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what does a high standard deviation mean | a large standard deviation indicates that there is a lot of variance in the observed data around the mean this indicates that the data observed is quite spread out a small or low standard deviation would indicate instead that much of the data observed is clustered tightly around the mean | |
what does standard deviation tell you | standard deviation describes how dispersed a set of data is it compares each data point to the mean of all data points and standard deviation returns a calculated value that describes whether the data points are in close proximity or whether they are spread out in a normal distribution standard deviation tells you how far values are from the mean | |
how do you find the standard deviation quickly | if you look at the distribution of some observed data visually you can see if the shape is relatively skinny vs fat fatter distributions have bigger standard deviations alternatively excel has built in standard deviation functions depending on the data set | |
how do you calculate standard deviation | standard deviation is calculated as the square root of the variance alternatively it is calculated by finding the mean of a data set finding the difference of each data point to the mean squaring the differences adding them together dividing by the number of points in the data set less than 1 and finding the square root the bottom linestandard deviation is important because it can help investors assess risk consider an investment option with an average annual return of 10 per year however this average was derived from the past three year returns of 50 15 and 5 by calculating the standard deviation and understanding your low likelihood of actually averaging 10 in any single given year you re better armed to make informed decisions and recognizing underlying risk | |
what is standard error se | standard error se is a statistic that reveals how accurately sample data represents the whole population it measures the accuracy with which a sample distribution represents a population by using standard deviation in statistics a sample mean deviates from the actual mean of a population this deviation is the standard error of the mean the standard error is considered part of inferential statistics or the conclusions drawn from the study it is inversely proportional to the sample size the larger the sample size the smaller the standard error because the statistic will approach the actual value investopedia joules garciaunderstanding standard errorthe term standard error or se for short is used to refer to the standard deviation of various sample statistics such as the mean or median | |
when a population is sampled the mean or average is generally calculated the standard error describes the variation between the calculated mean of the population and one which is considered known or accepted as accurate this helps compensate for any incidental inaccuracies related to the gathering of the sample | the standard error of the mean refers to the standard deviation of the distribution of sample means taken from a population the relationship between the standard error and the standard deviation is such that for a given sample size the standard error equals the standard deviation divided by the square root of the sample size the deviation of the standard error is expressed as a number sometimes the deviation is necessary or desired to be shown as a percentage when shown as a percentage it is known as the relative standard error standard error and standard deviation are measures of variability while central tendency measures include mean median etc the smaller the standard error the more representative the sample will be of the overall population and the more data points involved in the calculations of the mean the smaller the standard error tends to be in cases where the standard error is large the data may have some notable irregularities in cases where multiple samples are collected the mean of each sample may vary slightly from the others creating a spread among the variables this spread is most often measured as the standard error accounting for the differences between the means across the datasets formula and calculation of standard errorused in algorithmic trading the standard error of an estimate can be calculated as the standard deviation divided by the square root of the sample size se n where the population standard deviation n the square root of the sample size begin aligned text se frac sigma surd n textbf where sigma text the population standard deviation surd n text the square root of the sample size end aligned se n where the population standard deviation n the square root of the sample size if the population standard deviation is not known you can substitute the sample standard deviation s in the numerator to approximate the standard error 1standard error vs standard deviationthe standard deviation is a representation of the spread of each of the data points it is used to help determine the validity of the data based on the number of data points displayed at each level of standard deviation standard errors function more as a way to determine the accuracy of the sample or the accuracy of multiple samples by analyzing deviation within the means the standard error normalizes the standard deviation relative to the sample size used in an analysis standard deviation measures the amount of variance or dispersion of the data spread around the mean the standard error can be thought of as the dispersion of the sample mean estimations around the true population mean example of standard errorsay that an analyst has looked at a random sample of 50 companies in the s p 500 to understand the association between a stock s p e ratio and subsequent 12 month performance in the market assume that the resulting estimate is 0 20 indicating that for every 1 0 point in the p e ratio stocks return 0 2 poorer relative performance in the sample of 50 the standard deviation was found to be 1 0 the standard error is thus therefore we would report the estimate as 0 20 0 14 giving us a confidence interval of 0 34 0 06 the true mean value of the association of the p e on returns of the s p 500 would therefore fall within that range with a high degree of probability say now that we increase the sample of stocks to 100 and find that the estimate changes slightly from 0 20 to 0 25 and the standard deviation falls to 0 90 the new standard error would thus be se 0 90 100 0 90 10 0 09 begin aligned text se frac 0 90 surd100 frac 0 90 10 0 09 end aligned se 1000 90 100 90 0 09 the resulting confidence interval becomes 0 25 0 09 0 34 0 16 which is a tighter range of values | |
what is meant by standard error | standard error is intuitively the standard deviation of the sampling distribution in other words it depicts how much disparity there is likely to be in a point estimate obtained from a sample relative to the true population mean | |
what is a good standard error | standard error measures the amount of discrepancy that can be expected in a sample estimate compared to the true value in the population therefore the smaller the standard error the better in fact a standard error of zero or close to it would indicate that the estimated value is exactly the true value | |
how do you find the standard error | the standard error takes the standard deviation and divides it by the square root of the sample size many statistical software packages automatically compute standard errors the bottom linethe standard error se measures the dispersion of estimated values obtained from a sample around the true value to be found in the population statistical analysis and inference often involves drawing samples and running statistical tests to determine associations and correlations between variables the standard error thus tells us with what degree of confidence we can expect the estimated value to approximate the population value | |
what is a standard industrial classification sic code | standard industrial classification sic codes are four digit numerical codes assigned by the u s government that categorize the industries to which companies belong while also organizing industries by their business activities the sic codes were created by the u s government in 1937 to classify and analyze economic activity across various industries and government agencies and to promote uniformity in the presentation of statistical data collected by various government agencies1 sic codes have also been adopted in places outside the u s including in the u k 2however standard industrial classification codes were mostly replaced in 1997 by a system of six digit codes called the north american industry classification system naics 3 the naics codes were adopted in part to standardize industry data collection and analysis between canada the united states and mexico which had entered into the north american free trade agreement despite having been replaced government agencies and companies still use the sic standardized codes today for classifying the industry that companies belong to by matching their business activity with like companies understanding standard industrial classification sic codesthe sic system classifies the economy into 11 major divisions these are then divided into 83 two digit major groups and further subdivided into 416 three digit industry groups and then into more than 1 000 four digit industries every company has a primary sic code that indicates its main line of business the first two digits of the sic code identify the major industry group the third digit identifies the industry group and the fourth digit identifies the specific industry the securities and exchange commission sec is a major government agency that regulates the markets the sec still uses sic codes the sic codes are listed in a company s electronic data gathering analysis and retrieval system filings called edgar to indicate the company s industry 4sic codes vs naics codesthe sic code system continues to remain the most popular industry classification system the naics code system has been unable to fully replace it due to the sic system s long history and the reluctance of businesses and other organizations that have been long term users of sic codes to switch over to a new classification system although the u s government stopped updating sic codes as far back as 1987 private data organizations stepped in and continued to update the sic system including adding very specific additional classifications as a result at the most defined levels there are currently over 10 000 six digit sic codes compared with 1 066 naics codes with the increased degree of integration within the north american economy following the establishment of nafta u s companies now have both a sic code and a naics code | |
how sic codes are used | businesses and the government use sic codes in a number of ways as discussed below | |
how to find your sic code | there are many different ways to find the most appropriate sic code for a company examples of various usable resources include | |
how to read sic codes | each digit within a sic code has a meaning to read a sic code each set of digits should be independently evaluated to determine the overall meaning of the code the first two numbers of a sic code identifies the business s major sector group though the number of major groups fluctuates there are typically less than 100 major groups these major groups all fit into one of the 11 major divisions and these first two digits define what industry the company is in the third digit is the second independent feature that describes a company this third digit further refines the business classification and is often referred to as the business industry group for example if code 23xx refers to apparel companies the last digit of a sic code is the most specific identifier of a company factoring in this last digit there are now over 1 000 combinations for example sic code 2050 emphasis on the final digit represents bakery products while sic code 2052 represents cookie cracker manufacturers this fourth digit further refines the business classification into a very specific business category real world examples of sic codesapple inc s sec filings show its sic code as 3571 electronic computers the first two digits 35 identify its major industry group as industrial and commercial machinery and computer equipment while the third digit 7 narrows its industry group down to computer and office equipment and the final digit 1 classifies it as electronic computers note that if the first two digits are between 20 and 39 these companies are classified in the manufacturing division or segment of the economy despite the sic codes having been replaced by naics you can still search for them below is an image of the standard industrial codes along with their meaning for the banking industry taken from the sec s website 4 | |
how do i find my company s sic code | the united states securities and exchange commission publicly issues a standard code list that can be used to identify a sic code the code list is more specifically reviewed and updated by the division of corporation finance 4who needs a sic code all companies naturally have a sic code as there are over 1 000 total sic codes possible companies that file public reports are often required to use sic codes when reporting as the sec uses it as a basis for assigning review responsibility for company filing requirements | |
what is an example of a sic code | sic code 6500 represents the entire real estate industry sic code 6510 identifies real estate operators while sic code 6512 further refines the classification to nonresidential buildings while 6513 further refines the classification to operators of apartment buildings | |
what does sic code stand for | sic code stands for standard industrial classification sic code this four digit number identifies a very specific short descriptor of the type of business a company is engaged in the bottom lineto help identify the appropriate reviewer of company filings based on the industry a company operates within the securities and exchange commission publishes a listing of standard industrial classification sic codes when issuing reports companies must report the sic code that most closely identifies with their operations | |
what is standard of living | standard of living refers to the quantity and quality of material goods and services available to a given population understanding standard of livingstandard of living focuses on basic material factors such as income gross domestic product gdp life expectancy and economic opportunity it is closely related to quality of life which can also explore factors such as economic and political stability political and religious freedom environmental quality climate and safety standard of living is often used to compare geographic areas such as the standard of living in the united states versus canada or the standard of living in st louis versus new york standard of living can also be used to compare distinct points in time for example compared with a century ago the standard of living in the united states has improved greatly the same amount of work buys an increased quantity of goods and items that were once luxuries such as refrigerators and automobiles are now widely available moreover life expectancy has increased and annual hours worked have decreased 23in a narrow sense economists frequently measure standard of living using gdp per capita gdp provides a quick rough estimate of the total amount of goods and services available per person while numerous more complex and nuanced metrics of standard of living have been devised many of them correlate highly with per capita gdp standard of living is generally measured using per capita gdp standards of living are usually higher in developed countries in fact basic measures of standard of living such as per capita gdp are often used to define the differences between more and less developed countries emerging market economies usually see rising standards of living over time as they grow and develop into modern industrialized economies standard of living exampleone measure of standard of living is the united nations human development index hdi which scores 189 countries based on factors including life expectancy at birth education and income per capita as of 2019 the countries with the five highest hdi scores are norway 0 957 ireland and switzerland 0 955 hong kong and iceland 0 949 and germany 0 947 4conversely the countries with the five lowest 2019 hdi scores are niger 0 394 central african republic 0 397 chad 0 398 burundi and south sudan 0 433 and mali 0 434 the united states came in at 17 while china was 85 4to exemplify the difference between the scores of 0 957 and 0 394 norway has a life expectancy at birth of 82 4 years 18 1 expected years of schooling per citizen gross national income gni per capita of 66 494 purchasing power parity adjusted currency units and an internet usage rate of 96 5 of its population 5 niger meanwhile has a life expectancy at birth of 62 4 years 6 5 expected years of schooling a gni per capita of 1 201 and an internet usage rate of 5 3 6the u s scored seventeenth on the list with a combined score of 0 926 a life expectancy at birth of 78 9 years 16 3 expected years of schooling and gni per capita of 63 826 7standard of living vs quality of lifethe terms standard of living and quality of life are often believed to mean the same while they may overlap there is a difference between the two standard of living generally refers to wealth comfort material goods and necessities of certain classes in certain areas or more objectively measures of income and consumption quality of life is more subjective and intangible this happiness economic metric includes such things that impact human well being items such as personal liberty or environmental quality are considered characteristics that make up a good quality of life for one person may not necessarily be the same for someone else | |
what is standardization | standardization is a framework of agreements to which all relevant parties in an industry or organization must adhere to ensure that all processes associated with the creation of a good or performance of a service are performed within set guidelines standardization ensures that the end product has consistent quality and that any conclusions made are comparable with all other equivalent items in the same class | |
how standardization works | standardization is achieved by setting generally accepted guidelines with regard to how a product or service is created or supported as well as to how a business is operated or how certain required processes are governed the goal of standardization is to enforce a level of consistency or uniformity to certain practices or operations within the selected environment an example of standardization would be the generally accepted accounting principles gaap to which all companies listed on u s stock exchanges must adhere gaap is a standardized set of guidelines created by the financial accounting standards board fasb to ensure that all financial statements undergo the same processes so that the disclosed information is relevant reliable comparable and consistent standardization ensures that certain goods or performances are produced in the same way via set guidelines examples of standardization in businessstandardization can be found throughout the business world when companies want to achieve a consistent level of quality production standards manufacturing output and brand recognition for example many fast food franchises have detailed processes documented to make sure that a burger is prepared in the same manner regardless of which establishment in its franchise a consumer visits certain production and manufacturing businesses adhere to agency standards to ensure all products of the same category are created to the same specifications between different facilities or companies for example the wood products industry participates in international standards to maintain consistency of like products this can include references to acceptable product sizing water solubility grading and composite properties these standards ensure that when a person goes to a retail store to purchase an item such as a two by four the sizing is consistent regardless of the store visited or the product manufacturer the marketing of products sold internationally may be standardized to keep a uniform image among the varying markets for example the coca cola company uses global standardization in marketing by keeping the appearance of the product relatively unchanged between different markets the company uses the same design theme even when different languages are presented on the products coca cola s marketing also maintains a consistent theme to help reinforce the image it is presenting examples of standardization in tradingstandardization is commonplace in the financial markets which helps facilitate trades and financial transactions involving all of the participants such as investors brokers and fund managers in the stock market the standard minimum stock order that can be placed through an exchange without incurring higher commission fees is 100 shares these standardized lots are set by exchanges such as the new york stock exchange nyse to allow for consistency and greater liquidity in the markets the increased liquidity means that investors can buy and sell shares without delays or difficulties which helps to reduce trading costs and creates an efficient process for all of the market participants involved standardization is also used in options and futures markets which derive their values from underlying instruments such as stocks or commodities for example one equity option contract represents 100 shares of that stock when an options investor trades an option contract they know they re buying or selling 100 shares of the stock and determining the value based on the stock s current price in the market in the futures market the standardized contract sizes vary depending on the type of contract that is traded however there are set parameters within the futures market that determine the size and delivery dates for those contracts | |
what is a standby letter of credit sloc | a standby letter of credit sloc is a legal document that guarantees a bank s commitment of payment to a seller in the event that the buyer or the bank s client defaults on the agreement a standby letter of credit helps facilitate international trade between companies that don t know each other and have different laws and regulations although the buyer is certain to receive the goods and the seller is certain to receive payment a sloc doesn t guarantee the buyer will be happy with the goods a standby letter of credit can also be abbreviated sblc 1investopedia laura porter | |
how a standby letter of credit works | a sloc is most often sought by a business to help it obtain a contract the contract is a standby agreement because the bank will have to pay only in a worst case scenario although an sblc guarantees payment to a seller the agreement must be followed exactly for example a delay in shipping or misspelling a company s name can lead to the bank refusing to make the payment there are two main types of standby letters of credit the recipient of a standby letter of credit is assured that it is doing business with an individual or company that is capable of paying the bill or finishing the project the procedure for obtaining a sloc is similar to an application for a loan the bank issues it only after appraising the creditworthiness of the applicant in the worst case scenario if a company goes into bankruptcy or ceases operations the bank issuing the sloc will fulfill its client s obligations the client pays a fee for each year that the letter is valid typically the fee is 1 to 10 of the total obligation per year 1advantages of a stand by letter of creditthe sloc is often seen in contracts involving international trade which tend to involve a large commitment of money and have added risks for the business that is presented with a sloc the greatest advantage is the potential ease of getting out of that worst case scenario if an agreement calls for payment within 30 days of delivery and the payment is not made the seller can present the sloc to the buyer s bank for payment thus the seller is guaranteed to be paid another advantage for the seller is that the sblc reduces the risk of the production order being changed or canceled by the buyer an sblc helps ensure that the buyer will receive the goods or service that s outlined in the document for example if a contract calls for the construction of a building and the builder fails to deliver the client presents the sloc to the bank to be made whole another advantage when involved in global trade a buyer has an increased certainty that the goods will be delivered from the seller also small businesses can have difficulty competing against bigger and better known rivals an sblc can add credibility to its bid for a project and can often times help avoid an upfront payment to the seller | |
how much does a standby letter of credit cost | since a bank is taking a risk by offering a sblc there are fees to obtain one typically banks will charge between 1 and 10 of the total guaranteed price for each year that the sblc is active 2 | |
where can i apply for a standby letter of credit | standby letters of credit are typically offered by commercial banks and lenders the bank will assess the creditworthiness of the applicant much like a loan application | |
when would you need an slbc | standby letters of credit are often used in international trade deals where the terms may be different between parties but that is not the only use anytime a buyer needs to guarantee payment for goods or services a sblc may be in order the bottom linea sblc is a powerful tool for companies negotiating large deals for goods or services with the backing of a commercial bank an sblc offers reassurance that an agreement will go through even in a worst case scenario but a sblc is not without cost there are fees and your creditworthiness will be assessed | |
what is stare decisis | stare decisis is a legal doctrine that obligates courts to follow historical cases when making a ruling on a similar case stare decisis ensures that cases with similar scenarios and facts are approached in the same way simply put it binds courts to follow legal precedents set by previous decisions 1stare decisis is a latin term meaning to stand by that which is decided 1understanding stare decisisthe u s common law structure has a unified system of deciding legal matters with the principle of stare decisis at its core making the concept of legal precedent extremely important a prior ruling or judgment on any case is known as a precedent stare decisis dictates that courts look to precedents when overseeing an ongoing case with similar circumstances investopedia nez riaz | |
what makes a precedent | a unique case with hardly any past reference material may become a precedent when the judge makes a ruling on it also the new ruling on a similar present case replaces any precedent that has been overruled in a current case under the rule of stare decisis courts are obligated to uphold their previous rulings or the rulings made by higher courts within the same court system 2for example the kansas state appellate courts will follow their precedent the kansas supreme court precedent and the u s supreme court precedent kansas is not obligated to follow precedents from the appellate courts of other states say california however when faced with a unique case kansas may refer to the precedent of california or any other state that has an established ruling as a guide in setting its precedent in effect all courts are bound to follow the rulings of the supreme court as the highest court in the country 3 therefore decisions that the highest court makes become binding precedent or obligatory stare decisis for the lower courts in the system when the supreme court overturns a precedent made by courts below it in the legal hierarchy the new ruling will become stare decisis on similar court hearings if a case ruled in a kansas court which has abided by a certain precedent for decades is taken to the u s supreme court and is then overturned by that court the supreme court s overrule replaces the former precedent and kansas courts would need to adapt to the new rule as precedent overturning a precedentin rare cases the supreme court has reversed its own previous rulings david schultz professor of law at the university of minnesota and professor of political science at hamline university reports that between1 789 to 2020 the court did so 145 times out of 25 544 supreme court opinions and judgments after oral arguments this amounts to barely one half of one percent 4the most famous reversal to date schultz notes is 1954 s brown v board of education that decision reversed the separate but equal doctrine ruling of plessy v ferguson in 1896 which supported segregation 4the most recent and controversial overturning of a precedent occurred on june 24 2022 when the court reversed roe v wade the 1973 ruling that legalized abortion making the dobbs v jackson women s health organization the next major case to depart from stare decesis 567real world examplesinsider trading in the securities industry is the misuse of material nonpublic information for financial gain the insider can trade the information for their portfolio or sell the information to an outsider for a cost the precedent looked to by courts when dealing with insider trading is the 1983 case of dirks v sec in this case the u s supreme court ruled that insiders are guilty if they directly or indirectly received material benefits from disclosing the information to someone who acts on it 8 in addition exploiting confidential information exists when the information is gifted to a relative or friend this decision became precedent and is upheld by courts dealing with financial crimes that are similar in nature in the 2016 ruling of salman v the united states the supreme court used stare decisis to make the ruling bassam salman made an estimated 1 5 million from insider information that he received indirectly from his brother in law maher kara then a citigroup investment banker while salman s counsel believed that he should be convicted only if he compensated his brother in law in cash or kind the supreme court judge ruled that insiders do not have to get something in return for divulging company secrets based on stare decisis the confidential information given to salman was considered a gift as dirks v sec makes it clear that fiduciary duty is breached when a tipper gives confidential information as a gift salman was therefore found guilty of insider trading 9in 2014 the u s court of appeals for the second circuit in new york overturned the insider trading conviction of two hedge fund managers todd newman and anthony chiasson stating an insider can be convicted only if the misappropriated information produced a real personal benefit 10 when bassam salam appealed his 2013 conviction using the second circuit s ruling as precedent the u s court of appeals for the ninth circuit based in san francisco did not abide by the second circuit s precedent which it was not obligated to uphold the appeals court upheld the conviction ruling on salman 11as noted above salman appealed that decision to the u s supreme court stating that the second circuit s ruling was inconsistent with the supreme court precedent set about by dirks v sec and the appeals court had therefore not adhered to the principle of stare decisis the supreme court disagreed and also upheld the conviction salman s conduct is in the heartland of dirks s rule concerning gifts justice alito wrote 12 | |
what is a startup | the term startup refers to a company in the first stages of operations startups are founded by one or more entrepreneurs who want to develop a product or service for which they believe there is demand these companies generally start with high costs and limited revenue which is why they look for capital from a variety of sources such as venture capitalists investopedia laura porterunderstanding startupsstartups are companies or ventures that are focused on a single product or service that the founders want to bring to market these companies typically don t have a fully developed business model and more crucially lack adequate capital to move onto the next phase of business most of these companies are initially funded by their founders many startups turn to others for more funding including family friends and venture capitalists silicon valley is known for its strong venture capitalist community and is a popular destination for startups but is also widely considered the most demanding arena startups can use seed capital to invest in research and to develop their business plans market research helps determine the demand for a product or service while a comprehensive business plan outlines the company s mission statement vision and goals as well as management and marketing strategies the first few years are very important for startups this is the time that entrepreneurs should use to concentrate on raising capital and developing a business model special considerationsthere are a number of different factors that entrepreneurs must think of as they try to get their new business off the ground and begin operations we ve listed some of the most common ones below location can make or break any business and it s often one of the most important considerations for anyone starting up in the business world startups must decide whether their business is conducted online in an office or home office or in a store the location depends on the product or service being offered for example a technology startup selling virtual reality hardware may need a physical storefront to give customers a face to face demonstration of the product s complex features startups need to consider what legal structure best fits their entity a sole proprietorship is suited for a founder who is also the key employee of a business partnerships are a viable legal structure for businesses that consist of several people who have joint ownership and they re also fairly straightforward to establish personal liability can be reduced by registering a startup as a limited liability company llc startups often raise funds by turning to family and friends or by using venture capitalists this is a group of professional investors that specialize in funding startups crowdfunding has become a viable way for many people to get access to the cash they need to move forward in the business process the entrepreneur sets up a crowdfunding page online allowing people who believe in the company to donate money startups may use credit to commence their operations a perfect credit history may allow the startup to use a line of credit as funding this option carries the most risk particularly if the startup is unsuccessful other companies choose small business loans to help fuel growth banks typically have several specialized options available for small businesses a microloan is a short term low interest product tailored for startups a detailed business plan is often required in order to qualify advantages and disadvantages of startupsthere are a variety of advantages to working for a startup more responsibility and opportunities to learn are two as startups have fewer employees than large established companies employees tend to wear many hats working in a variety of roles which leads to more responsibility as well as opportunities to learn startups tend to be more relaxed in nature making the workplace more of a communal experience with flexible hours increased employee interaction and flexibility startups tend to also have better workplace benefits such as nurseries for children free food and shorter workweeks the work at startups can also be more rewarding as innovation is welcomed and managers allow talented employees to run with ideas with little supervision one of the primary disadvantages of a startup is increased risk this primarily applies to the success and longevity of a startup new businesses need to prove themselves and raise capital before they can start turning a profit keeping investors happy with the startup s progress is critical the risk of shutting down or not having enough capital to continue operations before turning a profit is ever present long hours are characteristic of startups as everyone is working toward the same goal to see the startup succeed this can lead to high stress moments and sometimes compensation that isn t commensurate with the hours worked competition is also always high as there tend to be a handful of startups working on the same idea more opportunities to learnincreased responsibilityflexibilityworkplace benefitsinnovation is encouragedflexible hoursrisk of failurehaving to raise capitalhigh stresscompetitive business environmentexamples of startupsdotcoms were a common startup in the 1990s venture capital was extremely easy to obtain during this time due to a frenzy among investors to speculate on the emergence of these new businesses unfortunately most of these internet startups eventually went bust due to major flaws in their business plans such as lacking a path to sustainable revenue however a handful of companies survived when the dotcom bubble burst amazon amzn and ebay ebay are just two examples many startups fail within the first few years that s why this initial period is important entrepreneurs need to find money create a business model and business plan hire key personnel work out intricate details such as equity stakes for partners and investors and plan for the long run many of today s most successful companies microsoft msft apple aapl and meta meta formerly facebook to name a few began as startups and ended up becoming publicly traded companies | |
how do you start a startup company | the first step in starting a startup is having a great idea from there market research is the next step to determine how feasible the idea is and what the current marketplace looks like for your idea after the market research creating a business plan that outlines your company structure goals mission values and objectives is the next step one of the most important steps is obtaining funding this can come from savings friends family investors or a loan after raising funding make sure you ve done all the correct legal and paperwork this means registering your business and obtaining any required licenses or permits after this establish a business location from there create an advertising plan to attract customers establish a customer base and adapt as your business grows | |
how do you get a startup business loan | a startup can obtain a loan from a bank certain organizations or friends and family one of the best and first options should be working with the u s small business administration which provides microloans to small businesses the average sba loan is 13 000 and the max loan amount is 50 000 these loans are usually from nonprofit community lenders and can be easier to obtain than traditional loans from banks 1 | |
what are the benefits of working for a startup | the benefits of working at a startup include greater opportunities to learn increased responsibility flexible work hours a relaxed work environment increased employee interaction good workplace benefits and innovation | |
how do you value a startup company | valuing a startup can be difficult as startups don t usually have longevity in which to determine their success startups also don t generate profits or even revenue for a few years after starting as such using the traditional financial statement metrics for valuations doesn t apply some of the best ways to value a startup include the cost to duplicate market multiples discounted cash flow and valuation by stage the bottom linestarting a company can be a difficult venture but a rewarding one having a great idea and attempting to bring it to market comes with a host of challenges such as attracting capital employees marketing legal work and managing finances keep in mind though that startups lead to increased job satisfaction and the possibility of leaving a legacy | |
what is a state owned enterprise | a state owned enterprise soe is a legal entity that is created by a government in order to partake in commercial activities on the government s behalf it can be either wholly or partially owned by a government and is typically earmarked to participate in specific commercial activities soes are common across the globe including in the united states where mortgage companies freddie mac and fannie mae are considered government sponsored enterprises gses understanding state owned enterprises soe also known as government owned corporations goc state owned entities should not be confused with listed companies with stocks that are owned in part by a government body as these companies are truly public corporations that happen to have a government entity as one of their shareholders the state owned enterprise soe is a global phenomenon and such organizations exist in the united states china south africa norway and new zealand legally most soes qualify as business entities providing them with all the rights and responsibilities associated with them this means that they are normally required to follow any laws and regulations governing the operation of their business type and they can also be held liable for their actions the current value of state owned enterprises assets worldwide as of 2020 according to the international monetary fund imf the figure reflects a huge jump in size for soes over the last few years with emerging markets leading the charge state owned enterprise examplewithin the united states mortgage companies freddie mac and fannie mae are some of the most recognized soes by its citizens but soes are not limited to lending in china several companies have state backing such as the jin jiang hotel which is owned and controlled by the government of shanghai the south africa based power utility eskom is the 11th largest company in the world in terms of electric generating capacity and it is an soe of the south african government many public transportation systems and utilities are soes as are postal services and some mining operations soes and corporatizationat times an soe is created out of a government agency through a process called corporatization this allows the agency to convert itself into a for profit business often the newly formed soe still operates with government goals in mind but officially it operates as a commercial enterprise sometimes governments of developing countries will create a state run business in a sector that it wishes to develop or exploit to boost their economic standing on the global stage such as the oil industry in brazil or the telecom industry in argentina soes and profiteven though an soe is a for profit business entity there are some that do not produce a profit for example the u s postal system may be operating at a loss for long periods of time while some soes may be permitted to fail those of importance to the operation of the state may receive government funding to continue its operations particularly those deemed as critical to a country s infrastructure in these cases the soes actually cost the government money instead of generating revenue in the case of china this has led some to accuse the government of artificially propping up so called zombie corporations that would otherwise go out of business | |
what is a statement of retained earnings | the statement of retained earnings retained earnings statement is a financial statement that outlines the changes in retained earnings for a company over a specified period this statement reconciles the beginning and ending retained earnings for the period using information such as net income from the other financial statements and is used by analysts to understand how corporate profits are utilized the statement of retained earnings is also known as a statement of owner s equity an equity statement or a statement of shareholders equity boilerplate templates of the statement of retained earnings can be found online it is prepared in accordance with generally accepted accounting principles gaap understanding statement of retained earningsthis statement of retained earnings can appear as a separate statement or as inclusion on either a balance sheet or an income statement the statement is a financial document that includes information regarding a firm s retained earnings along with the net income and amounts distributed to stockholders in the form of dividends an organization s net income is noted showing the amount that will be set aside to handle certain obligations outside of shareholder dividend payments as well as any amount directed to cover any losses each statement covers a specified time period as noted in the statement retained earningsthese funds may also be referred to as retained profit accumulated earnings or accumulated retained earnings often these retained funds are used to make a payment on any debt obligations or are reinvested into the company to promote growth and development whenever a company generates surplus income a portion of the long term shareholders may expect some regular income in the form of dividends as a reward for putting their money in the company traders who look for short term gains may also prefer getting dividend payments that offer instant gains dividends are paid out from profits and so reduce retained earnings for the company the following options broadly cover some of the possibilities on how the surplus money allocated to retained earnings and not paid out as dividends can be utilized retained earnings refer to any profits made by an organization that it keeps for internal use benefits of a statement of retained earningsthe purpose of releasing a statement of retained earnings is to improve market and investor confidence in the organization it is used as a marker to help analyze the health of a firm retained earnings do not represent surplus funds instead the retained earnings are redirected often as a reinvestment within the organization the retained earnings for a capital intensive industry or a company in a growth period will generally be higher than some less intensive or stable companies this is due to the larger amount being redirected toward asset development for example a technology based business may have higher asset development needs than a simple t shirt manufacturer as a result of the differences in the emphasis on new product development while a t shirt can remain essentially unchanged for a long period of time a computer or smartphone requires more regular advancement to stay competitive within the market hence the technology company will likely have higher retained earnings than the t shirt manufacturer the retention ratioone piece of financial data that can be gleaned from the statement of retained earnings is the retention ratio the retention ratio or plowback ratio is the proportion of earnings kept back in the business as retained earnings the retention ratio refers to the percentage of net income that is retained to grow the business rather than being paid out as dividends it is the opposite of the payout ratio which measures the percentage of profit paid out to shareholders as dividends the retention ratio helps investors determine how much money a company is keeping to reinvest in the company s operation if a company pays all of its retained earnings out as dividends or does not reinvest back into the business earnings growth might suffer also a company that is not using its retained earnings effectively have an increased likelihood of taking on additional debt or issuing new equity shares to finance growth as a result the retention ratio helps investors determine a company s reinvestment rate however companies that hoard too much profit might not be using their cash effectively and might be better off had the money been invested in new equipment technology or expanding product lines new companies typically don t pay dividends since they re still growing and need the capital to finance growth however established companies usually pay a portion of their retained earnings out as dividends while also reinvesting a portion back into the company | |
what is statistical significance | statistical significance is a determination made by an analyst that the results in the data are not explainable by chance alone statistical hypothesis testing is the method by which the analyst makes this determination this test provides a p value which is the probability of observing results as extreme as those in the data assuming the results are truly due to chance alone a p value of 5 or lower is often considered to be statistically significant investopedia paige mclaughlinunderstanding statistical significancestatistical significance is a determination of the null hypothesis which suggests that the results are due to chance alone a data set provides statistical significance when the p value is sufficiently small | |
when the p value is sufficiently small typically 5 or less the results are not easily explained by chance alone and the data are deemed inconsistent with the null hypothesis in this case the null hypothesis of chance alone as an explanation of the data is rejected in favor of a more systematic explanation 1 | statistical significance is often used for new pharmaceutical drug trials to test vaccines and in the study of pathology for effectiveness testing and to inform investors on how successful the company is at releasing new products examples of statistical significancesuppose alex a financial analyst is curious as to whether some investors had advance knowledge of a company s sudden failure alex decides to compare the average of daily market returns prior to the company s failure with those after to see if there is a statistically significant difference between the two averages the study s p value was 28 5 indicating that a difference as large as the observed 0 0033 to 0 0007 is not unusual under the chance only explanation thus the data did not provide compelling evidence of advance knowledge of the failure on the other hand if the p value were 0 01 much less than 5 then the observed difference would be very unusual under the chance only explanation in this case alex may decide to reject the null hypothesis and to investigate further whether some traders had advance knowledge statistical significance is also used to test new medical products including drugs devices and vaccines publicly available reports of statistical significance also inform investors on how successful the company is at releasing new products say for example a pharmaceutical leader in diabetes medication reported that there was a statistically significant reduction in type 1 diabetes when it tested its new insulin the test consisted of 26 weeks of randomized therapy among diabetes patients and the data gave a p value of 4 this signifies to investors and regulatory agencies that the data show a statistically significant reduction in type 1 diabetes 2stock prices of pharmaceutical companies are often affected by announcements of the statistical significance of their new products 3 | |
how is statistical significance determined | statistical hypothesis testing is used to determine whether the data is statistically significant in other words whether or not the phenomenon can be explained as a byproduct of chance alone statistical significance is a determination about the null hypothesis which posits that the results are due to chance alone the rejection of the null hypothesis is needed for the data to be deemed statistically significant | |
what is p value | a p value is a measure of the probability that an observed difference could have occurred just by random chance when the p value is sufficiently small e g 5 or less then the results are not easily explained by chance alone and the null hypothesis can be rejected when the p value is large then the results in the data are explainable by chance alone and the data is deemed consistent with while proving the null hypothesis | |
how is statistical significance used | statistical significance is often used to test the effectiveness of new medical products including drugs devices and vaccines publicly available reports of statistical significance also inform investors on how successful the company is at releasing new products stock prices of pharmaceutical companies are often affected strongly by announcements of the statistical significance of their new products 4 | |
what is statistics | statistics is a branch of applied mathematics that involves the collection description analysis and inference of conclusions from quantitative data the mathematical theories behind statistics rely heavily on differential and integral calculus linear algebra and probability theory people who do statistics are referred to as statisticians they re particularly concerned with determining how to draw reliable conclusions about large groups and general events from the behavior and other observable characteristics of small samples these small samples represent a portion of the large group or a limited number of instances of a general phenomenon dennis madamba investopediaunderstanding statisticsstatistics are used in virtually all scientific disciplines such as the physical and social sciences as well as in business the humanities government and manufacturing statistics is fundamentally a branch of applied mathematics that developed from the application of mathematical tools including calculus and linear algebra to probability theory in practice statistics is the idea that we can learn about the properties of large sets of objects or events a population by studying the characteristics of a smaller number of similar objects or events a sample gathering comprehensive data about an entire population is too costly difficult or impossible in many cases so statistics start with a sample that can be conveniently or affordably observed statisticians measure and gather data about the individuals or elements of a sample then they analyze this data to generate descriptive statistics they can then use these observed characteristics of the sample data which are properly called statistics to make inferences or educated guesses about the unmeasured characteristics of the broader population known as the parameters statistics informally dates back centuries an early record of correspondence between french mathematicians pierre de fermat and blaise pascal in 1654 is often cited as an early example of statistical probability analysis 1descriptive and inferential statisticsthe two major areas of statistics are known as descriptive statistics which describes the properties of sample and population data and inferential statistics which uses those properties to test hypotheses and draw conclusions descriptive statistics include mean average variance skewness and kurtosis inferential statistics include linear regression analysis analysis of variance anova logit probit models and null hypothesis testing descriptive statistics mostly focus on the central tendency variability and distribution of sample data central tendency means the estimate of the characteristics a typical element of a sample or population it includes descriptive statistics such as mean median and mode variability refers to a set of statistics that show how much difference there is among the elements of a sample or population along the characteristics measured it includes metrics such as range variance and standard deviation the distribution refers to the overall shape of the data which can be depicted on a chart such as a histogram or a dot plot and includes properties such as the probability distribution function skewness and kurtosis descriptive statistics can also describe differences between observed characteristics of the elements of a data set they can help us understand the collective properties of the elements of a data sample and form the basis for testing hypotheses and making predictions using inferential statistics inferential statistics is a tool that statisticians use to draw conclusions about the characteristics of a population drawn from the characteristics of a sample and to determine how certain they can be of the reliability of those conclusions based on the sample size and distribution statisticians can calculate the probability that statistics which measure the central tendency variability distribution and relationships between characteristics within a data sample provide an accurate picture of the corresponding parameters of the whole population from which the sample is drawn inferential statistics are used to make generalizations about large groups such as estimating average demand for a product by surveying a sample of consumers buying habits or attempting to predict future events this might mean projecting the future return of a security or asset class based on returns in a sample period regression analysis is a widely used technique of statistical inference used to determine the strength and nature of the relationship the correlation between a dependent variable and one or more explanatory independent variables the output of a regression model is often analyzed for statistical significance which refers to the claim that a result from findings generated by testing or experimentation is not likely to have occurred randomly or by chance it s likely to be attributable to a specific cause elucidated by the data having statistical significance is important for academic disciplines or practitioners that rely heavily on analyzing data and research mean median and modethe terms mean median and mode fall under the umbrella of central tendency they describe an element that s typical in a given sample group you can find the mean descriptor by adding the numbers in the group and dividing the result by the number of data set observations the middle number in the set is the median half of all included numbers are higher than the median and half are lesser the median home value in a neighborhood would be 350 000 if five homes were located there and valued at 500 000 400 000 350 000 325 000 and 300 000 two values are higher and two are lower mode identifies the number that falls between the highest and lowest values it appears most frequently in the data set understanding statistical datathe root of statistics is driven by variables a variable is a data set that can be counted that marks a characteristic or attribute of an item for example a car can have variables such as make model year mileage color or condition by combining the variables across a set of data such as the colors of all cars in a given parking lot statistics allows us to better understand trends and outcomes there are two main types of variables first qualitative variables are specific attributes that are often non numeric many of the examples given in the car example are qualitative other examples of qualitative variables in statistics are gender eye color or city of birth qualitative data is most often used to determine what percentage of an outcome occurs for any given qualitative variable qualitative analysis often does not rely on numbers for example trying to determine what percentage of women own a business analyzes qualitative data the second type of variable in statistics is quantitative variables quantitative variables are studied numerically and only have weight when they re about a non numerical descriptor similar to quantitative analysis this information is rooted in numbers in the car example above the mileage driven is a quantitative variable but the number 60 000 holds no value unless it is understood that is the total number of miles driven quantitative variables can be further broken into two categories first discrete variables have limitations in statistics and infer that there are gaps between potential discrete variable values the number of points scored in a football game is a discrete variable because statistics also makes use of continuous quantitative variables these values run along a scale discrete values have limitations but continuous variables are often measured into decimals any value within possible limits can be obtained when measuring the height of the football players and the heights can be measured down to 1 16th of an inch if not further statisticians can hold various titles and positions within a company the average total compensation for a statistician with one to three years of experience was 81 885 as of december 2023 this increased to 109 288 with 15 years of experience 2statistical levels of measurementthere are several resulting levels of measurement after analyzing variables and outcomes statistics can quantify outcomes in four ways there s no numerical or quantitative value and qualities are not ranked nominal level measurements are instead simply labels or categories assigned to other variables it s easiest to think of nominal level measurements as non numerical facts about a variable example the name of the president elected in 2020 was joseph robinette biden jr outcomes can be arranged in an order but all data values have the same value or weight although they re numerical ordinal level measurements can t be subtracted against each other in statistics because only the position of the data point matters ordinal levels are often incorporated into nonparametric statistics and compared against the total variable group example american fred kerley was the second fastest man at the 2020 tokyo olympics based on 100 meter sprint times 3outcomes can be arranged in order but differences between data values may now have meaning two data points are often used to compare the passing of time or changing conditions within a data set there is often no starting point for the range of data values and calendar dates or temperatures may not have a meaningful intrinsic zero value example inflation hit 8 6 in may 2022 the last time inflation was this high was in december 1981 4outcomes can be arranged in order and differences between data values now have meaning but there s a starting point or zero value that can be used to further provide value to a statistical value the ratio between data values has meaning including its distance away from zero example the lowest meteorological temperature recorded was 128 6 degrees fahrenheit in antarctica 5statistics sampling techniquesit would often not be possible to gather data from every data point within a population to gather statistical information statistics relies instead on different sampling techniques to create a representative subset of the population that s easier to analyze in statistics there are several primary types of sampling simple random sampling calls for every member within the population to have an equal chance of being selected for analysis the entire population is used as the basis for sampling and any random generator based on chance can select the sample items for example 100 individuals are lined up and 10 are chosen at random systematic sampling calls for a random sample as well but its technique is slightly modified to make it easier to conduct a single random number is generated and individuals are then selected at a specified regular interval until the sample size is complete for example 100 individuals are lined up and numbered the seventh individual is selected for the sample followed by every subsequent ninth individual until 10 sample items have been selected stratified sampling calls for more control over your sample the population is divided into subgroups based on similar characteristics then you calculate how many people from each subgroup would represent the entire population for example 100 individuals are grouped by gender and race then a sample from each subgroup is taken in proportion to how representative that subgroup is of the population cluster sampling calls for subgroups as well but each subgroup should be representative of the population the entire subgroup is randomly selected instead of randomly selecting individuals within a subgroup not sure which major league baseball player should have won most valuable player last year statistics often used to determine value is often cited when the award for best player is awarded 6 statistics can include batting average number of home runs hit and stolen bases uses of statisticsstatistics is prominent in finance investing business and in the world much of the information you see and the data you re given is derived from statistics which are used in all facets of a business | |
why is statistics important | statistics provide the information to educate how things work they re used to conduct research evaluate outcomes develop critical thinking and make informed decisions statistics can be used to inquire about almost any field of study to investigate why things happen when they occur and whether reoccurrence is predictable | |
what s the difference between descriptive and inferential statistics | descriptive statistics are used to describe or summarize the characteristics of a sample or data set such as a variable s mean standard deviation or frequency inferential statistics employ any number of techniques to relate variables in a data set to one another an example would be using correlation or regression analysis these can then be used to estimate forecasts or infer causality who uses statistics statistics are used widely across an array of applications and professions statistics are done whenever data are collected and analyzed this can range from government agencies to academic research to analyzing investments | |
how are statistics used in economics and finance | economists collect and look at all sorts of data ranging from consumer spending to housing starts to inflation to gdp growth in finance analysts and investors collect data about companies industries sentiment and market data on price and volume the use of inferential statistics in these fields is known as econometrics several important financial models from the capital asset pricing model capm to modern portfolio theory mpt and the black scholes options pricing model rely on statistical inference the bottom linestatistics is the practice of analyzing pieces of information that might seem conflicting or unrelated at first glance and on the surface it can lead to a solid career as a statistician but it can also be a handy metric in everyday life perhaps when you re analyzing the odds that your favorite team will win the super bowl before you place a bet gauging the viability of an investment or determining whether you re being comparatively overcharged for a product or service | |
what is the statute of frauds | the statute of frauds is a legal doctrine requiring that certain types of contracts be in written form the most common contracts covered by the statute of frauds include the sale of land agreements involving goods worth 500 or more and contracts lasting one year or more 12the purpose of the statute of frauds is to prevent fraud or other injury these purposes are often described as being evidentiary and cautionary the evidentiary function of the statute of frauds is to provide documentation that a legal binding agreement exists the cautionary function of the statute of frauds is meant to make each party more intent serious and deliberate in their transacting statutes of fraud were adopted in the u s primarily as a common law concept that is as unwritten law however many states have formalized the concept by creating statutes in a breach of contract case where the statute of frauds applies the defendant may raise it as a defense where the burden of proof is on the plaintiff the plaintiff must establish that a valid contract was indeed in existence history of the statute of fraudsthe statute of frauds has its roots in the act for prevention of frauds and perjuryes which was passed by the english parliament in 1677 the legislation which stipulated that a written contract be used for transactions where a large amount of money was at stake aimed to prevent some of the misunderstandings and fraudulent activity that can occur when relying on oral contracts 3indeed the english legal system of the time suffered from a lack of written evidence the courts were clogged with lawsuits and cases were often settled by using professional witnesses who were paid for their testimony perjury and corruption became the norm as the founders shaped the u s government they drew on the 1677 act to help shape how business transactions and disputes over them should be handled in the new world like their 17th century british forebears the founders decided that written and signed contracts minimized ambiguity by providing a clear record of the agreement that reduced the opportunity for later litigation and simplified the settlement of such suits when they occurred contracts covered by the statute of fraudsas applied in the united states the statute of frauds generally requires the following types of contracts to be written to be legally binding various legislative bodies outline statute of frauds requirements for example the restatement second of the law of contracts is a legal treatise that oversees general principles of contract common law in addition uniform commercial code ucc article 2 outlines rules over the sale of goods 56requirements of the statute of fraudsnot every written document is necessarily protected under a statute of frauds examples of some requirements the statute of frauds includes are emails and invoices can sometimes satisfy statute of fraud requirements for an enforceable contract exceptions to the statute of fraudsin some situations agreements that would ordinarily require a written contract under the statute of frauds may be enforceable without them several exceptions relate to situations in which oral agreements result in work beginning or financial outlays take a case in which steps are taken to create a series of specially manufactured items such as monogrammed shirts if the customer who commissioned them over the phone subsequently decides to cancel the order they will likely still be responsible for at least partial payment the same will usually apply if improvements or modifications to a customer s possessions based on oral agreements are begun and then canceled for example take a situation in which a house painter purchases materials based on a homeowner s request and begins to redecorate a house if the homeowner reverses course and claims no firm painting agreement was in place the contractor would likely prevail that s because of what s known as promissory estoppel promissory estoppel is defined as a principle of fundamental fairness intended to remedy a substantial injustice there are also cases of partial performance the fact that one party has already performed its responsibilities under the agreement may serve to confirm that a contract existed 8examples of the statute of fraudsprovisions for the statute of frauds are enforced by states the universal commercial code ucc in the u s provides a good example it is the standardized set of business laws that regulate financial contracts every state has adopted the ucc 9 although louisiana only has adopted part of it in cases where articles of the ucc that affect the statute of frauds change it may take time for those alterations to be reflected in every state s laws some states like louisiana also have some long standing variations from the norm in their statute of frauds and related regulations 10before relying on the statute of frauds in any given situation it is wise to research the statute of frauds provisions in your state or territory and seek legal advice as needed | |
what is the meaning of statute of frauds | the statute of frauds is written legislation or common law that requires that certain contracts be written to be valid in addition that written agreement often has stipulations such as delivery conditions or what must be included in that written agreement the idea behind the statute of frauds is to protect parties entering into a contract from a future dispute or disagreement on the terms of the deal | |
what is an example of statute of frauds | real estate such as the sale of land falls under the statue of frauds in order to acquire land you must enter into a written agreement this is to ensure both parties agree to the exact area of land being sold the exact terms of the agreement and other relevant terms to the contract 24 | |
what are exceptions to the statute of frauds | some contracts even when not written may still be enforceable to protect one party that has been at a disadvantage for example one exception is when a seller makes specially manufactured goods for a buyer if the seller can t easily sell the goods to others in the normal course of business they are protected by different rules another exception is when payment has already been made and received by the seller in this case the seller is obligated to furnish the agreed terms to the buyer since they have already received payment the bottom linethe statute of frauds is a law that deems certain types of verbal contracts non binding and unenforceable without written evidence to support them as was the case when this concept was brought alive back in seventeenth century england its job is to make sure both parties in a contract are protected from fraudulent behavior variations can exist though depending on where you live in the world in the u s certain states have different rules regarding the statute of frauds and there are situations when a written agreement can become void or an oral agreement enforceable such as after payment is made or work commences correction may 14 2023 a previous version of this article mistakenly stated the statute of frauds applied to goods worth more than 500 the statute applies to goods equal to 500 or more | |
what is a statute of limitations | a statute of limitations is a law that defines the maximum amount of time in which parties involved in a dispute must initiate legal proceedings following an alleged offense the duration of a statute of limitations varies depending on the nature of the offense and the location of the jurisdiction the law applies to both civil and criminal cases more serious offenses such as murder or war crimes often have no statute of limitations it s also applied in civil law to matters like consumer debt where the debt becomes time barred debt after the statute of limitations has passed 1understanding a statute of limitationsin general the time allowed under a statute of limitations varies depending on the nature of the offense with most statutes of limitations being applicable to civil cases take medical malpractice claims as an example the statute of limitations varies from one to four years across different states in texas for example individuals have a maximum of two years to file a claim for damages incurred 3 additionally texas law mandates that any health care liability claim must be filed within 10 years from the date of the act or omission causing the claim 4statutes of limitations are also applied to criminal offenses but for serious crimes such as murder there is usually no maximum time limit for bringing charges in some states crimes like sex offenses involving minors or violent acts such as kidnapping or arson are exempt from statutes of limitations this allows legal action to be taken regardless of how much time has passed since the offense occurred in some states the statute of limitations varies based on the severity of the crime for instance in 2016 california abolished the statutes of limitations for almost all felony level sex offenses 5 however there are exceptions within this broad categorization certain felony sex offenses in california such as those under penal code 261 a 5 which covers specific rape scenarios still have a statute of limitations 6 additionally for most sex offenses in california the statute of limitations can be extended by one year from the date when dna evidence identifies a suspect under international law crimes against humanity war crimes and genocide have no statute of limitations according to the convention on the non applicability of statutory limitations to war crimes and crimes against humanity and article 29 of the rome statute of the international criminal court 78in the u s the war crimes act of 1996 was established to align the united states with the 1949 geneva conventions mandating criminal penalties for specific war crimes with no statute of limitations 9 it applies to offenses like willful killing and torture and it holds individuals accountable under u s law for such crimes committed anywhere in the world the u s continues to push for a bigger address of war crimes through legislative efforts like the justice for victims of war crimes act introduced in 2022 the act aims to expand the jurisdiction of u s courts to prosecute war criminals found within u s borders regardless of their nationality or the nationality of their victims 10statutes of limitations can also apply to consumer debt because creditors have a certain amount of time in which to collect on the debt the statute of limitations on consumer debt depends on the laws of the state in question and the type of debt after the statute of limitations has passed creditors can no longer sue to collect a time barred debt which means they cannot garnish your wages or put a lien against any of your personal assets but it doesn t mean that the consumer doesn t owe the money making any payment towards a time barred debt can restart the clock on the statute of limitations 11the statute of limitations on consumer debt typically ranges between three and six years but can be longer depending on the state and the type of debt whether it is an open ended account a written contract an oral contract or a promissory note 12for example in florida the statute of limitations on debt is five years 13 the clock starts either on the date a payment is missed or when the debt was incurred time limits are also imposed for filing lawsuits against the government in court when congress creates legal rights to sue the government it usually includes a specific timeframe within which these lawsuits must be filed in these situations as time passes it not only limits the chance to seek legal action but may also completely remove the right to file a lawsuit 14the irs has a statute of limitations during which it can review and address issues related to your taxes after this period ends the irs is no longer able to impose taxes or collect extra amounts nor can you request a tax refund the exact duration of this time limit varies based on several factors including the time frame for the irs to assess taxes the period for tax collection and the window for taxpayers to claim credits or refunds 15statute of limitation origins can be traced back to ancient roman law the concept of limitations on legal actions was established in roman law as a means to promote legal certainty and prevent endless litigation 16benefits of a statute of limitationsa statute of limitations is sometimes controversial due to cases where legal action cannot be brought against an offender because the maximum length of time has elapsed however proponents of a statute of limitations argue that for practical reasons it is most equitable to limit the initiation of legal proceedings to a reasonable period after the event as time goes on important evidence may be lost and the memories of witnesses can grow foggy legal proceedings brought under these circumstances may not be fair to all parties for a statute of limitations on consumer debt the borrower benefits in that their financial situation improves because the risk of having their wages garnished or liens placed on assets is no longer a burden their credit score may still suffer however after the statute of limitations of seven years credit reports no longer show delinquent accounts 17real world exampleson feb 14 2019 new york governor andrew cuomo signed into law the child victims act legislation that extends the statute of limitations on child molestation the extension gives victims more time to seek criminal charges in general and allows for a one time 12 month litigation window for adult victims of all ages who were abused as children 18under the law victims can seek criminal charges against their abusers until age 28 versus the previous cutoff of age 23 and can file civil suits until age 55 the law also includes a one year litigation window for victims of any age to file lawsuits this was one of the largest sticking points that kept the law from being approved previously 19in the past one of the biggest opponents to the extension of the statute of limitations and inclusion of the one year litigation window was the catholic church at the time the republican controlled state senate had blocked the legislation for a decade but after a democratic majority was voted in the senate and democrat controlled assembly approved the legislation in florida the state halved the statute of limitations for negligence claims from four years to two years 20 this change impacts the timeframe for filing lawsuits related to personal injury and property damage due to negligence applying to incidents occurring after this date 21downsides of statute of limitationsthe obvious significant limitation is the statute of limitations can inadvertently protect wrongdoers for example if a crime or wrongful act remains undiscovered until after the statute of limitations has expired the perpetrator may escape legal consequences entirely another limitation of the statute of limitations is its inflexibility in certain situations different types of cases have varying time limits and these fixed periods do not always account for the complexities and nuances of individual cases for instance victims of medical malpractice might not immediately realize they have been harmed leading to a delay in filing a lawsuit the statute of limitations can also disproportionately affect marginalized and vulnerable populations individuals who lack access to legal resources or are unaware of their legal rights might miss the opportunity to file claims within the prescribed time limits this is especially true for people with limited financial means as some may believe they need to accumulate enough money upfront in order to seek legal counsel lastly variations in statute of limitations laws across different jurisdictions can create confusion and inconsistency for example according to world population review there are seven different lengths of statute of limitations for verbal civil cases 22 | |
what is the purpose of a statute of limitations | the purpose of statutes of limitations is to protect would be defendants from unfair legal action primarily arising from the fact that after a significant passage of time relevant evidence may be lost obscured or not retrievable and the memories of witnesses may not be as sharp | |
how long is the u s statute of limitations | in general u s federal law has a statute of limitations of five years unless there is specific legal language for offenses that stretch beyond that time for example for capital murder there is no statute of limitations | |
how long before a debt becomes uncollectible | the amount of time before debt becomes uncollectible varies based on the type of debt as well as the state the time frame typically ranges from three to six years but can be as high as 15 years 12 | |
which crimes have the longest statute of limitations | it depends on the location where the crime was committed some u s states have eliminated the statute of limitations for the most serious felony sex crimes while others are set at 10 to 20 years or more 23 however more serious crimes such as murder often have no statute of limitations no matter where the crime was committed 24the bottom linea statute of limitations is the length of time in which a civil or criminal case can be brought to legal proceedings after the statute of limitations has passed the parties in dispute can no longer take legal action statutes of limitations also apply to consumer debt after which creditors can no longer sue borrowers for delinquent accounts the debt is still owed but creditors can no longer take action such as garnishing wages it is still recommended that all debt be paid off as there can be other repercussions in the future | |
what are statutory reserves | statutory reserves are the funds that state insurance regulators require the insurance companies operating in their state to maintain at any given time the purpose of statutory reserves is to help ensure that insurance companies have adequate liquidity available to honor all of the legitimate claims made by their policyholders understanding statutory reservesthe mccarran ferguson act passed by congress in 1945 gave states the authority to regulate insurance companies to do business in a state each insurer must be licensed by the state s insurance department and abide by its rules among those rules is how much money an insurer must keep in reserve to make sure that it will be able to pay its future claims insurance companies collect insurance premiums from their customers and then invest those premiums in their general account to generate a return on investment roi in theory insurers might be tempted to invest a very large fraction of the premiums they collect in order to maximize their return however doing so could leave them with insufficient cash on hand to satisfy the claims made by their customers to prevent this from happening state insurance regulators enforce minimum levels of liquidity that insurance companies must maintain these statutory reserves can either be held in cash or in readily marketable securities that can be converted into cash reliably and on short notice statutory reserves apply to a range of insurance products including life insurance health insurance property and casualty insurance long term care insurance and annuity contracts the requirements can vary from one state to another and according to the type of insurance product statutory reserves methodsin setting the level of statutory reserves state insurance regulators use two basic approaches the first of these is a rules based approach in which insurers are told how much of their premiums they must keep in reserve based on standardized formulas and assumptions the second approach known as the principles based approach gives insurers greater leeway in setting their reserves specifically it allows them to set reserves based on their own experience such as the actuarial statistics and past claims behavior of their own customers provided that they are as large or larger than the reserves stipulated under the rules based approach | |
when an insurance company chooses to keep reserves that are in excess of the minimum amount required under the rules based approach these are referred to as non statutory or voluntary reserves | regardless of the approach used to calculate them statutory reserves will generally cause insurance companies to lose out on some potential profits however they benefit the insurance markets as a whole by making insurance customers more confident that their insurers will be able to withstand difficult economic circumstances and stand behind their policies example of statutory reservesconsider the case of xyz insurance according to the statutory reserve requirements of its state insurance regulator xyz would be required to keep 50 million in reserve based on the rules based approach however after considering the competitive landscape in its state and reviewing the past performance of its insurance portfolio xyz decided to use the principles based approach and set its statutory reserves above the minimum required level although the additional reserves would likely cost it in terms of lost investment income xyz reasoned that this more conservative approach would strengthen its image as a responsible insurer and make it well positioned to navigate any potential recession or other economic headwinds | |
what is a step up in basis | step up in basis refers to the adjustment in the cost basis of an inherited asset to its fair market value on the date of the decedent s death cost basis is what determines the taxes owed if any when the asset is sold cost basis starts with the price paid for an asset plus any additional costs added over time to improve or maintain the original asset 1step up in basis or stepped up basis is what happens when the price of an inherited asset on the date of the decedent s death is above its original purchase price the tax code allows for the raising of the cost basis to the higher price minimizing the capital gains taxes owed if the asset is sold later 2the step up in basis provision applies to financial assets like stocks bonds and mutual funds as well as real estate and other tangible property 3of course if the price of an asset has declined from that paid by the owner s date of death the asset s cost basis would step down instead of stepping up for heirs in practice most cost basis adjustments after death are steps up not steps down this is because financial assets passed on to heirs are often long term holdings while financial assets and real estate tend to have positive long term rates of return investopedia mira norianunderstanding step up in basisa step up in basis resets the cost basis of an inherited asset from its purchase or prior inheritance price to the asset s higher market value on the date of the owner s death 4for example let s suppose jane purchases a share of stock at 2 and dies when its market price is 15 had jane sold the stock before dying at 15 she or her estate after her death would be liable for capital gains tax on a gain of 13 instead her heir s cost basis becomes 15 so that if the stock is later sold at that price no capital gains tax would be due capital gains tax that would have been due on the rise in the share price from 2 to 15 absent jane s death is never collected tax basis is the cost of an asset to its owner as calculated and adjusted for tax purposes it is used to assess capital gains as well as depreciation amortization and depletion 5step up in basis for community property states and trustsresidents of nine community property states including california can take advantage of the double step up in basis rule the rule provides a step up in basis on community property all assets accumulated during marriage other than inheritances and gifts for the surviving spouse in other states assets owned solely by the surviving spouse do not receive the step up in basis and jointly owned assets receive only half the step up in basis they would receive in a community property state 6alaska kentucky south dakota and tennessee allow residents as well as non residents to create community property trusts qualifying held assets for community property tax treatment including the double step up in basis rule under the federal tax code 7consider ann and bill a hypothetical married couple living in a common law rather than a community property state they hold stock worth 200 000 in a joint brokerage account with a 100 000 cost basis at the time of bill s death under common law principles legislated in most states ann would be entitled to a step up in basis on bill s half of the brokerage account or 100 000 in current value but not on her half so the tax basis for stock held in the account would rise to 150 000 instead of 200 000 as in community property states or under community property trusts note that the surviving spouse anywhere in the u s would be entitled like any other heir to the stepped up basis on inherited assets previously owned solely by the deceased step up in basis as a tax loopholethe step up in basis tax provision has often been criticized as a tax loophole for the wealthiest families 8 the congressional budget office cbo has estimated over half the aggregate benefit accrues to the top 5 of taxpayers by income 9 in 2020 the cbo estimated the provision s cost in foregone tax revenues at 110 billion over a 10 year period 10some defenders of the stepped up basis have argued that eliminating it might provide a disincentive to save and subject estates to double taxation in combination with the federal estate tax 11 following the doubling of the federal estate tax exemption in 2017 a modern era record low 0 04 of adult deaths in 2020 produced an estate tax liability 12in 2021 a proposal backed by president joe biden and some democrats that would have eliminated the step up in basis for assets in excess of 2 5 million plus 250 000 for a home for a married couple failed to secure congressional approval 13 | |
how is step up in basis calculated | a step up in basis resets the cost basis of an inherited asset to its market value on the decedent s date of death if the asset is later sold the higher new cost basis would be subtracted from the sale price to calculate the capital gains tax liability if any | |
how is step up in basis treated differently in community property states | in community property states and for assets in community property trusts the surviving spouse receives a step up in basis for community property in the majority of states without community property provisions jointly owned property such as stock in a joint brokerage account would receive only half the step up in cost basis compared with the same account in a community property state after the death of a spouse | |
is step up in basis a tax loophole | the step up in basis is a duly legislated provision of the u s tax code though it is certainly responsible for a significant loss of public revenue because the exemption from capital gains taxes on assets held until death disproportionately benefits the wealthiest households disparaging descriptions are likely to persist | |
what is the sterling overnight interbank average sonia rate | the sterling overnight index average sonia rate is an interest rate benchmark used in the united kingdom it is the effective overnight interest rate paid by banks for unsecured transactions in the british sterling market administered by the bank of england boe sonia is used to fund trades that occur overnight during off hours as such it represents the depth of overnight business in the marketplace understanding the sterling overnight interbank average sonia ratethe sterling overnight interbank average rate is a benchmark interest rate used in the united kingdom and operated by the boe it represents the average interest rate banks use when they borrow british currency from others including financial institutions and large institutional investors calculated each business day in london sonia fixing is the weighted average rate of unsecured overnight sterling transactions that are brokered by members of the wholesale markets brokers association the daily sonia rate as of june 15 2023 was 4 42840 1the eligibility criteria for transactions to qualify for sonia include sonia provides up front certainty of the amount of interest due at the end of the interest period 3 the rate also encouraged the formulation of the overnight index swap ois market and the sterling money markets in great britain sonia is a widely used benchmark for many financial transactions among which is the reference rate for the sterling ois market according to the boe the rate is used to value around 30 trillion of assets each year 4calculating the sonia ratehere s how sonia is calculated once all of these steps are completed the boe publishes the rate history of the sonia ratesonia was established in 1997 by the wmba in the united kingdom the financial conduct authority fca in the u k regulated the wmba as a calculation and publication agent the wmba had no sterling overnight funding rate before sonia this created volatility in the country s overnight interest rates the creation of sonia brought stability to overnight rates 5the rate is managed and operated by the boe the country s central bank which took control of the rate in april 2016 45 the central bank made changes to the way it calculates sonia in april 2018 and began publishing the sonia compounded index on a daily basis in august 2020 2in april 2017 the working group on sterling risk free reference rates which is a group of active influential dealers in the sterling interest rate swap market announced sonia would be its preferred near risk free interest rate benchmark this change impacted sterling derivatives and related financial contracts it also provided an alternative interest rate to the dominant london interbank offered rate libor to that end the fca announced it would no longer require banks to submit libor quotes after 2021 sonia provided traders and financial institutions with an alternative to the libor as a benchmark for short term financial transactions all contracts using libor are to be wrapped up by june 30 2023 6 libor will be replaced by the secured overnight financing rate sofr the bank of england reported several changes that became valid as of april 2018 | |
what is the sterling overnight interbank average rate | the sterling overnight interbank average rate is a benchmark interest rate used in the united kingdom the rate which is managed calculated and published by the bank of england is the overnight interest rate that banks and other financial institutions pay for unsecured transactions in the british sterling market transactions must meet certain criteria to qualify among them transactions must be executed between a certain time frame 12 a m and 6 p m and must be worth at least 25 million 2 | |
what is the current sonia rate | the sonia rate calculated published and set on june 15 2023 was 4 42840 1who oversees sonia the bank of england manages and operates the sterling overnight interbank average rate it took control of sonia in 2016 and made changes to its methodology two years later but it was established by wholesale markets brokers association in 1997 prior to this there was no such rate as such there was a greater degree of volatility in the overnight interest rate environment in the united kingdom sonia though brought more stability to these rates it is now used as a broad benchmark for different types of unsecured financial transactions the bottom linethe bank of england is responsible for publishing the sonia rate which is the interest rate benchmark used by banks for different unsecured financial transactions in the overnight sterling market it provides some degree of stability to the country s overnight market and represents the depth of overnight business in the country s financial markets | |
what is the sticky wage theory | the sticky wage theory hypothesizes that employee pay tends to respond slowly to changes in company performance or to the economy according to the theory when unemployment rises the wages of those workers that remain employed tend to stay the same or grow at a slower rate rather than falling with the decrease in demand for labor specifically wages are often said to be sticky down meaning that they can move up easily but move down only with difficulty the theory is attributed to the economist john maynard keynes who called the phenomenon nominal rigidity of wages understanding sticky wage theorystickiness is a theoretical market condition wherein some nominal price resists change while it often apply to wages stickiness may also often be used in reference to prices within a market which is also often called price stickiness the aggregate price level or average level of prices within a market can become sticky due to an asymmetry between the rigidity and flexibility in pricing this asymmetry often means that prices will respond to factors that allow them to go up but will resist those forces acting to push them down this means that levels will not respond quickly to large negative shifts in the economy as they otherwise would wages are often said to work in the same way people are happy to get a raise but will fight against a reduction in pay wage stickiness is a popular theory accepted by many economists although some purist neoclassical economists doubt its robustness proponents of the theory have posed a number of reasons as to why wages are sticky these include the idea that workers are much more willing to accept pay raises than cuts that some workers are union members with long term contracts or collective bargaining power and that a company may not want to expose itself to the bad press or negative image associated with wage cuts stickiness is an important concept in macroeconomics particularly so in keynesian macroeconomics and new keynesian economics without stickiness wages would always adjust in more or less real time with the market and bring about relatively constant economic equilibrium with a disruption in the market would come proportionate wage reductions without much job loss instead due to stickiness in the event of a disruption wages are more likely to remain where they are and instead firms are more likely to trim employment this tendency of stickiness may explain why markets are slow to reach equilibrium if ever prices of goods are generally thought of as not being as sticky as wages are as the prices of goods often change easily and frequently in response to changes in supply and demand sticky wage theory in contextaccording to sticky wage theory when stickiness enters the market a change in one direction will be favored over a change in the other since wages are held to be sticky down wage movements will trend in an upward direction more often than downward leading to an average trend of upward movement in wages this tendency is often referred to as creep price creep when in reference to prices or as the ratchet effect some economists have also theorized that stickiness can in effect be contagious spilling from an affected area of the market into other unaffected areas economists have also warned however that such stickiness is only an illusion since real income will be reduced in terms of buying power as a result of inflation over time this is known as wage push inflation the entry of wage stickiness into one area or industry sector will often bring about stickiness into other areas due to competition for jobs and companies efforts to keep wages competitive stickiness is also thought to have some other relatively wide sweeping effects on the global economy for example in a phenomenon known as overshooting foreign currency exchange rates may often overreact in an attempt to account for price stickiness which can lead to a substantial degree of volatility in exchange rates around the world sticky wage theory and employmentemployment rates are thought to be affected by the distortions in the job market produced by sticky wages for example in the event of a recession like the great recession of 2008 nominal wages didn t decrease due to the stickiness of wages instead companies laid off employees to cut costs without reducing wages paid to the remaining employees later as the economy began to come out of recession both wages and employment will remain sticky because it can be challenging to determine when a recession is actually ending and in addition to the fact that hiring new employees may often represent a higher short term cost than a slight raise to wages companies tend to be hesitant to begin hiring new employees in this respect in the wake of a recession employment may actually be sticky up on the other hand according to the theory wages themselves will often remain sticky down and employees who made it through may see raises in pay | |
what is a stipend | a stipend is a form of compensation that is paid to certain individuals for services rendered other work or while they receive training stipends are often provided in lieu of or in some cases in addition to a regular salary they are often used to offset certain expenses and generally come in a fixed amount stipends are commonly paid to trainees interns students apprentices and clergy members individuals should be aware of the tax implications of stipends which are considered income but aren t immediately taxed | |
how stipends work | a stipend is often offered to individuals as a fixed sum and is commonly paid to the recipient as a lump sum payment this type of compensation is sometimes called an allowance and is normally provided on a daily weekly or monthly basis a stipend is usually offered as compensation for training instead of salaries for employment purposes that being said it allows people to pursue work that is normally unpaid by helping defray living expenses interns apprentices fellows and clergy are common recipients of stipends rather than being paid for their services they re given stipends as financial support while they engage in the service or task at hand a stipend often includes other benefits such as higher education room and board rules outlined by the department of labor dol exist surrounding how stipends can be used by companies and organizations stipends cannot be used to hire students to replace existing staff and the students must be the primary beneficiaries of the employment or training not the company also a stipend may be lower than the minimum wage as long as it s used to pay trainees 1for w 2 employees stipends cannot replace salaries they can only be an added benefit to an employee s salary the stipend amount an individual receives often depends on the task they are assigned or the expense that is being offset for instance a company may pay a trainee 450 for a week s worth of training or a church may pay a clergy member 1 000 for living expenses most stipends are considered taxable income so you ll have to pay the entire 15 3 withholding tax out of your own pocket this includes both your portion and the employer s portion 2special considerationsif you receive a stipend there are certain things you must consider one of the main advantages of this type of compensation is that you may get to keep what you earn depending on your employment status depending on your status you may not have taxes withdrawn to pay for medicare and social security but remember the majority of stipends are considered a form of taxable income this means recipients need to set aside a portion of their earnings for the 2024 tax year the withholding rate for both programs is 15 3 12 4 for social security and 2 9 for medicare half of this is paid by the employer 3recipients should be careful about how their payments are classified students and interns should be classified as such if the company identifies you as an employee your stipend may be taxed and you won t receive the full amount and in this case you re entitled to receive the minimum wage and any overtime pay if it applies on the other hand employees should ensure they aren t considered trainees this could lead to complications with their pay 1not all stipends are considered taxable for instance fringe benefits like parking are only taxable after a certain amount be sure to consult with a tax consultant if you re unsure about the tax implications of your stipend 4types of stipendsas mentioned above stipends are not hourly based pay and are often used by employers as a lower cost option to pay interns or to offset the cost individuals bear while executing certain services as such stipends can vary depending on the company or organization that pays them some companies pay stipends to help cover housing food or travel expenses here are just a few of the types of stipends that are offered stipends are commonly offered to researchers at academic institutions or other related organizations to help them focus on their projects much like grants these stipends may be furnished by third parties who wish to see a particular study or form of research advance further without fiscal distractions that may otherwise hamper the researcher foundations and comparable entities might also offer stipends on similar terms to support the work of researchers and the projects they are developing stipends might also be offered to cover very specific costs and expenses for instance students could receive a stipend that must be used toward the purchase or lease of computers during academic semesters alternatively stipends may be issued to help defer the cost of transportation incurred by the recipient to and from the company for training purposes since employers don t have to offer health benefits to interns some of them may offer their workers extra money by adding it to their paycheck to help them with health insurance costs individuals can then use this extra cash to put toward paying for their insurance premiums for coverage that can be purchased either through the healthcare exchange or directly from private insurers health and wellness are now an important part of the work life balance that many employers promote so it s only natural that a lot of companies also offer stipends for employees that can be used for a variety of fitness expenses such as gym memberships yoga classes or even personal trainers as part of a wellness program some companies offer stipends to employees who wish to take additional training and classes that may assist them with their jobs and career development the employee may enroll and pay for classes or additional training for which the employer provides a reimbursement examples of stipendsmany corporations and organizations offer stipends to workers and other individuals the following are just a few examples that are found in the real world | |
how is a stipend different from a salary | a salary is compensation for work performed and is a set amount typically per year a stipend on the other hand is not considered compensation for work but rather monetary support for a variety of possible factors such as expenses incurred during traveling or during a training period or to cover certain living expenses stipends are also typically lower in amount as such they are often lower than minimum wage and are not regulated by the state but provided at the discretion of the employer | |
is a stipend considered income | stipends are not considered as wages so employers will not withhold income tax on any stipends made to employees however stipends are often considered income so you as an individual will have to calculate and pay taxes on any stipends received this includes social security and medicare it is important to check with your employer on the tax implications regarding any stipends | |
how often stipends are paid out to an employee will vary on the institution and the circumstances stipends can be paid out weekly monthly or annually most often they will not be paid out annually as they are considered a form of support and the individual may need that monetary amount throughout the year it is common that stipends are paid out as often as an employee s salary | the bottom linestipends are monetary payments used to cover expenses such as food and housing for individuals who are performing unpaid work this can apply to students in internships or for other types of trainees stipends are also offered to employees as additional benefits to cover certain expenses which are offered by companies to make the job more attractive to potential candidates | |
what is stochastic modeling | stochastic modeling is a form of financial model that is used to help make investment decisions this type of modeling forecasts the probability of various outcomes under different conditions using random variables stochastic modeling presents data and predicts outcomes that account for certain levels of unpredictability or randomness companies in many industries can employ stochastic modeling to improve their business practices and increase profitability in the financial services sector planners analysts and portfolio managers use stochastic modeling to manage their assets and liabilities and optimize their portfolios understanding stochastic modeling constant vs changeableto understand the concept of stochastic modeling it helps to compare it to its opposite deterministic modeling deterministic modeling gives you the same exact results for a particular set of inputs no matter how many times you recalculate the model here the mathematical properties are known none of them is random and there is only one set of specific values and only one answer or solution to a problem with a deterministic model the uncertain factors are external to the model stochastic modeling on the other hand is inherently random and the uncertain factors are built into the model the model produces many answers estimations and outcomes like adding variables to a complex math problem to see their different effects on the solution the same process is then repeated many times under various scenarios who uses stochastic modeling stochastic modeling is used in a variety of industries around the world the insurance industry for example relies heavily on stochastic modeling to predict how company balance sheets will look at a given point in the future other sectors industries and disciplines that depend on stochastic modeling include stock investing statistics linguistics biology and quantum physics a stochastic model incorporates random variables to produce many different outcomes under diverse conditions an example of stochastic modeling in financial servicesstochastic investment models attempt to forecast the variations of prices returns on assets roa and asset classes such as bonds and stocks over time the monte carlo simulation is one example of a stochastic model it can simulate how a portfolio may perform based on the probability distributions of individual stock returns stochastic investment models can be either single asset or multi asset models and may be used for financial planning to optimize asset liability management alm or asset allocation they are also used for actuarial work a pivotal tool in financial decision makingthe significance of stochastic modeling in finance is extensive and far reaching when choosing investment vehicles it is critical to be able to view a variety of outcomes under multiple factors and conditions in some industries a company s success or demise may even hinge on it in the ever changing world of investing new variables can come into play anytime and could affect a stock picker s decisions enormously hence finance professionals often run stochastic models hundreds or even thousands of times which proffers numerous potential solutions to help target decision making | |
what is the difference between stochastic and deterministic models | unlike deterministic models that produce the same exact results for a particular set of inputs stochastic models are the opposite the model presents data and predicts outcomes that account for certain levels of unpredictability or randomness | |
what does a lot of variation mean in a stochastic model | stochastic models are all about calculating and predicting an outcome based on volatility and variability the more variation in a stochastic model is reflected in the number of input variables | |
what is an example of a stochastic event | the monte carlo simulation is one example of a stochastic model it can simulate how a portfolio may perform based on the probability distributions of individual stock returns | |
what is the difference between stochastic and probabilistic | they are generally considered synonyms of each other stochastic can be thought of as a random event whereas probabilistic is derived from probability the bottom linestochastic modeling is used to help make investment decisions this form of financial model forecasts the probability of various outcomes under different conditions using random variables | |
what is a stochastic oscillator | a stochastic oscillator is a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period of time the sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result it is used to generate overbought and oversold trading signals utilizing a 0 100 bounded range of values investopedia jessica olahunderstanding the stochastic oscillatorthe stochastic oscillator is range bound meaning it is always between 0 and 100 this makes it a useful indicator of overbought and oversold conditions traditionally readings over 80 are considered in the overbought range and readings under 20 are considered oversold however these are not always indicative of impending reversal very strong trends can maintain overbought or oversold conditions for an extended period instead traders should look to changes in the stochastic oscillator for clues about future trend shifts stochastic oscillator charting generally consists of two lines one reflecting the actual value of the oscillator for each session and one reflecting its three day simple moving average because price is thought to follow momentum the intersection of these two lines is considered to be a signal that a reversal may be in the works as it indicates a large shift in momentum from day to day divergence between the stochastic oscillator and trending price action is also seen as an important reversal signal for example when a bearish trend reaches a new lower low but the oscillator prints a higher low it may be an indicator that bears are exhausting their momentum and a bullish reversal is brewing the stochastic oscillator is only one of several technical indicators used by option traders to time entry and exit points image by sabrina jiang investopedia 2021formula for the stochastic oscillator k c l14 h14 l14 100 where c the most recent closing price l14 the lowest price traded of the 14 previous trading sessions h14 the highest price traded during the same 14 day period k the current value of the stochastic indicator begin aligned text k left frac text c text l14 text h14 text l14 right times100 textbf where text c the most recent closing price text l14 the lowest price traded of the 14 previous text trading sessions text h14 the highest price traded during the same text 14 day period text k the current value of the stochastic indicator end aligned k h14 l14c l14 100where c the most recent closing pricel14 the lowest price traded of the 14 previoustrading sessionsh14 the highest price traded during the same14 day period k the current value of the stochastic indicator notably k is referred to sometimes as the fast stochastic indicator the slow stochastic indicator is taken as d 3 period moving average of k the general theory serving as the foundation for this indicator is that in a market trending upward prices will close near the high and in a market trending downward prices close near the low transaction signals are created when the k crosses through a three period moving average which is called the d the difference between the slow and fast stochastic oscillator is the slow k incorporates a k slowing period of 3 that controls the internal smoothing of k setting the smoothing period to 1 is equivalent to plotting the fast stochastic oscillator 1history of the stochastic oscillatorthe stochastic oscillator was developed in the late 1950s by george lane as designed by lane the stochastic oscillator presents the location of the closing price of a stock in relation to the high and low prices of the stock over a period of time typically a 14 day period lane over the course of numerous interviews has said that the stochastic oscillator does not follow price volume or anything similar he indicates that the oscillator follows the speed or momentum of price lane also reveals that as a rule the momentum or speed of a stock s price movements changes before the price changes direction 2 in this way the stochastic oscillator can foreshadow reversals when the indicator reveals bullish or bearish divergences this signal is the first and arguably the most important trading signal lane identified example of the stochastic oscillatorthe stochastic oscillator is included in most charting tools and can be easily employed in practice the standard time period used is 14 days though this can be adjusted to meet specific analytical needs the stochastic oscillator is calculated by subtracting the low for the period from the current closing price dividing by the total range for the period and multiplying by 100 as a hypothetical example if the 14 day high is 150 the low is 125 and the current close is 145 then the reading for the current session would be 145 125 150 125 100 or 80 by comparing the current price to the range over time the stochastic oscillator reflects the consistency with which the price closes near its recent high or low a reading of 80 would indicate that the asset is on the verge of being overbought relative strength index rsi vs stochastic oscillatorthe relative strength index rsi and stochastic oscillator are both price momentum oscillators that are widely used in technical analysis while often used in tandem they each have different underlying theories and methods the stochastic oscillator is predicated on the assumption that closing prices should move in the same direction as the current trend meanwhile the rsi tracks overbought and oversold levels by measuring the velocity of price movements in other words the rsi was designed to measure the speed of price movements while the stochastic oscillator formula works best in consistent trading ranges in general the rsi is more useful during trending markets and stochastics more so in sideways or range bound markets 3limitations of the stochastic oscillatorthe primary limitation of the stochastic oscillator is that it has been known to produce false signals this is when a trading signal is generated by the indicator yet the price does not actually follow through which can end up as a losing trade during volatile market conditions this can happen quite regularly one way to help with this is to take the price trend as a filter where signals are only taken if they are in the same direction as the trend | |
how do you read the stochastic oscillator | the stochastic oscillator represents recent prices on a scale of 0 to 100 with 0 representing the lower limits of the recent time period and 100 representing the upper limit a stochastic indicator reading above 80 indicates that the asset is trading near the top of its range and a reading below 20 shows that it is near the bottom of its range | |
what does k represent on the stochastic oscillator | on a stochastic oscillator chart k represents the current price of the security represented as a percentage of the difference between its highest and lowest values over a certain time period in other words k represents the current price in relation to the asset s recent price range | |
what does d represent on the stochastic oscillator | on a stochastic oscillator chart d represents the 3 period average of k this line is used to show the longer term trend for current prices and is used to show the current price trend is continuing for a sustained period of time 3 | |
what is the stochastic rsi | the stochastic rsi stochrsi is an indicator used in technical analysis that ranges between zero and one or zero and 100 on some charting platforms and is created by applying the stochastic oscillator formula to a set of relative strength index rsi values rather than to standard price data using rsi values within the stochastic formula gives traders an idea of whether the current rsi value is overbought or oversold the stochrsi oscillator was developed to take advantage of both momentum indicators in order to create a more sensitive indicator that is attuned to a specific security s historical performance rather than a generalized analysis of price change image by sabrina jiang investopedia 2021the formulas for the stochastic rsi stochrsi are stochrsi r s i min r s i max r s i min r s i where r s i current rsi reading min r s i lowest rsi reading over the last 14 periods or your chosen lookback interval max r s i highest rsi reading over the last 14 periods begin aligned text stochrsi frac rsi min left rsi right max left rsi right min left rsi right textbf where rsi text current rsi reading min left rsi right text lowest rsi reading over the last 14 periods text or your chosen lookback interval max left rsi right text highest rsi reading over the last 14 periods text or your chosen lookback interval end aligned stochrsi max rsi min rsi rsi min rsi where rsi current rsi readingmin rsi lowest rsi reading over the last 14 periods or your chosen lookback interval max rsi highest rsi reading over the last 14 periods | |
where | rsi current rsi reading lowest rsi lowest rsi reading over last 14 periods or chosen lookback period andhighest rsi highest rsi reading over last 14 period or lookback period | |
how to calculate the stochastic rsi | the stochrsi is based on rsi readings the rsi has an input value typically 14 which tells the indicator how many periods of data it is using in its calculation these rsi levels are then used in the stochrsi formula | |
what does the stochastic rsi tell you | the stochrsi was developed by tushar s chande and stanley kroll and detailed in their book the new technical trader first published in 1994 while technical indicators already existed to show overbought and oversold levels the two developed stochrsi to improve sensitivity and generate a greater number of signals than traditional indicators could do the stochrsi deems something to be oversold when the value drops below 0 20 meaning the rsi value is trading at the lower end of its predefined range and that the short term direction of the underlying security may be nearing a low a possible move higher conversely a reading above 0 80 suggests the rsi may be reaching extreme highs and could be used to signal a pullback in the underlying security along with identifying overbought oversold conditions the stochrsi can be used to identify short term trends by looking at it in the context of an oscillator with a centerline at 0 50 when the stochrsi is above 0 50 the security may be seen as trending higher and vice versa when it s below 0 50 the stochrsi should also be used in conjunction with other technical indicators or chart patterns to maximize effectiveness especially given the high number of signals that it generates in addition non momentum oscillators like the accumulation distribution line may be particularly helpful because they don t overlap in terms of functionality and provide insights from a different perspective the difference between the stochastic rsi and the relative strength index rsi they seem similar but the stochrsi relies on a different formula from what generates rsi values rsi is a derivative of price meanwhile stochrsi is derivative of rsi itself or a second derivative of price one of the key differences is how quickly the indicators move stochrsi moves very quickly from overbought to oversold or vice versa while the rsi is a much slower moving indicator one isn t better than the other stochrsi just moves more and more quickly than the rsi limitations of using the stochastic rsione downside to using the stochrsi is that it tends to be quite volatile rapidly moving from high to low smoothing the stochrsi may help in this regard some traders will take a moving average of the stochrsi to reduce the volatility and make the indicator more useful for example a 10 day simple moving average of the stochrsi can produce an indicator that s much smoother and more stable most charting platforms allow for applying one type of indicator to another without any personal calculations required also the stochrsi is the second derivative of price in other words its output is two steps away from the actual price of the asset being analyzed which means at times it may be out of sync with an asset s market price in real time | |
what are stocks | a stock also known as equity is a security that represents the ownership of a fraction of the issuing corporation units of stock are called shares which entitle the owner to a proportion of the corporation s assets and profits equal to how much stock they own stocks are bought and sold predominantly on stock exchanges and are the foundation of many individual investors portfolios stock trades have to conform to government regulations meant to protect investors from fraudulent practices understanding stockscorporations issue stock to raise funds to operate their businesses the holder of stock a shareholder may have a claim to part of the company s assets and earnings a shareholder is considered an owner of the issuing company determined by the number of shares an investor owns relative to the number of outstanding shares if a company has 1 000 shares of stock outstanding and one person owns 100 shares that person would own and have a claim to 10 of the company s assets and earnings 2stockholders do not own a corporation but corporations are a special type of organization because the law treats them as legal persons corporations file taxes can borrow can own property and can be sued the idea that a corporation is a person means that the corporation owns its assets a corporate office full of chairs and tables belongs to the corporation and not to the shareholders 3corporate property is legally separated from the property of shareholders which limits the liability of both the corporation and the shareholder if the corporation goes bankrupt a judge may order all of its assets sold but a shareholder s assets are not at risk the court cannot force you to sell your shares although the value of your shares may have fallen likewise if a major shareholder goes bankrupt they cannot sell the company s assets to pay their creditors a person company or institution that owns at least one share of a company s stock | |
what shareholders own are shares issued by the corporation and the corporation owns the assets held by a firm if you own 33 of the shares of a company it is incorrect to assert that you own one third of that company however you do own one third of the company s shares this is known as separation of ownership and control | owning stock gives you the right to vote in shareholder meetings receive dividends if and when they are distributed and the right to sell your shares to somebody else if you own a majority of shares your voting power increases so that you can indirectly control the direction of a company by appointing its board of directors 4 this becomes most apparent when one company buys another the acquiring company buys all the outstanding shares the board of directors is responsible for increasing the value of the corporation and often does so by hiring professional managers or officers such as the chief executive officer ceo ordinary shareholders do not manage the company the importance of being a shareholder is that you are entitled to a portion of the company s profits which is the foundation of a stock s value the more shares you own the larger the portion of the profits you get many stocks however do not pay out dividends and instead reinvest profits back into growing the company these retained earnings however are still reflected in the value of a stock read about investopedia s 10 rules of investing by picking up a copy of our special issue print edition | |
how to compare common and preferred stock | there are two main types of stock common and preferred common stock usually entitles the owner to vote at shareholders meetings and to receive any dividends paid out by the corporation preferred stockholders generally do not have voting rights though they have a higher claim on assets and earnings than common stockholders for example owners of preferred stock receive dividends before common shareholders and have priority if a company goes bankrupt and is liquidated 2the first common stock ever issued was by the dutch east india company in 1602 5companies can issue new shares whenever there is a need to raise additional cash this process dilutes the ownership and rights of existing shareholders provided that they do not buy any of the new offerings corporations can also engage in stock buybacks which benefit existing shareholders because they cause their shares to appreciate in value | |
what is the difference between stocks and bonds | stocks are issued by companies to raise capital to grow the business or undertake new projects there are important distinctions between whether somebody buys shares directly from the company when it issues them in the primary market or from another shareholder in the secondary market when the corporation issues shares it does so in return for money bonds vary from stocks in several ways bondholders are creditors to the corporation and are entitled to interest as well as repayment of the principal invested also creditors are given legal priority over other stakeholders in the event of a bankruptcy and will be made whole first if a company is forced to sell assets conversely shareholders often receive nothing in the event of bankruptcy implying that stocks are inherently riskier investments than bonds 2 | |
how do you buy stock | most often stocks are bought and sold on stock exchanges such as the nasdaq or the new york stock exchange nyse after a company goes public through an initial public offering ipo its stock becomes available for investors to buy and sell on an exchange typically investors will use a brokerage account to purchase stock on the exchange which will list the purchasing price the bid or the selling price the offer the price of the stock is influenced by supply and demand factors in the market among other variables | |
how can you earn income from owning stock | there are two ways to earn money by owning shares of stock through dividends and capital appreciation dividends are cash distributions of company profits if a company has 1 000 shares outstanding and declares a 5 000 dividend then stockholders will get 5 for each share they own 6capital appreciation is the increase in the share price itself if you sell a share to someone for 10 and the stock is later worth 11 the shareholder has made 1 6 | |
is it risky to own stock | all investments have a degree of risk stocks bonds mutual funds and exchange traded funds etfs can lose value if market conditions decline | |
when you invest you make choices about what to do with your financial assets your investment value might rise or fall because of market conditions or corporate decisions such as whether to expand into a new area of business or merge with another company 7 | historically stocks have outperformed most other investments over the long run 1the bottom linea stock represents fractional ownership of equity in an organization it is different from a bond which operates like a loan made by creditors to the company in return for periodic payments a company issues stock to raise capital from investors for new projects or to expand its business operations the type of stock common or preferred held by a shareholder determines the rights and benefits of ownership | |
what is stock analysis | stock analysis is the evaluation of a particular trading instrument an investment sector or the market as a whole stock analysts attempt to determine the future activity of an instrument sector or market understanding stock analysisstock analysis is a method for investors and traders to make buying and selling decisions by studying and evaluating past and current data investors and traders attempt to gain an edge in the markets by making informed decisions the notion of stock analysis relies on the assumption that available market information can be used to determine the intrinsic value of a stock in the primary methods discussed below investors use financial statements stock price movement market indicators or industry trends to make investment decisions much of this strategy relies on leveraging historical information for instance investors may analyze a company s stock based on it s financial performance an analyst that is trying to determine the fair price of that stock may strive to understand how similar companies of similar performance performed in the past there are two basic types of stock analysis fundamental analysis and technical analysis each method is discussed more in depth below fundamental analysisfundamental analysis concentrates on data from sources including financial records economic reports company assets and market share to conduct fundamental analysis on a public company or sector investors and analysts typically analyze the metrics on a company s financial statements balance sheet income statement cash flow statement and footnotes these statements are released to the public in the form of a 10 q or 10 k report through the database system edgar which is administered by the u s securities and exchange commission sec also the earnings report released by a company during its quarterly earnings press release is analyzed by investors who look to ascertain how much in revenue expenses and profits a company made companies often release their financial statement information on set cadences with predictable release periods | |
when running stock analysis on a company s financial statements an analyst will usually be checking for the measure of a company s profitability liquidity solvency efficiency growth trajectory and leverage different ratios can be used to determine how healthy a company is | for example the current ratio and quick ratio are used to estimate whether a company will be able to pay its short term liabilities with its available current assets the formula for current ratio is calculated by dividing current assets by current liabilities figures that can be gotten from the balance sheet although there is no such thing as an ideal current ratio a ratio less than 1 could indicate to the stock analyst that the company is in poor financial health and may not be able to cover its short term debt obligations when they come due looking at the balance sheet still a stock analyst may want to know the current debt levels taken on by a company in this case a stock analyst may use the debt ratio which is calculated by dividing total liabilities by total assets a debt ratio above 1 typically means that a company has more debt than assets in this case if the company has a high degree of leverage a stock analyst may conclude that a rise in interest rates may increase the company s probability of going into default stock analysis involves comparing a company s current financial statement to its financial statements in previous years to give an investor a sense of whether the company is growing stable or deteriorating the financial statement of a company can also be compared to that of one or more other companies within the same industry a stock analyst may be looking to compare the operating profit margin of two competing companies by looking at their income statements the operating profit margin is a metric that shows how much revenue is left after operating expenses have been paid and what portion of revenue is left to cover non operating costs and is calculated as operating income divided by revenue a company with an operating margin of 0 30 will be looked on more favorably than one with a margin of 0 03 a 0 30 operating margin means that for every dollar of revenue a company has 30 cents left after operating costs have been covered in other words the company uses 70 cents out of every dollar in net sales to pay for its variable or operating costs technical analysisthe second method of stock analysis is technical analysis technical analysis focuses on the study of past and present price action to predict the probability of future price movements technical analysts analyze the financial market as a whole and are primarily concerned with price and volume as well as the demand and supply factors that move the market charts are a key tool for technical analysts as they show a graphical illustration of a stock s trend within a stated time period for example using a chart a technical analyst may mark certain areas as a support or resistance level the support levels are marked by previous lows below the current trading price and the resistance markers are placed at previous highs above the current market price of the stock a break below the support level would indicate a bearish trend to the stock analyst while a break above the resistance level would take on a bullish outlook technical stock analysis is effective only when supply and demand forces influence the price trend analyzed when outside factors are involved in a price movement analyzing stocks using technical analysis may not be successful like other forms of analysis analyzing stock price trends using technical analysis is more complicated as more variables are considered examples of factors other than supply and demand that can affect a stock price include stock splits mergers dividend announcements a class action lawsuit death of a company s ceo a terrorist attack accounting scandals change of management monetary policy changes etc these unpredictable events may occur that were essentially impossible to forecast or plan for technical analysis is only possible if a company s historical stock price can be used to predict future price movement other forms of stock analysisaside from fundamental analysis and technical analysis analysts can leverage other less formal ways to analyze the price of a stock with the interconnectivity and complexity of social media analysts can perform sentiment analysis by engaging with social media and news to gauge public perception of the company quantitative analysis is similar to technical analysis in that it relies on complex financial calculations to determine future price projections quantitative analysis relies on mathematical and statistical modeling to review data the goal of these models is to identify general trends based on what has happened in the past not necessarily tied specifically to the stock price analysts may also perform either a top down analysis or bottom up analysis top down analysis requires an analysis of the overall economy then narrows down to the specific performance of a company on the other hand bottom up requires analyzing individual companies then reviewing how the broader economy is performing both types of analysis are used to more generally understand factors that impact price such as broad market conditions limitations of stock analysismany investors rely on stock analysis to deploy their best investment strategies however stock analysis may result in misplaced confidence or misguided strategies stock analysis is often performed with limited information this is due to a few reasons first public companies may not fully disclose all situations of their company to the general public second stock analysis strives to project the future in which the information is simply not available because of this reliance on future events to occur there is broad uncertainty around all stock analysis techniques the stock market may rapidly change in either direction based on prevailing market conditions for example should political climates change rapidly and redefine political risk there may be an unpredictable impact to investments no previously foreseen as analysis dig into stock data there is always an inherent risk of bias if the data being analyzed is not anonymous analysts may find themselves favoring certain outcomes based on what they know about the investment options in addition analysts and investors may be lured into confirmation bias that steers decisions to match a desired outcome last stock analysis is often complex it isn t easy to pull together and it requires a substantial amount of time in addition as variables change everyday stock analysis requires continual thoughtfulness and analysis to evaluate morphing conditions | |
which stock analysis technique is best | investors may be best suited to use fundamental technical and quantitative analysis as one technique may not always be superior compared to other techniques based on the information available and objectives of the investors it may be better to analyze the financial positioning research the company s industry or devise complex financial models | |
how do you know if a stock s price will go up | the best answer to this question is that nobody knows whether a stock s price will go up or down however analysts and investors can leverage information to make the best most strategic decision to follow general information related to the stock in general if the fair value of a stock is less than the current price of the stock the price will go down on the other hand companies with higher fair values as determined by the market will go up | |
how can beginners start analyzing stocks | analyzing your first stock does not need to be difficult first gather as much public information related to the company as available this includes recent news articles associated with the company as well as the most recent set of financial statements then filter down this information to the most relevant information consider leveraging industry averages or data from competitors to set benchmarks then decide whether the company is outperforming or underperforming compared to current prices and stock activity | |
how do i research stocks before buying them | as an investor researching stocks you should aim to collect a broad range of information about the company this includes recent government filings news articles press releases statements or activity on social media and the company s financial statements you can also leverage information from other analysts as professionals may publicly give their opinion about the position of the company this insight can be used to form your own opinion on future price movement the bottom lineboth fundamental and technical analysis can be done independently or together some analysts use both methods of analysis while others stick to one either way using stock analysis to vet stocks sectors and the market is an important method of creating the best investment strategy for one s portfolio | |
what are stock appreciation rights | stock appreciation rights sars are a type of employee compensation linked to the company s stock price during a predetermined period sars are profitable for employees when the company s stock price rises which makes them similar to employee stock options esos however employees do not have to pay the exercise price with sars instead they receive the sum of the increase in stock or cash the primary benefit of stock appreciation rights is that employees can receive proceeds from stock price increases without having to buy stock understanding stock appreciation rightsstock appreciation rights offer the right to the cash equivalent of a stock s price gains over a predetermined time interval employers almost always pay this type of bonus in cash however the company may pay the employee bonus in shares in most cases employees can exercise sars after they vest when sars vest it simply means that they become available to exercise employers generally issue sars along with stock options these stock appreciation rights are called tandem sars they assist in funding the purchase of options and help pay off taxes due at the time the sars are exercised like several other forms of stock compensation sars are transferable and are often subject to clawback provisions clawback provisions specify conditions under which the company may take back some or all of the income received by employees under the plan for example they might allow the firm to withdraw sars if an employee goes to work for a competitor before a specified date sars are also frequently awarded according to a vesting schedule that ties them to performance goals set by the company sars are taxed the same way as non qualified stock options nsos there are no tax consequences of any kind on either the grant date or when they are vested however participants must recognize ordinary income on the spread at the time of exercise most employers will also withhold supplemental federal income tax furthermore they will hold back funds to pay state and local taxes where applicable many employers will also withhold taxes on sars in the form of shares for example an employer may only give a certain number of shares and withhold the remainder to cover the tax as with nsos the amount of income recognized upon exercise becomes the cost basis for taxes when holders sell the shares special considerationssars are similar in some ways to phantom stock the major difference is that phantom stocks are typically reflective of stock splits and dividends phantom stock is a promise that an employee will receive either the value of the company s shares or the amount that the stock price increases during a specified period the phantom stock bonus an employee receives is taxed as ordinary income at the time it is received phantom stock is not tax qualified so it does not have to follow the rules that employee stock ownership plans esops and 401 k s must follow advantages and disadvantages of sarsthe greatest advantage of sars is flexibility companies can structure sars in a variety of ways that work best for different individuals however this flexibility requires making numerous choices companies offering sars must decide which employees receive them the value of these bonuses the liquidity of the sars and which vesting rules to adopt employers like sars because the accounting rules for them are more favorable than in the past they receive fixed instead of variable accounting treatment much like conventional stock option plans however sars require the issuance of fewer shares and dilute the share price less than traditional stock plans like all other forms of equity compensation sars can also serve to motivate and retain employees despite their many benefits sars are a high risk form of employee compensation if the company s stock does not appreciate sars often expire worthless example of stock appreciation rightsconsider an employee who earns 200 sars as a performance bonus furthermore suppose that the sars mature after a period of two years the stock of the company then proceeds to increase by 35 a share over those two years the result is that the employee receives 7 000 200 sars x 35 7 000 in additional compensation these sars could also have a clawback provision where employees lose them if they leave the company before the two year period ends | |
what is stock compensation | stock compensation is a way corporations use stock options to reward employees employees with stock options need to know whether their stock is vested and will retain its full value even if they are no longer employed with that company because tax consequences depend on the fair market value fmv of the stock if the stock is subject to tax withholding the tax must be paid in cash even if the employee was paid by equity compensation 1 | |
how stock compensation works | stock compensation is often used by startup companies since they typically do not have the cash on hand to pay employees competitive rates executives and staff may share in the company s growth and profits that way however many laws and compliance issues must be adhered to such as fiduciary duty tax treatment and deductibility registration issues and expense charges | |
when vesting companies let employees purchase a predetermined number of shares at a set price companies may vest on a specific date or on a monthly quarterly or annual schedule the timing may be set according to company wide or individual performance targets being met or both time and performance criteria vesting periods are often three to four years typically beginning after the first anniversary of the date an employee became eligible for stock compensation after being vested the employee may exercise their stock purchasing option any time before the expiration date | example of stock compensationfor example assume that an employee is given the right to purchase 2 000 shares of stock at 20 per share the options vest 30 per year over three years and have a term of five years the employee pays 20 per share when buying the stock regardless of the stock price over the five year period types of stock compensationthere are different types of stock compensation such as non qualified stock options nsos and incentive stock options isos isos are only available to employees and not non employee directors or consultants these options provide special tax advantages with non qualified stock options employees are required to pay income tax based on the grant price minus the price of the exercised option 2stock appreciation rights sars let the value of a predetermined number of shares be paid in cash or shares phantom stock pays a cash bonus at a later date equaling the value of a set number of shares employee stock purchase plans espps let employees buy company shares at a discount restricted stock and restricted stock units rsus let employees receive shares through purchase or gift after working a set number of years and meeting performance goals restricted stock requires the completion of a vesting period this may be done all at once after a certain period of time alternatively vesting may be done equally over a set period of years or any other combination management finds suitable rsus are similar but they represent the company s promise to pay shares based on a vesting schedule this offers some advantages to the company but employees do not gain any rights of stock ownership such as voting rights until the shares are earned and issued companies award performance shares to executives and managers only if certain specified measures are met these could include metrics such as an earnings per share eps target return on equity roe or the total return of the company s stock in relation to an index typically performance periods are over a multi year time horizon exercising stock optionsstock options may be exercised by paying cash exchanging shares already owned working with a stockbroker on a same day sale or executing a sell to cover transaction however a company typically allows only one or two of those methods for example private companies typically restrict the sale of acquired shares until the company goes public or is sold in addition private companies do not offer sell to cover or same day sales | |
what is a stock dividend | a stock dividend is a payment to shareholders that consists of additional shares of a company s stock rather than cash the distributions are paid in fractions per existing share for example if a company issues a stock dividend of 5 it will pay 0 05 shares for every share owned by a shareholder the owner of 100 shares would get five additional shares investopedia jessica olah | |
how a stock dividend works | a stock dividend may be paid out when a company wants to reward its investors but either doesn t have the spare cash or prefers to save it for other uses the stock dividend has the advantage of rewarding shareholders without reducing the company s cash balance however it does increase its liabilities stock dividends have a tax advantage for the investor as well unlike cash dividends stock dividends are not taxed until the investor sells the shares a stock dividend may require that the newly received shares not be sold for a certain period this holding period typically begins the day after the dividend is received 1stock dividend dilution | |
when a company issues additional stock shares for any reason the result is stock dilution more shares in circulation means a reduction in the earnings per share eps of the existing shares and in the ownership percentage held by each current shareholder | dilution is a downside of a stock dividend if the company s net income does not increase proportionately an example of share dilution is as follows the company rewards investors while keeping its cashthe decrease in share price may attract new investorsinvestors do not owe tax on these dividends until the stock is soldbonus shares dilute the share pricestock dividends may signal a company s financial instabilityshare dividends are less attractive than cash dividends to some shareholdersadvantages and disadvantages of stock dividendsfrom an investor s viewpoint receiving stock dividends yields little immediate reward then again there s no tax due until the additional shares are sold issuing share dividends lowers the price of the stock at least in the short term a lower priced stock tends to attract more buyers so current shareholders are likely to get their reward down the road or they can sell the additional shares immediately pocket the cash and still retain the same number of shares they had before a public company is not required to issue dividends on common stock however it s not a good look for a company to abruptly stop paying dividends or pay less in dividends than in the past for the company a stock dividend is a pain free way to issue dividends without depleting its cash reserves journal entries for stock dividends |
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