or withdrawals so the value remains unaffected because of poor investment performance the value of the annuity dropped to 75 000 dissatisfied joe transfers his funds into another annuity with another company in this scenario the original contract s cost basis of 100 000 becomes the new contract s basis although just 75 000 was transferred 5 | |
what is not allowed in a 1035 exchange | transfers between qualified accounts such as iras and 401 k s are not characterized as 1035 exchanges under a 1035 exchange the irs disallows the transfer of funds from the account holder to the institution exchanges between like kind accounts where the annuitant or owner on the existing account is not the same on the new account annuity to life insurance endowment to life insurance and annuity to endowment 6 | |
do individuals have to report a 1035 exchange on a tax return | a 1035 exchange must be reported on a tax return if the funds are transferred from institution to institution the transferring company will issue a 1099 r form recording the amount transferred and a distribution code to denote a 1035 exchange although the transaction is reportable it is not taxable if the exchange occurs in house the financial institution may not issue a 1099 r 7 | |
what is the difference between a replacement and a 1035 exchange | a 1035 exchange is a replacement however not every replacement qualifies as a 1035 exchange when an annuity or life insurance policy is exchanged into another annuity it is a replacement and 1035 exchange an exchange of an annuity contract for a life insurance policy can be characterized as a replacement but does not qualify as a 1035 exchange such transactions are taxable with gains and losses recognized 6the bottom linesection 1035 of the internal revenue code allows for the non taxable exchange of certain insurance products allowable exchanges include a life insurance policy to an annuity an annuity to an annuity an endowment to an endowment and a life insurance policy to a life insurance policy the cost basis of the old policy or contract becomes the basis of the new one despite losses that have eroded the balance policyholders should exercise caution when exchanging one product for another paying careful attention to forgone benefits charges fees and alignment with goals and objectives | |
what is section 1231 gain | section 1231 property is a type of property defined by section 1231 of the u s internal revenue code section 1231 property is real or depreciable business property held for more than one year a section 1231 gain from the sale of a property is taxed at the lower capital gains tax rate versus the rate for ordinary income if the sold property was held for less than one year the 1231 gain does not apply examples of section 1231 properties include buildings machinery land timber and other natural resources unharvested crops cattle livestock and leaseholds that are at least one year old however section 1231 property does not include poultry and certain other animals patents inventions and inventory such as goods held for sale to customers 1investopedia ellen lindnerunderstanding section 1231 gainbroadly speaking if gains on property fitting section 1231 s definition are more than the adjusted basis and amount of depreciation the income is counted as capital gains and as a result it is taxed at a lower rate than ordinary income however when losses are recorded on section 1231 property whereby the loss is classified as an ordinary loss it s 100 deductible against income ordinarily if income was qualified as capital gains so would any losses which can only be deductible up to 3 000 for the tax year and any losses in excess of that figure would be arrived at in the following year the section 1231 law makes it so taxpayers and business owners get the best of both worlds 2the irs handles the taxation of a section 1231 gain as a regular capital gain when there is income but not when there is a loss capital gains tax is a tax on the profit when you sell something that s increased in value it s the gain you make that s taxed not the amount of money you receive types of section 1231 transactionsthe following are considered 1231 transactions under irs regulations 1section 1231 property is related to section 1245 property and section 1250 property section 1231 defines the tax treatment of the gains and losses of property fitting the definitions of sections 1245 and 1250 on form 4797 3section 1231 vs section 1245 propertysection 1245 property cannot include buildings or structural components unless the structure is designed specifically to handle the stresses and demands of a specific use and can t be used for any other use in which case it can be considered closely related to the property it houses section 1245 property is any asset that is depreciable or subject to amortization and meets any of the following descriptions in publication 544 sales and other dispositions of assets 4if the sale of section 1245 property is less than the depreciation or amortization on the property or if the gains on the disposition of the property are less than the original cost gains are recorded as normal income and are taxed as such if the gain on the disposition of the section 1245 property is greater than that original cost then those gains are taxed as capital gains if the section 1245 property was acquired through a like kind exchange the amounts you claimed on the property you used in the exchange are included in the depreciation or amortization amount as would be the amounts a previous owner of section 1245 property claimed if the adjusted basis was used as a reference to your own 5section 1231 vs section 1250 propertythe irs defines section 1250 property as all real property such as land and buildings that are subject to the allowance for depreciation as well as a leasehold of land or section 1250 property 6much like with section 1245 property gains on section 1250 property qualify as ordinary income if they are less than or equal to the amount the property has depreciated and if the gains exceed the depreciation then the income is treated as capital gains during the year of the sale depreciation recapture is taxable as ordinary income if the sale of the property is executed in an installment method 7while section 1231 was introduced in the 1954 irs code the content of the tax code referring to gains received upon deposition of depreciable and real property was introduced in 1939 in section 117 j 8example of section 1231 propertylet s say a building is bought at 2 million and then has another 2 million put into it in the form of refurbishment updating a c units windows and a new roof with an amortization rate of 50 over 10 years so let s say then that 10 years after the building had 2 million put into it it is sold at a price of 6 million the recorded gains on that sale would be 4 million not 2 because the cost of refurbishment would be capitalized on the books that 4 million sale would be taxed as capital gains because the property was sold for more than the amount that it had depreciated | |
where does section 1231 gain get reported | irs form 4797 sales of business property is used to report the section 1231 gains on a sold property | |
what is the difference between 1231 and 1250 property | section 1231 applies to all depreciable business assets owned for more than one year while section 1250 and also 1245 provides guidance on how different asset categories are taxed when sold at a gain or loss all property used in a trade or business is considered section 1231 property and for taxation purposes either section 1245 or 1250 applies depending on the property s characteristics 9 | |
when it comes to taxation there is no difference under certain circumstances if gains on property fitting section 1231 s definition are more than the adjusted basis and amount of depreciation the income is counted as capital gains and as a result it is taxed at a lower rate than ordinary income | the bottom linesection 1231 gains are gains from depreciable property and real property used in a business and held for more than one year such gains are considered tax friendly as they have traditionally enjoyed a favored status in the tax code net section 1231 gains for the taxable year are treated as long term capital gains but a net section 1231 loss is considered an ordinary loss | |
what is section 1245 | section 1245 is part of the internal revenue code irc that covers the applicable tax rate for gains from the sale or transfer of depreciable and amortizable property it applies to certain types of real or tangible business property that have been held by that business for more than 12 months section 1245 outlines what properties are included in this treatment and when the ordinary income tax rate applies to their sale rather than the capital gains tax rate understanding section 1245section 1245 recaptures depreciation or amortization allowed or allowable on tangible and intangible personal property at the time a business sells such property at a gain section 1245 taxes the gain at ordinary income rates to the extent of its allowable or allowed depreciation or amortization 1the irs defines section 1245 property as the following section 1245 properties must be or have been subject to an allowance for depreciation or amortization they can be either personal property either tangible or intangible or other tangible property except buildings and their structural components used as any of the following section 1245 is a mechanism to recapture at ordinary income tax rates allowable or allowed depreciation or amortization taken on section 1231 property allowable or allowed means that the amount of depreciation or amortization recaptured is the greater of that taken or that could have been taken but was not 2a section 1231 property is a real or depreciable business property that has been held by the business for more than one year 1section 1245 backgroundconceptually a lower tax rate on gain means less tax payable and a higher tax rate on loss means a larger offset of taxable income and less tax payable for this reason tax planning strategies seek lower capital gains rates for gains and higher ordinary income rates for losses congress enacted irc section 1231 to favor businesses by allowing them to apply a lower capital gains rate on gains and a higher ordinary income rate on losses recognized from the sale of their property 2 however many businesses had already gotten favorable tax treatment by taking depreciation or amortization deductions on these properties so congress enacted section 1245 to recapture depreciation and amortization at ordinary income rates on properties sold at a gain the wording of section 1245 implies that it covers a new or different class of property section 1245 property but in reality section 1245 property is merely section 1231 property that has been depreciated or amortized section 1245 property is section 1245 property only as long as it has unrecaptured depreciation or amortization once its depreciation or amortization is fully recaptured it becomes section 1231 property 2tax picture of a sale of section 1245 propertyif section 1245 property is sold at a loss it converts to section 1231 property for tax purposes the loss is ordinary subject to netting and look back if section 1245 property is sold at a gain it remains section 1245 property to the extent of depreciation or amortization the gain is taxed at ordinary income rates 2once depreciation or amortization has been recaptured it converts to section 1231 property any remaining gain is taxed at capital gains rates 2tax rates for capital gains are lower than ordinary income tax rates 34example of a sale of section 1245 propertyas an example imagine that a business owns a 100 widget and takes 75 of depreciation the widget s adjusted tax basis is its 100 cost minus 75 of depreciation or 25 the business sells the widget for 150 the gain is the 150 sale price minus the 25 adjusted tax basis or 125 of that 125 75 the depreciated amount is a section 1245 gain taxed at ordinary income rates the remaining 50 125 75 is a section 1231 gain taxed at capital gains rates if the business sells the 100 widget for 20 you have a loss of 20 sale price minus 25 adjusted tax basis or 5 since there is a 0 gain section 1245 does not apply and the 5 loss is a section 1231 loss that is ordinary | |
what is section 1231 | section 1231 is part of the u s internal revenue code that defines the tax treatment of certain types of real or depreciable business property it allows the sale of these properties to be taxed at capital gains tax rates rather than at the higher rates for ordinary income 2 | |
what are capital gains tax rates | the capital gains tax is levied on the sale of certain investments or properties that have been held for more than a year in 2023 the tax return filed in 2024 the capital gains tax rates are 0 15 or 20 of the profit depending on the filer s income 4 | |
what is the difference between section 1245 property and section 1231 property | section 1245 and section 1231 concern the same types of business property the difference between them is that section 1245 properties have been depreciated or amortized once the tax on that depreciation or amortization has been recaptured the property is considered section 1231 property 2the bottom linesection 1245 provides a way to recapture taxes lost on section 1231 property that has depreciated or amortized it applies to real or depreciable business property that a business has held for more than one year this recapture happens when the business sells certain tangible or intangible personal property if the business took depreciation deductions on its property then sold that property for a profit the gains are taxed at ordinary income tax rates once the depreciation or amortization is recaptured the property becomes section 1231 property and the remaining value is taxed at capital gains rates | |
what is section 1250 | section 1250 of the united states internal revenue code is a rule establishing that the irs will tax a gain from the sale of depreciated real property as ordinary income if the accumulated depreciation exceeds the depreciation calculated with the straight line method section 1250 bases the amount of tax due on the property type on whether it is residential or nonresidential real estate while also factoring in how many months the filer owned the property in question the basics of section 1250section 1250 addresses the taxing of gains from the sale of depreciable real property such as commercial buildings warehouses barns rental properties and their structural components at an ordinary tax rate however tangible and intangible personal properties and land acreage do not fall under this tax regulation section 1250 is chiefly applicable when a company depreciates its real estate using the accelerated depreciation method resulting in larger deductions in the early life of a real asset compared to the straight line method section 1250 states that if a real property sells for a purchase price that produces a taxable gain and the owner depreciates the property using the accelerated depreciation method the irs taxes the difference between the actual depreciation and the straight line depreciation as ordinary income because the irs mandates owners to depreciate all post 1986 real estate using the straight line method the treatment of gains as ordinary income under section 1250 is a relatively rare occurrence if an owner disposes of the property as a gift transferred at death sells it as part of a like kind exchange or disposes of it through other methods there are no possible taxable gains 1an example of an application of section 1250to observe a real world example of section 1250 in action imagine an investor buys an 800 000 real estate property with a 40 year useful life five years later employing the accelerated depreciation method this investor claims accumulated depreciation expenses in the amount of 120 000 resulting in a cost basis of 680 000 let us further assume that this investor unloads the property for 750 000 resulting in a 70 000 total taxable gain due to the fact that the accumulated straight line depreciation amounts to 100 000 the 800 000 initial price divided by 40 years multiplied by five years of use the internal revenue service must then tax 20 000 of the actual depreciation exceeding straight line depreciation as ordinary income the irs would subsequently tax the 50 000 that remains of the total gain at applicable capital gains tax rates under section 1250 the recapture of gain as ordinary income is restricted to the actual gain recorded on a real property sale in our example if the investor unloaded the real property for 690 000 thereby producing a gain of 10 000 the internal revenue service would only categorize 10 000 as ordinary income not the additional 20 000 | |
what is a sector | a sector is an area of the economy in which businesses share the same or related business activity product or service sectors represent a large grouping of companies with similar business activities such as the extraction of natural resources and agriculture dividing an economy into different sectors helps economists analyze the economic activity within those sectors as a result sector analysis provides an indication as to whether an economy is expanding or if areas of an economy are experiencing contraction in the financial markets economic sectors are broken down even further into sub sectors called investment sectors investment sectors represent a grouping of companies with similar business activities examples of investment sectors include technology energy and financial services this article explores the main types of economic sectors and the business activity associated with them and how investment sectors play a role in determining a nation s economic conditions investopedia jake shiunderstanding sectorssectors are used by economists to classify economic activity by grouping companies that are engaged in similar business activities for example some sectors are engaged in activities that involve the earliest stages of the production cycle such as extracting raw materials other sectors involve the manufacturing of goods using those raw materials still other companies are engaged in service activities developing and emerging economies tend to have only one or two sectors that define most business activities for example some nations rely heavily on the extraction and sale of crude oil which can be turned into gasoline and sold to consumers within developed economies on the other hand developed nations tend to have a more diverse representation of all sectors although there is some debate about the true number of sectors that represent business activity in an economy typically sectors are broken out into four main categories however please bear in mind that there can also be sub sectors within each of the four major sectors listed below the primary sector involves companies that participate in the extraction and harvesting of natural products from the earth primary sector companies are typically engaged in economic activity that utilizes the earth s natural resources which are sold to consumers or commercial businesses companies involved in the processing and packaging of raw materials are also categorized within the primary sector primary sector business activities include the following emerging economies tend to have a higher amount of economic activity and employment concentrated within the primary sector versus more advanced economies on the other hand developed nations tend to utilize machinery and technology in their primary sector activities meaning the primary sector doesn t represent a large portion of the population s employment the secondary sector consists of processing manufacturing and construction companies the secondary sector produces goods from the natural products within the primary sector the secondary sector includes the following business activities the tertiary sector is comprised of companies that provide services such as retailers entertainment firms and financial organizations the tertiary sector provides services to businesses and consumers by selling the goods that are manufactured by companies in the secondary sector the types of services provided by the tertiary sector include the quaternary sector includes companies engaged in intellectual activities and pursuits the quaternary sector typically includes intellectual services such as technological advancement and innovation research and development that leads to improvements to processes such as manufacturing would fall under this sector the companies and firms within the quaternary sector had been traditionally part of the tertiary sector however with the growth of the knowledge based economy and technological advancements a separate sector was created firms within the quaternary sector use information and technology to innovate and improve processes and services leading to enhancements in economic development firms within the quaternary sector might be engaged in the following business activities stock and investment sectorsin the financial markets the economic sectors are broken down into sub sectors to help investors compare companies with similar business activities while economic sectors represent a broad representation of the economy investment sectors further define and categorize companies investment sectors are important because they help measure how well an economy is performing based on the financial performance of the corporations within that sector the list below does not represent an exhaustive list but here are some examples of investment sectors sectors and the economyinvestors use sectors to group stocks and other investments into categories that share unique characteristics investment sectors can provide insight as to how an economy is performing and which areas of the economy are performing better than others if there is a large increase in the purchase of raw materials such as copper or crude oil it may be an indication that the economy is expanding in other words in an expanding economy businesses and consumers tend to use more raw materials and energy since consumer and business spending is on the rise industrials would also perform well in an expansionary economy since increased economic growth typically leads to an increase in manufacturing and construction similarly real estate such as commercial real estate and housing might also experience an increase in sales and development if consumer confidence is high consumers might increase their purchases of non essential goods leading to a rise in consumer discretionary spending as a result companies within sectors that benefit from an expanding economy would likely experience increased revenue conversely if an economy is performing poorly or there are expectations that economic growth will slow in the coming months companies that sell consumer staples often experience an increase in revenue the reason for this correlation between a slowing economy and consumer staples stocks is that consumers will likely continue to purchase essential products such as paper towels and toilet paper even in periods of negative or slowing growth also investment sectors may represent a specific risk profile that may or may not attract investors for example in a slowing economy investment in the utilities sector tends to increase since those stocks are considered safe haven investments understanding economic sectors and the activity driving growth within those sectors can help investors determine which sub sectors and their stocks will be impacted sector investingit is common for investment analysts and other investment professionals to specialize in certain sectors for example at large research firms analysts may cover just one sector such as technology stocks additionally investment funds often specialize in a particular economic sector a practice known as sector investing for those who want to invest in a particular sector there are exchange traded funds etfs called sector etfs these funds contain a basket of stocks or securities within a particular industry or sector for example the energy sector particularly the oil and gas industry is a large industry that attracts specialized investment funds sector vs industrywhile a sector represents a large segment of an economy that includes many companies an industry represents a more narrow focus of the companies within a particular sector thus industries are the result of breaking down a sector into more defined and specific groupings on the other hand sectors can represent a large grouping of companies that have similar business activities sectors may have companies that don t necessarily compete with each other while industries tend to represent corporations that are in direct competition for example companies within the oil and gas industry such as exxon and chevron are competitors those same companies also fall under the primary sector since they both engage in the extraction of natural resources however exxon or chevron would not likely compete with companies involved in agriculture despite being classified within the primary sector | |
what are the 4 main economic sectors | the four main sectors of an economy are | |
what is a sector breakdown | a sector breakdown is the mix of industry sectors like technology or healthcare held by a fund or portfolio typically expressed as a percentage sector designations can vary depending on the fund s investment criteria and overall objective investopedia eliana rodgerssector investinga sector breakdown can help an investor observe the investment allocations of a fund fund companies regularly provide sector reporting in their marketing materials sector investing can influence investments in the fund a fund may target a specific sector such as technology or seek to diversify among many sectors some funds may have restraints on sector investments this may occur with environmental social and governance esg focused funds these funds seek to exclude industries or companies that their investors consider undesirable for various reasons such as tobacco producers or oil exploration companies a sector fund allocates 100 to a specified sector such as healthcare technology or energy gicsthe global industry classification standard also known as gics is the primary financial industry standard for defining sector classifications gics was developed by index providers msci and the s p dow jones its hierarchy begins with 11 sectors which can be further delineated to 25 industry groups 74 industries and 163 sub industries it follows a coding system that assigns a code from each grouping to every company publicly traded in the market 111 sectorsthe eleven sectors defined by gics include diversificationa diversified stock portfolio will hold stocks across most gics sectors diversification across stock sectors helps to mitigate idiosyncratic or unsystematic risks caused by factors affecting specific industries or companies within an industry sector indexes can be used by investors seeking to invest in the growth prospects of a single sector investment companies offer passive index funds that seek to replicate each of the eleven gics sectors the vanguard information technology index fund is one example of a passively managed mutual fund that replicates the holdings of the msci u s investable market information technology index 2 | |
what is the five percent rule | a well diversified portfolio includes as many sectors as possible and does not concentrate too many funds into a single sector or related sectors investors can employ the five percent rule with sector funds to diversify within specialty sectors such as biotech commercial real estate or gold miners investors keep their allocation to 5 or less for each | |
what industries are included in the energy sector | the energy sector includes companies that target oil gas coal and consumable fuels through exploration and production refining and marketing and storage and transportation the sector also includes companies that offer oil and gas equipment and services 3 | |
how are companies classified under gics | every company is assigned a gics classification at the sub industry levelaccording to its primary business activity msci and s p dow jones indices use revenues and earnings to determine a company s principal business 4the bottom linesectors are broad classifications such as consumer staples healthcare or technology the global industry classification standard is the primary financial industry standard for defining sector classifications the sector breakdown of a portfolio shows how much asset weights are allocated to what industry sectors and are commonly expressed as a percentage | |
what is secular | in finance secular is a descriptive word used to refer to market activities that occur over the long term secular can also point to specific stocks or stock sectors unaffected by short term trends secular trends are not seasonal or cyclical instead they remain consistent over time understanding secularinvestors and analysts expect secular trends and secular stocks to remain moving in the same direction over the long term maintaining a static trajectory regardless of current economic conditions when applying the term to the stock market a secular market is the market s overarching trend or direction for a long period of time further secular trends may be upward or downward in direction it is important for investors to identify secular trends in markets not just short term trends to develop a long term investment strategy examples of secular trends include an aging population which tends to have different spending and savings habits than a younger population the expansion of a particular technology such as the internet the clean energy movement and the growth in impact investing examples of secularwithin the stock market experts consider technology companies such as netflix and google parent alphabet secular because short term economic trends have a minimal lasting impact on their long term performance david kostin of goldman sachs as reported by cnbc in march of 2018 came up with a list of the best secular growth stocks prime for investment 1 the short list includes internet companies amazon and google s alphabet as well as domino s pizza and summit materials goldman chose these companies because they grew sales by over 10 over the three previous years and have robust and forward looking potential other frequently cited examples include companies like apple and amazon whose businesses do not rely heavily on cyclical factors deere tesla and devon energy are also considered secular stocks 2 solar stocks may also be considered secular in that demand will remain consistent in times of economic hardship | |
how to identify secular trends | a stock is secular when the associated company earnings remain constant regardless of other trends occurring within the market companies are often secular when the primary business relates to consumer staples or products that most households consistently use consumer staples can include personal care items such as shampoo and toilet paper various food item producers and certain pharmaceutical companies a stock is considered a secular play if its revenues are likely to remain consistent regardless of other trends in the market for example consumer staples are likely to be strong secular plays because they will remain in demand even in times of recession secular vs cyclicalsecular stocks are very different from cyclical stocks which are securities whose price is impacted by the movement in the overall economy due to consumer buying power these are companies whose business model is most likely to suffer during an economic downturn cyclical stocks tend to be those whose profits depend on discretionary spending which tends to decline during recessions for example starbucks and nike are commonly considered examples of cyclical stocks because they are considered relatively expensive and non essential many consumers will reduce spending on these products when money gets tight special considerationssecular movements can proceed in either a positive or negative direction therefore the term does not always mean growth investors may be secular bears or secular bulls also secular can refer to subtle or dramatic movements as the term does not identify the degree of change the defining characteristics are the long term nature of the movement and the lack of impact of short term trends on associated activity while experts consider them to be long term secular trends are not necessarily permanent in his book stocks for the long run mcgraw hill education 5th edition 2014 jeremy siegel an economics ph d and finance professor at the wharton school university of pennsylvania argues that equity securities particularly u s equities are secular and will likely outperform the other major asset classes secularly or over the long term in support of his argument siegel points to the 130 years between 1871 and 2001 during any rolling 30 year period within this timeframe stocks outperformed all other asset classes especially bonds and t bills most experts agree that a 30 year period constitutes a secular trend | |
what are secular trends in healthcare | in healthcare a secular trend refers to patterns in disease activity over a long time usually many years secular trends may be affected by factors such as population immunity but they are not affected by periodic factors or seasonal trends 3 | |
what does secular headwinds mean | in finance a headwind refers to forces that act to slow or limit growth a secular headwind refers to long term factors that act as a dampener to market growth during the upswing of the business cycle | |
what does secular tailwinds mean | in finance a tailwind refers to forces that help accelerate market growth a secular tailwind refers to long term economic trends that help feed market growth in contrast to cyclical factors that limit growth the bottom linein investing secular refers to business trends with a low correlation to the business cycle a secular stock is one that is likely to preserve value even during a recession or economic downturn in contrast a cyclical stock or trend is one that is likely to follow with the fluctuations in the wider economy | |
what is the securities and exchange board of india sebi | the securities and exchange board of india sebi is the most important regulator of securities markets in india sebi is the counterpart of the securities and exchange commission sec in the u s its stated objective is to protect the interests of investors in securities and to promote the development of and to regulate the securities market and for matters connected therewith or incidental thereto 1creation of the sebithe securities and exchange board of india was established in its current incarnation in april 1992 following the passage of the securities and exchange board of india act by the nation s parliament 2 it supplanted the controller of capital issues which had regulated the securities markets under the capital issues control act of 1947 passed just months before india gained independence from the british 3the sebi headquarters is located in the business district at the bandra kurla complex in mumbai it also has regional offices in the cities of new delhi kolkata chennai and ahmedabad and more than a dozen local offices in cities including bangalore jaipur guwahati patna kochi and chandigarh sebi s charteraccording to its charter sebi is expected to be responsible for three main groups the body drafts regulations and statutes in a regulatory capacity passes rulings and orders in a judicial capacity conducts investigations and imposes penalties in an enforcement capacity as an example the board banned short selling between 2001 and 2008 sebi is run by a board of directors including a chair who is elected by the parliament two officers from the ministry of finance one member from the reserve bank of india and five members who are also elected by the parliament 5criticism of sebicritics say sebi lacks transparency and is insulated from direct public accountability the only mechanisms to check its power are a securities appellate tribunal which consists of a panel of three judges and the supreme court of india both bodies have occasionally censured sebi still sebi has been aggressive at times in doling out punishment and in issuing strong reforms it also established the financial stability board in 2009 in response to the global financial crisis giving the board a broader mandate than its predecessor to promote financial stability 6 | |
what is the securities act of 1933 | the securities act of 1933 was created and passed into law to protect investors after the stock market crash of 1929 the legislation had two main goals to ensure more transparency in financial statements so investors could make informed decisions about investments and to establish laws against misrepresentation and fraudulent activities in the securities markets understanding the securities act of 1933the securities act of 1933 was the first major legislation regarding the sale of securities prior to this legislation the sales of securities were primarily governed by state laws the legislation addressed the need for better disclosure by requiring companies to register with the securities and exchange commission sec registration ensures that companies provide the sec and potential investors with all relevant information by means of a prospectus and registration statement the act also known as the truth in securities law the 1933 act and the federal securities act requires that investors receive financial information from securities being offered for public sale this means that before going public companies have to submit information that is readily available to investors today the required prospectus has to be made available on the sec website a prospectus must include the following information the proposed sec budget for fiscal year 2024 2securities exempt from sec registrationsome securities offerings are exempt from the registration requirement of the act these include the other main goal of the securities act of 1933 was to prohibit deceit and misrepresentations the act aimed to eliminate fraud that happens during the sale of securities 1every registration statement and prospectus for a public securities offering in the united states can be found on edgar an electronic database by the securities and exchange commission history of the securities act of 1933the securities act of 1933 was the first federal legislation used to regulate the stock market the act took power away from the states and put it into the hands of the federal government the act also created a uniform set of rules to protect investors against fraud it was signed into law by president franklin d roosevelt and is considered part of the new deal passed by roosevelt 34the securities act of 1933 is governed by the securities and exchange commission which was created a year later by the securities exchange act of 1934 several amendments to the act have been passed over the years to update rules 56 | |
what was the objective of the 1933 securities act | the main goal of the securities act of 1933 was to introduce national disclosure requirements for companies selling stock or other securities it requires companies selling securities to the public to reveal key information about their property financial health and executives prior to that law securities were only subject to state regulations and brokers could promise extravagant returns while disclosing little relevant information | |
how is the head of the securities and exchange commission chosen | the securities and exchange commission is headed by five commissioners who serve five year terms and are appointed by the president with the consent of the senate the president also designates one of those commissioners to be the chairman of the body 7 | |
how did the public benefit from the federal securities act | the main benefit of the securities act was to introduce disclosure requirements for new securities issues prior to its passage companies selling stocks or bonds could promise large profits without revealing key information about their companies the disclosure requirements helped investors better understand the true financial prospects of a company allowing them to make better investment decisions and safeguard their money the bottom linethe securities act of 1933 was the first federal law to regulate the securities industry it requires companies that sell stocks or bonds to the public to disclose certain information such as their assets financial health executives and a description of the security being sold it is now one of many laws that control securities offerings in the united states | |
the u s securities and exchange commission sec is an independent federal government regulatory agency responsible for protecting investors and maintaining fair and orderly securities markets congress created the sec in 1934 as the first federal regulator of the securities markets the sec s efforts are meant to protect shareholders especially retail investors against fraudulent and manipulative practices in the market and ensure that companies provide accurate and complete disclosures about significant financial events including corporate takeovers it also approves registration statements for bookrunners among underwriting firms 12 | securities offered in the u s must be registered with the sec before being sold to investors financial services firms such as broker dealers advisory firms asset managers and their professional representatives must also register with the sec to do business investopedia julie bang | |
how the securities and exchange commission sec works | the sec oversees organizations and individuals in the securities markets including securities exchanges brokerage firms dealers registered investment advisors and investment funds through established securities rules and regulations the sec promotes disclosure and sharing of market related information fair dealing and protection against fraud it provides investors access to registration statements periodic financial reports and other securities forms through its electronic data gathering analysis and retrieval database better known as edgar 3the sec was created in 1934 to help restore investor confidence in the wake of the 1929 stock market crash 1the sec is headed by five commissioners appointed by the president one of whom is the chair the commissioners have a five year term but may serve an additional 18 months until a replacement is found present sec chair gary gensler took office in april 2021 4 the law requires that no more than three of the five commissioners come from the same political party to promote nonpartisanship 54the sec consists of five divisions and 23 offices 2 their goals are to interpret and enforce securities laws issue new rules oversee securities institutions and coordinate regulations among different parts of the government the five divisions and their roles are as follows | |
how the sec enforces securities law | since the 1930s the sec has enforced securities laws and regulations through two primary mechanisms often in conjunction with criminal cases brought by doj and other prosecutorial authorities in civil suits the sec seeks three main sanctions below is a table of the most common results of the sec s successful enforcement actions the potential forums for the sec s enforcement actions changed significantly following a june 2024 supreme court decision in sec v jarkesy 12 the court ruled that the sec s practice of imposing civil penalties through administrative proceedings in cases of securities fraud violates the seventh amendment right to a jury trial the decision requires the sec to pursue such penalties in federal court potentially affecting the rapidity and scope of its enforcement actions thus while the sec can still pursue some administrative actions those involving nonmonetary damages cases involving civil penalties for securities fraud and similar matters insider trading accounting fraud and market manipulation must now be brought in federal court criminal cases continue to be referred to law enforcement agencies including the fbi doj and any relevant agencies in states where crimes are alleged to have occurred the sec also serves as the first level of appeal for actions sought by the securities industry s self regulatory organizations such as finra or the new york stock exchange in 2023 the sec awarded the most ever to whistleblowers 600 million out of that 279 million was awarded to one person another record the award was related to a 1 1 billion settlement with ericsson eric in 2019 over bribery allegations 13established in 2011 under the dodd frank wall street reform and consumer protection act the sec whistleblower office has become a significant part of the agency s enforcement efforts as the unit s name suggests the office administers a program that offers major incentives to those who come forward with high quality information about potential securities law violations since its inception the office of the whistleblower has been highly effective leading or developing further many successful enforcement actions and recovering billions for investors whistleblowers who voluntarily provide original information that results in fines and disgorgements exceeding 1 million are eligible for awards ranging from 10 to 30 of the amount collected 14in fiscal year 2023 the sec awarded almost 600 million to whistleblowers its highest yet this success directly benefits investors as whistleblower tips have contributed to enforcement actions resulting in orders requiring bad actors to disgorge more than 4 billion in ill gotten gains and interest said gurbir s grewal director of the sec s division of enforcement the awards show there is a significant incentive for whistleblowers to come forward with accurate information about potential securities law violations the sec office of the whistleblower couldn t function without efforts to protect whistleblowers from retaliation or too many would fear coming forward the sec thus also enforces rules prohibiting actions meant to impede those reporting to the sec or retaliating against them for doing so 15history of the secduring the u s stock market crash of october 1929 the stocks of many companies quickly became worthless bankrupting many because many had previously provided false or misleading information public faith in the integrity of the securities markets plunged to restore investor confidence congress passed the securities act of 1933 which aimed to ensure more transparency in financial statements so investors could make informed decisions about investments a year later congress passed the securities exchange act of 1934 which created the sec the sec was tasked with ensuring that publicly traded companies made truthful statements about the major aspects of their businesses and that brokers dealers and exchanges treated investors in an honest and fair manner 1 as such the act granted the sec broad authority to oversee the securities industry including the power to register regulate and oversee brokerage firms transfer agents and clearing agencies beginnings up to 1970sthe sec began operations on july 2 1934 joseph p kennedy the father of future president john f kennedy was appointed the first chair during its early years the sec played a major part in the rollout of the financial reforms of president franklin d roosevelt s new deal the investment company act of 1940 and investment advisers act of 1940 expanded the sec s regulatory scope to include oversight of investment companies and advisers the sec continued to evolve in the decades after world war ii as it responded to new challenges and a boom in u s capital markets during an extended period of expansion for the u s economy major legislation during this period included the securities acts amendments of 1964 which extended sec oversight to over the counter markets and increased disclosure requirements 16 during this time the sec began to focus on insider trading and cases of market manipulation reflecting the increasing complexity of financial markets the rise of the cftcin 1974 congress established the commodity futures trading commission cftc to regulate derivatives markets including futures options and swaps while the sec oversees securities and capital markets the cftc s purview encompasses commodities and their derivatives although the two agencies often collaborate on matters of overlapping jurisdiction such as security futures products their historical relationship has been characterized more by competition than cooperation the tension between them quickly came to a head in 1982 forcing congress to intervene and compel them to agree to the shad johnson accord later written in legislation 17 the term accord was reminiscent of the camp david peace accords between long standing and bitter adversaries underscoring the contentious nature of the regulators relationship their rivalry affected the markets with investors often confused about which of the sec and cftc s competing regulations often for the same investments to follow to resolve this confusion the agreement granted the cftc exclusive authority over all futures contracts including those based on broad based stock indexes the sec received jurisdiction over options on securities and stock indexes while the accord provided far greater regulatory clarity for investors the interagency rivalry persisted for decades although largely defused in the aftermath of the 2008 financial crisis and subsequent legislation tensions between the cftc and sec have at times resurfaced most notably over the regulation of cryptocurrencies 1980s to 2008in the 1980s and 1990s the sec adapted to technological changes such as the rise of electronic trading platforms and the globalization of financial markets the national securities markets improvement act of 1996 was meant to bring greater consistency to state and federal securities regulations following major corporate scandals after the dot com bubble of the late 1990s and early 2000s burst such as those involving enron and worldcom the sarbanes oxley act of 2002 sox was passed to regain public confidence in the markets the law s changes were meant to be sweeping though it wouldn t be long before a far greater set of scandals rocked the markets sox required corporate executives to personally certify the accuracy of financial statements making them criminally liable for any misrepresentations sox also strengthened auditor independence by restricting the types of non audit services they can provide to clients therefore giving companies incentives to look the other way lest they endanger other parts of their firms and established the public company accounting oversight board pcaob to oversee the audits of public companies in 2007 the financial industry regulatory authority finra was born from the merger of the national association of securities dealers and the new york stock exchange s regulatory arm 18 finra has become the largest independent regulator overseeing broker dealers in the country while the sec continues to hold a broader mandate overseeing the entirety of the securities markets and ensuring fair treatment for investors finra focuses on regulating the specific activities of brokerage firms and registered representatives the sec s oversight of corporate finance economic analysis enforcement and trading activities is still central however finra s role in writing and enforcing rules for broker dealers examining firms for compliance and resolving disputes between investors and firms added another layer of protection for the investing public post crisis landscapethe financial crisis of 2007 to 2008 was the sec s most significant challenge since the great depression the dodd frank wall street reform and consumer protection act of 2010 aimed to prevent future crises by increasing transparency in financial markets and reducing risks within the financial system dodd frank significantly expanded the sec s authority to bring administrative proceedings against a broader range of individuals and entities 19before dodd frank the sec could only pursue administrative actions against those directly regulated by the commission such as registered investment advisors or broker dealers the act broadened this authority to include any person associated with securities law violations 20 this means the sec can now bring administrative actions against a broader range of individuals including those not directly regulated by the agency such as corporate officers employees and individuals associated with unregistered entities each year the sec brings many civil enforcement actions against firms and individuals that violate securities law and it s involved in every significant case of financial misconduct either directly or in conjunction with the doj typical offenses the sec prosecutes include accounting fraud disseminating misleading or false information and insider trading after the financial crisis of 2007 to 2008 the sec helped prosecute the financial institutions that caused the crisis returning billions of dollars to investors it charged 204 entities or individuals and collected almost 4 billion in penalties disgorgement and other monetary relief goldman sachs for example paid 550 million then the largest penalty ever for a wall street firm and the second largest in sec history exceeded only by the 750 million paid by worldcom 2122 given the wounds to the economy many in the public criticized the agency for not doing enough to bring those responsible to justice in june 2024 the supreme court s decision in sec v jarkesy brought a significant shift in the sec s enforcement powers 12 the ruling addressed the expanded authority granted to the sec by dodd frank the majority in jarkesy determined that the sec s practice of imposing civil penalties through administrative proceedings in fraud cases violates the seventh amendment right to a jury trial the ruling required the sec to pursue such penalties in federal court rather than through its in house administrative law judges the decision has far reaching implications for the sec s enforcement of securities laws potentially slowing its ability to bring enforcement actions | |
how does the sec make new rules | new sec regulations start with a concept release which leads to a proposal a concept release and subsequent proposal are published for public review and comment the sec reviews the public s input to determine its next steps 23 the sec will then convene to consider feedback from the public industry representatives and other subject matter experts it then votes on whether to adopt the rule | |
is the sec the same as finra | no the sec is the u s regulator charged with setting rules concerning the issuing marketing and trading of securities the sec is also charged with protecting investors finra formerly nasd is a nonprofit self regulatory industry organization that oversees broker dealers and issues licenses to securities professionals 18 when finra takes punitive action against those it oversees those decisions are appealed to the sec who oversees the sec the sec is an independent federal agency headed by a bipartisan five member commission composed of the chair and four commissioners appointed by the president and confirmed by the u s senate 24 the sec is accountable to congress and operates under the authority of federal laws that include the securities act of 1933 the securities exchange act of 1934 the investment company act of 1940 the investment advisers act of 1940 and the sarbanes oxley act of 2002 among others the sec is an independent federal agency established in 1934 to regulate the u s securities markets and protect investors created in the wake of the 1929 stock market crash the sec oversees securities exchanges broker dealers investment advisors and other market participants it also enforces federal securities laws proposes securities regulations and oversees the securities industry the nation s stock and options exchanges and other electronic securities markets over time the sec s role and authority have evolved in response to changing markets and legislative actions the agency has played a crucial role in maintaining confidence in u s markets both at home and abroad however recent developments including the 2024 supreme court decision in sec v jarkesy have reshaped the sec s enforcement abilities the 2024 ruling limits the sec s ability to impose civil penalties through administrative proceedings requiring such actions to be pursued in federal court for securities fraud cases as the financial landscape continues to evolve particularly with the rise of new technologies and investments the sec s role remains critical in balancing investor protection with the promotion of capital formation and market efficiency | |
what is the securities exchange act of 1934 | the securities exchange act of 1934 sea was created to govern securities transactions on the secondary market after issue its goal was to ensure greater financial transparency and accuracy and less fraud or manipulation the sea authorized the formation of the securities and exchange commission sec the regulatory arm of the sea the sec has the power to oversee securities stocks bonds and over the counter securities as well as markets and the conduct of financial professionals including brokers dealers and investment advisors it also monitors the financial reports that publicly traded companies are required to disclose understanding the securities exchange act of 1934the sea regulates trading on the secondary market and major stock exchanges as well as participants in these markets participants can include exchanges brokers transfer agents and clearing agencies the secondary market is where trading happens after assets are initially issued by a company these assets can include stocks bonds stock options and stock futures all companies listed on stock exchanges must follow the reporting requirements outlined in the securities exchange act of 1934 primary requirements include the purpose of these requirements is to ensure transparency fairness and an environment of investor confidence if the sec brings action against a company for violation of disclosure or other requirements it can choose to file a case in federal court or settle the matter outside of trial history of the securities exchange act of 1934the sea of 1934 was enacted by franklin d roosevelt s administration it was a response to the widely held belief that irresponsible financial practices were one of the chief causes of the 1929 stock market crash the sea of 1934 followed the securities act of 1933 which required corporations to make public certain financial information including stock sales and distribution other regulatory measures put forth by the roosevelt administration include the public utility holding company act of 1935 the trust indenture act of 1934 the investment advisers act of 1940 and the investment company act of 1940 they all came in the wake of a financial environment in which the commerce of securities was subject to little regulation and controlling interests of corporations were amassed by relatively few investors without public knowledge creation and role of the secthe securities and exchange commission sec is the regulatory arm of the securities exchange act of 1934 the sea granted the sec broad authority to regulate all aspects of the securities industry it manages the disclosure and sharing of market related information which is designed to promote fair dealing for investors and protect against securities fraud the sec is led by five commissioners who are appointed by the president and has five divisions the sec has the power and responsibility to lead investigations into potential violations of the sea such as insider trading selling unregistered stocks stealing customers funds manipulating market prices disclosing false financial information and breaching broker customer integrity the sec manages the electronic data gathering analysis and retrieval database known as edgar 6 this database allows investors to access financial reports registration statements and other securities forms reporting requirementsunder the sea companies with publicly held securities as well as companies of a certain size are known as reporting companies this means they must make regular financial disclosures that provide investors with pertinent information about the company these disclosures include these disclosures provide investors with access to the information they need to make informed investing decisions 7in addition to companies with publicly traded securities those with more than 10 million in assets and whose shares are held by more than 500 owners must also meet reporting requirements 7areas of security law coveredin addition to regulating secondary securities markets the sea covers several other areas of securities law fraudulent insider trading is when a person trades a security based on important information that isn t available to the general public this is prohibited by the 1934 sea pools are ways to manipulate stock prices when the price of a security reaches a high point pool members coordinate to unload their shares allowing them to make a profit while prices drop dramatically the sea prohibits this kind of manipulation which was common when it was created the sea requires that anyone who wishes to make a tender offer or a direct purchase of 5 or more of a company s shares must disclose certain material information this allows shareholders to make an informed decision about these types of offers which are usually made to gain control of a company proxy materials are used to gain shareholder votes either during annual or special meetings to ensure that shareholders have all relevant information before they register their votes these materials must be filed with the sec before any vote solicitation begins | |
what did the securities exchange act of 1934 do | the securities exchange act of 1934 regulates secondary financial markets to ensure a transparent and fair environment for investors it prohibits fraudulent activities such as insider trading and ensures that publicly traded companies must disclose important information to current and potential shareholders | |
what are the two main purposes of the securities exchange act | the sea has two primary goals it is intended to prevent fraud in the securities market and to create more transparency in companies financial disclosures so that investors have the information they need to make informed decisions | |
what is the difference between the 1933 and 1934 securities acts | the securities exchange act of 1933 regulates newly issued securities such as those being sold through an initial public offering the securities exchange act of 1934 regulates securities that are already being actively traded on the secondary market the bottom linethe securities exchange act of 1934 regulates securities transactions on the secondary market it creates reporting and financial disclosure requirements for companies listed on the stock exchange as well as prohibiting fraudulent activity such as insider trading the sea is designed to protect investors and ensure they have access to important information when making investment decisions the securities and exchange commission is the regulatory arm of the sea it is responsible for making financial and other disclosures accessible to the public as well as enforcing reporting requirements and investigating violations of the sea | |
what is securities lending | securities lending is the practice of loaning shares of stock commodities derivative contracts or other securities to other investors or firms securities lending requires the borrower to put up collateral whether cash other securities or a letter of credit | |
when a security is loaned the title and the ownership are also transferred to the borrower a loan fee or borrow fee is charged by a brokerage to a client for borrowing shares along with any interest due related to the loan the loan fee and interest are charged pursuant to a securities lending agreement that must be completed before the stock is borrowed by a client holders of securities that are loaned receive a rebate from their brokerage | securities lending provides liquidity to markets can generate additional interest income for long term holders of securities and allows for short selling investopedia ryan oakleyunderstanding securities lendingsecurities lending is generally facilitated between brokers or dealers and not directly by individual investors to finalize the transaction a securities lending agreement or loan agreement must be completed this sets forth the terms of the loan including duration interest rates lender s fees and the nature of the collateral according to current regulations borrowers should provide at least 100 percent of the security s value as collateral collateral for securities also depends on its volatility the minimum initial collateral on securities loans is at least 102 percent of the market value of the lent securities plus for debt securities any accrued interest 1 in addition the fees and interest charged on a securities loan will often depend on how difficult it is to locate those securities desired for borrow the more scarce the supply of available securities the higher the cost typical securities lending requires clearing brokers who facilitate the transaction between the borrowing and lending parties the borrower pays a fee to the lender for the shares and this fee is split between the lending party and the clearing agent benefits of securities lendingsecurities lending is important to short selling in which an investor borrows securities to immediately sell them the borrower hopes to profit by selling the security and buying it back later at a lower price since ownership has been transferred temporarily to the borrower the borrower is liable to pay any dividends out to the lender in these transactions the lender is compensated in the form of agreed upon fees and also has the security returned at the end of the transaction this allows the lender to enhance its returns through the receipt of these fees the borrower benefits through the possibility of drawing profits by shorting the securities securities lending is also involved in hedging arbitrage and fails driven borrowing in all of these scenarios the benefit to the securities lender is either to earn a small return on securities currently held in its portfolio or to possibly meet cash funding needs understanding short sellinga short sale involves the sale and buyback of borrowed securities the goal is to sell the securities at a higher price and then buy them back at a lower price these transactions occur when the securities borrower believes the price of the securities is about to fall allowing him to generate a profit based on the difference in the selling and buying prices regardless of the amount of profit if any the borrower earns from the short sale the agreed upon fees to the lending brokerage are due once the agreement period has ended | |
when a security is transferred as part of the lending agreement all rights are transferred to the borrower this includes voting rights the right to dividends and the rights to any other distributions often the borrower sends payments equal to the dividends and other returns back to the lender | example of securities lendingsuppose an investor believes that the price of a stock will fall from its current price of 100 to 75 in the near future the stock is not very volatile and generally trades in defined ranges in order to profit from this thesis the investor borrows 50 shares of the company from a securities firm and sells them for 5 000 50 shares x 100 current price assuming the share price drops to 75 the investor will then purchase 50 shares for 3 750 50 shares x 75 price and return them to the securities firm in this case the profit on this short sale transaction is 1 250 5 000 3 750 however short sales do not always work out as planned if the investor has miscalculated and the company s shares end up increasing in price rather than decreasing the investor will have to purchase the stock back at a higher price than the price at which they sold it and will incur a loss on this transaction | |
securitization is the financial alchemy of taking not easily or nontradable assets pooling them together and selling tradeable shares in that pool to investors broadly securitization could be taking any assets as with bitcoin or ether for crypto exchange traded funds or properties and related assets for real estate investment trusts and selling securities related to them | however we focus here on its primary meaning for investors and regulators when an issuer designs a marketable financial instrument by merging financial assets normally mortgage loans and consumer or commercial debt 1 investors who buy these securities receive the principal and interest payments for the underlying assets 2we ll take up the nuts and bolts of how securitization works exploring its mechanics through a step by step example we ll examine the potential benefits securitization offers to both lenders and investors such as improved liquidity risk diversification and more efficient capital allocation meanwhile we ll grapple with the significant risks and downsides of securitization including reduced transparency misaligned incentives and the potential for systemic instability investopedia xiaojie liu | |
how securitization works | in securitization the company or the originator that holds the assets determines which assets to remove from its balance sheets a bank might do this with mortgages and personal loans it no longer wants to service or raise capital for additional loans this gathered group of assets is now considered a reference portfolio the originator then sells the portfolio to an issuer who creates tradable securities with a stake in the assets in the portfolio investors buy the new securities for a specific rate of return and effectively take the position of the lender securitization allows the original lender or creditor to remove assets from its balance sheets to underwrite additional loans investors profit as they earn a rate of return based on the associated principal and interest payments made on the underlying loans and obligations by the debtors or borrowers securitization frees up capital for originators and promotes liquidity in the marketplace steps in securitizationsecuritization is a complex process that involves several steps 23types of securitizationthere are several types of securitization each with its own structure and characteristics the most common types include pass through securitization pay through debt instruments and collateralized debt obligations cdos 3the new securitized financial instrument may be divided into different sections called tranches the tranches consist of individual assets grouped by loan type maturity date interest rate and remaining principal each tranche carries different degrees of risk and offers different yields pass through securitization is the most basic form of securitization in this structure the cash flows from the underlying pool of assets are transferred to investors the spv issues securities known as pass through or flow through certificates which represent an undivided interest in the pool of assets i e there are no tranches as borrowers make payments on the underlying loans the cash flows are collected by the servicer and distributed to the investors pro rata mbs issued by government sponsored enterprises gses like fannie mae and freddie mac are examples of pass through securitization 4pay through instruments also known as collateralized mortgage obligations cmos or real estate mortgage investment conduits are a more complex form of securitization for these the cash flows from the underlying pool of assets are used to pay interest and principal on the securities issued by the spv but the securities themselves are structured as debt obligations the securities are divided into tranches with different maturities risk profiles and payment priorities the cash flows from the underlying assets are allocated to the tranches based on a preset structure with the senior tranches receiving payments before the junior tranches 5asset backed securities abs are a general term for securitization backed by a pool of nonmortgage assets such as auto loans credit card receivables student loans or equipment leases the cash flows from these assets are used to pay interest and principal on the securities issued by the spv like other types of securitization abs can be structured with different tranches each with its own risk and return profile collateralized debt obligations cdos are a type of securitization that involves pooling together a diverse range of debt obligations such as corporate bonds loans or even other securitized products like mbs or abs the pool of assets is then divided into tranches each with its own risk and return characteristics upping the ante cdo squared and cdo cubed have underlying assets of cdos and cdo squared respectively these played a significant role in the 2007 to 2008 global financial crisis 67 many of these securities were backed by subprime mortgages and experienced significant losses when the housing market collapsed the complexity and lack of transparency in these structures made it difficult for investors to understand the true risks involved leading to a loss of confidence in the securitized product market 8advantages and disadvantages of securitizationturns illiquid assets into liquid onesfrees up capital for the originatorprovides income for investorssmall investors can participateinvestor assumes creditor rolerisk of default on underlying loanslack of transparency regarding assetsearly repayment damages investor s returnssecuritization creates liquidity by allowing retail investors to buy shares in instruments that would be unavailable to them an mbs investor can buy portions of mortgages and receive regular returns from interest and principal payments unlike other investments many loan based securities are backed by collateral in addition as the originator moves debt into the securitized portfolio it reduces the liability on its balance sheet allowing it to underwrite further loans although the securities may be backed by tangible assets there is a risk of default moreover early repayments will cut the returns the investor receives on the underlying notes there may also be a lack of transparency about the underlying assets misrepresented mbs infamously played a toxic and precipitating role in the financial crisis of 2007 to 2008 example of securitizationthe investment company fidelity offers mbs that give investors a monthly distribution of principal and interest payments made by homeowners 9 for this example fidelity offers an mbs issued by various gses or agencies | |
when an investor purchases these securities they are essentially buying a share in a pool of mortgages as homeowners make their monthly mortgage payments principal and interest the cash is collected by the gses or agency and distributed to mbs investor pro rata | investors in mbs benefit from the regular cash flows from the underlying mortgages as well as the potential for capital appreciation if interest rates fall as the value of fixed income securities generally rises when interest rates decline however they also face prepayment risk which is the risk that homeowners may refinance or pay off their mortgages earlier than expected altering the cash flow profile of the mbs by investing in these mbs investors are exposed to the risks and returns associated with the underlying mortgages these mbs are backed by the full faith and credit of the u s government making them among the safest fixed income investments 10 these are called agency mbs as opposed to non agency private mbs which make up but a small part of the market | |
which agencies regulate securitization | companies that engage in securities or investment activities are regulated by the u s securities and exchange commission and the financial industry regulatory authority | |
how are investors paid by investing in mortgage based securities | two types of mbs included pass throughs and collateralized mortgage obligations cmo pass throughs are structured as trusts in which mortgage payments are collected and passed to investors with stated maturities of 5 15 or 30 years cmos consist of pools of securities known as tranches with varying credit ratings that determine the rates that are returned to investors | |
what is the difference between an mbs and an abs | mortgage backed securities are bonds backed by home loans issued to consumers asset backed securities are bonds backed by auto loans mobile home loans credit card loans and student loans the bottom linesecuritization pools or groups debt into investable portfolios to make marketable financial instruments investors can profit from the interest and principal paid on the underlying assets both mortgage backed securities and asset backed securities are created through securitization and include mortgages consumer and commercial debt | |
what is a security | the term security refers to a multitude of different investments such as stocks bonds investment contracts notes and derivatives for example a security can represent ownership in a corporation in the form of stock a creditor relationship with a governmental body or corporation in the form of a bond or rights to ownership in the form of an option investopedia daniel fishelunderstanding securitiesthe securities act of 1933 is the first federal legislation to regulate the u s stock market an authority that was previously regulated at the state level under the law anyone who wishes to sell investment contracts to the public must publish certain information regarding the proposed offering the company making the offering and the principal figures of that company these requirements are intended to protect the investing public from deceptive or misleading marketing practices the company and its leading figures are strictly liable for any inaccuracy in its financial statements whether intentional or not later legislation created the securities and exchange commission sec which is responsible for regulations and enforcement although the term securities is commonly associated with stocks bonds and similar instruments the u s supreme court gives the term a much broader interpretation in the case of howey vs sec 1946 the court found that the plaintiff s sale of land and agricultural services constituted an investment contract even though there was no trace of a stock or bond this case established the four prong howey test which states that an investment can be regulated as a security if under this rule it does not matter if a securities offering is formalized with a legal contract or stock certificates any type of investment offering can be a security on several occasions courts have enforced securities provisions on unconventional assets such as whiskey beavers and chinchillas the sec has also sought enforcement against issuers of cryptocurrencies and non fungible tokens 123types of securitiessecurities can be broadly categorized into two distinct types equity and debt however some hybrid securities combine elements of both equities and debts an equity security represents ownership interest held by shareholders in an entity a company partnership or trust realized in the form of shares of capital stock which includes shares of both common and preferred stock holders of equity securities are typically not entitled to regular payments although equity securities often do pay out dividends but they are able to profit from capital gains when they sell the securities assuming they ve increased in value equity securities do entitle the holder to some control of the company on a pro rata basis via voting rights in the case of bankruptcy they share only in residual interest after all obligations have been paid out to creditors they are sometimes offered as payment in kind a debt security represents borrowed money that must be repaid with terms that stipulate the size of the loan interest rate and maturity or renewal date debt securities which include government and corporate bonds certificates of deposit cds and collateralized securities such as cdos and cmos generally entitle their holder to the regular payment of interest and repayment of principal regardless of the issuer s performance along with any other stipulated contractual rights which do not include voting rights they are typically issued for a fixed term at the end of which they can be redeemed by the issuer debt securities can be secured backed by collateral or unsecured and if secured may be contractually prioritized over other unsecured subordinated debt in the case of bankruptcy hybrid securities as the name suggests combine some of the characteristics of both debt and equity securities examples of hybrid securities include equity warrants options issued by the company itself that give shareholders the right to purchase stock within a certain timeframe and at a specific price convertible bonds bonds that can be converted into shares of common stock in the issuing company and preference shares company stocks whose payments of interest dividends or other returns of capital can be prioritized over those of other stockholders although preferred stock is technically classified as an equity security it is often treated as a debt security because it behaves like a bond preferred shares offer a fixed dividend rate and are popular instruments for income seeking investors they are essentially fixed income securities a derivative is a type of financial contract whose price is determined by the value of some underlying asset such as a stock bond or commodity among the most commonly traded derivatives are call options which gain value if the underlying asset appreciates and put options which gain value when the underlying asset loses value an asset backed security represents a part of a large basket of similar assets such as loans leases credit card debts mortgages or anything else that generates income over time the cash flow from these assets is pooled and distributed among the different investors 4 | |
how securities trade | publicly traded securities are listed on stock exchanges where issuers can seek security listings and attract investors by ensuring a liquid and regulated market in which to trade informal electronic trading systems have become more common in recent years and securities are now often traded over the counter or directly among investors either online or over the phone an initial public offering ipo represents a company s first major sale of equity securities to the public following an ipo any newly issued stock while still sold in the primary market is referred to as a secondary offering alternatively securities may be offered privately to a restricted and qualified group in what is known as a private placement an important distinction in terms of both company law and securities regulation sometimes companies sell stock in a combination of a public and private placement in the secondary market also known as the aftermarket securities are simply transferred as assets from one investor to another shareholders can sell their securities to other investors for cash and or capital gain the secondary market thus supplements the primary the secondary market is less liquid for privately placed securities since they are not publicly tradable and can only be transferred among qualified investors investing in securitiesthe entity that creates the securities for sale is known as the issuer and those who buy them are of course investors generally securities represent an investment and a means by which municipalities companies and other commercial enterprises can raise new capital companies can generate a lot of money when they go public selling stock in an initial public offering ipo for example city state or county governments can raise funds for a particular project by floating a municipal bond issue depending on an institution s market demand or pricing structure raising capital through securities can be a preferred alternative to financing through a bank loan on the other hand purchasing securities with borrowed money an act known as buying on a margin is a popular investment technique in essence a company may deliver property rights in the form of cash or other securities either at inception or in default to pay its debt or other obligation to another entity these collateral arrangements have been growing of late especially among institutional investors regulation of securitiesin the united states the u s securities and exchange commission sec regulates the public offer and sale of securities public offerings sales and trades of u s securities must be registered and filed with the sec s state securities departments self regulatory organizations sros within the brokerage industry often take on regulatory positions as well examples of sros include the national association of securities dealers nasd and the financial industry regulatory authority finra residual securitiesresidual securities are a type of convertible security that is they can be changed into another form usually that of common stock a convertible bond for example is a residual security because it allows the bondholder to convert the security into common shares preferred stock may also have a convertible feature corporations may offer residual securities to attract investment capital when competition for funds is intense | |
when a residual security is converted or exercised it increases the number of current outstanding common shares this can dilute the total share pool and their price also dilution also affects financial analysis metrics such as earnings per share because a company s earnings have to be divided by a greater number of shares | in contrast if a publicly traded company takes measures to reduce the total number of its outstanding shares the company is said to have consolidated them the net effect of this action is to increase the value of each individual share this is often done to attract more or larger investors such as mutual funds other types of securitiescertificated securities are those represented in physical paper form securities may also be held in the direct registration system which records shares of stock in book entry form in other words a transfer agent maintains the shares on the company s behalf without the need for physical certificates modern technology and policies have in most cases eliminated the need for certificates and for the issuer to maintain a complete security register a system has developed wherein issuers can deposit a single global certificate representing all outstanding securities into a universal depository known as the depository trust company dtc all securities traded through the dtc are held in electronic form it is important to note that certificated and un certificated securities do not differ in terms of the rights or privileges of the shareholder or issuer bearer securities are those that are negotiable and entitle the shareholder to the rights under the security they are transferred from investor to investor in certain cases by endorsement and delivery in terms of proprietary nature pre electronic bearer securities were always divided meaning each security constituted a separate asset legally distinct from others in the same issue depending on market practice divided security assets can be fungible or less commonly non fungible meaning that upon lending the borrower can return assets equivalent either to the original asset or to a specific identical asset at the end of the loan in some cases bearer securities may be used to aid tax evasion and thus can sometimes be viewed negatively by issuers shareholders and fiscal regulatory bodies alike they are rare in the united states registered securities bear the name of the holder and other necessary details maintained in a register by the issuer transfers of registered securities occur through amendments to the register registered debt securities are always undivided meaning the entire issue makes up one single asset with each security being a part of the whole undivided securities are fungible by nature secondary market shares are also always undivided letter securities are not registered with the sec and cannot be sold publicly in the marketplace a letter security also known as a restricted security letter stock or letter bond is sold directly by the issuer to the investor the term is derived from the sec requirement for an investment letter from the purchaser stating that the purchase is for investment purposes and is not intended for resale when changing hands these letters often require an sec form 4 cabinet securities are listed under a major financial exchange such as the nyse but are not actively traded held by an inactive investment crowd they are more likely to be a bond than a stock the cabinet refers to the physical place where bond orders were historically stored off of the trading floor the cabinets would typically hold limit orders and the orders were kept on hand until they expired or were executed issuing securities examplesconsider the case of xyz a successful startup interested in raising capital to spur its next stage of growth up until now the startup s ownership has been divided between its two founders it has a couple of options to access capital it can tap public markets by conducting an ipo or it can raise money by offering its shares to investors in a private placement the former method enables the company to generate more capital but it comes saddled with hefty fees and disclosure requirements in the latter method shares are traded on secondary markets and are not subject to public scrutiny both cases however involve the distribution of shares that dilute the stake of founders and confer ownership rights on investors this is an example of an equity security next consider a government interested in raising money to revive its economy it uses bonds debt securities to raise that amount promising regular payments to holders of the coupon finally look at the case of startup abc it raises money from private investors including family and friends the startup s founders offer their investors a convertible note that converts into shares of the startup at a later event most such events are funding events the note is essentially a debt security because it is a loan made by investors to the startup s founders at a later stage the note turns into equity in the form of a predefined number of shares that give a slice of the company to investors this is an example of a hybrid security | |
what is the difference between stocks and securities | stocks or equity shares are one type of security each stock share represents fractional ownership of a public corporation which may include the right to vote for company directors or to receive a small slice of the profits there are many other types of securities such as bonds derivatives and asset backed securities | |
what are marketable securities | a marketable security is any type of stock bond or other security that can easily be bought or sold on a public exchange for example the shares of public companies can be traded on a stock exchange and treasury bonds can be bought and sold on the bond market in contrast a non marketable security is one that cannot be legally sold to the public for example shares in non public companies can only be bought or sold in very limited circumstances | |
what are treasury securities | treasury securities are debt securities issued by the u s treasury department to raise money for the government since they are backed by the government these bonds are considered very low risk and highly desirable for risk averse investors the bottom linesecurities represent the most common investment contracts when saving for retirement most people choose to put a portion of their savings in equity or debt securities these securities markets are also important for the market as a whole in that they allow companies to raise capital from the public | |
what is the security market line | the security market line sml is a line drawn on a chart that serves as a graphical representation of the capital asset pricing model capm which shows different levels of systematic or market risk of various marketable securities plotted against the expected return of the entire market at any given time 1also known as the characteristic line the sml is a visualization of the capm where the x axis of the chart represents risk in terms of beta and the y axis of the chart represents expected return the market risk premium of a given security is determined by where it is plotted on the chart relative to the sml 1understanding the security market linethe security market line is an investment evaluation tool derived from the capm a model that describes the risk return relationship for securities and is based on the assumption that investors need to be compensated for both the time value of money tvm and the corresponding level of risk associated with any investment referred to as the risk premium interpreting the information from an sml graph helps analysts understand market risks investopedia ellen lindnerthe concept of beta is central to the capm and the sml the beta of a security is a measure of its systematic risk which cannot be eliminated by diversification a beta value of one is considered as the overall market average a beta value that s greater than one represents a risk level greater than the market average and a beta value of less than one represents a risk level that is less than the market average 1the formula for plotting the sml is although the sml can be a valuable tool for evaluating and comparing securities it should not be used in isolation as the expected return of an investment over the risk free rate of return is not the only thing to consider when choosing investments using the security market linethe security market line is commonly used by money managers and investors to evaluate an investment product that they re thinking of including in a portfolio the sml is useful in determining whether the security offers a favorable expected return compared to its level of risk | |
when a security is plotted on the sml chart if it appears above the sml it is considered undervalued because the position on the chart indicates that the security offers a greater return against its inherent risk | conversely if the security plots below the sml it is considered overvalued in price because the expected return does not overcome the inherent risk the sml is frequently used in comparing two similar securities that offer approximately the same return in order to determine which of them involves the least amount of inherent market risk relative to the expected return the sml can also be used to compare securities of equal risk to see which one offers the highest expected return against that level of risk | |
what is seed capital | the term seed capital refers to the type of financing used in the formation of a startup funding is provided by private investors usually in exchange for an equity stake in the company or for a share in the profits of a product much of the seed capital a company raises may come from sources close to its founders including family friends and other acquaintances obtaining seed capital is the first of four funding stages required for a startup to become an established business investopedia joules garciaunderstanding seed capitala company that is first starting out may have limited access to funding and other sources banks and other investors may be reluctant to invest because it has no history or established track record or any measure of success many startup executives often turn to people they know for initial investments family and friends this financing is referred to as seed capital seed capital also called seed money or seed financing is referred to as such because it is money raised by a business in its infancy or early stages it doesn t have to be a large amount of money because it comes from personal sources it s often a relatively modest sum this money generally covers only the essentials a startup needs such as a business plan and initial operating expenses rent equipment payroll insurance and or research and development costs r d the primary goal at this point is to attract more financing this means catching the interest of venture capitalists and or banks neither is inclined to invest large sums of money in a new idea that exists only on paper unless it comes from a successful serial entrepreneur special considerationsa startup normally has to move through four distinct phases of investment before it is truly established seed capital venture capital mezzanine funding and an initial public offering ipo as mentioned above seed capital tends to be just enough to help a startup achieve its initial goals if the company is successful in the initial phase it may catch the interest of venture capitalists these investors are likely to invest heavily in the company before it moves further so called mezzanine financing is sometimes necessary to support a company into its introductory phase this is usually available only to businesses with a track record even then at a high rate of interest the final stage is when early investors get their payday when a young company goes public with its ipo it raises sufficient capital to keep growing and expanding 12seed capital is one of the four phases of investment along with venture capital mezzanine funding and an initial public offering seed capital vs angel investingprofessional angel investors sometimes provide seed money either through a loan or in return for equity in the future company these investors are generally high net worth individuals hnwis and may come from the personal network of a startup s founder s angel investors often enjoy a hands on role in helping develop a company from scratch if the angel investor contributes less than 1 million the money is usually in the form of a loan for the entrepreneur this can solve the problem of attracting sufficient seed money given the reluctance of financial institutions and even venture capitalists to take on considerable risk when contributing more than 1 million an angel investor typically prefers seed equity and becomes a co owner of the startup and the holder of preferred stock with voting rights seed capital vs venture capitalseed capital and venture capital are often used as synonyms and they tend to overlap seed capital is generally used to develop a business idea to the point that it can be presented effectively to venture capital firms that have large amounts of money to invest if venture capital firms like the idea they generally get a stake in the new venture in return for investing in its development venture capitalists provide the lion s share of the money needed to start a new business it is a considerable investment paying for product development market research and prototype production most startups at this stage have offices staff and consultants even though they may have no actual product example of seed capitalalphabet the parent company of google provided seed money to the center for resource solutions in 2016 for a project to implement renewable energy certification programs in asia the goal of the san francisco based center is to help businesses buy power from clean sources the center for resource solutions is a nonprofit organization but google has a business interest in the venture it is already the world s largest non utility purchaser of renewable energy but it wants to power its global data centers and eventually its entire operations with renewable energy 34 | |
what is seigniorage | seigniorage is the difference between the face value of money such as a 10 bill or a quarter coin and the cost to produce it if the seigniorage is positive the government will make a profit a negative seigniorage will result in a loss understanding seigniorageseigniorage is counted as revenue for a government when the money it creates is worth more than it costs to produce this revenue is often used by governments to finance portions of their expenditures without having to collect taxes if for example it costs the u s government five cents to produce 1 the seigniorage is 95 cents or the difference between the two amounts seigniorage gives a country the potential to turn a profit when it produces money while the definition of seigniorage is most often the difference between the cost of printing new currency and the face value of that same currency it is also the number of goods or services a government can acquire through the printing of new notes in some situations the production of currency can result in a loss instead of a gain for the government creating the currency this loss is more commonly experienced in the production of coins because the metal used to produce coins has inherent value this value often called the melt value may be higher than the denomination it originally represented or when combined with production costs may result in a loss for example the u s penny with a face value of one cent cost 3 07 cents to produce in 2023 the eighteenth year in a row that production costs exceeded the penny s face value over time the melt value can also change as market demands shift and it can potentially lead to the value of the metal being worth more than the face value of the currency one example is silver coins such as the u s silver quarter and the silver dime real world example of seignioragebased on anticipated demand for new currency the federal reserve places an order annually with the department of the treasury s bureau of engraving and printing and pays for production costs the fed provides detailed information on each currency denomination and the cost to produce it in 2023 for example it cost 5 3 cents to produce a 20 bill and 8 6 cents to produce a 100 bill the u s mint is responsible for coin production which is influenced by the number of requested federal reserve bank orders the federal reserve then purchases the coins at face value the federal reserve s currency operating budget in 2024 special considerationswhile the basic principle behind seigniorage suggests that a country can profit from the production of new bills there can be other factors affecting the entire transaction if the federal reserve agrees to increase the number of dollars available within the u s economy it will purchase a treasury bill t bill in exchange for permitting the production of more dollars while the government may appear to profit when the cost of production is lower than the face value of the bills it is important to note that treasury bills require interest payments to the federal reserve in addition to the original investment placed when the treasury bill was purchased seigniorage and gresham s lawgresham s law is a monetary principle stating that bad money drives out good gresham s law was originally based on the composition of minted coins and the value of the precious metals used in them in other words if a gold coin is worth 5 and a silver coin is worth 0 50 people will hoard the gold coin and instead exchange 10 silver coins as a result the gold coins drop out of circulation and thus the bad money the silver drives out the good the gold this becomes a form of effective seigniorage since the gold becomes worth more even though its face value is the same as 10 silver coins however since the abandonment of metallic currency standards the theory has been applied to the relative stability of different currencies value in global markets | |
does seigniorage cause inflation | seigniorage itself does not necessarily create inflation but it can contribute to inflationary pressures under certain circumstances the relationship between seigniorage and inflation is complex but let s take a closer look | |
when a government or central bank engages in seigniorage by creating new money it increases the money supply if this increase in the money supply outpaces the growth of goods and services in the economy it can lead to inflation this is based on the quantity theory of money which suggests that an increase in money supply all else being equal will lead to a proportional increase in the price level | the inflationary impact of seigniorage largely depends on how the newly created money is used if the government uses seigniorage to finance productive investments that increase the economy s productive capacity it may not lead to significant inflation on the other hand if seigniorage is used to finance current consumption or unproductive expenditures it s more likely to be inflationary keep in mind that central banks typically aim to control inflation through various monetary policy tools they may offset the potential inflationary effects of seigniorage through other mechanisms such as adjusting interest rates or conducting open market operations therefore while excessive seigniorage can contribute to inflation the central banks that can very closely monitor the impact of seigniorage and adapt their policies accordingly | |
does inflation impact seigniorage | in general moderate levels of inflation can increase seigniorage revenue for governments but this relationship becomes more complicated at higher inflation rates in a low to moderate inflation environment rising prices increase the nominal demand for money this increased demand for money allows the government to issue more currency thereby generating more seigniorage revenue additionally inflation erodes the real value of government debt which can be seen as an indirect form of seigniorage as it reduces the government s real debt burden however as inflation rates increase beyond moderate levels the relationship becomes more nuanced high inflation rates can lead to currency substitution where people begin to use foreign currencies or other stores of value instead of the domestic currency this behavior reduces the demand for the domestic currency meaning the government issues less currency which decreases seigniorage revenue | |
what are the origins of seigniorage | the origins of the term seigniorage date back to the days of feudal lords in europe those who were seigneurs or lords had the authority to mint coins | |
what is the seigniorage of 1 | in 2023 the u s dollar cost 2 8 cents to produce this means the seigniorage of 1 is 97 2 cents | |
how many coins does the u s mint produce | in 2023 the u s mint produced more than 13 1 billion circulating coins circulating coins such as the penny nickel dime and quarter are defined as those used for everyday transactions the u s mint also produces commemorative coins and precious metal coins can cryptocurrencies generate seigniorage cryptocurrencies can indeed generate a form of seigniorage albeit through different mechanisms than traditional currencies in proof of work cryptocurrencies like bitcoin miners are rewarded with newly created coins for validating transactions which can be seen as a form of seigniorage can seigniorage lead to hyperinflation while seigniorage itself doesn t necessarily lead to hyperinflation excessive reliance on seigniorage as a source of government funding can contribute to hyperinflationary scenarios this typically occurs when governments facing severe fiscal deficits resort to rapidly increasing the money supply to finance expenditures as more money is created its value decreases leading to higher prices the bottom lineseigniorage allows governments to earn revenue when the face value of money is more than the cost to produce it the revenue is typically used to fund expenditures without having to collect taxes sometimes the production of currency can result in a loss instead of a gain | |
what is a self directed ira sdira | a self directed individual retirement account sdira is a type of individual retirement account ira that can hold various alternative investments normally prohibited from regular iras although a custodian or trustee administers the account it s directly managed by the account holder which is why it s called self directed available as either a traditional ira to which you make tax deductible contributions or a roth ira from which you take tax free distributions self directed iras are best suited for savvy investors who already understand alternative investments and want to diversify in a tax advantaged account understanding a self directed ira sdira the main difference between an sdira and other iras is the types of investments that you can hold in the account in general regular iras are limited to common securities like stocks bonds certificates of deposit cds and mutual or exchange traded funds etfs but sdiras allow the owner to invest in a much broader array of assets with an sdira you can hold precious metals commodities private placements limited partnerships tax lien certificates real estate and other alternative investments 1as such an sdira requires greater initiative and due diligence by the account owner taxes withdrawals and contributionscontributions to a self directed ira are limited to annual amounts in 2023 this is 6 500 for those under age 50 with a 1 000 catch up contribution for those over 50 in 2024 the amount increases to 7 000 with the catch up contribution remaining the same 2 | |
how to open an sdira | with most ira providers you can only open a regular ira traditional or roth and only invest in the usual suspects stocks bonds and mutual funds etfs to open an sdira you ll need to remember that sdiras are self directed so custodians aren t allowed to give financial advice 1 as such traditional brokerages banks and investment companies usually don t offer them to their clients this means that you need to do your homework if you need help picking or managing your investments you should plan on working with a financial advisor traditional vs roth sdiraself directed iras can be set up as traditional or roth iras but keep in mind that the two account types have different tax treatments eligibility requirements contribution guidelines and distribution rules a key difference between a traditional and a roth ira is when you pay the taxes with traditional iras you get an up front tax break but you pay taxes on your contributions and earnings as you withdraw them during retirement when you contribute to a roth ira you don t get a tax break but your contributions and earnings grow tax free and qualified distributions are also tax free 5of course there are other differences to consider here s a quick rundown these same rules apply to whichever version of an sdira you have sdiras also have to abide by the general ira annual contribution limits for 2024 that s 7 000 per year or 8 000 if you re 50 or older up from 6 500 and 7 500 respectively for 2023 2investing in an sdiraself directed roth iras open up a large universe of potential investments in addition to the standard investments stocks bonds cash money market funds and mutual funds you can hold assets that aren t typically part of a retirement portfolio for example you can buy investment real estate to hold in your sdira account you can also hold partnerships and tax liens even a franchise business 1the internal revenue service irs forbids a few specified investments in sdiras whether it s the roth or traditional version for example you can t hold life insurance s corporation stocks any investment that constitutes a prohibited transaction such as one that involves self dealing and collectibles collectibles include a wide range of items among them antiques artwork alcoholic beverages baseball cards memorabilia jewelry stamps and rare coins note that this affects the kind of gold that a self directed roth ira can hold 8check with a financial advisor to be sure you aren t inadvertently violating any of the sdira rules advantages and disadvantages of sdirassdiras have lots of benefits but there are a few things to watch out for you can choose the assets you place in the accounttax breaks on earningspersonalized diversityeasy to accidentally violate a rule and distribute the entire accountyou can t get help from a custodiancomplicated fee structuresome investments are not very liquideasy to become a victim of fraud | |
what is a self directed individual retirement account sdira | a self directed individual retirement account sdira is a type of individual retirement account ira that can hold investments that a typical ira cannot such as precious metals commodities and real estate 1 sdiras have the same contribution limits as traditional and roth iras 7 000 per year and 8 000 if you re 50 or older for 2024 up from 6 500 and 7 500 respectively for 2023 2 | |
how do you set up an sdira | per the internal revenue service irs all retirement assets including those in sdiras must be held by a qualified custodian the custodian which could be a bank credit union or other financial institution administers the sdira holds the account s investments for safekeeping and ensures that the sdira complies with irs rules while you can open an ira or sdira at virtually any bank or financial institution most big box custodians don t offer alternative investments such as real estate precious metals or cryptocurrencies therefore it s essential to find an sdira custodian that offers the nontraditional assets in which you are interested keep in mind that these firms can t provide investment advice meaning investment research is your responsibility 101 | |
what is the self employed contributions act seca tax | the self employed contributions act seca tax is imposed by the u s government on individuals who are self employed as opposed to those who work for an employer it requires self employed individuals to pay both the employer and employee shares of the federal insurance contributions act fica tax these contributions are crucial for funding social security and medicare programs ensuring that self employed workers are covered by these essential social safety nets just like traditional employees 1understanding the self employed contributions act seca taxseca taxes are calculated on net earnings defined as the gross income derived from business activities minus the expenses incurred in the course of doing business 3self employed individuals pay social security taxes at a combined rate of 12 4 this covers both the employer s and the employee s portions since they fulfill both roles self employed taxpayers subject to seca are taxed at 12 4 6 2 6 2 as they are considered to be both employer and employee 45there are limits however on how much income is subject to this percentage this tax is capped applying only to the first 160 200 of earnings in 2023 and increasing to 168 600 in 2024 earnings above these amounts aren t subject to social security tax the medicare tax rate is set at 2 9 with no cap on the income it applies to bringing the total seca tax rate to 15 3 6an additional medicare tax applies to earnings above 200 000 or 250 000 for joint filers according to the irs self employed individuals can also deduct health insurance costs affecting their net earnings calculation 7to pay self employment tax you need to have a ssn or itin and tax payments are typically made through estimated tax payments each quarter you must pay self employment tax on all earnings including foreign income exempt from income tax this applies to earnings from both within the united states and abroad 8 however the u s has agreements with certain countries to avoid double taxation to show you re exempt from foreign social security taxes but liable for u s self employment tax obtain a certificate of coverage from the u s social security administration or a foreign agency and attach it to your form 1040 noting your exemption 9deducting the self employed contributions act seca taxthe employer portion of the payment is deductible as a business expense in other words the irs allows self employed individuals to use the employer half of the self employment tax as a business deduction for purposes of calculating the taxpayer s income tax this takes into account that the efforts of running a company are taken on by an individual rather than an employer which would be the case for an employee of a company it is important to understand that this deduction impacts your income tax calculation without changing your self employment net earnings or the self employment tax you owe deducting half of the self employment tax only modifies how your income tax is computed not your earnings or the self employment tax due 10high income earners face an additional seca levy as a result of the affordable care act aca individuals with a net income above 200 000 250 000 for married couples filing jointly or 125 000 for married couples filing separately will be subject to an additional 0 9 medicare tax 10 it applies to wages self employment income and railroad retirement compensation 11paying the self employed contributions act seca taxthe irs mandates that self employed individuals include seca tax in their quarterly estimated tax payments since they don t have withholding taxes no seca tax is due for net earnings below 400 or 108 28 from certain church related work that s exempt from employer taxes however once earnings exceed these amounts seca tax is due on the full earnings even the portion below the threshold 1213 | |
how much tax do you pay if you are self employed | the total tax you pay if you are self employed is 15 3 this is made up of social security tax 12 4 both from the employer and employee s side of 6 2 each and medicare tax 2 9 both from the employer and employee s side of 1 45 each you are liable for an additional 0 9 medicare tax if your earnings or combined earnings with your spouse exceed certain thresholds 250 000 for married filing jointly 125 000 for married filing separately and 200 000 for single head of household or qualifying widow er 10 | |
how do i avoid paying taxes if i am self employed | as a self employed individual it s mandatory to pay taxes and evading this responsibility constitutes tax evasion however you can legally lower your tax bill by claiming allowable deductions for business expenses the irs permits deductions for various business related costs including office supplies equipment gasoline utilities and insurance which can reduce your taxable income 1415 | |
are you taxed more if you are self employed | yes self employed individuals face higher taxation due to the necessity of covering both the employer and employee portions of social security and medicare taxes totaling 15 3 this breaks down into 12 4 for social security 6 2 each for employer and employee and 2 9 for medicare 1 45 each for employer and employee however the irs allows a tax deduction on the employer s portion of the tax 10the bottom linefor self employed individuals the seca tax is a mandatory contribution to social security and medicare reflecting both employer and employee shares and totaling 15 3 additionally those with higher incomes might incur an extra 0 9 medicare tax however the irs offers deductions on the employer s share of this tax and other business expenses to lessen the tax load despite the higher tax rate for self employed individuals these provisions aim to balance their financial responsibilities and benefits | |
what is self employment | self employment is earning income without being employed and paid by someone else self employed persons may be involved in a variety of occupations but generally are highly skilled at a particular kind of work writers tradespeople freelancers traders investors lawyers salespeople and insurance agents all may be self employed self employment isn t like being a traditional worker because self employed individuals aren t tied to an employer being self employed gives people flexibility but comes with certain tax implications understanding self employmentthe precise definition of self employment depends on who you ask as it varies among different agencies including the u s bureau of labor statistics bls the internal revenue service irs and private research firms however the overarching definition of the term is the state of earning a living from any independent pursuit of economic activity instead of earning a living working for a company or entity a self employed person is anyone who performs work for pay independent contractors sole proprietors of businesses and individuals engaged in partnerships 1 a freelancer or an independent contractor who performs all of their work for a single client may still be a self employed person 2being self employed is often confused with owning a business but the two concepts aren t necessarily the same a self employed person is usually the business itself whereas a business owner may own the company but not be involved in operating or managing it special considerationsa self employed person must file annual taxes and pay an estimated quarterly tax they are also required to pay what is called the self employment tax in addition to income tax this tax equals 15 3 of their earnings of this tax 12 4 goes to social security on the first 168 600 in 2024 and 2 9 goes to medicare tax 34those who make less than an annual net profit of 400 are exempt from paying taxes on that income 2advantages and disadvantages of self employmentthere are benefits and drawbacks of working as a self employed individual we ve highlighted some of the key pros and cons below while self employment generally requires much more work and attention many benefits are attractive one of the most significant disadvantages of self employment is that there is no entity withholding and paying your estimated taxes or withholding you re required to pay estimated federal taxes quarterly some other disadvantages are you are the bossability to choose projectsflexibility in your schedule | |
do what you enjoy | no paid days offno benefitswork may come and goyou are liable for your own taxestypes of self employmentindependent contractors are businesses or individuals hired to do specific jobs they receive payment only for the jobs that they do because they are not considered employees they do not receive benefits or workers compensation their clients do not withhold taxes from their payments for work performed and equal opportunity laws do not apply to them 5examples of independent contractors include doctors journalists freelance workers lawyers actors and accountants who are in business for themselves it is worth noting that independent contractors are not just limited to specialized fields and can include various jobs sole proprietors are the only owners of unincorporated businesses while partnerships involve two or more self employed people who form a business together independent contractors sole proprietors and partnerships often hire a few employees to help them with their work 67the number of self employed and unincorporated individuals in the u s as of march 2024 8it is estimated that freelancers particularly in what is known as the gig economy will continue to grow there were approximately 67 6 million freelancers in 2021 which is expected to grow to 86 5 million by 2027 it is expected that 50 9 of the workforce will be freelancers by 2027 9 | |
what are the main types of self employment | the main types of self employment types are independent contractor which is an individual working a specific job a sole proprietorship which is a business enterprise run by an individual and which may or may not have additional employees and a partnership which is a business structure between two or more individuals with ownership status | |
how do you show proof of income if you are self employed | proof of income may be required in various instances such as filing taxes obtaining a mortgage or other loan or purchasing health insurance ways to show proof of income if you are self employed include tax returns form 1099 bank statements both personal and of the business account audited profit and loss statements and official invoices | |
what are the benefits of being self employed | the benefits of being self employed include being your own boss creating your own schedule flexibility working towards your dreams enjoying the challenges of starting something from scratch choosing the people you work with and creating your own work environment the bottom linea self employed person isn t tied to a specific employer they more or less decide when they ll work and when they won t as such a self employed person is their own boss which comes with certain tax liabilities this includes paying the employee and employer portions of social security and medicare taxes as well as periodic income tax payments they must also foot the bill for supplies equipment and office space although it may sound tempting it s important to consider the benefits and disadvantages carefully if you re considering going out independently as a self employed person | |
what is a self regulatory organization sro | a self regulatory organization sro is an entity such as a non governmental organization which has the power to create and enforce stand alone industry and professional regulations and standards on its own in the case of financial sros such as a stock exchange the priority is to protect investors by establishing rules regulations and setting standards of procedures that promote ethics equality and professionalism understanding self regulatory organizations sros although sros are private organizations they are still subject to government imposed regulation to a degree however the government does delegate some aspects of the industry oversight to self regulatory organizations since the sro has some regulatory influence over an industry or profession it can often serve as a watchdog to guard against fraud or unprofessional practices the ability of an sro to exercise regulatory authority does not stem from a grant of power from the government instead sros often accomplish control through internal mechanisms that regulate the flow of business operations the authority may also come from an external agreement between businesses the purpose of these organizations is to govern from within while avoiding ties to a country s governance any applicable laws or governmental regulations will apply and be foremost while those set by the sro become supplemental authority of srosonce the self regulating organization sets regulations and provisions to guide activity those rules are binding failure to operate within the given regulations can have consequences and a firm must understand those rules when it considers associating with the sro further the sro may set standards for professionals or businesses to meet before becoming a member such as having a specified educational background or working in a manner that is considered ethical by the industry an additional function undertaken by the sro is educating investors on appropriate business practices the sro will provide information and allow input on any areas of interest or concern which may include fraud or other unethical industry activities the sro may also help investors understand how their investments work and advise on methods to mitigate potential risks associated with the securities industry examples of srosmost people have heard of sros even if they did not realize the organization in question was self regulatory these include several prominent asset exchanges and regulatory bodies including there may also be self regulatory organizations specific to the country they serve such as the investment industry regulatory organization of canada iiroc and the association of mutual funds in india amfi some industries may also create sros with examples being the american bar association and the institute of nuclear power operations inpo financial sros are required to file form 19b 4 with the sec before making any changes to its rules specifically in regard to trading rules in the filing the sro must justify the new rules to sec staff making it clear that the rule change supports fair trading markets and provides investor protections and requisite oversight procedures as an example the financial industry regulatory authority finra has the power to license securities dealers their authority includes the ability to audit dealers and associated firms and to ensure compliance with the standards currently in place the goal is to promote ethical industry practices and improve transparency within the sector finra also oversees arbitration between investors brokers and other involved parties this oversight provides a standard to address various disputes although it also limits actions a firm may take outside of the system finra is not a governmental organization instead it is a private organization populated by member firms that consist of financial institutions like broker dealers and financial professionals the rules and regulations promoted and enforced by finra are thus under the auspices of a self regulatory framework governmental laws or mandates fall under the control of the securities and exchange commission sec the laws of the federal or state level of government will supersede any finra specific regulations | |
what does an sro mean in business | sro stands for self regulatory organization with an sro the principles and rules that govern the organization have been formulated and approved by its members and members agree to adhere to them or face penalties such as fines or expulsion from the organization still sros may be subject to government regulation | |
what can a self regulatory organization do | an sro is usually formed by an industry or professional group to oversee activities within that industry or profession as such sros can admit reprimand or expel members based on established rules and criteria sros thus have oversight surveillance and enforcement mechanisms in place to ensure members are conforming to its standards | |
is finra the only financial sro | no many stock exchanges and other professional bodies in the world of finance are structured as sros moreover sros also exist outside of finance | |
is the sec an sro | no the u s securities and exchange commission sec is a federal regulatory body created by an act of congress it is thus governed by federal securities laws and not membership based rules note that the sec oversees finra and acts as the first level of appeal for actions brought by finra the bottom lineself regulatory organizations sros set industry standards and regulations of their own accord though they provide standards and enforce them upon their members they are secondary to the standards and laws set by the government sros seek to protect all parties involved in the various fields in which they operate | |
what is sell in may and go away | sell in may and go away is a well known saying in finance it is based on stocks historical underperformance during the six month period from may to october the historical pattern was popularized by the stock trader s almanac which found investing in stocks as represented by the dow jones industrial average from november to april and switching into fixed income the other six months would have produced reliable returns with reduced risk since 1950 1the divergence has remained pronounced in recent years with the s p 500 index gaining an average of about 2 from may to october since 1990 compared with an average of approximately 7 from november to april according to fidelity investments 2an academic paper that surveyed stock markets outside u s found the same pattern calling the seasonal divergence trend remarkably robust 3theories for the seasonal divergencefinancial markets were once influenced by the seasonal patterns tied to agriculture but these have likely faded to insignificance given farming s dramatically reduced economic weight seasonality in investment flows may persist as a result of year end financial industry and business bonuses with the mid april u s income tax filing deadline possibly contributing whatever fundamental considerations may be in play the historical pattern is more pronounced as a result of the october stock market collapses in 1987 and 2008 the last significant stock market decline during the period from may to october took place in 2011 with the s p 500 down 8 1 the s p 500 declined 0 3 over the same months in 2015 | |
why not sell in may and go away | the only drawback of historical patterns is that they don t reliably predict the future that s especially true of well known historical patterns if enough people were to become convinced the sell in may and go away pattern is here to stay it would in fact promptly start to go away early bird sellers would all try to sell in april and bid against each other to buy the stocks back ahead of the pack in october the seasonal tendency s averages also conceal big fluctuations from year to year of course in any given year the influence of seasonality is swamped by a variety of other often more pressing considerations selling in may would have done anyone following that adage no good in 2020 as the s p 500 slumped 34 over five weeks in february and march as the covid 19 pandemic struck only to return 12 4 from may to october in fact in the decade through 2020 the unfashionable summer half of the market year averaged a solid if unspectacular return of 3 8 with no significant decline since 2011 according to lpl research 4 sell in may has also been off the mark in early 2022 with the s p 500 down 8 8 in april and 13 3 since the start of the year in summary while the historical pattern is undeniable its predictive power is questionable and the opportunity costs incurred potentially significant alternatives to sell in may and go away instead of acting on the saying literally investors who believe the pattern will continue could rotate from the higher risk market sectors to those that tend to outperform in periods of market weakness for example a custom index representing the strategy of rotating between healthcare and consumer staples stocks held from may to october and more economically sensitive market sectors from november to april would have significantly outperformed the s p 500 in both periods between 1990 and 2021 according to pacer etfs sponsor of an exchange traded fund attempting to execute this seasonal rotation as an investment strategy 5 the pacer cfra stovall equal weight seasonal rotation etf szne had about 80 million in assets and was down more than 12 in 2022 as of april 29 67for many retail investors with long term goals a buy and hold strategy hanging on to equities year round year after year unless there s a change in fundamentals remains the best course | |
what is sell side | sell side is the part of the financial industry that is involved with the creation promotion and sale of stocks bonds foreign exchange and other financial instruments to the public market the sell side can also include private capital market instruments such as private placements of debt and equity sell side individuals and firms work to create and service products that are made available to the buy side of the financial industry the sell side of wall street includes investment bankers who serve as intermediaries between issuers of securities and the investing public and the market makers who provide liquidity in the public market investment bankers and corporate finance advisors play the same role for private issues of debt and equity understanding sell sidethe sell side and buy side of wall street are two sides of the same coin one is dependent upon the other and could not operate without the other the sell side tries to get the highest price possible for each financial instrument while providing insight and analysis on each of these financial assets buy side players in the public market include money managers at hedge funds institutional firms mutual funds and pension funds individual investors are technically on the buy side in the private market private equity funds vc funds and venture arms of corporations investing in startups are on the buy side however the term mostly applies to professional money managers on the sell side of the equation are the market makers who are the driving force of the financial market for example any individual or firm that purchases stock to sell it later at a profit is from the buy side foreign exchange sell sidethe fx market is the world s largest financial marketplace with more than an estimated 6 6 trillion changing hands daily as of 2019 here the sell side is dominated by top multinational banks led by jp morgan chase citibank deutsche bank and ubs bank trading rooms are divided into two groups many interbank traders take proprietary positions but salespeople generally do not bond market sell sidethe global bond market is the world s second largest financial marketplace with an estimated value of over 100 trillion the u s bond market is estimated to be valued at approximately slightly over 40 trillion investment banks dominate the sell side with the largest being goldman sachs and morgan stanley jp morgan chase and bank of america which combine commercial and investment banks under a single holding company underwrite and manage bond issues many are also primary dealers of u s treasury bonds which means that they buy directly from the u s treasury the investment banks are very active both trading and taking positions in the bond market stock market sell sideinvestment banks also dominate the sell side of the stock market they underwrite stock issuance take proprietary positions and sell to both institutional and individual investors one of the most high profile activities of the sell side in the stock market is in initial public offerings ipos of stocks companies can t go public themselves they must enlist the services of an investment bank for underwriting underwriters are typically brokers who act as a buffer between companies and the investing public and who market and sell those initial shares example of sell sidea wealthy individual worth millions of dollars is looking to invest a significant portion of his capital he heads to an investment bank for some options the private wealth management division of the investment bank takes a look at the individual s assets and risk tolerance and comes up with an investment strategy for the individual as well as certain financial products they can sell to him the individual takes on the business of the investment bank paying it commissions and fees for managing his money the business that the investment bank has offered the wealthy individual is considered the sell side of the business as it is selling to the client services and financial products | |
what is seller financing | seller financing is a real estate agreement in which the seller handles the mortgage process instead of a financial institution instead of applying for a conventional bank mortgage the buyer signs a mortgage with the seller 1owner financing is another name for seller financing it is also called a purchase money mortgage | |
how seller financing works | buyers attracted to seller financing are often those finding it difficult to get a conventional loan perhaps due to poor credit unlike a bank mortgage seller financing typically involves few or no closing costs and may not require an appraisal sellers are often more flexible than a bank in the amount of down payment also the seller financing process is much faster often settling within a week for sellers financing the buyer s mortgage can make it much easier to sell a house during a down real estate market and when credit is tight buyers may prefer seller financing moreover sellers can expect to get a premium for offering to finance meaning they are more likely to get their asking price in a buyer s market seller financing rises and falls in popularity along with the overall tightness of the credit market during times when banks are risk averse and reluctant to lend money to any but the most creditworthy borrowers seller financing can make it possible for many more people to buy homes seller financing may also make it easier to sell a home conversely when the credit markets are loose and banks are enthusiastically lending money seller financing has less appeal like a bank sellers face the risk of borrower default however they must meet this risk alone disadvantages of seller financingthe chief drawback for buyers is that they will almost certainly pay higher interest than for a market rate mortgage from a bank financial institutions have more flexibility in changing the interest rate charged by offering non conventional loans long term the higher seller offered interest could wipe out the savings gained from avoiding closing costs buyers will still need to demonstrate their ability to pay back the loan as with any real estate purchase they will also pay for a title search to make sure the deed is accurately described and free from encumbrances other charges they may have to pay to include survey fees document stamps and taxes unlike banks sellers don t have a staff of employees dedicated to chasing down delinquent payments and filing foreclosure notices a court might order the buyer to reimburse those costs but if the buyer is bankrupt that will not matter if the seller still has a mortgage note on the property it probably has a due on sale clause or an alienation clause these clauses require full repayment of the current mortgage when the property sells 2 all this also means that both sides should employ experienced real estate attorneys to draft the paperwork to close the deal and make sure that all eventualities are covered | |
what are selling general and administrative expenses sg a | selling general and administrative expenses sg a include all non production expenses for a reporting period examples of these expenses are marketing advertising rent and utilities this line item includes nearly all business costs that aren t directly attributable to making a product or performing a service sg a consists of the costs of managing a company and the expenses of delivering its products or services understanding selling general and administrative expenses sg a sg a plays a key role in a company s profitability and in calculating its break even point or margin targets it s also one of the first places managers look when they re reducing redundancies after mergers or acquisitions this makes it an easy target for a management team that s looking to boost profits quickly it s also the first place that private equity firms or strategic investors perform their due diligence when they re considering an investment or acquisition target selling expenses can be broken down into direct and indirect costs direct selling expenses are incurred only when the product is sold indirect selling expenses occur throughout the manufacturing process and after the product is finished these expenses are sometimes confused with the action of indirect selling which happens when third parties or affiliates sell the products g a expenses are the company s overhead they re incurred in the day to day operations of a business and may not be directly tied to any specific function or department within the company they re usually fixed costs incurred disregarding the amount of sales or production incurred during a certain period many sg a expenses are unavoidable companies are often required to carry insurance policies and to spend money to maintain their headquarters types of sg a expensesselling expenses are often related to expenses that are necessary for a company to directly interface with customers these types of expenses include general expenses are often necessary to run a business these costs would likely have to be incurred regardless of the type of product or industry that a company operates within these types of expenses include administrative expenses are primarily related to the cost of personnel these employees may be internal staff or external parties who provide services for a fee they often don t directly interface with the manufacturing or sale of goods these types of expenses include general and administrative costs are rarely reported separately it s fairly common to see these two costs reported together | |
how to calculate sg a expenses | calculating sg a expenses is straightforward when expenses have been classified into categories several factors to keep in mind when calculating sg a costs include | |
how to report sg a expenses | sg a has a very specific place on a company s income statement net revenue is always reported at the top then cogs is deducted to arrive at the gross margin sg a and any other expenses are listed below the gross margin the result is operating profit when these expenses are deducted from the gross margin not all expenses have been recorded when calculating operating expenses some expenses such as interest or tax expenses are reported below operating income a company may report sg a in several ways companies can aggregate all these expenses in a single sg a line or they can segregate selling costs from general and administrative costs sg a expenses as a percentage of revenue are generally high for healthcare and telecommunications businesses but relatively low for real estate and energy 1sg a expenses vs operating expensessg a expenses and operating expenses are the same in many cases both encompass expenses that are necessary to operate a business independent of the costs of manufacturing goods there are several subtle differences between sg a expenses and operating expenses larger companies often separate these types of costs into smaller specific sg a categories because it s often easier for companies to track and monitor costs in these groups management often has discretion in how many of these costs are reported on the income statement and concerning how to group these types of costs there are also a few specific accounts that may warrant specific accounting treatment that excludes them from sg a research and development costs are often not to be included in sg a depreciation costs are often reported in this section of the income statement but are excluded from sg a as well examples of sg a expensesapple reported 14 48 billion in operating expenses for the quarter as part of its q1 2024 financial reporting of this 7 70 billion was research and development and 6 79 billion was selling general and administrative 2a more in depth example is provided by amazon which reported 22 billion in sales and marketing expenses in addition to 6 67 billion in general and administrative expenses for the year ending dec 31 2022 3amazon also guides the notes to its financial statements to explain what makes up the sales and marketing categories in addition to the general and administrative categories 4 | |
what is the difference between cogs and sg a | sg a includes almost every business expense that isn t included in the cost of goods sold cogs cogs includes the expenses that are necessary to manufacture a product including the labor materials and overhead expenses sg a costs are the residual expenses that are necessary to run the organization and incur costs less specifically tied to the cost of making the product | |
what are selling expenses | selling expenses include both indirect and direct business costs | |
what are general and administrative g a expenses | the g a of sg a can be called overhead expenses a business has many expenses that are not directly related to making or selling a product office rent utilities and insurance are all costs of doing business departments like human resources and information technology support the company but don t take a direct role in product creation | |
how can sg a be useful to a business manager | sg a is both critical to the success of a business and vulnerable to cost cutting cutting the cost of goods sold cogs can be tough to do without damaging the quality of the product cutting operating expenses can be less damaging to the core business sg a costs are typically reduced after a company merger or acquisition which makes it possible to reduce redundancies | |
does sg a include salaries | it depends the cost to directly manufacture products is included in cogs this includes salaries such as manufacturing line supervisors other salaries such as accounting staff are included in sg a the bottom linea company must incur many types of costs to run a business and many of these expenses aren t directly tied to making specific products these broad costs are classified as selling general and administrative costs these expenses are reported separately from cogs and are deducted from the gross margin to determine a company s net income | |
what is a senior bank loan | a senior bank loan is a debt financing obligation issued to a company by a bank or similar financial institution and then repackaged and sold to investors the repackaged debt obligation consists of multiple loans senior bank loans hold legal claim to the borrower s assets above all other debt obligations because it is considered senior to all other claims against the borrower in the event of a bankruptcy it will be the first loan to be repaid before any other creditors preferred stockholders or common stockholders receive repayment senior bank loans are usually secured via a lien against the assets of the borrower |
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