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what is a demand curve | the demand curve is a graphic illustration of how prices affect supply and demand as prices rise the quantity of a particular good or service that consumers demand will decline conversely as prices fall demand rises | |
what is a supply curve | a supply curve illustrates the relationship between prices and supply as the price rises for a particular good or service the more of it producers will be motivated to provide | |
when a demand curve and a supply curve for a particular item are overlaid on the same graph the point at which they intersect is referred to as the equilibrium point that s the price at which the quantity consumers are willing to buy and the quantity producers are willing to deliver are perfectly matched | the bottom linethe theory of price in microeconomics states that the price of a particular good or service is determined by the relationship between producer supply and consumer demand at any given point prices should rise if demand exceeds supply and fall if supply exceeds demand when supply and demand are equal the market is said to have achieved equilibrium | |
what is the theory of the firm | in neoclassical economics an approach to economics focusing on the determination of goods outputs and income distributions in markets through supply and demand the theory of the firm is a microeconomic concept that states that a firm exists and make decisions to maximize profits a firm maximizes profits by creating a gap between revenue and costs understanding the theory of the firmneoclassical economics dominates mainstream economics today so the theory of the firm and other theories associated with neoclassicism influences decision making in a variety of areas including resource allocation production techniques pricing adjustments and the volume of production while early economic analysis focused on broad industries as the 19th century progressed more economists began to ask basic questions about why companies produce what they produce and what motivates their choices when allocating capital and labor however the theory has been debated and expanded to consider whether a company s goal is to maximize profits in the short term or long term modern takes on the theory of the firm sometimes distinguish between long run motivations such as sustainability and short run motivations such as profit maximization if a company s goal is to maximize short term profits it might find ways to increase efficiency boost revenue and reduce costs however companies that utilize fixed assets like equipment would ultimately need to make capital investments to ensure the company is profitable in the long term the use of cash to invest in assets would undoubtedly hurt short term profits but would help with the long term viability of the company competition not just profit can also impact the decision making of company executives if competition is strong the company will need to not only maximize profits but also stay one step ahead of its competitors by reinventing itself and adapting its offerings therefore long term profits could only be maximized if there s a balance between short term profits and investing in the future theory of the firm vs theory of the consumerthe theory of the firm works side by side with the theory of the consumer which states that consumers seek to maximize their overall utility in this case utility refers to the perceived value a consumer places on a good or service sometimes referred to as the level of happiness the customer experiences from the good or service for example when consumers purchase a good for 10 they expect to receive a minimum of 10 in utility from the purchased good special considerationsrisks exist for companies that subscribe to a profit maximization goal solely focusing on profit maximization comes with a level of risk in regards to public perception and a loss of goodwill between the company consumers investors and the public a modern take on the theory of the firm proposes that maximizing profits is not the only driving goal of a company particularly with publicly held companies companies that have issued equity or sold stock have diluted their ownership this scenario of low equity ownership by the decision makers in the company can lead to chief executive officers ceos having multiple goals including profit maximization sales maximization public relations and market share further risks exist when a firm focuses on a single strategy within the marketplace in order to maximize profits if a company relies on the sale of one particular good for its overall success and the associated product eventually fails within the marketplace the company can fall into financial hardship competition and the lack of investment in its long term success such as updating and expanding product offerings can eventually drive a company into bankruptcy | |
what is there ain t no such thing as a free lunch tanstaafl | there ain t no such thing as a free lunch tanstaafl also known as there is no such thing as a free lunch tinstaafl is an expression that describes the cost of decision making and consumption the expression conveys the idea that things appearing free always have some cost paid by somebody or that nothing in life is truly free a free lunch refers to a situation where there is no cost incurred by the individual receiving the goods or services being provided but economists point out that even if something were truly free there is an opportunity cost in what is not taken | |
how tanstaafl works | the tanstaafl concept is important to consider when making various types of decisions whether they be financial or lifestyle the concept can help consumers make wiser decisions by considering all indirect and direct costs and externalities in economics tanstaafl describes the concept of opportunity costs which states that for every choice made there is an alternative not chosen which would also have produced some utility decision making requires trade offs and assumes that there are no real free offerings in society for example products and services gifted free to individuals are paid for by the person giving the gift even when there is no one to assume the direct costs society bears the burden as in the case of negative externalities like pollution investors must remain particularly wary of a seemingly free lunch when dealing with investments that promise a stream of fairly high fixed payments over a period of multiple years with supposedly low risk many of these investments remain laden with hidden fees some of which may not be fully understood by investors in general any investment that promises a guaranteed return is not a free lunch because there is some implicit cost somewhere including the opportunity cost of not investing elsewhere there is also the implicit cost related to unseen risks some brokerages heavily marketed mortgage backed securities mbs as an apparent free lunch in the early 2000s these investments were described as being very safe aaa rated investments backed by a diversified pool of mortgages however the housing crisis in the u s exposed the true underlying risk of these investments as well as a faulty ratings system that classified pools of loans as aaa even when many of the underlying loans carried very substantial default risks even products and services given to individuals for free are not truly free a company government or individual ultimately pays the cost history of the tanstaafl conceptthe concept of tanstaafl is thought to have originated in 19th century american saloons where customers were given free lunches with the purchase of drinks from the basic structure of the offer it is evident that there is an implicit cost associated with the free lunch the purchase of a drink however there are additional unseen costs resulting from the consumption of the free lunch because the lunches were high in salt customers were enticed to purchase more drinks so the saloons purposely offered free lunches with the expectation that they would generate enough revenue in additional drinks to offset the cost of the lunch the proposal of a free good or service with the purchase of another good or service is an oxymoronic tactic many businesses still use to entice customers tanstaafl has been referenced many times historically in a variety of different contexts for example in 1933 former new york city mayor fiorello h la guardia used the italian phrase finita la cuccagna translating to no more free lunch in his campaign against crime and corruption popular references to the phrase can also be found in robert heinlein s the moon is a harsh mistress as well as in milton friedman s book there ain t no such thing as a free lunch examples of tanstaaflacross different disciplines e g economics finance statistics etc tanstaafl has different connotations for example in science it refers to the theory that the universe is a closed system the idea is that a source of something e g matter comes from a resource that will be exhausted the cost of the supply of matter is the exhaustion of its source in sports tanstaafl was used to describe the health costs associated with being great at a sport like no pain no gain despite the different meanings the common factor is cost for investments tanstaafl helps to explain risk treasury bills t bill notes and bonds offer a nearly risk free return however the opportunity cost of investing in one of these instruments is the foregone opportunity to invest in an alternative riskier investment as an investor moves higher on the risk spectrum the phrase tanstaafl becomes even more relevant as investors provide capital with hopes of achieving larger gains than what less riskier securities yield however this choice assumes the cost that growth prospects may not be achieved and the investment could be lost | |
what is theta | theta the greek letter is used to name an options risk factor concerning how fast there is a decline in the value of an option over time this is also known as an option s time decay as an option gets closer to maturity or the contract s end it loses value as long as everything is the same 12theta is generally expressed as a negative number for long positions and a positive number for short positions it can be thought of as the amount by which an option s value declines daily for instance a theta of 0 05 indicates that the option s price will decrease by five cents per day investopedia julie bangunderstanding thetaoptions give the buyer the right to buy or sell an underlying asset at the strike price before the option expires the strike price also called an exercise price is set when the contract is first written for the price the underlying asset must reach before the option can be exercised options greeks or simply greeks are invaluable tools for these investors the mathematical variables help investors calculate the risks that influence an option s price especially as it nears its expiration time is one of the risks for option buyers since options are only exercisable for a certain period simply stated an option s profitability decreases as time goes on theta measures the time decay or erosion of an option s value as time passes | |
what happens when two options are similar and one expires after a longer period the value of the longer term option is higher since there is more time during which the option could move above the strike price | theta is generally expressed as a negative number for long positions the option s value diminishes as time passes until the zero time value when the option expires this is why theta is good for sellers and not so for buyers value decreases from the buyer s side as time goes by and increases for the seller hence selling an option is known as a positive theta trade as theta increases so do sellers earnings on their options time decay and option valuesif all else remains the same the time decay causes an option to lose extrinsic value or premium as it approaches its expiration date therefore theta is one of the main greeks that option buyers should pay attention to given that time is not on their side if they are long option holders conversely time is on the side of the investor who writes options option writers benefit from time decay because options become less valuable as the time to expiration decreases consequently it is cheaper for option writers to buy back the options and close out the short position put differently option values are if applicable composed of extrinsic and intrinsic values at option expiration all that remains is the intrinsic value if any because time is a significant part of the extrinsic value theta vs other greeksthe greeks measure the sensitivity of options prices to their respective variables for instance the delta of an option indicates the sensitivity of an option s price in relation to a 1 change in the underlying asset while the gamma indicates the sensitivity of an option s delta with regard to a 1 change in the underlying security vega indicates how an option s price theoretically changes for each one percentage point move in implied volatility drawn from the greek alphabet theta has numerous meanings across different fields in economics it also refers to the reserve ratio of banks in economic models example of thetaimagine you re interested in buying a call option for a stock named techco the stock is trading at 50 and you re looking at a call option with a 52 strike price expiring in 30 days this option costs 2 per share or 200 for a standard options contract that covers 100 shares suppose the theta for this option is 0 05 if everything else stock price volatility interest rates etc stays the same the option will lose five cents per day in value just because time is passing fast forward 10 days and you find that techco s stock price hasn t changed if all else stayed the same the value of your option should have decreased only because of theta or time decay specifically you d expect a drop of 50 cents 10 days multiplied by the theta 0 05 in the option s price that would mean your 2 option is now worth 1 50 hence understanding theta helps you grasp how the ticking of the clock affects your options investments time decay gradually erodes an option s value as the expiration date approaches knowing this can help you make more informed decisions for your trading strategy | |
is theta good for options | in options trading a positive theta equals the selling time for a short options seller as time moves forward the option becomes cheaper which is good for the seller this option seller will profit if the underlying asset is neutral bearish for a short call and bullish for a short put | |
which option has the highest theta | the highest theta is for at the money options and the lowest is for the furthest out of the money and in the money options for an option that is at the money or nearly so the absolute value of theta rises as the expiration date is reached | |
does theta decay on weekends | yes theta decays on weekends options models usually take into consideration weekends so decay will occur over seven days for five trading days can theta be positive and what would that mean theta can appear positive particularly when you re short or writing an option if you ve sold an option the passage of time works in your favor making the option less valuable which is good when you eventually buy it back at a lower price or let it expire worthless in the case of selling options while the theta of the option itself is still technically negative the effect on your position is positive | |
how does theta react to volatility in the market | theta and volatility have a complex relationship generally speaking when market volatility is high option prices go up which can also cause theta to increase this is because the higher premium associated with the option will have more to lose each day as it approaches expiration however it s important to understand that an increase in theta doesn t necessarily mitigate the impact of rising volatility in a volatile market the option price can swing dramatically quickly overshadowing the slow erosion of time decay so while theta might increase in a high volatility market the option s price could still rise if the increased volatility is even more significant the bottom linetime decay isn t just a theoretical concept in options it s a noteworthy factor that can erode potential profits for buyers while benefiting sellers whether you re taking a long position buying an option or writing options understanding theta can make the difference between a profitable trade and a losing gamble if you re an option buyer time is not on your side since it gradually saps the value of your investment conversely time decay becomes your ally if you re on the selling end making it cheaper to close out your short position as the option s value decreases armed with an understanding of theta and how it connects to other market variables like volatility you can better manage the risks associated with your investment strategy | |
what is a third party | a third party is an individual or entity that is involved in a transaction but is not one of the principals and thus may have a lesser interest in the transaction an example of a third party would be the escrow company in a real estate transaction the escrow party acts as a neutral agent by collecting the documents and money that the buyer and seller exchange when completing the transaction a collection agency may be another example of a third party if a debtor owes a creditor a sum of money and hasn t been making the scheduled payments the creditor is likely to hire a collection agency to ensure that the debtor honors his agreement | |
how a third party works | a third party may also refer to an entity that a company uses to mitigate risk for example small investment firms face difficulty entering the industry when large firms continue leading the competition one reason large firms grow more quickly is because they invest in middle and back office infrastructure to stay competitive many smaller firms outsource those functions as a method of gaining a greater share of the marketplace small firms save time and money by leveraging scalable infrastructure with variable costs for trade operations data storage disaster recovery and system integration and maintenance by outsourcing middle and back office solutions small firms take advantage of technology and processes for more efficient task completion maximum operating efficiency reduced operational risks decreased reliance on manual processes and minimal errors operational costs are reduced compliance is enhanced and tax and investor reporting improve example of a third partya real estate escrow company acts as a third party to hold deeds documents and funds involved in completing real estate transactions the company deposits the funds in an account on behalf of the buyer and the seller the escrow officer follows the directions of the lender the buyer and the seller in an efficient manner when handling the funds and documentation involved in the sale for example the officer pays authorized bills and responds to the principals authorized requests although the escrow process follows a similar pattern for all homebuyers the details differ among properties and specific transactions the officer follows instructions when processing the escrow and upon meeting all written requirements delivers the documents and the funds to the appropriate parties before closing the escrow a company may hire a collection agency for securing payment of company debt company invoices or initial customer contracts typically state at which time a collection agency may be used for securing outstanding payments some businesses can carry debt for years whereas others expect payment within 90 days the schedule depends on the market and the company s relationship with the client | |
what is third party insurance | third party insurance is a policy purchased by the insured first party from the insurance company second party for protection against the claims of another third party a common example of third party insurance is car insurance which is designed to protect you against the claims of other drivers in case of an accident investopedia jake shiunderstanding third party insurancethird party insurance is essentially a form of liability insurance the first party is responsible for their damages or losses regardless of the cause of those damages one of the most common types is third party insurance is automobile insurance third party offers coverage against claims of damages and losses incurred by a driver who is not the insured the principal and is therefore not covered under the insurance policy the driver who caused the damages is the third party for auto insurance there are two types of third party liability coverage in some cases third party insurance may be required by law drivers for example must carry at least a minimal amount of bodily injury liability and property damage liability coverage these coverage requirements vary from state to state a few states do not require both or have other limitations each state sets its minimum requirement for each type of coverage 2even in no fault states liability coverage is all but essential no fault laws do not protect you from million dollar injury lawsuits stemming from seriously injured third parties 3no fault laws were established to reduce or eliminate ordinary injury lawsuits affixed with low dollar price tags and an overwhelming number of claims for pain and suffering both types of third party insurance are important for individuals such as homeowners with substantial assets to protect the more money and assets an insured has the higher the limit should be for each type of liability coverage special considerationsin most countries third party or liability insurance is compulsory for any party sued by a third party public liability insurance involves industries or businesses that take part in processes or other activities that may affect third parties such as subcontractors architects and engineers here the third party can be visitors guests or users of a facility most companies include public liability insurance in their insurance portfolio to protect against damage to property or personal injury product liability insurance is typically mandated by legislation which varies by country and often varies by industry this insurance covers all major product classes and types including chemicals agricultural products and recreational equipment it protects companies against lawsuits over products or components that cause damage or injury | |
what is the importance of third party insurance | third party insurance is a form of liability insurance it offers the insured coverage for injury or damage they have caused to another person or business without third party insurance a person or business could end up paying extremely high damages to someone they have injured whether or not the injury was intentional who are the parties in third party insurance for an insurance policy the first party is the person or business that purchases the insurance the insured the second party is the company providing the insurance the insurer a third party is some outside person or business that makes a claim for damages from the first party | |
what is the difference between first party and third party claims | in a first party claim the insurance company makes a payment directly to the insured person or business in a third party claim the payment is made to someone other than the insured or insurer this happens when the insured person is liable for damages if your homeowner s insurance repays you for a repair to your roof that s a first party claim but if it pays for the medical bills of someone who slipped on your front steps that s a third party claim the bottom linethird party insurance is a form of liability insurance that covers you when someone makes a claim against you for damages a common example of this is auto insurance which will pay another driver who is injured in an accident that you have caused another common type of third party insurance is for property damage third party insurance protects you against having to potentially pay thousands or tens of thousands of dollars in claims like other forms of insurance you may not need it but if you do it could save you extremely large amounts of money or even protect you from bankruptcy | |
what is a third party transaction | a third party transaction is a business deal that involves a person or entity other than the main participants typically it would involve a buyer a seller and another party the third party the involvement of the third party can vary based on the type of business transaction in some cases the involvement is one time such as a third party payment for an item purchased from a website sometimes the involvement is longer term such as a third party vendor always used by a certain company understanding third party transactions | |
when a buyer and seller enter into a business deal they may decide to use the services of an intermediary or third party that manages the transaction between both parties the role of the third party can vary it may include designing the particulars of the deal in question providing a specific service for a company that is slightly outside its wheelhouse serving as the middleman that connects two parties or serving as the means of receiving payment from the buyer and forwarding that payment to the seller | third party transactions are important for various accounting policies and occur in a variety of situations importantly the third party is not affiliated with the other two participants in the transaction for example if firm a sells inventory to its subsidiary firm b a third party transaction occurs when firm b sells those final goods to firm c example of a third party transactionmany kinds of transactions involve third parties and they take place on a day to day basis across a variety of industries for example in the insurance industry insurance brokers are third party agents that market insurance products to insurance shoppers the client goes through the broker to secure a good insurance contract that has reasonable rates and terms while the insurance company works through the broker to bring in a new client if the broker is successful in bringing a new client to an insurance provider it is paid a commission by the insurer in the same light a mortgage broker is considered a facilitator in third party transactions as they will attempt to match the needs of a potential homebuyer with the loan programs offered by a lender through digital platforms a buyer can make a payment for the purchase of a good or service bought from a third party special considerationsas technology evolves and changes the way interactions are handled in the digital era more people and businesses are participating in third party transactions through online payment platforms through digital platforms a buyer can make a payment for the purchase of a good or service bought from another party that third party provider receives the payment from the buyer verifies that the funds are available and debits the buyer s account the money is then forwarded to the seller s account typically on the same online portal the seller s account may be credited in minutes or days but the funds may be withdrawn to a bank account or used to conduct other transactions once the deposit has been made in the account paypal is one good example of an online payment portal that acts as a third party in a retail transaction a seller offers a good or service and a buyer uses a credit card entered through the paypal payment service the payment is run through paypal and is thus a third party transaction | |
what is the third world | certain nations were categorized as third world countries in the last half of the 20th century this is now considered an outdated and derogatory phrase used to describe nations that were economically underdeveloped and had little or no affiliation with major world powers the third world countries occupied one of four segments that identified nations by their relative economic standing roughly the major world powers and their economic and political allies were first world countries allies of the soviet union were second world countries underdeveloped nations were third world countries and nations that were entirely isolated from global politics and economics were the fourth world today the preferred terminology categorizes a nation as a developing country an underdeveloped country or a low and middle income country lmic defining developing nationsclassifying countries as first second third and fourth world was a concept that was created soon after the end of world war ii in 1945 and used until the collapse of the soviet union in 1991 nations are often characterized by their economic status and key economic metrics like gross domestic product gdp gdp growth gdp per capita employment growth and unemployment rate in developing countries low production rates and struggling labor market characteristics are usually paired with relatively low levels of education poor infrastructure lack of sanitation limited access to health care and lower costs of living developing nations are closely watched by the international monetary fund imf and the world bank which provide grants and loans that help struggling nations improve their infrastructure and economic systems 1both organizations refer to these countries as lower middle or low income countries developing nations or lmics are of particular interest to investors seeking to identify growth opportunities both their risks and their returns are relatively high developing countries are generally characterized as economic underperformers but innovation and industrial breakthroughs can lead to substantial improvements in a short amount of time history of developing nations classificationsthe classification of nations as first world or third world emerged during the cold war first world countries were known as highly industrialized nations whose views aligned with the north atlantic treaty organization and capitalism second world countries had communist systems and most were allied with the soviet union these included the soviet satellite states in eastern europe and some asia nations third world countries included nations in asia and africa that were not aligned with either the united states or the soviet union now in part because the soviet union no longer exists the definition of third world is outdated and may be considered offensive alfred sauvy a french demographer anthropologist and historian is credited with coining the term third world during the cold war sauvy observed a group of countries many of them former colonies that did not share the ideological views of western capitalism or soviet socialism three worlds one planet wrote sauvy in a 1952 article published in l observateur 2dividing the worldmost nations today fall into one of three general categories that some refer to as developed emerging and frontier the former world segmentations have been fit into these categories for the most part the developed countries are the most industrialized with the strongest economic characteristics the emerging countries demonstrate significant strides in various economic growth areas though their metrics are not as stable the frontier markets often closely mirror the old third world classification and often show the lowest economic indicators frontier markets listmsci s frontier markets index can serve as a list of developing countries 3 the index includes the following countries other definitions of developing nationsthe world trade organization provides another point of reference the wto divides countries into two classes developing and least developed there are no criteria for these classifications so countries self nominate though their statuses can be contested by other nations 5each wto segregation comes with certain opportunities for the nations wto projects are designed to increase trading opportunities and improve infrastructure as an offshoot of the wto the human development index hdi is another economic status metric developed by the united nations to assess the social and economic development levels of countries the hdi measures and then ranks a country based on education life expectancy and gross national income per capita the world health organization and the united nations use least developed countries ldc to describe a set of 48 countries with low socioeconomic developmental indicators this list is reassessed every few years the indicators are a combination of gross national income human assets nutrition life expectancy secondary school education adult literacy and economic vulnerability population size remoteness merchandise export concentration agriculture exports and natural disaster preparedness | |
what is the third world | the phrase third world was used to characterize nations that existed outside the economic and political ties that bind the industrialized countries around the world many are former colonies of european nations the term third world is today considered pejorative a nation might now be considered developing or frontier a developing nation is intent on improving the infrastructure education system health system and trade ties that are necessary to improve living standards a frontier nation might be just beginning that process there also are the nations that the united nations terms the least developed formerly termed the fourth world nations they remain isolated from the rest of the world s economic systems technology and politics | |
what is the first world | the term first world collectively means the highly industrialized nations with capitalist economies although the term is largely outdated the list of first world nations today would include japan as well as the nations of north america and western europe it might arguably also include some eastern european south american and asian nations | |
what is a frontier nation | the term frontier nation is used primarily by investment professionals who specialize in international investing it describes a nation that seems poised for fast economic development investments in these countries is seen as offering potentially high rewards at substantially high risk the bottom linethe term third world was coined in a very different time in the wake of world war ii it seemed reasonable to classify nations as capitalist powers the first world communist countries the second world and countries that are neither the third world current classifications will probably seem equally outdated in 70 years but for now there are developed nations developing nations and underdeveloped nations | |
thomas robert malthus was an influential british economist best known for his theory on population growth outlined in his 1798 book an essay on the principle of population | in it malthus argued that populations inevitably expand until they outgrow their available food supply causing the population growth to be reversed by disease famine war or calamity he is also known for developing an exponential formula used to forecast population growth which is currently known as the malthusian growth model understanding the ideas of thomas malthusin the 18th and early 19th centuries some philosophers believed firmly that human society would continue to improve and tilt toward a utopian ideal malthus countered this belief arguing that segments of the general population have invariably been poor and miserable effectively slowing population growth based on his observation of conditions in england in the early 1800s malthus argued that available farmland was insufficient to feed the increasing population more specifically he stated that the human population increases geometrically while food production increases arithmetically under this paradigm humans would reproduce until their numbers surpassed their production capacity at which point the population would be forcibly reduced by famine or some other catastrophe and return to a manageable level these conclusions inspired the description of economics as the dismal science originally coined by the philosopher thomas carlyle the term was used to describe malthus conclusions regarding the inevitability of overpopulation and famine the naturalist charles darwin based his theory of natural selection in part on malthus analysis of population growth malthus views also enjoyed a resurgence in the 20th century with the advent of keynesian economics malthus early life and educationthomas malthus was born on february 13 1766 to a prominent family near guildford surrey malthus was home schooled before being accepted to cambridge university s jesus college in 1784 he earned a master s degree in 1791 and became a fellow two years later in 1805 malthus became a professor of history and political economy at the east india company s college at haileybury 1malthus became a fellow of the royal society in 1819 two years later he joined the political economy club along with economist david ricardo and scottish philosopher james mill malthus was elected to be one of 10 royal associates of the royal society of literature in 1824 in 1833 he was elected to both the acad mie des sciences morales et politiques in france as well as berlin s royal academy malthus co founded the statistical society of london in 1834 he died in st catherine near bath somerset in 1834 1published works of thomas malthusmalthus most famous work was his book essay on the principle of population first published in 1798 and enlarged in later editions this work contained his famous argument that human populations tend to grow faster than agricultural output resulting in famines or crises later editions proposed that moral restraint could slow population growth malthus was a prolific essayist and exchanged many letters with contemporary economists his other publications included the term political economy was first used in academic circles when malthus joined the faculty of the east india company s college at haileybury as a professor of history and political economy 1malthus and population growthmalthus severe theory on population growth was shaped by his status as an 18th century anglican cleric he believed that poor people would work hard enough to produce an abundant food supply in favorable times however he thought that they would then abuse their newfound abundance particularly by producing larger families at some point their numbers would exceed their ability to provide the necessities of life starvation or some other disaster would inevitably follow until the population was reduced to manageable levels in short malthus was something of a misanthrope although he denied it in his principle of population he wrote that humans are by nature inert sluggish and averse from labour unless compelled by necessity 2he argued against england s poor laws on the grounds that the aggregate mass of happiness would be increased if the very poor were denied lifesaving relief 3criticism of thomas malthusthe population theory espoused by malthus has been largely discredited over time technological advances invalidated his main conclusion his theory was made repugnant by some of the political decisions that it influenced however his theory of the effects of gluts or overproduction continued to influence economists including john maynard keynes who further developed the analysis of the cycle of boom and bust that defines an economy 4malthus theory that population growth would inevitably exceed its means of production was based largely on his observation of english life in the late 18th century and his later travels in europe the advances of the industrial revolution allowed agricultural production to be ramped up to far greater levels than the subsistence farming of his day could sustain later advances in farming techniques chemical fertilizers and genetic modifications have allowed food production to continue to scale upwards for example the green revolution of the 1960s in india which boasts the world s second biggest population helped feed a growing population in the state of punjab 5 in europe after world war ii populations increased steadily without widespread starvation if simplified enough malthus theory sounds a lot like ebenezer scrooge s declaration that the poor might as well just die and decrease the surplus population malthus theory of population was used to support genocidal policies in colonial india malthus died before the time of the irish potato famine of the mid 19th century but contemporary politicians leaned on his theory to blame irish overpopulation rather than british government policies for the massive death toll 6 | |
what did malthus predict about population growth | malthus predicted that natural population growth would inevitably outpace agricultural output ultimately resulting in famine and other catastrophes until the population was reduced below a sustainable level the cycle is endless he believed relative abundance causes an increase in fertility until the population again grows to an unsustainable level and collapses | |
how did thomas malthus influence charles darwin | darwin s theory of natural selection was influenced by malthus population theories darwin found that limited resources place competitive pressures on every species darwin s revelation was that a species adapted over time to improve its rate of survival | |
what is the malthusian growth model | the malthusian growth model is a mathematical equation for population growth it holds that the rate of growth is proportionate to the current population this is functionally equivalent to exponential growth where the size of the population doubles at predictable intervals the bottom linethomas malthus was an 18th century british economist best known for his theory that human populations tend to outgrow their agricultural production capabilities resulting in famines and other disasters these theories have largely been discredited by innovations in agricultural technology but they remain influential in the field of evolutionary biology | |
what are the three black crows | three black crows is a phrase used to describe a bearish candlestick pattern that may predict the reversal of an uptrend candlestick charts show the day s opening high low and closing prices for a particular security for stocks moving higher the candlestick is white or green when moving lower they are black or red the black crow pattern consists of three consecutive long bodied candlesticks that have opened within the real body of the previous candle and closed lower than the previous candle often traders use this indicator in conjunction with other technical indicators or chart patterns as confirmation of a reversal three black crows explainedthree black crows are a visual pattern meaning that there are no particular calculations to worry about when identifying this indicator the three black crows pattern occurs when bears overtake the bulls during three consecutive trading sessions the pattern shows on the pricing charts as three bearish long bodied candlesticks with short or no shadows or wicks in a typical appearance of three black crows the bulls will start the session with the price opening modestly higher than the previous close but the price is pushed lower throughout the session in the end the price will close near the session low under pressure from the bears this trading action will result in a very short or nonexistent shadow traders often interpret this downward pressure sustained over three sessions to be the start of a bearish downtrend image by julie bang investopedia 2020example of how to use three black crowsas a visual pattern it s best to use three black crows as a sign to seek confirmation from other technical indicators the three black crows pattern and the confidence a trader can put into it depends a lot on how well formed the pattern appears the three black crows should ideally be relatively long bodied bearish candlesticks that close at or near the low price for the period in other words the candlesticks should have long real bodies and short or nonexistent shadows if the shadows are stretching out then it may simply indicate a minor shift in momentum between the bulls and bears before the uptrend reasserts itself volume can make the three black crows pattern more accurate volume during the uptrend leading up to the pattern is relatively low while the three day black crow pattern comes with relatively high volume during the sessions in this scenario the uptrend was established by a small group of bulls and then reversed by a larger group of bears of course with markets being what they are that could also mean a large number of small bullish traders running into a smaller group of large volume bearish trades the actual number of market participants matters less than the volume each is bringing to the table three black crows vs three white soldiersthe opposite of the three black crows pattern is the three white soldiers pattern which occurs at the end of a bearish downtrend and predicts a potential reversal higher this pattern appears as three long bodied white candlesticks with short or ideally nonexistent shadows the open occurs within the previous candlestick s real body and the close occurs above the previous candlestick s close three white soldiers are simply a visual pattern indicating the reversal of a downtrend whereas three black crows indicate the reversal of an uptrend the same caveats apply to both patterns regarding volume and confirmation from other indicators limitations of using three black crowsif the three black crows pattern involves a significant move lower traders should be wary of oversold conditions that could lead to consolidation before a further move lower the best way to assess the oversold nature of a stock or other asset is by looking at technical indicators such as the relative strength index rsi where a reading below 30 0 indicates oversold conditions or the stochastic oscillator indicator that shows the momentum of movement many traders typically look at other chart patterns or technical indicators to confirm a breakdown rather than using the three black crows pattern exclusively as a visual pattern it is open to some interpretation such as what is an appropriately short shadow also other indicators will mirror a true three black crows pattern for example a three black crows pattern may involve a breakdown from key support levels which could independently predict the beginning of an intermediate term downtrend the use of additional patterns and indicators increases the likelihood of a successful trade or exit strategy real world example of three black crowsin the third week of may 2018 a three black crows pattern appeared on the gbp usd weekly price chart representing an ominous sign for the currency pairing analysts speculated that the three black crows pattern indicated that the pairing would continue to trend low three factors were analyzed to determine that the three black crows pattern signaled a continuing downturn | |
what is a three sigma limit | a three sigma limit is a statistical calculation in which the data are within three standard deviations from a mean three sigma refers to processes in business applications that operate efficiently and produce items of the highest quality three sigma limits are used to set the upper and lower control limits in statistical quality control charts control charts establish limits for a manufacturing or business process that s in a state of statistical control understanding three sigma limitscontrol charts are also known as shewhart charts named after walter a shewhart an american physicist engineer and statistician 1891 1967 1 control charts are based on the theory that a certain amount of variability in output measurements is inherent even in perfectly designed processes control charts determine if there s a controlled or uncontrolled variation in a process variations in process quality due to random causes are said to be in control out of control processes include both random and special causes of variation control charts are intended to determine the presence of special causes statisticians and analysts use a metric known as the standard deviation to measure variations also referred to as sigma it s a statistical measurement of variability showing how much variation exists from a statistical average sigma measures how far observed data deviates from the mean or average investors use standard deviation to gauge expected volatility consider the normal bell curve which has a normal distribution the farther to the right or left a data point is recorded the higher or lower the data is than the mean low values indicate that the data points fall close to the mean high values indicate that the data is widespread and not close to the average example of calculationlet s consider a manufacturing firm that runs a series of 10 tests to determine whether there s a variation in the quality of its products the data points for the 10 tests are 8 4 8 5 9 1 9 3 9 4 9 5 9 7 9 7 9 9 and 9 9 | |
how are three sigma limits used | three sigma limits set a range for the process parameter at 0 27 control limits three sigma control limits are used to check data from a process and to determine if it s within statistical control by checking if data points are within three standard deviations from the mean the upper control limit ucl is set three sigma levels above the mean and the lower control limit lcl is set at three sigma levels below the mean 2 | |
what is standard deviation | standard deviation is a statistical measurement it calculates the spread of a set of values against their average it s the positive square root of the variance and defines the difference between the variation and the mean 3 | |
what is a bell curve | a bell curve gets its name from its appearance a bell shaped curve that rises in the middle it illustrates normal probability and several graphs and distributions use it the single line measures data on one two and three standard deviations 4the bottom linethe term three sigma points to three standard deviations shewhart set three standard deviation 3 sigma limits as a rational and economic guide to minimum economic loss around 99 73 of a controlled process will occur within plus or minus three sigmas so the data from a process ought to approximate a general distribution around the mean and within the predefined limits data that lie above the average and beyond the three sigma line on a bell curve represent less than 1 of all data points | |
what do three white soldiers mean | three white soldiers is a bullish candlestick pattern that is used to predict the reversal of the current downtrend in a pricing chart the pattern consists of three consecutive long bodied candlesticks that open within the previous candle s real body and a close that exceeds the previous candle s high these candlesticks should not have very long shadows and ideally open within the real body of the preceding candle in the pattern | |
what do three white soldiers tell you | the three white soldiers candlestick pattern is typically observed as a reversal indicator often appearing after a period of price decline this chart pattern suggests a strong change in market sentiment in terms of the stock commodity or forex pair making up the price action on the chart | |
when a bullish candle closes with small or no shadows it suggests that the bulls have managed to keep the price at the top of the range for the session basically the bulls take over the rally all session and closed near the high of the day for three consecutive sessions in addition the pattern may be preceded by other candlestick patterns suggestive of a reversal such as a doji or a hammer | here is an example of three white soldiers appearing in a pricing chart for the vaneck vectors fallen angel high yield bond exchange traded fund etf 1the etf had been in a strong bearish downtrend over the course of several weeks before the three white soldiers pattern marked a sharp bullish reversal the pattern may suggest that the rally will continue but traders should also look at other relevant factors before making a decision for example the stock may have reached an area of resistance at the conclusion of the formation of the pattern or the rise might have been on low volume which is not an indication of strength example of how to trade three white soldiersbecause three white soldiers is a bullish visual pattern it is used as a potential entry or exit point for a trade traders who are short on the security look to exit and traders who are waiting to take a bullish position see the three white soldiers as an entry opportunity | |
when trading the three white soldiers pattern it s important to note that the strong moves higher could create temporary overbought conditions the relative strength index rsi for example may have moved above 70 0 levels in some cases there is a short period of consolidation following the three white soldiers pattern but the short and intermediate term bias remains bullish the significant move higher could also reach key resistance levels where the stock could experience a period of consolidation before continuing to move higher | the difference between three white soldiers and three black crowsthe opposite of the three white soldiers is the three black crows candlestick pattern three black crows consist of three consecutive long bodied candlesticks that have opened within the real body of the previous candle and closed lower than the previous candle whereas three white soldiers catch the momentum shift from the bears to the bulls three black crows show the bears taking control from the bulls the same caveats about volume and additional confirmation apply to both patterns though confirming volume is more important in the bullish pattern limitations of using three white soldiersthree white soldiers can also appear during periods of consolidation which is an easy way to get trapped in a continuation of the existing trend rather than a reversal one of the key things to watch is the volume supporting the formation of three white soldiers any pattern on low volume is suspect because it is the market action of the few rather than the many to combat the limitation of visual patterns traders use the three white soldiers and other such candlestick patterns in conjunction with other technical indicators like trendlines moving averages and bands for example traders may look for areas of upcoming resistance before initiating a long position or look at the level of volume on the breakout to confirm that there was a high amount of dollar volume during the move if the pattern occurred on low volume with near term resistance traders should until there is further confirmation of a breakout to initiate a long position | |
what other chart patterns are similar to the three white soldiers | several other chart patterns bear similarities to the three white solders each with its own nuances and predictive capabilities some of these include the three black crows the bullish engulfing pattern morning star hammer and inverted hammer the piercing line the abandoned baby tweezer bottoms and tops as well as the double bottom and double top | |
what can be done to improve the reliability of the three white soldiers chart pattern | improving the reliability of the three white soldiers chart pattern involves a multi faceted approach that incorporates additional technical indicators volume analysis and contextual market conditions | |
what are the best assets to trade with the three white soldiers chart pattern | the three white soldiers chart pattern is a versatile technical indicator that could be applied across various asset classes however its effectiveness may vary depending on the asset s liquidity volatility and market conditions some asset classes where this pattern is commonly used are stocks forex commodities etfs futures and options | |
what is the best timeframe to use the three white solders chart pattern | the effectiveness of the three white soldiers chart pattern can vary depending on the timeframe used for analysis the best timeframe largely depends on the trader s style and risk tolerance generally the three white solders pattern is often considered more reliable on longer timeframes such as the daily or weekly charts | |
what indicators can be used in conjunction with the three white soldiers chart pattern | using the additional technical indicators alongside the three white soldiers chart pattern has the potential to enhance its reliability and provide a more comprehensive trading strategy some commonly used indicators that complement this pattern are the relative strength index rsi moving averages bollinger bands volume oscillator moving average convergence divergence macd stochastic oscillators fibonacci retracement levels the average directional index adx the ichimoku cloud and pivot points the bottom linethe three white soldiers pattern serves as a strong bullish indicator often signaling a reversal in a downtrend however traders should exercise caution and corroborate this pattern with othertechnical indicators and volume data to avoid false signals it s not a standalone tool but can be highly effective when used in conjunction with other technical analysis methods | |
what are thrifts | even though they re not as common as they used to be thrifts or savings and loan associations still play an important part in many consumers lives thrifts also refer to credit unions and mutual savings banks that provide a variety of savings and loan services thrifts differ from commercial banks in that they can borrow money from the federal home loan bank system which allows them to pay members higher interest understanding thriftsthrifts along with commercial banks and credit unions qualify as depository institutions most people are familiar with commercial banks and credit unions but the line becomes fuzzy when defining a thrift thrifts are essentially savings and loan associations that help members savings grow at a higher interest rate more importantly they are savings banks that specialize in real estate originally thrifts only offered savings accounts and time deposits but over the past 20 years the banks scope of services has expanded to meet the needs of the average consumer they now offer the same products as credit unions and commercial banks commercial banks vs thriftscommercial banks like most corporations are in it for the profit they have no specific mandate in terms of asset class shareholders own these organizations and like most corporations the goal is to grow earnings the range of powers given to commercial banks is mainly determined by state and federal law as both issue bank charters corporate charters and the powers granted to banks under state and federal law determine the range of the banks activities commercial banks receive deposit insurance from the federal deposit insurance corporation fdic and are under the federal reserve system furthermore what commercial banks lose in terms of member savings they gain in convenience with thousands of branches nationwide you won t have trouble finding a local office if you run into an emergency while traveling by contrast thrifts specialize in mortgages and real estate lending the first mandate is to the members of the thrift not profit like commercial banks thrifts may be chartered by either the office of the comptroller of the currency occ or by the state the fdic also insures them thrifts tend to retain their loan portfolio rather than securitize loans so members with atypical profiles that don t fit into agency mortgage standards may stand a better chance of securing a loan through a local thrift than a national commercial bank qualified thrift lenderdue to their charter thrifts are mandated to focus on housing related assets and must be members of the federal home loan bank system originally thrifts were required to have at least 65 of their portfolio in housing related assets this threshold was referred to as the qualified thrift lender qtl test as it was a measure of adherence to the original charter one benefit to passing the qtl test is that thrifts also get to borrow from the federal home loan bank system which translates into higher interest for depositors compared to commercial banks | |
what is a thrift bank | a thrift bank also just called a thrift is a type of financial institution that specializes in offering savings accounts and originating home mortgages for consumers thrift banks are also sometimes referred to as savings and loan associations s ls thrift banks differ from larger commercial banks like wells fargo or bank of america because they usually offer higher yields on savings accounts and provide limited lending services to businesses while a thrifts core offerings are traditional savings accounts and home loan origination these institutions also offer checking accounts personal and car loans and credit cards for consumers however they give primary attention to home financing for single family residences thrifts are structured either as corporate entities that are owned by their shareholders or they are mutually owned i e owned by their borrowers and depositors history of thrift banksthe thrift institution began with the establishment of the customer owned building society in the united kingdom at the beginning of the 18th century in the u s the first successor to the u k s customer owned building society was referred to as savings and loan associations s ls 1 one of the main impetuses for the founding of s ls in the u s was to make improvements to the market for mortgages in the u s at the beginning of the 20th century the typical u s mortgage was a five to 10 year interest only loan that had to be refinanced or paid off with a large balloon payment at the end of the term homeowners often defaulted on these payments especially as levels of unemployment rose during the great depression as levels of unemployment rose in 1932 president herbert hoover passed the federal home loan bank act an act that was aimed at encouraging homeownership by providing member banks with a source of low cost funds for use in extending mortgage loans 2 this act was the first in a series of bills that sought to make homeownership a more achievable goal for more americans in the first half of the 20th century in addition as a result of this act the federal home loan bank board was created this board was tasked with facilitating the development of a secondary market for mortgages it created s ls to issue those mortgages the impact of thrift banksone of the major impacts of thrift banks coupled with a mortgage insurance program created by the veterans administration in 1944 was the facilitation of home purchases in the aftermath of wwii many young war veterans and their families were able to purchase homes in the suburbs because of these federal programs in the 1960s and 1970s the majority of mortgages were issued through thrifts and s ls as a result of these institutions and other federal programs rates of homeownership in the u s rose significantly between 1940 and 1980 3by law loans to commercial businesses can account for no more than 20 of a thrift bank s business during the savings and loan crisis which occurred between 1986 and 1995 many thrift institutions and s ls failed while analysts have come up with a number of explanations for the huge decline in the industry in general the failure has been attributed to poor lending practices in the years since the crisis many structural changes have been made to thrift banks that have blurred some of the distinctions between them and conventional banks the financial institutions reform recovery and enforcement act of 1989 firrea had a significant impact on the s l and thrift industry in 2010 the dodd frank act eliminated some of the key advantages of thrifts such as less stringent regulations than those applied to major banks 4 the commitment of the thrifts to serving consumers continues however the most important purpose of s ls is still to make mortgage loans on residential property | |
what are some types of thrift banks | thrift banks include savings banks private development banks and stock savings and loan associations | |
what is the difference between thrift banks and commercial banks | thrift banks operate similarly to traditional banks but they are designed to serve consumers rather than businesses in other words thrifts primarily offer consumer accounts and loans while commercial banks also offer financial services to businesses thrifts are generally smaller local institutions and don t have the reach and resources of large banks with branches nationwide however thrift banks are increasingly offering the same services as commercial banks creating less of a distinction between the two | |
what are mutual savings banks | many thrift banks are also mutual savings banks meaning that account holders are also shareholders of the bank in this sense mutual banks are similar to credit unions but the main difference between mutual banks and credit unions is that the former are for profit while the latter are nonprofit the bottom linecommercial banks thrift banks and credit unions are the three major types of depository institutions in the united states thrift banks also known as savings and loans associations s ls or simply thrifts are financial institutions primarily funded by consumer deposits a thrift specializes in offering savings accounts and originating home mortgages for consumers thrifts also offer many of the same services as commercial banks including debit and credit cards and savings and checking accounts | |
what is the thrift savings plan tsp | a thrift savings plan tsp is a retirement investment program open only to federal employees and uniformed service members including the ready reserve it is a defined contribution dc plan that offers federal employees many of the same benefits that are available to workers in the private sector a tsp closely resembles a 401 k plan offered by private employers | |
how the thrift savings plan tsp works | there are several ways to invest in a thrift savings plan these can include no matter the type of tsp or contribution structure you choose the contribution limit is 22 500 for 2023 and 23 000 in 2024 employees aged 50 and over can also make catch up contributions of 7 500 in either year 78employees new to federal employment can roll over 401 k and individual retirement account ira assets into a tsp rollovers can also go in the opposite direction if federal employees move to the private sector 9a thrift savings plan tsp is a defined contribution retirement plan with advantages similar to private sector plans the tsp investment optionsthe tsp offers a choice of six funds and a mutual fund option 4the f s c and i funds in the tsp are index funds currently managed by the blackrock institutional trust company under contract by the federal retirement thrift investment board frtib this independent government agency administers the tsp and acts as a fiduciary that is legally liable to manage the tsp prudently and in the best interests of participants and their beneficiaries 10index funds in the tsp are designed to mimic the return characteristics of the corresponding benchmark index for example the c fund is invested in a fund that replicates the s p 500 index which is made up of the stocks of 500 large to medium sized u s companies 4 l funds are invested in the five individual tsp funds and their asset allocations are based on the individual investor s time horizon 11the maximum annual contribution to a thrift savings plan in 2024 if you are 50 or older you can add an extra 7 500 7the mutual fund window is for tsp participants who want more flexibility in their retirement investments you can invest a portion of your tsp savings through the tsp mutual fund window into available mutual funds you choose however there are certain requirements for participating in the mutual fund window such as having at least 40 000 in your tsp account and not investing more than 25 of your account balance in mutual funds using the window 12tsps vs irascomparing the tsp to an ira is not an either or proposition you can have both a tsp and an ira at the same time one primary difference between them is their respective contribution limits for 2023 the annual limit is 22 500 for a tsp with a catch up contribution of 7 500 for those over 50 the limit is 30 000 for an ira it is much less 6 500 7 500 if you are over 50 if you have multiple iras this is the total amount you can contribute thus a tsp allows you to build your retirement funds faster than an ira if you have the extra money to do so 8for 2024 the annual limit is 23 500 for a tsp with a catch up contribution of 7 500 for those over 50 the limit is 30 500 for an ira it is 7 000 8 000 if you are over 50 13another big difference is in the employer match the federal government provides a sliding percentage scale of matching contributions for your tsp even if you contribute nothing it will contribute 1 of your annual salary to your tsp the scale tops out at a 5 government match if you contribute 5 of your salary to your tsp thus doubling the amount of money invested 14 because an ira is something you set up for yourself with no employer involved there are no matching contributions the investment fees also differ tsp fees are pretty low usually around 0 05 and transparent 15 in the private sector ira investment fees can range from 0 5 to 2 5 depending on the kind of fund and it can sometimes be difficult to know exactly how much they are in aggregate iras offer more investment opportunities than tsps as they are limited to the six funds discussed above this allows an ira holder to be more aggressive in their investment strategies than a tsp holder 4some final differences have to do with withdrawals traditional iras and tsps as well as roth tsps have required minimum distributions rmds that start at age 73 up from 72 in previous years 16 with an ira you are allowed to take whatever withdrawals you like without a penalty starting at age 59 as long as it meets the minimum required 17tsps only allow you to withdraw monthly quarterly or annually you can request that the payment be a specific dollar amount or an amount based on your life expectancy and account balance that is recomputed annually 1819iras also have an early withdrawal penalty of 10 for any money taken out when you are younger than 59 however if you retire at age 55 or older tsps will waive the 10 penalty 20 even better if you qualify under federal employees retirement system fers special provisions this age drops to 50 21 | |
how do i contact tsp administrators | you can call their toll free thriftline at 877 968 3778 monday through friday from 7 a m to 9 p m et there is also an international phone line at 404 233 4400 that is not a toll free line the 711 tts relay is available for people with hearing or speech disabilities by dialing 711 you can also use ava the tsp virtual assistant from your tsp account page thrift service center c o broadridge processing p o box 1600 newark nj 07101 1600 22the message center allows you to send and receive messages if you have an online account response time is two business days | |
is a tsp the same thing as a 401 k | a tsp is not exactly the same thing as a 401 k though they are structured similarly and have the same contribution limits a tsp is what the federal government offers instead of a 401 k the type of plan offered by private employers it is possible to have both if you have worked for both a government and a private employer however the total contribution to these retirement plans cannot exceed the annual contribution limits set by the internal revenue code 8 | |
is a tsp better than an ira | tsps and iras both have benefits with a tsp you can contribute considerably more each year expect matching contributions from the federal government and pay lower investment fees you have greater control over your investments with an ira and there are no limits on withdrawals from it upon retirement you can borrow from your tsp up to 50 000 but you cannot typically borrow from an ira account 23 | |
what happens to my thrift savings plan if i quit my job | if you quit your job your thrift savings plan will remain as is if the balance is 200 or more and it will continue earning however if you re not fully vested as a fers or brs employee the government may withdraw its contributions and the associated earnings from your account from there you can control the principal in the account and adjust your investments but you cannot make any more contributions 24the bottom linethe thrift savings plan is a retirement plan for federal employees and servicemembers it is similar to private sector plans like the 401 k but is more limited in choices and flexibility the limitations exist to ensure employees can make good decisions about their retirement investing however they can use some of the funds in the account to invest as they see fit in approved mutual funds giving them investment flexibility if desired the tsp is not necessarily better or worse than other retirement plans it is a retirement planning option for government employees and servicemembers similar to those available to employees in the private sector | |
what is throughput | throughput in business is the amount of a product or service that a company can produce and deliver to a client within a specified period of time the term is often used in the context of a company s rate of production or the speed at which something is processed businesses with high throughput levels can take market share away from their lower throughput peers because high throughput generally indicates that a company can produce a product or service more efficiently than its competitors understanding throughputthe idea of throughput also known as the flow rate is part of the theory of constraints in business management the guiding ideology of this theory is that a chain is only as strong as its weakest link the goal for business managers is to find ways to minimize how the weakest links affect a company s performance and to maximize throughput for the product s end users once throughput is maximized by removing inefficiencies allowing inputs and outputs to flow in the most ideal manner a company can reach revenue maximization a company s level of production capacity is closely related to throughput and management can make several types of assumptions about capacity if the company assumes that production will operate continually without any interruptions management is using theoretical capacity but this level of capacity is not reachable no production process can produce the maximum output forever because machines need to be repaired and maintained and employees take vacation days it s more realistic for businesses to use practical capacity which accounts for machine repairs wait times and holidays only products that are actually sold count toward throughput factors affecting throughputa company s throughput also depends on how well the company manages its supply chain which is the interaction between the company and its suppliers if for whatever reason supplies are not available as an input to production the disruption has a negative impact on throughput in many cases two products may start in production using the same process which means that the joint costs are allocated between each product when production reaches the split off point however the products are produced using separate processes this situation makes it more difficult to maintain a high level of throughput formula and calculation of throughputthroughput can be calculated using the following formula | |
where | benefits of knowing throughput timethroughput time refers to the total amount of time that it takes to run a particular process in its entirety from start to finish for example a manufacturer can measure how long it takes to produce a product from initial customer order to sourcing raw materials to manufacturing to sale throughput time can be further broken down into components adding these together gives you the total throughput time if you can identify areas where there are backlogs bottlenecks or slowdowns company managers can address these and improve efficiency quicker throughput times increase return on investment roi and profitability throughput analysis is also a form of capital budgeting analysis aiding companies in choosing which projects to undertake using throughput analysis the entire company may be viewed as a single process | |
how to increase throughput | increasing throughput and decreasing throughput time are important goals for company managers as such there are several ways to help achieve this goal one is to deploy real time monitoring and data analysis of production processes made easier with the help of technology applications that analyze throughput can quickly identify slowdowns or other anomalies so that they can be quickly addressed another time proven method is to use a standardized checklist of steps to follow in the process that must be ticked off every time while this may seem tedious and redundant studies have shown that committing to a checklist reduces errors and speeds up processes 1a third way often used by companies in various industries is to introduce a bit of competition among workers using a scorecard where speed and efficiency are rewarded and inefficiency is highlighted as a problem area example of throughputabc cycles manufactures bicycles the company has procedures in place to maintain equipment used to make bikes and it plans production capacity based on scheduled machine maintenance and employee staffing plans however abc must also communicate with its metal bike frames and seat suppliers and get them to deliver these component parts when it requires them for production if the parts don t arrive when abc cycles needs them the company s throughput will be lower going further abc cycles begins building more than one type of bicycle it starts the production of mountain and road bikes using a joint production process and both bikes use the same bike frame and seat later on in the process however the production becomes separate because each bike model uses different tires brakes and suspensions this makes production harder to manage since abc must consider production capacity and supply chains in both joint and separate production processes let s say that abc cycles has 200 bikes in inventory and the average time that a bike is in the production process is five days the throughput for the company would be | |
what is the difference between throughput time and lead time | both lead time and throughput time are important measures of operational efficiency lead time measures the entire period between a customer order and ultimate delivery throughput time in contrast only measures the time it takes to pass through processes to produce the good or service | |
how do you calculate throughput | in corporate finance throughput is generally measured as inventories divided by the time it takes to produce those inventories | |
how can one find a bottleneck in a business process | having a clear schematic of a production process allows you to monitor each step to look for bottlenecks if there is a slowdown parts can accumulate at the end of one specific step today these can be identified by automated systems that monitor and report on production once identified they can try to be resolved | |
a tick is a measure of the minimum upward or downward movement in the price of a security a tick can also refer to the change in the price of a security from one trade to the next since 2001 when the securities and exchange commission sec required all stock markets to convert to decimals the minimum tick size for stocks trading above 1 has been one cent 1 | understanding a ticka tick represents the standard upon which the price of a security may fluctuate the tick provides a specific price increment reflected in the local currency associated with the market in which the security trades by which the overall price can change 3before april 2001 the minimum tick size was one sixteenth of a dollar meaning a stock could only move in increments of 0 0625 4 while the introduction of decimalization has benefited investors through much narrower bid ask spreads and better price discovery it has also made market making a less profitable and riskier activity | |
how a tick works | investments may have different potential tick sizes depending on the market in which they participate for example the e mini s p 500 futures contract has a designated tick size of 0 25 while gold futures have a tick size of 0 10 if a futures contract on the e mini s p 500 is listed for 20 it can move one tick upward changing the price to 20 25 based on the 0 25 tick size minimum however with that minimum tick size the price of the security could not move from 20 to 20 10 because 0 10 is below the minimum 56in 2015 the sec approved a two year pilot plan to widen the tick sizes of 1 200 small cap stocks this was done as part of research on trading in publicly traded companies with market capitalization levels around 3 billion and trading volumes below one million shares daily on average the pilot looked to widen the tick size for the selected securities to determine the overall effect on liquidity 2 the pilot program began in october 2016 and ended two years later 7results of the sec s tick size pilot programin the mid 2010s the sec was reviewing proposals to increase tick sizes some argued that doing so would provide an incentive for brokers to allocate more resources toward researching and promoting small cap stocks in particular boosting investment capital flow to smaller companies 8 the 2016 to 2018 pilot program however did not end as expected revealing that increasing tick sizes for these stocks led to reduced liquidity and a decline in stock prices for small spread stocks ranging between 1 75 and 3 2 the experiment which cost investors between 350 and 900 million highlighted the challenges of adapting regulatory frameworks in rapidly evolving financial markets particularly with the rise of discount brokers and online trading platforms the effort to revitalize interest in small cap stocks through larger tick sizes ultimately did not yield the anticipated benefits underscoring the complexity of market changes and the impact of regulatory changes 8tick as a movement indicatorthe term tick can also be used to describe the direction of the price of a stock an uptick indicates a trade where the transaction has occurred at a price higher than the previous transaction and a downtick indicates a transaction at a lower price for this reason an important sec regulation is known as the uptick rule which was in place from 1938 to 2007 and then reinstated in 2010 in an alternate form the rule requires trading centers not to allow short sales when there isn t an uptick in the stock price from the previous closing day the regulation is designed to relieve downward pressure on a stock that s already declining the 2010 alternative uptick rule rule 201 allows investors to get out of their long positions before short selling occurs the rule triggers once a stock price falls a minimum of 10 in a day once it does short selling is only allowed if the price is above the current best bid 910 | |
what is a tick in the s p 500 | u s stocks generally trade in one cent tick size increments meaning the minimum number their share prices can move is up or down by 0 01 | |
what is the difference between a tick and a point in trading | point and tick are terms traders use to describe price changes a point represents a larger movement than a tick a point is the smallest possible price change on the left side of a decimal point meanwhile a tick represents the smallest possible price change on the right side of a decimal point let s use an example suppose a stock is trading at 50 00 it has moved one point if the stock price increases to 51 00 if the same stock s price moved instead to 50 01 it would have moved one tick or one cent | |
are ticks and pips the same | a pip is like a tick representing the smallest change to the right of the decimal but often applies to forex markets it is the smallest whole unit price move that an exchange rate can make | |
what is time and tick in trading | time and tick is a way to determine if a margin call should be issued with this method only open positions are used to calculate a day trade margin call the bottom linea tick is the minimum number in price a security can move on an exchange tick sizes vary by market and investment for example an e mini s p 500 futures contract has a designated tick size of 0 25 gold futures have a tick size of 0 10 and stocks trading above 1 have a minimum tick size of one cent the word tick may also be used to describe the direction of the price of a stock an uptick means the price is rising while a downtick indicates the opposite | |
what is tick size | tick size is the minimum price change up or down of a trading instrument in a market its size for different assets traded varies in u s markets the tick size increment is in dollars or cents or fractions thereof stocks generally trade in one cent tick increments while currencies have tick sizes in pips and rates in basis points bps analysts and traders describe any price changes with ticks | |
how is tick size measured | in modern trading tick sizes are generally in decimals until the early 2000s however u s stock markets expressed tick sizes in fractions of a dollar for most stocks that fraction was one sixteenth so a tick size represented 0 0625 although some stocks had 1 8 for lightly traded stocks and 1 32 tick sizes for more active and liquid issues this ungainly convention originated with the early new york stock exchange which first modeled its measurements on a centuries old spanish trading system that used a base of eight or the number of fingers on a person s two hands minus the thumbs in 2005 the securities and exchange commission sec introduced rule 612 the sub penny rule rule 612 required decimalization with the minimum tick size for stocks over 1 00 as 0 01 and stocks under 1 00 as 0 0001 the sec now requires all u s exchanges to effectively use hundredths which is why the tick size today is one cent for most stocks though the sec has recently experimented with larger tick sizes for some less liquid stocks futures markets typically have a tick size specific to the instrument with 1 minimum tick sizes known as points for instance s p 500 futures contracts which are heavily traded have a tick size of 0 25 this means if say the march contract s current price is 4 553 00 and someone wanted to offer more for it they would have to bid at a minimum 4 553 25 tick size pilot programon oct 3 2016 the sec began a two year pilot program to test the potential benefits of larger tick sizes for stocks with closing prices of 2 or greater market capitalizations of 3 billion or less and consolidated average daily volume of 1 million shares or less the sec separated a sample of small cap securities into one control group and two test groups as part of the test according to the sec each test group included about 400 securities with the rest in the control group the first group in the test used tick sizes of 0 05 although stocks in this group continued to trade at their current price increments the second group also quoted tick sizes of 0 05 and traded only in these increments although it included a small number of exceptions to this general rule the third group was quoted with trades in 0 05 increments although a rule prevented price matching by trading organizations that do not display the best price unless an exception applies securities in the control group continued to trade at 0 01 increments while only a test some retail brokers and traders criticized the study arguing that a move to 0 05 tick sizes only benefited market makers by raising trading margins at the expense of individual investors a white paper on the plan tick size pilot plan and market quality released in january 2018 found that stocks in the test groups increased in spreads and volatility and decreased price efficiency relative to stocks in the control group the exchanges and financial industry regulatory authority submitted to the sec a publicly available joint assessment of the impact of the tick size pilot in july 2018 in the end exchanges did not adopt the large nickel tick size in stocks staying at one penny increments pips and forex quotespips equal 1 100 one basis point or 0 01 the foreign exchange forex market uses a four decimal quoting convention with pips for the tick size for example the eur usd pair may have a 1 1257 bid some forex brokers also offer fractional pip pricing which is to the fifth decimal place for example the above quote could be further specified as 1 12573 there are 10 factional pips to a whole pip representing 1 10 the value of a full pip the value of a pip varies based on the currency pair being traded tick size examplesstocks trader a buys 100 shares of abc stock at 50 per share the tick size is 0 01 in most stocks today the price moves up five ticks from 50 to 50 05 with 100 shares trader a sees a gain as follows 100 0 05 5 00 futures trader b buys one contract of the e mini s p 500 futures at 4 700 00 the tick size in this futures market is 0 25 points and s p 500 futures trade with a multiplier of 50 per point per contract so one tick equals a 12 50 profit or loss per contract suppose the price moves up five ticks from 4 700 00 to 4 701 25 trader b therefore profits as follows 5 12 50 62 50 forex trader c buys 100 000 eur usd at 1 1200 representing one standard lot the pip size is 0 0001 the price moves up five pips from 1 1200 to 1 1205 for 100 000 eur trader c profits as follows 5 0 0001 100 000 50 00 the tick size is the minimum price increment by which an asset s market prices can rise or fall the tick value is the dollar amount of such a change in price using s p 500 e mini futures the tick size is 0 25 while the tick value is 12 50 per tick | |
why do traders need to pay attention to tick size | for active traders tick size is crucial in determining liquidity position sizes and potential risks and rewards for example a high tick size means each tick change equals a larger profit or loss traders may opt for smaller position sizes if the tick size is high can stocks trade between tick sizes yes stocks can trade below the official tick size of 0 01 orders can be priced in sub penny increments if they are priced to execute against a particular hidden order or used in a retail price improvement program where a retail investor s order is executed at a slightly better price than the best available public quote in dark pools private exchanges for trading securities not accessible by the public investing community and through internalization where a broker might fill an order from their own inventory transactions can sometimes occur at sub penny increments however these trades are not publicly displayed | |
how can i calculate the tick size | the tick size is set by the exchange where the instrument is traded and is based on the type of instrument its price and the market it trades in to find the tick size of the instrument you are interested in search for its product specifications on the exchange s where it trades | |
why do exchanges set minimum tick sizes | tick sizes help maintain an orderly market by standardizing the minimum price increments tick sizes reduce price volatility caused by too many price movements in tiny increments a well chosen tick size can balance liquidity and price discovery if the tick size is too large it can lead to a wider bid ask spread making trading more costly for investors meanwhile a tiny tick size can result in a cluttered order book with minimal meaningful price differentiation obstructing efficient price discovery the bottom linetick size is the lowest allowed increment of a price change for a listed security set by the exchanges different financial products have different standardized tick sizes a smaller tick size allows tighter bid ask spreads and the trend has been for implementing smaller tick sizes in many markets for example when the u s stock market shifted from minimum ticks of one sixteenth of a point 0 0625 to decimalization in the 2000s the minimum tick became 0 05 and then 0 01 for most stocks today due to mechanisms like retail price improvement and dark pools customers often see stock fills at sub penny increments tick size can differ from the tick value or the profit loss per tick based on the tick size so if a tick size is 0 05 a one tick change would result in a 5 00 difference for 100 shares of stock | |
what is tier 1 capital | tier 1 capital refers to the core capital held in a bank s reserves and is used to fund business activities for the bank s clients it includes common stock as well as disclosed reserves and certain other assets along with tier 2 capital the size of a bank s tier 1 capital reserves is used as a measure of the institution s financial strength regulators require banks to hold certain levels of tier 1 and tier 2 capital as reserves in order to ensure that they can absorb large losses without threatening the stability of the institution under the basel iii accord the minimum tier 1 capital ratio was set at 6 of a bank s risk weighted assets 1investopedia hilary allisonunderstanding tier 1 capitaltier 1 capital represents the core equity assets of a bank or financial institution it is largely composed of disclosed reserves also known as retained earnings and common stock it can also include noncumulative nonredeemable preferred stock as defined by the basel iii standard tier 1 capital has two components common equity tier 1 cet1 and additional tier 1 capital at1 cet1 is the highest quality of capital and can absorb losses immediately as they occur this category includes common shares retained earnings accumulated other comprehensive income and qualifying minority interest minus certain regulatory adjustments and deductions 2additional tier 1 capital includes noncumulative nonredeemable preferred stock and related surplus and qualifying minority interest these instruments can also absorb losses although they do not qualify for cet1 2the tier 1 capital ratio compares a bank s equity capital with its total risk weighted assets rwas rwas are all assets held by a bank that are weighted by credit risk most central banks set formulas for asset risk weights according to the basel committee s guidelines tier 1 capital shouldn t be confused with common equity tier 1 cet1 capital tier 1 includes cet1 as well as additional tier 1 capital tier 1 capital vs tier 2 capitalin the basel accords the basel committee on banking supervision set the regulatory standards for tier 1 and tier 2 capital that must be reserved by any financial institution tier 2 capital has a lower standard than tier 1 and is harder to liquidate it includes hybrid capital instruments loan loss and revaluation reserves as well as undisclosed reserves 3the difference between tier 1 and tier 2 capital reserves relates to the purpose of those reserves tier 1 capital is described as going concern capital that is it is intended to absorb unexpected losses and allow the bank to continue operating as a going concern tier 2 capital is described as gone concern capital in the event of a bank failure these assets are used to defray the bank s obligations before depositors lenders and taxpayers are affected 2while the basel agreements create a broad standard among international regulators implementation will vary in each country changes to tier 1 capital ratiosthe minimum requirements for tier 1 and tier 2 capital were set by the basel accords a set of international regulatory agreements set by a committee of central banks and national bodies under the original basel i agreement the minimum ratio of capital to risk weighted assets was set at 8 following the 2007 8 financial crisis the basel committee met again to address the weaknesses that the crisis had exposed in the banking system the basel iii agreement published in 2010 raised the capital requirements and introduced more stringent disclosure requirements it also introduced the distinction between tier 1 and tier 2 capital under the new guidelines the minimum cet1 capital ratio was set at 4 5 and the minimum tier 1 capital ratio cet1 at1 was set at 6 the total amount of reserve capital tier 1 and tier 2 must be over 8 2these standards were further amended by the basel iv standards in 2017 which started implementation in january 2023 4 the effects of the revised standards will vary depending on each bank s business model | |
how do banks use tier 1 capital | tier 1 capital represents the strongest form of capital consisting of shareholder equity disclosed reserves and certain other income under the basel iii standards banks must maintain the equivalent of 6 of their risk weighted assets in tier 1 capital this allows them to absorb unexpected losses and continue operating as a going concern | |
what is the difference between tier 1 capital and common equity tier 1 cet1 capital | cet1 is the main component of tier 1 capital it represents the strongest form of capital which can be quickly liquidated to absorb unexpected losses it comprises common stock and stock surplus retained earnings qualifying minority interest and certain other income tier 1 includes cet1 as well as certain other instruments such as preferred stock and related surplus | |
what are the major changes between basel iii and basel iv | the basel iv standards are a set of recommendations to financial regulators that were adopted in 2017 and started to take effect in january 2023 these recommendations fine tune the calculations of credit risk market risk and operations risk they also enhance the leverage ratio framework for certain banks and other reforms 5the bottom linetier 1 capital is the core capital held in a bank s reserves and is used to fund business activities for clients it comprises common stock as well as disclosed reserves and certain other assets along with tier 2 capital the size of a bank s tier 1 capital reserves is used as a measure of the institution s financial strength and a globally recognized standard to gauge banks health under the basel iii accord the value of a bank s tier 1 capital must be greater than 6 of its risk weighted assets | |
what is the tier 1 capital ratio | the term tier 1 capital ratio refers to the ratio of a bank s tier 1 or core capital financial institutions must meet a certain ratio to ensure their financial stability tier 1 capital is the minimum amount that a bank must hold in its reserves to finance its banking activities this ratio measures a bank s core equity capital against its total risk weighted assets tier 1 capital is comprised of a bank s common stock retained earnings accumulated other comprehensive income aoci noncumulative perpetual preferred stock and any regulatory adjustments to those accounts tier 1 capital ratio formula | |
what is the tier 1 common capital ratio | tier 1 common capital ratio is a measurement of a bank s core equity capital compared with its total risk weighted assets and signifies a bank s financial strength the tier 1 common capital ratio is utilized by regulators and investors because it shows how well a bank can withstand financial stress and remain solvent tier 1 common capital excludes any preferred shares or non controlling interests which makes it differ from the closely related tier 1 capital ratio the formula for the tier 1 common capital ratio is t 1 c c c t 1 c p s n i t r w a where t 1 c c c tier 1 common capital ratio t 1 c tier 1 capital p s preferred stock n c noncontrolling interests t r w a total risk controlling assets begin aligned t1ccc dfrac t1c ps ni trwa textbf where t1ccc text tier 1 common capital ratio t1c text tier 1 capital ps text preferred stock nc text noncontrolling interests trwa text total risk controlling assets end aligned t1ccc trwat1c ps ni where t1ccc tier 1 common capital ratiot1c tier 1 capitalps preferred stocknc noncontrolling intereststrwa total risk controlling assets investopedia dennis madamba | |
what does the tier 1 common capital ratio tell you | a firm s risk weighted assets include all assets that the firm holds that are systematically weighted for credit risk central banks typically develop the weighting scale for different asset classes cash and government securities carry zero risk while a mortgage loan or car loan would carry more risk the risk weighted assets would be assigned an increasing weight according to their credit risk cash would have a weight of 0 while loans of increasing credit risk would carry weights of 20 50 or 100 regulators use the tier 1 common capital ratio to grade a firm s capital adequacy as one of the following well capitalized adequately capitalized undercapitalized significantly undercapitalized or critically undercapitalized to be classified as well capitalized a firm must have a tier 1 common capital ratio of 7 or greater and not pay any dividends or distributions that would reduce that ratio below 7 a firm characterized as a systemically important financial institution sifi is subject to an additional 3 cushion for its tier 1 common capital ratio making its threshold to be considered well capitalized at 10 firms not considered well capitalized are subject to restrictions on paying dividends and share buybacks the tier 1 common capital ratio differs from the closely related tier 1 capital ratio tier 1 capital includes the sum of a bank s equity capital its disclosed reserves and non redeemable non cumulative preferred stock tier 1 common capital however excludes all types of preferred stock as well as non controlling interests tier 1 common capital includes the firm s common stock retained earnings and other comprehensive income bank investors pay attention to the tier 1 common capital ratio because it foreshadows whether a bank has not only the means to pay dividends and buy back shares but also the permission to do so from regulators the federal reserve assesses a bank s tier 1 common capital ratio during stress tests to discern whether a bank can withstand economic shocks and market volatility example of the tier 1 common capital ratioas an example assume a bank has 100 billion of risk weighted assets after assigning the corresponding weights for its cash credit lines mortgages and personal loans its tier 1 common capital includes 4 billion of common stock and 4 billion of retained earnings leading to total tier 1 common capital of 8 billion the company also issued 500 million in preferred shares dividing the tier 1 common capital of 8 billion less the 500 in preferreds by total risk weighted assets of 100 billion yields a tier 1 common capital ratio of 7 5 if we were instead computing the standard tier 1 capital ratio it would be calculated as 8 since it would include the preferred shares | |
what is the tier 1 leverage ratio | the tier 1 leverage ratio measures a bank s core capital relative to its total assets the ratio looks specifically at tier 1 capital to judge how leveraged a bank is based on its assets tier 1 capital refers to those assets that can be easily liquidated if a bank needs capital in the event of a financial crisis the tier 1 leverage ratio is thus a measure of a bank s near term financial health the tier 1 leverage ratio is frequently used by regulators to ensure the capital adequacy of banks and to place constraints on the degree to which a financial company can leverage its capital base tier 1 leverage ratio formula tier 1 leverage ratio tier 1 capital consolidated assets 1 0 0 where tier 1 capital common equity retained earnings reserves plus certain other instruments begin aligned text tier 1 leverage ratio frac text tier 1 capital text consolidated assets times 100 textbf where text tier 1 capital text common equity retained earnings text reserves plus certain other instruments end aligned tier 1 leverage ratio consolidated assetstier 1 capital 100where tier 1 capital common equity retained earnings reserves plus certain other instruments | |
what does the tier 1 leverage ratio tell you | the tier 1 leverage ratio was introduced by the basel iii accords an international regulatory banking treaty proposed by the basel committee on banking supervision in 2009 1 the ratio uses tier 1 capital to evaluate how leveraged a bank is in relation to its overall assets the higher the tier 1 leverage ratio is the higher the likelihood that the bank could withstand a negative shock to its balance sheet tier 1 capital is the core capital of a bank according to basel iii and consists of the most stable and liquid capital as well as the most effective at absorbing losses during a financial crisis or downturn the denominator in the tier 1 leverage ratio is a bank s total exposures which include its consolidated assets derivative exposure and certain off balance sheet exposures basel iii required banks to include off balance sheet exposures such as commitments to provide loans to third parties standby letters of credit sloc acceptances and trade letters of credit 2basel iii established a 3 minimum requirement for the tier 1 leverage ratio while it left open the possibility of increasing that threshold for certain systematically important financial institutions 3in 2014 the federal reserve the office of the comptroller of the currency occ and the federal deposit insurance corporation fdic released regulatory capital rules that imposed higher leverage ratios for banks of certain sizes effective as of jan 1 2018 bank holding companies with more than 700 billion in consolidated total assets or more than 10 trillion in assets under management must maintain an additional 2 buffer making their minimum tier 1 leverage ratios 5 4in addition if an insured depository institution is being covered by a corrective action framework meaning it demonstrated capital deficiencies in the past it must demonstrate at least a 6 tier 1 leverage ratio to be considered well capitalized real world example of the tier 1 leverage ratiobelow are the capital ratios taken from the financial statements of bank of america corporation bac as reported in the bank s q3 earnings report on oct 31 2018 | |
what is tier 2 capital | the term tier 2 capital refers to one of the components of a bank s required reserves tier 2 is designated as the second or supplementary layer of a bank s capital and is composed of items such as revaluation reserves hybrid instruments and subordinated term debt it is considered less secure than tier 1 capital the other form of a bank s capital because it s more difficult to liquidate in the united states the overall capital requirement is partially based on the weighted risk of a bank s assets understanding tier 2 capitalbank capital requirements were designated as part of the international basel accords this set of recommendations was developed by the basel committee on bank supervision over a number of years dating back to the 1980s according to the regulations banks must maintain a certain amount of cash and or other forms of liquid assets on hand in order to meet their obligations no more than 25 of a bank s capital requirements can be comprised of tier 2 capital 1bank capital is divided into two layers tier 1 or core capital and tier 2 or supplementary capital a bank s capital ratio is calculated by dividing its capital by its total risk based assets the minimum capital ratio reserve requirement for a bank is set at 8 6 of which must be provided by tier 1 capital the remaining must be tier 2 capital along with tier 1 capital it provides a bank with a financial cushion in case it needs to liquidate its assets 21there are four components of tier 2 capital these include tier 2 capital is split into upper and lower levels upper level tier 2 capital consists of securities that are perpetual meaning they have no maturity date revaluation reserves and fixed asset investments lower level tier 2 capital consists of subordinated debt and is generally inexpensive for a bank to issue 6special considerationsundisclosed reserves may be counted as part of a bank s tier 2 capital in certain countries these reserves are profits a bank earns that don t appear on publicly available documents such as a bank s balance sheet despite not being disclosed most banks still consider these reserves to be real assets regulatory authorities in some countries recognize their banks undisclosed reserves as part of tier 2 capital most countries including the united states do not allow this kind of capital to be used to legitimately meet reserve requirements 78most countries including the united states do not allow undisclosed reserves to be used to meet reserve requirements 7 tier 2 capital vs tier 1 capitalas mentioned above a bank s capital reserves are divided into tiers unlike tier 2 capital tier 1 capital is a bank s core capital or the primary source of funding for a bank as such it consists of almost all of an institution s funds including all of its disclosed reserves and any equity capital like common stock this capital helps a bank absorb any losses so it can continue its day to day operations because this level is composed of a bank s core capital tier 1 is a very good indicator of its financial health this tier is considered more reliable than tier 2 capital that s because the capital is much easier to calculate accurately the assets that fall into this category are also much easier to liquidate 9 | |
what is tier 3 capital | tier 3 capital is tertiary capital banks use to support market risk in their trading activities tier 3 capital includes a greater variety of debt short term unsecured subordinated debt than tier 1 and tier 2 capital but it s of lower quality tier 3 capital is being abolished under the basel iii accords | |
what is basel ii | basel ii is the second of the three basel accords aimed to create international standards for bank regulation and reduce risk in the banking system it built upon basel i clarifying some of its rules and adding new ones basel ii led to basel iii which aims to address the inadequacies of the two earlier accords | |
what is the minimum capital adequacy under basel ii | under basell ii banks are required to maintain a capital reserve tier 1 2 3 equal to at least 8 of their risk weighted assets 10the bottom linebanking regulations known as the basel accords require banks to hold different types of capital on hand and certain percentages of each having these types of liquid assets or cash balances out the risk weighted assets that banks hold and increases the stability of the financial system tier 2 capital is the supplementary capital held in reserve by a bank it is less reliable than tier 1 capital because it s composed of assets that are difficult to liquidate and it s more difficult to measure accurately | |
what is tight monetary policy | tight or contractionary monetary policy is a course of action undertaken by a central bank such as the federal reserve to slow down overheated economic growth to constrict spending in an economy that is seen to be accelerating too quickly or to curb inflation when it is rising too fast the central bank tightens policy or makes money tight by raising short term interest rates through policy changes to the discount rate and federal funds rate boosting interest rates increases the cost of borrowing and effectively reduces its attractiveness tight monetary policy can also be implemented via selling assets on the central bank s balance sheet to the market through open market operations omo investopedia laura porterunderstanding tight monetary policycentral banks around the world use monetary policy to regulate specific factors within the economy central banks most often use the federal funds rate as a leading tool for regulating market factors the federal funds rate is used as a base rate throughout global economies it refers to the rate at which banks lend to each other an increase in the federal funds rate is followed by increases in the borrowing rates throughout the economy rate increases make borrowing less attractive as interest payments increase it affects all types of borrowing including personal loans mortgages and interest rates on credit cards an increase in rates also makes saving more attractive as savings rates also increase in an environment with a tightening policy the fed may also raise reserve requirements for member banks in a bid to shrink the money supply or perform open market operations by selling assets like u s treasuries to large investors this large number of sales lowers the market price of such assets and increases their yields making it more economical for savers and bondholders on aug 27 2020 the federal reserve announced that it will no longer raise interest rates due to unemployment falling below a certain level of inflation it also changed its inflation target to an average meaning that it will allow inflation to rise somewhat above its 2 target to make up for periods when it was below 2 tight monetary policy is different from but can be coordinated with a tight fiscal policy which is enacted by legislative bodies and includes raising taxes or decreasing government spending when the fed lowers rates and makes the environment easier to borrow it is called monetary easing a benefit of tight monetary policy open market treasury salesin a tightening policy environment the fed can also sell treasuries on the open market in order to absorb some extra capital during a tightened monetary policy environment this effectively takes capital out of the open markets as the fed takes in funds from the sale with the promise of paying the amount back with interest tightening policy occurs when central banks raise the federal funds rate and easing occurs when central banks lower the federal funds rate in a tightening monetary policy environment a reduction in the money supply is a factor that can significantly help to slow or keep the domestic currency from inflation the fed often looks at tightening monetary policy during times of strong economic growth an easing monetary policy environment serves the opposite purpose in an easing policy environment the central bank lowers rates to stimulate growth in the economy lower rates lead consumers to borrow more also effectively increasing the money supply many global economies have lowered their federal funds rates to zero and some global economies are in negative rate environments both zero and negative rate environments benefit the economy through easier borrowing in an extreme negative rate environment borrowers even receive interest payments which can create a significant demand for credit | |
what are the 3 main monetary tools of the federal reserve | the federal reserve s three primary monetary tools are reserve requirements the discount rate and open market operations the reserve requirement stipulates the amount of reserves that member banks must have on hand the discount rate is the rate at which banks can borrow from the federal reserve and open market operations is the fed s buying or selling of u s treasuries | |
what are tight and loose monetary policy | tight monetary policy is a central bank s efforts to contract a growing economy by increasing interest rates increasing the reserve requirement for banks and selling u s treasuries conversely a loose monetary policy is one that seeks to expand or grow an economy which is done by lowering interest rates lowering the reserve requirements for banks and buying u s treasuries | |
what is monetary policy | monetary policy is the actions that a nation s central bank takes to control the money supply in an economy with the goal of helping grow a slowing economy or to contract an economy that is growing too fast | |
what is a timber investment management organization timo | a timber investment management organization timo is a management group that aids institutional investors in managing their timberland investment portfolios a timo acts as a broker for institutional clients to find analyze and acquire investment properties that would best suit their clients similar to some reits once an investment property is chosen the timo is given the responsibility of actively managing the timberland to achieve adequate returns for the investors understanding timber investment management organizations timos timos developed in the 1970s after congress passed legislation called the employee retirement income security act which encouraged institutional investors to diversify their portfolios before the legislation investment in timberland properties was made chiefly by both large and small firms in the forestry industry by 2007 a study by the realtors land institute rli showed that approximately 60 billion in the land was managed by timos initially timos were viewed positively by forest conservationists who felt separating the owners of forest lands from the wood mills that use the lumber was a good idea later conservationists came to understand the timos were not looking to maximize the conservation of america s forest lands instead timos are focused on maximizing the financial return for investors according to a study published by the pinchot institute for conservation private forest lands are being converted for development at a rate of 6 000 acres per day forisk consulting tracks the largest timos in the united states the table below lists the 2021 top 10 u s timberland owners by acreage and compares this to their prior year rankings timos hold six of the top ten positions | |
why invest in timberland | according to rli timberland returns have compared favorably with stocks but with much less risk and volatility others say timberland returns have varied over time as the industry has matured returns were negative for a year after the financial crisis of 2008 but have since been increasing u s timberland investment performance is measured by the ncreif timberland property index according to ncreif investment returns from u s timberland between q2 2020 and q2 2021 was just 1 46 compared to 18 4 earned by the s p 500 in 2020 one year s performance is not enough to accurately measure long term investment performance but this data serves to demonstrate how annual returns differ for various asset classes it is true that timos can help institutional investors diversify their portfolios into u s timberlands but such real estate investments are probably best used as part of a well diversified portfolio with multiple asset classes such as stocks bonds and commodities in addition to wealth building opportunities created by market changes there are a number of other reasons to consider adding timber to a portfolio | |
what is time decay | time decay is a measure of the rate of decline in the value of an options contract due to the passage of time time decay accelerates as an option s time to expiration draws closer since there s less time to realize a profit from the trade | |
how time decay works | time decay is the reduction in the value of an option as the time to the expiration date approaches an option s time value is how much time plays into the value or the premium for the option the time value declines or time decay accelerates as the expiration date gets closer because there s less time for an investor to earn a profit from the option this figure when calculated will always be negative as time only moves in one direction the countdown for time decay begins as soon as the option is initially bought and continues until expiration time decay is also called theta and is known as one of the options greeks other greeks include delta gamma vega and rho and these formulas help you assess the risks inherent with an options trade special considerationsto understand how time decay impacts an option we must first review what makes up the value of an option options contracts give investors the right to buy or sell securities such as stocks at a specific price and time the strike price is the price at which the options contract changes to shares of the underlying security if the option is exercised each option has a premium attached to it which is the value and often the cost of purchasing the option however there are a few other components that also drive the value of the premium these factors include intrinsic value extrinsic value interest rate changes and the volatility the underlying asset may exhibit intrinsic value is the difference between the market price of the underlying security such as a stock and the strike price of the option a call option with a strike price of 20 while the underlying stock is trading at 20 would have no intrinsic value since there s no profit however a call option with a strike price of 20 while the underlying stock is trading at 30 would have a 10 intrinsic value in other words the intrinsic value is the minimum profit that s built into the option given the prevailing market price and the strike of course the intrinsic value can change as the stock s price fluctuates but the strike price remains fixed throughout the contract the extrinsic value is more abstract than the intrinsic value and it s more difficult to measure the extrinsic value of options factors in the amount of time left before expiration and the rate of time decay leading up to the expiry if an investor buys a call option with a few months until expiry the option will have a greater value than an option that expires in a few days the time value of an option with little time left until expiry is less since there s a lower probability of an investor making money by buying the option as a result the option s price or premium declines the option with a few months until expiry will have an increased amount of time value and slow time decay since there s a reasonable probability that an option buyer could earn a profit however as time passes and the option isn t yet profitable time decay accelerates particularly in the last 30 days before expiration as a result the option s value declines as the expiry approaches and more so if it s not yet profitable time decay vs moneynessmoneyness is the level of profitability of an option as measured by its intrinsic value if the option is in the money itm or profitable it will retain some of its value as the expiration approaches since the profit is already built in and time is less of a factor the option would have intrinsic value while time decay would increase at a slower rate however time decay and the time value of an option are extremely important for investors to consider because they are key factors in determining the likelihood that the option will be profitable time decay is prevalent with at the money atm options since there s no intrinsic value in other words the premium for an atm option mostly consists of time value if the option is out of the money otm or not profitable time decay increases at a faster rate this acceleration is because as more time passes the option becomes less and less likely to become in the money the loss of time value happens even if the value of the underlying asset has not changed during the same period another way to look at options contracts is that they are wasting assets meaning their value declines or depreciates over time essentially investors are buying options that have the greatest probability of making a profit by expiry and how much time is left determines the price investors are willing to pay for the option in short the more time left until expiry the slower the time decay while the closer to expiry the more time decay increases advantages and disadvantages of time decaytime decay is slow early in an option s life adding to its value or premium | |
when time decay is slow investors can sell the option while it still has value | time decay s impact on an option s premium helps investors determine whether it s worth pursuing time decay accelerates as an option s time to expiration draws closer measuring the rate of change in time decay of an option can be difficult time decay occurs regardless of whether the underlying asset s price has risen or fallen example of time decayan investor is looking to buy a call option with a strike price of 20 and a premium of 2 per contract the investor expects the stock to be at 22 or higher at expiration in two months however a contract with the same strike of 20 that s has only a week left until expiration has a premium of 50 cents per contract the contract costs far less than the 2 contract since it s unlikely the stock will move higher by 10 or more in a few days in other words the extrinsic value of the second option is lower than the first option with two months left until expiration | |
what is a time deposit | a time deposit is an interest bearing bank account that has a pre set date of maturity a certificate of deposit cd is the best known example the money must remain in the account for the fixed term in order to earn the stated interest rate time deposits generally pay a slightly higher rate of interest than a regular savings account the longer the time to maturity the higher the interest payment will be another name for this type of investment is term deposit time deposits explaineda time deposit such as a cd can be purchased at virtually any bank credit union or other financial institution the interest rates paid vary as do other terms for example one bank may offer a higher return but require a larger deposit it pays to shop around most post their rates prominently and advertise them widely a cd is essentially a savings account that is opened with the promise that the owner won t touch the money for a set period of time this can range from a few months to years a term of a year or less is considered a short term time deposit anything over that is a long term deposit the owner of a time deposit can withdraw the money out if necessary but will lose some or all of the promised interest and may pay penalty fees the terms are in the fine print that the saver receives when opening the account a customer can earn a slightly higher interest rate with a time deposit account than would be available in a standard savings account or an interest bearing checking account the better return is offered because the funds remain locked until the maturity date of the account time deposits are insured by the federal deposit insurance corporation fdic up to 250 000 per investment those opened at a credit union carry protection from the national credit union administration ncua time deposit accounts provide banks with the cash flow they need to lend money to other customers the bank makes a profit by lending the funds held in time deposit accounts for a higher interest rate than the rate it pays on the time deposits the bank may also invest the money from the time deposit in other securities that pay a higher return than it is paying the customer banks and other financial institutions may accept any maturity term that a customer requests as long as it is a minimum of 30 days once the investment matures the funds can be withdrawn without penalty or the investor may choose to renew the time deposit account for another term for example a one year cd could be rolled over into another one year cd typically the longer the term to maturity the higher the interest rate paid to the depositor for example a one year cd may offer a 1 10 annual percentage yield apy while a five year cd for the same amount might provide a 1 75 apy the annual percentage yield is the effective annual rate of return ror taking into account the effect of compounding interest generally two rates are quoted for time deposits and cds the apy is therefore higher than the quoted interest rate as with most financial products there are advantages and disadvantages to time deposit accounts above all they are a safe place to put your money and they re a breeze to obtain like regular bank deposits time deposits are insured against any losses on the other hand the rate of return is usually lower than that for other investments the investor could deposit the same amount of money in a bond mutual fund or treasury bills and earn a higher yield there is another risk especially if the investor chooses a long term for the time deposit interest rates may go up over time while the investor s money is locked into the rate that prevailed when the account was open higher interest rates go hand in hand with higher inflation so that investor s money is shrinking while it sits there in terms of real spending power time deposits offer investors a fixed interest rate until maturity time deposits are risk free investments backed by the fdic or ncua time deposits have various maturity dates and minimum deposit amounts time deposits pay a higher interest rate than regular savings accounts time deposit returns are lower than that of other conservative investments investors may miss a better opportunity if interest rates rise depositors can t withdraw their money without a penalty fixed interest rates don t generally keep pace with inflation real world examples of time depositsa look at some examples of time deposit returns as of feb 9 2020 offers some insight into the variations among cds on offer at financial institutions | |
what is an investment time horizon | an investment time horizon or just time horizon is the period of time one expects to hold an investment until they need the money back time horizons are largely dictated by investment goals and strategies for example saving for a down payment on a house for maybe two years would be considered a short term time horizon while saving for college would be a medium term time horizon and investing for retirement a long term time horizon andresr getty imagesunderstanding investment time horizonsan investment time horizon is the time period where one expects to hold an investment for a specific goal investments are generally broken down into two main categories stocks riskier and bonds less risky the longer the time horizon the more aggressive or riskier a portfolio an investor can build the shorter the time horizon the more conservative or less risky the portfolio the investor may want to adopt the short term horizon refers to investments that are expected to last for fewer than five years these investments are appropriate for investors who are approaching retirement or who may need a large sum of cash in the near future money market funds savings accounts certificates of deposit and short term bonds are good choices for short term investments since they can easily be liquidated for cash medium term investments are those which one expects to hold for three to ten years such as by people saving for college marriage or a first home medium term investment strategies tend to balance between high and low risk assets so a mix of stocks and bonds would be a suitable way to protect your wealth without losing value to inflation the long term investment horizon is for investments that one expects to hold for ten or twenty years or even longer the most common long term investments are retirement savings long term investors are typically willing to take greater risks in exchange for greater rewards generally speaking the longer your investment horizon the more aggressive you can be in choosing your investments example of an investment time horizonlet s say two people marry and while they live in the city now they d eventually like to move out to the suburbs in a few years but they don t have the money for a down payment on a house so they ll need to start saving up that s a short term investment horizon so they ll probably want to go with something relatively conservative like a money market fund to avoid any sharp swings in stocks meanwhile they ve both taken advantage of their employers 401 k savings funds an employer sponsored retirement fund sometimes with employer matching and since they re both young that s a long term time horizon given the length of time until their retirement they can afford to be very aggressive in their asset allocation upwards of 90 of stocks as the long investment horizon should allow their portfolio to recover from any short term downturns next a baby comes along now they have to start thinking about saving for college that s more of a medium or long term goal so they can be pretty aggressive in the beginning and then turn a little more conservative as high school graduation for the child comes along but there is a government saving plan 529 that allows your contributions to grow tax free as long as they re used for educational expenses investment horizon and riskeach type of investment carries different forms of risk which should be factored into your investment strategy businesses can fail borrowers can default and even sound investments can be vulnerable in a market downturn below we ll outline some forms of risk and their effects on each type of investment inflationary risk refers to the danger that the real value of an investment will fall due to an unexpected increase in consumer prices bonds are particularly susceptible to inflation since coupon rates are typically fixed an unexpected spike in inflation could erode any expected gains from the investment however it is possible to ameliorate inflationary risk to bonds through treasury inflation protected securities 1interest rate risk is the danger that an unexpected rise in interest rates could eat away some of the gains of an investment like inflationary risk this is typically a concern for fixed income securities like bonds 2 this risk can be reduced by holding bonds of different durations or investing in interest rate derivatives business risk refers to the danger that a company might fail or go bankrupt causing any stocks or bonds issued by that company to plummet in value while no company is immune to business risk you can go a long way towards avoiding the riskiest companies by carefully evaluating their business plans you can also reduce your exposure to any one business by having a diversified portfolio default risk is the probability that a borrower will be unable to repay its debts this usually refers to bond issuers but it could also refer to other debt based securities you can reduce your exposure to default risk by investing in bonds with high credit ratings market risk or volatility risk refers to the chance that the value of an investment could be negatively impacted by speculative behavior market crashes or other world events since markets trend upwards in the long run market risk is typically a larger concern for short and medium term investment horizons investment horizon faqsan investment horizon refers to the timeline in which an investor plans to gain value on their investment this can range from a few years to several decades the length of an investment horizon will determine what types of investment products are most suitable for the investor s goals typically investors seek stable assets for short term investing riskier investments are more acceptable on a longer term investment horizon since markets overall tend to trend upwards the medium term investment horizon typically refers to investments of five to ten years such as people saving for a child s college education the long term horizon refers to investments that have a decade or more to accumulate profits the most common type of long term investment is saving for retirement since interest compounds exponentially a longer investment horizon can generate much greater profits than a short term investment this is why it is important to save for retirement early a small investment now can generate high returns if it has a few decades to grow the bottom lineevery investor needs to carefully evaluate their own goals and investment timeline before deciding where to put their money savings accounts and cds may be a convenient place to store money over the short term but will quickly lose their value to inflation conversely aggressive investments in the stock market will generate high expected returns in the long run but they will remain susceptible to short term market fluctuations it falls on each investor to decide the optimal balance of risk and rewards | |
time in force is a special instruction used when placing a trade to indicate how long an order will remain active before it is executed or expires these options are especially important for active traders and allow them to be more specific about the time parameters | common examples include immediate or cancel ioc or day order basics of time in forcetime in force orders are a useful way for active traders to keep from accidentally executing trades by setting time parameters they don t have to remember to cancel old trades unintended trade executions can be very costly if they occur during volatile market conditions when prices are rapidly changing most active traders use limit orders to control the price that they pay for a stock which means that they set a time in force option to control how long the order stays open while day orders are the most common type of order there are many circumstances when it makes sense to user other order types there are several different types of time in force orders that traders can use some brokers only offer a limited set of order types but active traders often are given more options many brokers use acronyms like day gtc opc ioc gtd and dtc to refer to these orders we look a little more closely at these order types below types of time in force ordersday orders are a popular type of time in force order they are canceled if the trade does not execute by the close of the trading day these are often the default order type for brokerage accounts another type of time in force order are good til canceled gtc orders which are effective until the trade is executed or canceled some common exceptions include stock splits distributions account inactivity modified orders and during quarterly sweeps these can be a useful option for a long term investor who is willing to wait for a stock to reach their desired price point before pulling the trigger sometimes traders might wait several days or even weeks for a trade to execute at their desired price fill or kill fok orders are a third type of time in force order they are canceled if the entire order does not execute as soon as it becomes available often these are used to avoid purchasing shares in multiple blocks at different prices and to ensure an entire order executes at a single price these can be popular during fast moving markets where day traders wants to ensure that they get a good price on a trade a few other order types include market on open moo and limit on open loo orders which execute as soon as a market opens immediate or cancel ioc orders which must be filled immediately or are canceled and day til canceled dtc orders that are deactivated at the end of the day instead of canceled making it easier to re transmit the order later example of time in forcejohn believes that the price of stock abc which is currently trading at 10 will rise but it will take time approximately three months he purchases abc call options with a strike price of 15 and places a good til cancelled gtc order to avoid having the order remain on hold indefinitely he places a limit of three months on the order after three months stock abc s price is still struggling to break past the 12 mark john s order is cancelled automatically | |
what is the times interest earned tie ratio | the times interest earned tie ratio is a solvency ratio that determines how well a company can pay the interest on its business debts it is a measure of a company s ability to meet its debt obligations based on its current income the formula for a company s tie number is earnings before interest and taxes ebit divided by the total interest payable on bonds and other debt the result is a number that shows how many times a company could cover its interest charges with its pretax earnings tie is also referred to as the interest coverage ratio investopedia julie bangformula and calculation of the times interest earned tie ratioassume for example that xyz company has 10 million in 4 debt outstanding and 10 million in common stock the company needs to raise more capital to purchase equipment the cost of capital for issuing more debt is an annual interest rate of 6 the company s shareholders expect an annual dividend payment of 8 plus growth in the stock price of xyz the business decides to issue 10 million in additional debt its total annual interest expense will be 4 x 10 million 6 x 10 million or 1 million annually the company s ebit is 3 million this means that the tie ratio for xyz company is 3 or three times the annual interest expense | |
what the tie ratio can tell you | obviously no company needs to cover its debts several times over in order to survive however the tie ratio is an indication of a company s relative freedom from the constraints of debt generating enough cash flow to continue to invest in the business is better than merely having enough money to stave off bankruptcy a company s capitalization is the amount of money it has raised by issuing stock or debt and those choices impact its tie ratio businesses consider the cost of capital for stock and debt and use that cost to make decisions companies that have consistent earnings like utilities tend to borrow more because they are good credit risks special considerationsas a rule companies that generate consistent annual earnings are likely to carry more debt as a percentage of total capitalization if a lender sees a history of generating consistent earnings the firm will be considered a better credit risk utility companies for example generate consistent earnings their product is not an optional expense for consumers or businesses some utility companies raise a considerable percentage of their capital by issuing debt startup firms and businesses that have inconsistent earnings on the other hand raise most or all of the capital they use by issuing stock once a company establishes a track record of producing reliable earnings it may begin raising capital through debt offerings as well | |
what does a times interest earned ratio of 0 90 to 1 mean | the times interest earned ratio shows how many times a company can pay off its debt charges with its earnings if a company has a ratio between 0 90 and 1 it means that its earnings are not able to pay off its debt and that its earnings are less than its interest expenses | |
is times interest earned a profitability ratio | no times interest earned is not a profitability ratio it is a solvency ratio the ratio does not seek to determine how profitable a company is but rather its capability to pay off its debt and remain financially solvent if a company can no longer make interest payments on its debt it is most likely not solvent | |
how can a company improve its times interest earned ratio | to improve its times interest earned ratio a company can increase earnings reduce expenses pay off debt and refinance current debt at lower rates the bottom linethe times interest earned ratio looks at how well a company can furnish its debt with its earnings it is one of many ratios that help investors and analysts evaluate the financial health of a company the higher the ratio the better as it indicates how many times a company could pay off its debt with its earnings | |
what is a time series | a time series is a sequence of data points that occur in successive order over some period of time this can be contrasted with cross sectional data which captures a point in time in investing a time series tracks the movement of the chosen data points such as a security s price over a specified period of time with data points recorded at regular intervals there is no minimum or maximum amount of time that must be included allowing the data to be gathered in a way that provides the information being sought by the investor or analyst examining the activity understanding time seriesa time series can be taken on any variable that changes over time in investing it is common to use a time series to track the price of a security over time this can be tracked over the short term such as the price of a security on the hour over the course of a business day or the long term such as the price of a security at close on the last day of every month over the course of five years time series analysis can be useful to see how a given asset security or economic variable changes over time it also can be used to examine how the changes associated with the chosen data point compare to shifts in other variables over the same time period time series is also used in several nonfinancial contexts such as measuring the change in population over time the figure below depicts such a time series for the growth of the u s population over the century from 1900 to 2000 c k taylortime series analysissuppose you wanted to analyze a time series of daily closing stock prices for a given stock over a period of one year you would obtain a list of all the closing prices for the stock from each day for the past year and list them in chronological order this would be a one year daily closing price time series for the stock delving a bit deeper you might analyze time series data with technical analysis tools to know whether the stock s time series shows any seasonality this will help to determine if the stock goes through peaks and troughs at regular times each year analysis in this area would require taking the observed prices and correlating them to a chosen season this can include traditional calendar seasons such as summer and winter or retail seasons such as holiday seasons alternatively you can record a stock s share price changes as it relates to an economic variable such as the unemployment rate by correlating the data points with information relating to the selected economic variable you can observe patterns in situations exhibiting dependency between the data points and the chosen variable one potential issue with time series data is that since each variable is dependent on its prior state or value there can be a great deal of autocorrelation which can bias results time series forecastingtime series forecasting uses information regarding historical values and associated patterns to predict future activity most often this relates to trend analysis cyclical fluctuation analysis and issues of seasonality as with all forecasting methods success is not guaranteed the box jenkins model for instance is a technique designed to forecast data ranges based on inputs from a specified time series it forecasts data using three principles autoregression differencing and moving averages these three principles are known as p d and q respectively each principle is used in the box jenkins analysis and together they are collectively shown as an autoregressive integrated moving average or arima p d q arima can be used for instance to forecast stock prices or earnings growth another method known as rescaled range analysis can be used to detect and evaluate the amount of persistence randomness or mean reversion in time series data the rescaled range can be used to extrapolate a future value or average for the data to see if a trend is stable or likely to reverse cross sectional vs time series analysiscross sectional analysis is one of the two overarching comparison methods for stock analysis cross sectional analysis looks at data collected at a single point in time rather than over a period of time the analysis begins with the establishment of research goals and the definition of the variables that an analyst wants to measure the next step is to identify the cross section such as a group of peers or an industry and to set the specific point in time being assessed the final step is to conduct analysis based on the cross section and the variables and come to a conclusion on the performance of a company or organization essentially cross sectional analysis shows an investor which company is best given the metrics that they care about time series analysis known as trend analysis when it applies to technical trading focuses on a single security over time in this case the price is being judged in the context of its past performance time series analysis shows an investor whether the company is doing better or worse than before by the measures that they care about often these will be classics like earnings per share eps debt to equity free cash flow fcf and so on in practice investors will usually use a combination of time series analysis and cross sectional analysis before making a decision for example looking at the eps over time and then checking the industry benchmark eps |
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