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what is total return | total return when measuring performance is the actual rate of return of an investment or a pool of investments over a given evaluation period total return includes interest capital gains dividends and distributions realized over a period total return accounts for two categories of return income including interest paid by fixed income investments distributions or dividends and capital appreciation representing the change in the market price of an asset understanding total returntotal return is the amount of value an investor earns from a security over a specific period typically one year when all distributions are reinvested the total return is expressed as a percentage of the amount invested for example a total return of 20 means the security increased by 20 of its original value due to a price increase distribution of dividends if a stock coupons if a bond or capital gains if a fund it is a strong measure of an investment s overall performance some of the best dividend stocks have low growth potential and produce small capital gains basing an investment s return on capital gains alone does not take into consideration price increases or other methods of growing the stock s value for example an investor buys shares of company b and the share price increases 24 5 in one year the investor gains 24 5 from the price change alone since company b also paid a dividend during the year adding in the stock s yield of 4 1 to the price change the combined return is 28 6 the investor may wish to calculate dividend adjusted return this figure considers both the stock price appreciation and its dividends the dividend adjusted return provides a more accurate valuation of a stock s return total return determines an investment s true growth over time it is important to evaluate the big picture and not just one return metric when determining an increase in value total return is used when analyzing a company s historical performance calculating expected future returns puts reasonable expectations on an investor s investments and helps plan for retirement or other needs | |
when analyzing mutual fund performance investors should analyze their average annual total returns for different periods comparing returns to a benchmark indicates how the fund has performed relative to an index when analyzing average annual total returns it s important to remember | example of total returnan investor buys 100 shares of stock a at 20 per share for an initial value of 2 000 stock a pays a 5 dividend the investor reinvests buying five additional shares after one year the share price rises to 22 to calculate the investment s total return the investor divides the total investment gains 105 shares x 22 per share 2 310 current value 2 000 initial value 310 total gains by the initial value of the investment 2 000 and multiplies by 100 to convert the answer to a percentage 310 2 000 x 100 15 5 the investor s total return is 15 5 | |
what is a total return index | a total return index is a type of equity index that tracks both the capital gains as well as any cash distributions such as dividends or interest attributed to the components of the index a look at an index s total return displays a more accurate representation of the index s performance to shareholders by assuming dividends are reinvested it effectively accounts for those stocks in an index that do not issue dividends and instead reinvest their earnings within the underlying company as retained earnings a total return index can be contrasted with a price return or nominal index total return indexes explaineda total return index may be deemed more accurate than other methods that do not account for the activity associated with dividends or distributions such as those that focus purely on the annual yield for example an investment may show an annual yield of 4 along with an increase in share price of 6 while the yield is only a partial reflection of the growth experienced the total return includes both yields and the increased value of the shares to show a growth of 10 if the same index experienced a 4 loss instead of a 6 gain in share price the total return would show as 0 example the s p 500the s p 500 total return index sptr is one example of a total return index the sptr is different from the standard s p index spx which does not include dividend gains the total return indexes follow a similar pattern in which many mutual funds operate where all resulting cash payouts are automatically reinvested back into the fund itself while most total return indexes refer to equity based indexes there are total return indexes for bonds that assume that all coupon payments and redemptions are reinvested through buying more bonds in the index other total return indexes include the dow jones industrials total return index djitr and the russell 2000 index differences between price return and total return index fundstotal returns stand in contrast to price returns which do not take into account dividends and cash payouts including dividends makes a significant difference in the return of the fund as demonstrated by two of the most prominent for instance the price return for the spdr s p 500 etf spy since it was introduced in 1993 was 789 as of march 10 2021 the total return price dividends reinvested however is close to 1 400 the dow jones industrial average over the 10 years ended in march 2021 had a price return of 162 while the total return rose to 228 understanding index fundsindex funds are a reflection of the index they are based on for example an index fund associated with the s p 500 may have one of each of the securities included in the index or may include securities that are deemed to be a representative sample of the index s performance as a whole the purpose of an index fund is to mirror the activity or growth of the index that functions as its benchmark in that regard index funds only require passive management when adjustments need to be made to help the index fund keep pace with its associated index due to the lower management requirements the fees associated with index funds may be lower than those that are more actively managed additionally an index fund may be seen as a lower risk since it provides for an innate level of diversification | |
what is a total return swap | a total return swap is a swap agreement in which one party makes payments based on a set rate either fixed or variable while the other party makes payments based on the return of an underlying asset which includes both the income it generates and any capital gains 1 in total return swaps the underlying asset referred to as the reference asset is usually an equity index a basket of loans or bonds the asset is owned by the party receiving the set rate payment understanding total return swapsa total return swap allows the party receiving the total return to gain exposure and benefit from a reference asset without actually owning it these swaps are popular with hedge funds because they provide the benefit of a large exposure to an asset with a minimal cash outlay the two parties involved in a total return swap are known as the total return payer and the total return receiver a total return swap is similar to a bullet swap however with a bullet swap payment is postponed until the swap ends or the position closes requirements for total return swapsin a total return swap the party receiving the total return collects any income generated by the asset and benefits if the price of the asset appreciates over the life of the swap in exchange the total return receiver must pay the asset owner the set rate over the life of the swap 2if the asset s price falls over the swap s life the total return receiver will be required to pay the asset owner the amount by which the asset has fallen in a total return swap the receiver assumes systematic or market risk and credit risk conversely the payer forfeits the risk associated with the performance of the referenced security but takes on the credit exposure to which the receiver may be subject total return swap exampleassume that two parties enter into a one year total return swap in which one party receives the london interbank offered rate libor in addition to a fixed margin of 2 the other party receives the total return of the standard poor s 500 index s p 500 on a principal amount of 1 million after one year if libor is 3 5 and the s p 500 appreciates by 15 the first party pays the second party 15 and receives 5 5 the payment is netted at the end of the swap with the second party receiving a payment of 95 000 or 1 million x 15 5 5 conversely consider that rather than appreciating the s p 500 falls by 15 the first party would receive 15 in addition to the libor rate plus the fixed margin and the payment netted to the first party would be 205 000 or 1 million x 15 5 5 | |
total shareholder return tsr is a measure of financial performance indicating the total amount an investor reaps from an investment specifically equities or shares of stock to arrive at its total usually expressed as a percentage tsr factors in capital gains and dividends from a stock it might also include special distributions stock splits and warrants whichever way it is calculated tsr means the same thing the sum total of what a stock has returned to those who invested in it | understanding total shareholder return tsr an investor makes money from stock in two basic ways capital gains and current income a capital gain is a change in the market price of the stock from the time it was purchased to the date it was sold or the current price if it is still owned profits in other words current income is the dividends paid out by the company from its earnings while the investor still owns the stock | |
when calculating tsr an investor can only consider the dividends they actually received or were eligible to receive for example they may be in possession of the stock on the day the dividend is payable yet they receive the dividend only if they owned the stock on or before the ex dividend date therefore an investor needs to know the stock s ex dividend date rather than the dividend payment date when calculating tsr | dividends which are per share distributions of some of a company s earnings to certain classes of its stockholders can include stock buyback programs one time payments and regular quarterly or semi annual cash payouts tsr is most useful when measured over time as it shows the long term value of an investment the most accurate metric for gauging success for most individual investors examples of total shareholder return tsr total shareholder return is calculated as the overall appreciation in the stock s price per share plus any dividends paid by the company during a particular measured interval this sum is then divided by the initial purchase price of the stock to arrive at the tsr as a mathematical equation it would be tsr current price purchase price dividends purchase price begin aligned text tsr frac text current price text purchase price text dividends text purchase price end aligned tsr purchase price current price purchase price dividends as an example let s assume that an investor bought 100 shares of a company s stock at 20 per share for a total investment of 2 000 the stock which they still own is now trading at 24 per share since the investor bought the stock two years ago the company has paid out a total of 4 50 in dividends per share | |
what is the investor s tsr over those two years it would be calculated as | so the tsr would be 42 5 as an equation tsr 2 4 2 0 4 5 0 2 0 0 4 2 5 1 0 0 4 2 5 begin aligned text tsr big 24 20 4 50 big div 20 0 425 times 100 42 5 end aligned tsr 24 20 4 50 20 0 425 100 42 5 note if you prefer to think of tsr in dollar terms versus percentage you would simply do the first two steps above to have 8 50 per share as your total shareholder return aka stock return cash value as it s called in this form for fiscal year 2020 microsoft corporation msft had a tsr of 59 4 for investors who had held it for that entire period of that amount 57 6 came from an increase in share price and 1 8 was returned from dividends 1 tsr can also be considered the internal rate of return irr of all cash flows to an investor during the period they ve held their shares advantages and disadvantages of total shareholder return tsr simple to calculate easy to understandmore complete evaluation of investment s wortheasy to compare to other companies or benchmarksgood gauge of long term performancelimited to past performance no sense of future returnseffective only for investments with cash inflowssensitive to stock market sentiment | |
doesn t reflect size of investment | tsr is best used when analyzing venture capital and private equity investments these investments typically involve multiple cash investments over the life of the business and a single cash outflow at the end through an initial public offering ipo or sale because tsr is expressed as a percentage the figure is readily comparable with industry benchmarks or companies in the same sector however it reflects the past overall return to shareholders without consideration of future returns tsr represents an easily understood figure of the overall financial benefits generated for stockholders the figure measures how the market evaluates the overall performance of a company over a specific time period however tsr is calculated for publicly traded companies at the overall level not at a divisional level also tsr works only for investments with one or more cash inflows after purchase in addition tsr is externally focused and reflects the market s perception of performance therefore tsr could be adversely affected if a fundamentally strong company s share price suffers greatly in the short term for whatever reason like negative publicity or quirky stock market behavior or sentiment tsr does not measure the absolute size of an investment or its return for this reason tsr may favor investments with high rates of return even when the dollar amount of the return is small for example a 1 investment returning 3 has a higher tsr than a 1 million investment returning 2 million also tsr cannot be used when the investment generates interim cash flows in addition tsr does not take into consideration the cost of capital and cannot compare investments over different time periods | |
what is total shareholder return | total shareholder return tsr is a way to evaluate an investment s performance it factors in capital gains and dividends to measure the overall returns an investor earns from a stock | |
how is tsr measured | tsr short for total shareholder return measures the appreciation in the price of a stock s shares plus the total sum paid in dividends per share over a specific time period | |
how do you calculate total shareholder return | to calculate total shareholder return tsr first subtract a stock s current price per share from the price originally paid for it then add the dollar amount of dividends received per share along with any other special distributions or payouts like from a stock buyback for example divide this sum by the stock s purchase price per share multiply by 100 to arrive at a percentage figure for the tsr the bottom linetotal shareholder return tsr is a way to determine how much your investment has made for you how much additional money your capital has earned in a specific time period it takes into account both appreciation in a stock s shares and the dividends paid on those shares it has its limitations what financial metric does not but overall it provides a more complete sense of your return on a stock than simply gaging the gain in the stock price | |
what is total utility | total utility is the aggregate amount of satisfaction or fulfillment that a consumer receives through the consumption of a specific good or service total utility is often compared to marginal utility which is the satisfaction a consumer receives from consuming one additional unit of a good or service total utility helps economists understand the demand for goods and services 1understanding total utilityin economics utility refers to the satisfaction gained from consuming a good or service total utility is usually defined as a quantifiable summation of satisfaction or happiness obtained from consuming multiple units of a particular good or service 1utility and total utility are used in the economic analysis of consumer behaviors within a marketplace economists seek to quantify total utility using special calculations economists may also study several economic metrics in conjunction with total utility when seeking to understand how consumer behaviors align with supply and demand in economics economists typically view changes in behavior and consumption by analyzing marginal increases and marginal decreases marginal changes will usually be either scaled increases or scaled decreases in the case of total utility marginal refers to the increasing or decreasing level of utility that is obtained with added consumptions 1rational choice theorytotal utility is often studied alongside rational choice theory and the law of diminishing marginal utility rational choice theory says that consumers seek to maximize their utility with each unit of consumption consumer theory and demand theory suggest that consumer actions are driven toward utility maximization by attempting to acquire the most satisfaction possible in the most affordable way in general classical economic theories show that most consumers want to get the highest possible level of utility per unit for the money they spend 2total utility is usually measured in relative units called utils 3 when measuring total utility analysis can span from one unit of consumption to multiple units for example a cookie provides a level of utility as determined by its singular consumption while a bag of cookies may provide total utility over the course of time it takes to completely consume all the cookies in the bag the law of diminishing marginal utilityto better understand total utility one must understand the law of diminishing marginal utility which states that as more of a single good or service is consumed the additional satisfaction referred to as marginal utility drops the first good consumed provides the highest utility the second good has a lower marginal utility and so on therefore total utility grows less rapidly with each additional unit consumed of the same good or service 1 | |
how to calculate total utility | each individual unit of a good or service has its own utility and each additional unit of consumption will have its own marginal utility the total utility will be the aggregated sum of utility gained from all units being studied satisfaction is a subjective measure and will vary from individual to individual meaning that total utility acts more as a guide in understanding a consumer s psychological decisions 1a total utility formula will include utils utils are typically relative and assigned a base value economists usually analyze utils across a spectrum to provide a comparative analysis of the amount of util or satisfaction gained from a unit of consumption an assigned base value for utils is needed because theoretically there is no real value for utility satisfaction in general to find total utility economists use the following basic total utility formula tu u1 mu2 mu3 tu total utilityu utilitymu marginal utilitythe total utility is equal to the sum of utils gained from each unit of consumption in the equation each unit of consumption is expected to have slightly less utility as more units are consumed total utility maximizationeconomic theory regarding consumer activities suggests that the primary goal of the consumer is to achieve the largest amount of utility for the least amount of cost this is partly due to the limited amount of funds a person may possess as well as a desire to achieve as much satisfaction from the consumption of goods and services as possible 1for example if a consumer is presented with two purchasing options with the same financial cost and neither option is more necessary or functional than the other the consumer will choose the good or service that provides the most utility for the money example of total utilityjohn is hungry and decides to eat a chocolate bar his total utility from eating one chocolate bar is 20 utils he is still hungry so he eats another chocolate bar where his total utility is 25 utils john is still hungry and has two more chocolate bars the third chocolate bar has a total utility of 27 utils and the fourth has a total utility of 24 utils this is best represented in the table below with each additional chocolate bar john s total utility increases until it reaches its max at three chocolate bars with the fourth chocolate bar john s total utility decreases this can be understood with marginal utility the utility that john derives from each additional chocolate bar with every additional chocolate bar after the first john s marginal utility is decreasing meaning that he is deriving less satisfaction from another chocolate bar this makes sense as he is getting more full with each bar after the third bar his marginal utility is negative meaning he is deriving no satisfaction and in fact is made worse off perhaps feeling sick after consuming so much chocolate and sugar total utility faqstotal utility is the aggregate satisfaction that an individual receives from consuming a specific quantity of a good or service while total utility measures the aggregate satisfaction an individual receives from the consumption of a specific quantity of a good or service marginal utility is the satisfaction an individual receives from consuming one additional unit of a good or service if marginal utility is positive then total utility will increase once marginal utility is negative then total utility will decrease the basic formula to calculate total utility is as follows tu u1 mu2 mu3 tu total utilityu utilitymu marginal utilitymarginal utility is calculated as follows mu change in total utility change in unitstotal utility does not always increase when marginal utility is negative then total utility will decrease this means that an individual does not derive any satisfaction from the consumption of an additional unit of a good or service and is worse off by doing so the bottom lineutility measures the satisfaction an individual receives from the consumption of a good or service total utility measures the total satisfaction from a specific quantity of goods or services total utility operates hand in hand with marginal utility which measures the additional satisfaction received from the consumption of a good or service as long as marginal utility is positive total utility will increase once marginal utility is negative then total utility will decrease economists aim to study total utility and marginal utility to understand consumer behavior consumer behavior helps to predict the demand for goods and services which impacts supply and their prices all key metrics of analyzing an economy | |
what is a tracker fund | a tracker fund is an index fund that tracks a broad market index or a segment thereof tracker funds are also known as index funds designed to offer investors exposure to an entire index at a low cost these funds seek to replicate the holdings and performance of a designated index constructed as etfs or alternative investments to meet the fund s tracking objective | |
how a tracker fund works | the term tracker fund has evolved from the tracking function that drives index fund management tracker funds seek to replicate the performance of a market index market innovation has significantly broadened the number of tracker funds available in the investable market investing in an index fund is a form of passive investing initially index funds were introduced to provide investors a low cost investment vehicle that allows for exposure to the many securities included in a market index the primary advantage of such a strategy is the lower expense ratio on an index fund popular indexes for u s market exposure include the s p 500 dow jones industrial average and the nasdaq composite investors often choose traditional tracker funds because a majority of investment fund managers fail to beat broad market indexes on a consistent basis the majority of tracker funds are either income or accumulation units income is paid out to fund holders as cash in the former and in the latter the income is retained within the fund for reinvestment special considerationsas markets have evolved over time investment companies have sought to meet comprehensive demands by developing new and innovative funds and indexes to satisfy investors as a result many investment companies now work with specialized index providers or create their own customized indexes to use in passively managed funds with this market evolution tracker funds now encompass a much broader definition passively managed tracker funds now include customized indexes for market segments sectors and themes tracker fund strategies have also expanded beyond traditional growth and value index strategies to include indexes screened for a wide range of characteristics and fundamentals customized tracker funds still seek to track a predefined market index but they provide for much more targeted investment offering relatively low costs for investors they are able to keep overall fund expenses lower by continuing to use an index replication strategy while getting many of the benefits of active fund management through screened indexes these funds only need to make significant fund transactions when a customized index reconstitutes which is typically once a year customized tracker funds offer investors a broader range of options while also alleviating many of the significant challenges for fund managers in beating the market examples of tracker fundsinvestors will find tracker funds available for nearly every market index in the world one of the most popular tracker funds is the spdr s p 500 etf spy the fund has 364 billion in assets under management as of june 15 2021 it has an expense ratio of 0 0945 1 the year to date return for the spy through may 31 2021 was 12 55 closely matching the s p 500 s total returns 1alternatively many companies develop their own indexes with specified criteria for tracker funds the fidelity quality factor etf fqal is an example the fund tracks a customized index created by fidelity called the fidelity u s quality factor index the fidelity quality factor etf seeks to replicate the holdings and performance of the fidelity u s quality factor index the index utilizes a screening methodology to identify high quality large cap and mid cap stocks investors get exposure to high quality u s large cap and mid cap stocks while the fund requires lower costs due to its index replication construction as of may 31 2021 the fidelity quality factor etf returned 34 2 over the last twelve months 2 meanwhile the fund underperformed the broad u s large and mid cap universe represented by the russell 1000 which has a one year return of 42 52 as of may 31 2021 3 | |
what is a tracking error | tracking error is the divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark this is often in the context of a hedge fund mutual fund or exchange traded fund etf that did not work as effectively as intended creating an unexpected profit or loss tracking error is reported as a standard deviation percentage difference which reports the difference between the return an investor receives and that of the benchmark they were attempting to imitate investopedia julie bangunderstanding a tracking errorsince portfolio risk is often measured against a benchmark tracking error is a commonly used metric to gauge how well an investment is performing tracking error shows an investment s consistency versus a benchmark over a given period of time even portfolios that are perfectly indexed against a benchmark behave differently than the benchmark even though this difference on a day to day quarter to quarter or year to year basis may be ever so slight the measure of tracking error is used to quantify this difference tracking error is the standard deviation of the difference between the returns of an investment and its benchmark given a sequence of returns for an investment or portfolio and its benchmark tracking error is calculated as follows from an investor s point of view tracking error can be used to evaluate portfolio managers if a manager is realizing low average returns and has a large tracking error it is a sign that there is something significantly wrong with that investment and that the investor should most likely find a replacement it may also be used to forecast performance particularly for quantitative portfolio managers who construct risk models that include the likely factors that influence price changes the managers then construct a portfolio that uses the type of constituents of a benchmark such as style leverage momentum or market cap to create a portfolio that will have a tracking error that closely adheres to the benchmark special considerationsthe net asset value nav of an index fund is naturally inclined toward being lower than its benchmark because funds have fees whereas an index does not a high expense ratio for a fund can have a significantly negative impact on the fund s performance however it is possible for fund managers to overcome the negative impact of fund fees and outperform the underlying index by doing an above average job of portfolio rebalancing managing dividends or interest payments or securities lending beyond fund fees a number of other factors can affect a fund s tracking error one important factor is the extent to which a fund s holdings match the holdings of the underlying index or benchmark many funds are made up of just the fund manager s idea of a representative sample of the securities that make up the actual index there are frequently also differences in weighting between a fund s assets and the assets of the index illiquid or thinly traded securities can also increase the chance of a tracking error since this often leads to prices differing significantly from market price when the fund buys or sells such securities as a result of larger bid ask spreads finally the level of volatility for an index can also affect the tracking error sector international and dividend etfs tend to have higher absolute tracking errors broad based equity and bond etfs tend to have lower ones management expense ratios mer are the most prominent cause of tracking error and there tends to be a direct correlation between the size of the mer and tracking error but other factors can intercede and be more significant at times premiums or discounts to nav may occur when investors bid the market price of an etf above or below the nav of its basket of securities such divergences are usually rare in the case of a premium the authorized participant typically arbitrages it away by purchasing securities in the etf basket exchanging them for etf units and selling the units on the stock market to earn a profit until the premium is gone premiums and discounts as high as 5 have been known to occur particularly for thinly traded etfs | |
when there are thinly traded stocks in the benchmark index the etf provider can t buy them without pushing their prices up substantially so it uses a sample containing the more liquid stocks to proxy the index this is called portfolio optimization | etfs are registered with regulators as mutual funds and need to abide by the applicable regulations of note are two diversification requirements 75 of its assets must be invested in cash government securities and securities of other investment companies and no more than 5 of the total assets can be invested in any one security 1 this can create problems for etfs tracking the performance of a sector where there are a lot of dominant companies indexes don t have cash holdings but etfs do cash can accumulate at intervals due to dividend payments overnight balances and trading activity the lag between receiving and reinvesting the cash can lead to a decline in performance known as drag dividend funds with high payout yields are most susceptible etfs track indexes and when the indexes are updated the etfs have to follow suit updating the etf portfolio incurs transaction costs and it may not always be possible to do it the same way as the index for example a stock added to the etf may be at a different price than what the index maker selected etfs are more tax efficient than mutual funds but have nevertheless been known to distribute capital gains that are taxable in the hands of unitholders although it may not be immediately apparent these distributions create a different performance than the index on an after tax basis indexes with a high level of turnover in companies e g mergers acquisitions and spin offs are one source of capital gains distributions the higher the turnover rate the higher the likelihood the etf will be compelled to sell securities at a profit some etf companies may offset tracking errors through security lending which is the practice of lending out holdings in the etf portfolio to hedge funds for short selling the lending fees collected from this practice can be used to lower tracking error if so desired international etfs with currency hedging may not follow a benchmark index due to the costs of currency hedging which are not always embodied in the mer factors affecting hedging costs include market volatility and interest rate differentials which impact the pricing and performance of forward contracts commodity etfs in many cases track the price of a commodity through the futures markets buying the contract closest to expiry as the weeks pass and the contract nears expiration the etf provider will sell it to avoid taking delivery and buy the next month s contract this operation known as the roll is repeated every month if contracts further from expiration have higher prices contango the roll into the next month will be at a higher price which incurs a loss thus even if the spot price of the commodity stays the same or rises slightly the etf could still show a decline vice versa if futures further away from expiration have lower prices backwardation the etf will have an upward bias leveraged and inverse etfs use swaps forwards and futures to replicate on a daily basis two or three times the direct or inverse return of a benchmark index this requires rebalancing the basket of derivatives daily to ensure they deliver the specified multiple of the index s change each day example of a tracking errorfor example assume that there is a large cap mutual fund benchmarked to the s p 500 index next assume that the mutual fund and the index realized the following returns over a given five year period given this data the series of differences is then 11 12 3 5 12 13 14 9 and 8 7 these differences equal 1 2 1 5 and 1 the standard deviation of this series of differences the tracking error is 2 50 | |
what is a tracking stock | a tracking stock is a special equity offering issued by a parent company that tracks the financial performance of a particular segment or division tracking stocks will trade in the open market separately from the parent company s stock tracking stocks allow larger companies to isolate the financial performance of a higher growth segment in turn tracking stocks give investors the ability to gain exposure to a specific aspect of a larger company s business e g the mobile division within a large telecom provider understanding tracking stocks | |
when a parent company issues a tracking stock all revenue and expenses of the applicable division are separated from the parent company s financial statements the long term performance of the tracking stock is tied to the financials of the division or segment it follows not the parent company | if the division does well financially the tracking stock will likely appreciate even if the parent company is performing poorly conversely if the division slumps financially the tracking stock will likely fall even if the parent company is doing well large companies might issue tracking stocks in order to separate a segment that doesn t quite fit with the core business an example would be a large manufacturing company with a small software development division companies also issue tracking stocks to isolate a high growth division from the larger slower growth parent however the parent company and its shareholders retain control of the division s operations tracking stocks are registered similarly to common stocks per the regulations enforced by the u s securities and exchange commission sec the issuance and reporting are essentially the same as they are for any new common shares companies include a separate section for the tracking stock and the financials of the underlying division in their financial reports tracking stocks were more frequently used in the late 1990s technology boom than they are now although some companies still issue them today tracking stocks benefits and risks for investorstracking stocks allow investors the opportunity to invest in a particular portion of a much larger business the appreciation potential of well established conglomerates is often limited due to them having multiple divisions across various business lines tracking stocks can give investors access to only the most promising parts of a company tracking stocks also allow investors to participate in the business segments that best fit their own risk tolerance that said investors need to be mindful of the risks involved in buying a tracking stock when the parent company is struggling or not well established the parent company and its shareholders do not give up control of the tracking segment s operations investors of tracking shares typically have limited or no voting rights and in the event of corporate bankruptcy at the parent company creditors would have a claim on the tracking segment s assets even if the segment was doing well tracking stocks benefits and risks for companiescompanies raise money through the issuance of tracking stocks the proceeds can then be used to pay down debt fund other growth projects or invest further in the tracking division companies can gauge investor interest in specific segments of the business through the associated activity of each tracking stock for example a large scale telecom giant may choose to use tracking stocks to separate its wireless segment and its landline services investor interest in each division can be measured based on the performance of each of the tracking stocks tracking stocks also eliminate the need for management to create a separate business or legal entity for the tracked segment in a spinoff situation for example the separated segment would require its own board of directors and management team on the flip side companies that issue tracking stocks might be parsing out the best parts of their company if the parent company underperforms financially the high growth segment associated with the tracking stock won t be able to help offset that poor performance tracking stocks give investors access to the more promising divisions of a company the performance of tracking stocks comes only from the tracked segment not from the parent company as a whole new issuance of tracking stocks provides companies with capital to pay down debt and fund growth investors can lose money on tracking stocks if the division performs poorly even if the parent company does well tracking stocks typically come with limited or no voting rights if the parent company goes into bankruptcy creditors may have a claim on the tracking segment s assets even if it is doing well financially example of a tracking stockin 1999 the walt disney company issued a tracking stock for its internet holdings division go com go com s websites included espn com abcnews com disney online and disney s daily blast the tracking stock traded under the ticker symbol go 1in january 2001 just as the tech bubble was popping disney was forced to close go com lay off hundreds of employees and retire the tracking stock permanently 1 | |
what is trade | trade is the voluntary exchange of goods or services between different economic actors since the parties are under no obligation to trade a transaction will only occur if both parties consider it beneficial to their interests trade can have more specific meanings in different contexts in financial markets trade refers to purchasing and selling securities commodities or derivatives free trade means international exchanges of products and services without obstruction by tariffs or other trade barriers investopedia nez riaz | |
how trade works | as a generic term trade can refer to any voluntary exchange from selling baseball cards between collectors to multimillion dollar contracts between companies in macroeconomics trade usually refers to international trade the system of exports and imports that connects the global economy a product sold to the global market is an export and a product bought from the global market is an import exports can account for a significant source of wealth for well connected economies international trade results in increased efficiency and allows countries to benefit from foreign direct investment fdi by businesses in other countries fdi can bring foreign currency and expertise into a country raising local employment and skill levels for investors fdi offers company expansion and growth eventually leading to higher revenues a trade deficit is a situation where a country spends more on aggregate imports from abroad than it earns from its aggregate exports a trade deficit represents an outflow of domestic currency to foreign markets this may also be referred to as a negative balance of trade bot the total value of the global trading market according to the united nations conference on trade and development 1international tradeinternational trade occurs when countries put goods and services on the international market and trade with each other without trade between different countries many modern amenities people expect to have would not be available trade seems to be as old as civilization itself ancient civilizations traded with each other for goods they could not produce for themselves due to climate natural resources or other inhibiting factors the ability of two countries to produce items the other could not and mutually exchange them led to the principle of comparative advantage this principle commonly known as the law of comparative advantage is popularly attributed to english political economist david ricardo and his book on the principles of political economy and taxation in 1817 however ricardo s mentor james mill likely originated the analysis ricardo famously showed how england and portugal benefited by specializing and trading according to their comparative advantages in this case portugal was able to make wine at a low cost while england was able to manufacture cloth cheaply by focusing on their comparative advantages both countries could consume more goods through trade than they could in isolation the first long distance trade is thought to have occurred 5 000 years ago between mesopotamia and the indus valley the theory of comparative advantage helps to explain why protectionism is often counterproductive while a country can use tariffs and other trade barriers to benefit specific industries or interest groups these policies also prevent their consumers from enjoying the benefits of cheaper goods from abroad eventually that country would be economically disadvantaged relative to countries that conduct trade comparative advantage is one country s ability to produce something better and more efficiently than others whatever the item is it becomes a powerful bargaining tool because it can be used as a trade incentive for trading partners | |
when two countries trade they can each have a comparative advantage and benefit each other for instance imagine a country that has limited natural resources one day a shepherd stumbled upon an abundant cheap and renewable energy source only occurring within that country s borders that could provide enough clean energy for its neighboring countries for centuries as a result this country would suddenly have a comparative advantage it could market to trading partners | imagine a neighboring country has a booming lumber trade and can manufacture building supplies much cheaper than the country with the new energy source but it consumes a lot of energy to do so the two countries have comparative advantages that can be traded beneficially for both benefits of tradebecause countries are endowed with different assets and natural resources some may produce the same good more efficiently and sell it more cheaply than others countries that trade can take advantage of the lower prices available in other countries here are some other benefits of trade 2criticisms of tradewhile the law of comparative advantage is a regular feature of introductory economics many countries try to shield local industries with tariffs subsidies or other trade barriers one possible explanation comes from what economists call rent seeking rent seeking occurs when one group organizes and lobbies the government to protect its interests for example business owners might pressure their country s government for tariffs to protect their industry from inexpensive foreign goods which could cost the livelihoods of domestic workers even if the business owners understand trade benefits they could be reluctant to sacrifice a lucrative income stream moreover there are strategic reasons for countries to avoid excessive reliance on free trade for example a country that relies on trade might become too dependent on the global market for critical goods some development economists have argued for tariffs to help protect infant industries that cannot yet compete on the global market as those industries grow and mature they are expected to become a comparative advantage for their country | |
what are the types of trade | generally there are two types of trade domestic and international domestic trades occur between parties in the same countries international trade occurs between two or more countries a country that places goods and services on the international market is exporting those goods and services one that purchases goods and services from the international market is importing those goods and services | |
what is the importance of trade | trade is essential for many reasons but some of the most commonly cited ones are lowering prices becoming or remaining competitive developing relationships fueling growth reducing inflation encouraging investment and supporting better paying jobs 2 | |
what are the advantages and disadvantages of trade | trade offers many advantages such as increasing quality of life and fueling economic growth however trade can be used politically through embargoes and tariffs to manipulate trade partners it also comes with language barriers cultural differences and restrictions on what can be imported or exported additionally intellectual property theft becomes an issue because regulations and enforcement methods change across borders the bottom linetrade is the exchange of goods and services between parties for mutually beneficial purposes people and countries trade to improve their circumstances and quality of life it also develops relationships between governments and fosters friendship and trust | |
what is trade credit | trade credit is a business to business b2b agreement in which a customer can purchase goods without paying cash upfront and paying the supplier at a later scheduled date usually businesses that operate with trade credits will give buyers 30 60 or 90 days to pay with the transaction recorded through an invoice trade credit can be thought of as a type of 0 financing increasing a company s assets while deferring payment for a specified value of goods or services to sometime in the future and requiring no interest to be paid in relation to the repayment period nono flores investopediaunderstanding trade credittrade credit is an advantage for a buyer in some cases certain buyers may be able to negotiate longer trade credit repayment terms which provides an even greater advantage often sellers will have specific criteria for qualifying for trade credit a b2b trade credit can help a business to obtain manufacture and sell goods before ever having to pay for them this allows businesses to receive a revenue stream that can retroactively cover the cost of goods sold walmart is one of the biggest utilizers of trade credit seeking to pay retroactively for inventory sold in their stores international business deals also involve trade credit terms in general if trade credit is offered to a buyer it typically always provides an advantage for a company s cash flow the number of days for which a credit is given is determined by the company allowing the credit and is agreed upon by both the company allowing the credit and the company receiving it trade credit can also be an essential way for businesses to finance short term growth because trade credit is a form of credit with no interest it can often be used to encourage sales since trade credit puts suppliers at somewhat of a disadvantage many suppliers use discounts when trade credits are involved to encourage early payments a supplier may give a discount if a customer pays within a certain number of days before the due date for example a 2 discount if payment is received within 10 days of issuing a 30 day credit this discount would be referred to as 2 10 net 30 or simply just 2 10 net 30 trade credit accountingtrade credits are accounted for by both sellers and buyers accounting with trade credits can differ based on whether a company uses cash accounting or accrual accounting accrual accounting is required for all public companies 1 with accrual accounting a company must recognize revenues and expenses at the time they are transacted trade credit invoicing can make accrual accounting more complex if a public company offers trade credits it must book the revenue and expenses associated with the sale at the time of the transaction when trade credit invoicing is involved companies do not immediately receive cash assets to cover expenses therefore companies must account for the assets as accounts receivable on their balance sheet with trade credit there is the possibility of default companies offering trade credits also usually offer discounts which means they can receive less than the accounts receivable balance both defaults and discounts can require the need for accounts receivable write offs from defaults or write downs from discounts these are considered liabilities that a company must expense alternatively trade credit is a useful option for businesses on the buying side a company can obtain assets but would not need to credit cash or recognize any expenses immediately in this way trade credit can act like a 0 loan on the balance sheet the company s assets increase but cash does not need to be paid until sometime in the future and no interest is charged during the repayment period a company only needs to recognize the expense when cash is paid using the cash method or when revenue is received using the accrual method overall these activities greatly free up cash flow for the buyer trade credit trendstrade credit is most rewarding for businesses that do not have a lot of financing options in financial technology new types of point of sale financing options are being provided for businesses to utilize in place of trade credits many of these fintech firms partner with sellers at the point of sale to provide 0 or low interest financing on purchases these partnerships help to alleviate trade credit risks for sellers while also supporting growth for buyers trade credit has also brought about new financing solutions for sellers in the form of accounts receivable financing accounts receivable financing also known as invoice financing or factoring is a type of financing that provides businesses with capital in relation to their trade credit accounts receivable balances from an international standpoint trade credit is encouraged the world trade organization wto reports that 80 to 90 of world trade is in some way reliant on trade finance 2 trade finance insurance is also a part of many trade finance discussions globally with many new innovations liquidx for example now offers an electronic marketplace focused on trade credit insurance for global participants 3research conducted by the u s federal reserve banks also highlights some important insights the 2022 small business credit survey finds that trade credit finance is the third most popular financing tool used by small businesses with 9 of businesses reporting that they utilize it 4related concepts and other considerationstrade credit has a significant impact on the financing of businesses and is therefore linked to other financing terms and concepts other important terms that affect business financing are credit rating trade line and buyer s credit a credit rating is an overall assessment of the creditworthiness of a borrower whether a business or individual based on financial history that includes debt repayment timeliness and other factors without a good credit rating trade credit may not be offered to a business if businesses do not pay trade credit balances according to agreed terms then penalties in the form of fees and interest are usually incurred sellers can also report delinquencies on trade credit which may affect a buyer s credit rating delinquencies affecting a buyer s credit rating can also affect their ability to obtain other types of financing trade credit is usually only available for businesses with an established credit history new businesses without a credit history may have to look at other means of financing a trade line or tradeline is a business credit account record provided to a business credit reporting agency for large businesses and public companies trade lines can be followed by rating agencies such as standard poor s moody s or fitch buyer s credit is related to international trade and is essentially a loan given to specifically finance the purchase of capital goods and services buyer s credit involves different agencies across borders and typically has a minimum loan amount of several million dollars advantages and disadvantages of trade creditthe advantages of trade credit for buyers include simple and easy access to financing it is also an affordable type of financing that comes at no extra cost compared to other means of financing such as a loan from a bank because payment is not due until later trade credits improve the cash flow of businesses they can sell the goods they acquired without having to pay for those goods until a later date trade credits also improve your business profile as well as your relationship with your vendors the disadvantages of trade credit include high costs if payments are not made on time costs usually appear in the form of late payment penalty charges or interest charges on the outstanding debt if payments are not made this can also negatively impact the credit profile of your business as well as the relationship with your supplier the advantages of trade credits for sellers include building a strong relationship with your clients encouraging customer loyalty and therefore repeat business trade credits can also lead to higher sales volumes as buyers are likely to purchase more when there is no cost associated with the financing sellers have a few more disadvantages than buyers when it comes to trade credits these include delayed revenue if a business is flush with cash that s not a problem if budgets are tight then delayed revenue might be an issue in terms of covering operating costs trade credits also come with bad debts as some buyers will inevitably not be able to pay this means a business takes on risks when extending financing bad debts can be written off but having a customer not pay can always be detrimental to a business cost effective means of financing for buyersimproves cash flow for buyersencourages higher sales volumes for sellersleads to strong relationships and customer loyalty for sellershigh cost for buyers if payments are not made on timelate payments or bad debts can negatively impact a buyer s credit profile and relationship with supplierssellers run the risk of buyers not paying their debtsdelayed payments can be a strain on the balance sheet for sellers | |
what are the most common terms for using trade credit | the most common terms for using trade credit require a buyer to make payment within seven 30 60 90 or 120 days a percentage discount is applied if payment is made before the date agreed to in the terms | |
what type of credit is trade credit | trade credit is commercial financing whereby a business is able to buy goods without having to pay until later commercial financing in relation to a trade credit comes at a 0 borrowing cost | |
what are the types of trade credit | trade credits can come in the form of open accounts promissory notes or bills payable | |
is trade credit expensive | in its purest form trade credit is not expensive to the buyer as there is no associated cost trade credit is an interest free loan however trade credit can be expensive if payment is not made by the agreed upon date whereby a borrower can incur high costs either through late fees or an interest rate charged by the seller on the outstanding amount the bottom linetrade credit is a form of commercial financing that greatly benefits businesses in their operations it is an interest free loan for a buyer allowing them to obtain goods with payment due at a later date at no extra charge this allows for improved cash flows and the avoidance of traditional costs associated with financing | |
what is a trade deficit | a trade deficit occurs when a country s imports exceed its exports a trade deficit is also referred to as a negative balance of trade bot the balance can be calculated on different categories of transactions goods a k a merchandise services goods and services balances are also calculated for international transactions current account capital account and financial account understanding trade deficitsa trade deficit occurs when there is a negative net amount or negative balance in an international transaction account the balance of payments international transaction accounts records all economic transactions between residents and non residents where a change in ownership occurs a trade deficit or net amount can be calculated on different categories within an international transaction account these include goods services goods and services current account and the sum of balances on the current and capital accounts the sum of the balances on the current and capital accounts equals net lending borrowing this also equals the balance on the financial account plus a statistical discrepancy the financial account measures financial assets and liabilities in contrast to purchases and payments in the current and capital accounts advantages of trade deficitsthe most obvious benefit of a trade deficit is that it allows a country to consume more than it produces in the short run trade deficits can help nations to avoid shortages of goods and other economic problems in some countries trade deficits correct themselves over time a trade deficit creates downward pressure on a country s currency under a floating exchange rate regime with a cheaper domestic currency imports become more expensive in the country with the trade deficit consumers react by reducing their consumption of imports and shifting toward domestically produced alternatives domestic currency depreciation also makes the country s exports less expensive and more competitive in foreign markets trade deficits can also occur because a country is a highly desirable destination for foreign investment for example the u s dollar s status as the world s reserve currency creates a strong demand for u s dollars foreigners must sell goods to americans to obtain dollars the stability of developed countries generally attracts capital while less developed countries must worry about capital flight disadvantages of trade deficitstrade deficits can create substantial problems in the long run the worst and most obvious problem is that trade deficits can facilitate a sort of economic colonization if a country continually runs trade deficits citizens of other countries acquire funds to buy up capital in that nation that can mean making new investments that increase productivity and create jobs however it may also involve merely buying up existing businesses natural resources and other assets if this buying continues foreign investors will eventually own nearly everything in the country trade deficits are generally much more dangerous with fixed exchange rates under a fixed exchange rate regime devaluation of the currency is impossible trade deficits are more likely to continue and unemployment may increase significantly according to the twin deficits hypothesis there is also a link between trade deficits and budget deficits some economists believe that the european debt crisis was caused in part by some eu members running persistent trade deficits with germany exchange rates can no longer adjust between countries in the eurozone making trade deficits a more serious problem trade deficit and politicstrade deficits are frequently politicized serving as ammunition for politicians to advance their agendas for instance the trade deficit between the u s and china has been a focal point in political discourse and specific reporting 1 this political narrative surrounding trade imbalances shapes public perception influences policy decisions and often underscores broader concerns about globalization and job loss in summary trade deficit may dictate how some people vote consider final figures that demonstrated how america s trade gap increased during donald trump s presidency 2moreover trade deficits can strain diplomatic relations between countries disproportionate trade imbalances may lead to tensions and disputes prompting retaliatory measures like tariffs or trade barriers for instance consider how sanctions and export control on russia would have been met by retaliation measures by russia as part of the ukraine conflict 3 in this situation having a trade deficit may be unfavorable as it may be an indicator of nobody willing to export to them real world example of trade deficitsin 2023 the u s trade deficit dropped to 773 4 billion from 951 2 billion in 2022 this was due to more exports and fewer imports the goods deficit fell by 121 3 billion to 1 061 7 billion while the services surplus rose by 56 4 billion to 288 2 billion as a percentage of gdp the deficit decreased from 3 7 to 2 8 4exports of goods and services reached 3 053 5 billion up by 35 0 billion 1 2 however goods exports declined by 39 2 billion while services exports increased by 74 2 billion the drop in goods exports was mainly in industrial supplies and foods though there were increases in capital goods and automotive items service exports rose due to more travel financial services and telecommunications imports of goods and services decreased by 142 7 billion 3 6 to 3 826 9 billion in 2023 4 | |
what is a trade deficit | a trade deficit occurs when a country imports more goods and services than it exports resulting in a negative balance of trade in other words it represents the amount by which the value of imports exceeds the value of exports over a certain period | |
how is a trade deficit calculated | to calculate a trade deficit subtract the total value of exports from the total value of imports for a specific period the resulting figure represents the net trade balance with a negative value indicating a trade deficit | |
how does a trade deficit impact employment | a trade deficit can have both positive and negative effects on employment on the negative side increased imports can lead to job losses in industries that face stiff competition from foreign producers however on the positive side a trade deficit can also be associated with strong domestic demand which can stimulate job creation in other sectors of the economy can trade deficits be beneficial for an economy while trade deficits are often viewed negatively they can also have potential benefits for an economy for example a trade deficit may reflect strong domestic demand and economic growth as well as access to a wider range of goods and services for consumers additionally a trade deficit can be financed by foreign investment inflows which can stimulate domestic investment and economic activity the bottom linetrade deficits occur when a country imports more goods and services than it exports resulting in a negative balance of trade they can affect domestic industries employment and economic growth and are influenced by factors such as exchange rates trade policies and global economic conditions | |
what is trade finance | trade finance represents the financial instruments and products that are used by companies to facilitate international trade and commerce trade finance makes it possible and easier for importers and exporters to transact business through trade trade finance is an umbrella term meaning it covers many financial products that banks and companies utilize to make trade transactions feasible investopedia michela buttignol | |
how trade finance works | the function of trade finance is to introduce a third party to transactions to remove the payment risk and the supply risk trade finance provides the exporter with receivables or payment according to the agreement while the importer might be extended credit to fulfill the trade order 1the parties involved in trade finance are numerous and can include 2trade financing is different than conventional financing or credit issuance general financing is used to manage solvency or liquidity but trade financing may not necessarily indicate a buyer s lack of funds or liquidity instead trade finance may be used to protect against international trade s unique inherent risks such as currency fluctuations political instability issues of non payment or the creditworthiness of one of the parties involved below are a few of the financial instruments used in trade finance 3although international trade has been in existence for centuries trade finance facilitates its advancement the widespread use of trade finance has contributed to international trade growth | |
how trade financing reduces risk | trade finance can help reduce the risk associated with global trade by reconciling the divergent needs of an exporter and importer ideally an exporter would prefer the importer to pay upfront for an export shipment to avoid the risk that the importer takes the shipment but refuses to pay for the goods however if the importer pays the exporter upfront the exporter may accept the payment but refuse to ship the goods a common solution to this problem is for the importer s bank to provide a letter of credit to the exporter s bank that provides for payment once the exporter presents documents that prove the shipment occurred like a bill of lading the letter of credit guarantees that once the issuing bank receives proof that the exporter shipped the goods and the terms of the agreement have been met it will issue the payment to the exporter with the letter of credit the buyer s bank assumes the responsibility of paying the seller the buyer s bank would have to ensure the buyer was financially viable enough to honor the transaction trade finance helps both importers and exporters build trust in dealing with each other and thus facilitating trade 5trade finance allows both importers and exporters access to many financial solutions that can be tailored to their situation and often multiple products can be used in tandem or layered to help ensure the transaction goes through smoothly other benefits to trade financebesides reducing the risk of nonpayment and non receipt of goods trade finance has become an important tool for companies to improve their efficiency and boost revenue trade finance helps companies obtain financing to facilitate business but also it is an extension of credit in many cases trade finance allows companies to receive a cash payment based on accounts receivables in case of factoring a letter of credit might help the importer and exporter to enter a trade transaction and reduce the risk of nonpayment or non receipt of goods as a result cash flow is improved since the buyer s bank guarantees payment and the importer knows the goods will be shipped in other words trade finance ensures fewer delays in payments and in shipments allowing both importers and exporters to run their businesses and plan their cash flow more efficiently think of trade finance as using the shipment or trade of goods as collateral for financing the company s growth trade finance allows companies to increase their business and revenue through trade for example a u s company that can land a sale with a company overseas might not have the ability to produce the goods needed for the order however through export financing or help from private or governmental trade finance agencies the exporter can complete the order as a result the u s company gets new business that it might not have had without the creative financial solutions that trade finance provides without trade financing a company might fall behind on payments and lose a key customer or supplier that could have long term ramifications for the company having options like revolving credit facilities and accounts receivables factoring can not only help companies transact internationally but also help them in times of financial difficulties | |
what is trade liberalization | trade liberalization is the removal or reduction of restrictions or barriers on the free exchange of goods between nations these barriers include tariffs such as duties and surcharges and nontariff barriers such as licensing rules and quotas economists often view the easing or eradication of these restrictions as steps to promote free trade understanding trade liberalizationtrade liberalization is a controversial topic critics of trade liberalization claim that the policy can cost jobs because cheaper goods will flood the nation s domestic market critics also suggest that the goods can be of inferior quality and less safe than competing domestic products that may have undergone more rigorous safety and quality checks proponents of trade liberalization however claim that it ultimately lowers consumer costs increases efficiency and fosters economic growth protectionism the opposite of trade liberalization is characterized by strict barriers and market regulation the outcome of trade liberalization and the resulting integration among countries is known as globalization advantages and disadvantages of trade liberalizationtrade liberalization promotes free trade which allows countries to trade goods without regulatory barriers or their associated costs this reduced regulation decreases costs for countries that trade with other nations and may ultimately result in lower consumer prices because imports are subject to lower fees and competition is likely to increase increased competition from abroad as a result of trade liberalization creates an incentive for greater efficiency and cheaper production by domestic firms this competition might also spur a country to shift resources to industries in which it may have a competitive advantage for example trade liberalization has encouraged the united kingdom to concentrate on its service sector rather than manufacturing however trade liberalization can negatively affect certain businesses within a nation because of greater competition from foreign producers and may result in less local support for those industries there may also be a financial and social risk if products or raw materials come from countries with lower environmental standards trade liberalization can pose a threat to developing nations or economies because they are forced to compete in the same market as stronger economies or nations this challenge can stifle established local industries or result in the failure of newly developed industries there countries with advanced education systems tend to adapt rapidly to a free trade economy because they have a labor market that can adjust to changing demands and production facilities that can shift their focus to more in demand goods countries with lower educational standards may struggle to adapt to a changing economic environment critics believe that trade liberalization costs jobs and depresses wages proponents believe it spurs competition and growth trade liberalization examplethe north american free trade agreement nafta was signed on dec 17 1992 by canada mexico and the united states it entered into force on jan 1 1994 1 the agreement eliminated the tariffs on products that were traded among the three countries one of nafta s goals was to integrate mexico with the highly developed economies of the united states and canada in part because mexico was considered a lucrative new market for canada and the united states the three governments also hoped that the trade deal would improve mexico s economy 2 over time regional trade tripled and cross border investment increased among the countries however former president donald j trump considered the agreement detrimental to u s jobs and manufacturing on sept 30 2018 the trump administration concluded negotiations on an updated pact the u s mexico canada agreement usmca which entered into force on july 1 2020 3 most economists agree that nafta was beneficial to the canadian and u s economies according to a council on foreign relations report regional trade increased from 290 billion in 1993 to over 1 1 trillion in 2016 and u s foreign direct investment fdi stock in mexico increased from 15 billion to more than 100 billion however economists also say that other factors may also have contributed to these outcomes such as technological change and extended trade with china 2 critics of nafta argue that the agreement caused job losses and wage stagnation in the united states because companies moved their production to mexico to take advantage of lower labor costs 2 it remains to be seen how the usmca will affect these factors | |
what is a trade line | a trade line is a record of activity for any type of credit extended to a borrower and reported to a credit reporting agency a trade line is established on a borrower s credit report when a borrower is approved for credit the trade line records all of the activity associated with an account comprehensively trade lines are used by credit reporting agencies to calculate a borrower s credit score different credit reporting agencies give differing weights to the activities of trade lines when establishing a credit score for borrowers | |
how a trade line works | a trade line is an important record keeping mechanism that tracks the activity of borrowers on their credit reports each credit account has its own trade line borrowers will have multiple trade lines on their credit report each representing the individual borrowing accounts for which they have been approved the basic types of accounts that have a trade line are those paid off in fixed installments and these accounts are often broken into categories first revolving trade lines are reported on credit cards or other lines of credit second installment trade lines report the history of car loans mortgages student loans and personal loans open accounts a third type of account on a trade line are often associated with businesses as opposed to individuals | |
should a trade line be created in your name fraudulently you can request to have the trade line removed from your credit history | records included in a trade linetrade lines may contain a variety of different data points related to the creditor the lender and the type of credit that is being provided the trade line often contains the name of the creditor or lender the account or another identifier for the type of credit being provided the parties responsible for paying the loan and the payment status of the account the trade line will also contain particular account milestones such as the date the credit was extended the credit limit the payment history all levels of delinquency if any missed payments have occurred and the total amount owed as of the last report if a consumer closes an account that account will typically remain on his or her credit report as a trade line for seven years though in some cases the account can go away sooner payment status indicates whether or not payments for the loan are being made on time and how late they are if they are not being made on time if the payments are being made on time the payment status will indicate that the payments are being made according to the terms of the credit agreement the information included in your trade lines is used to calculate your credit scores while your credit score is a summarized snapshot of your creditworthiness lenders may inquire to see a detailed report of your entire trade line special considerationslate payments are usually grouped in a range of days according to how late they are for example delinquencies may be reported as 30 days late 60 days late or 90 days late the payment status may be set to charge off if the creditor deems it unlikely that the debt will be repaid and the status may also indicate that the credit recipient has entered bankruptcy as trade lines are used by credit reporting agencies to develop an individual s credit score credit scores vary with higher scores generally given to individuals with more favorable trade line reporting factors considered when calculating the credit score include the number of trade lines types of trade lines lengths of open accounts and payment history in addition to reviewing a borrower s credit score a lender who pulls data from a credit reporting agency may also comprehensively analyze all of the trade line reporting on a credit report when considering a credit application in the underwriting process | |
what is a trade line | a trade line is a summary on every revolving or installment credit you have this detailed report outlines your creditworthiness by communicating to creditors and lenders your payment history your credit history and your delinquencies | |
what is an example of a trade line | a trade line is created for every credit line you own an example of a trade line is your car payment history when you begin repaying a car loan a trade line is created that summarizes your contact information your current payment status the date the line of credit was opened and the date the line was closed the trade line will also report current information such as the date of your last payment the current balance remaining and your monthly payment amount can trade lines hurt your credit yes trade lines communicate to lenders your prior creditworthiness and details how much debt you have what your current minimum monthly payments are and what your historical payment delinquencies are | |
how do you get a trade line | a trade line is automatically created for you when a new line of credit is started for example when you sign up for a new credit card a new trade line is created specific to that individual line of credit as you incur purchases on the card and pay off debt balances a record of history is created | |
how long do trade lines last | trade lines may show up on your credit report as soon as 15 days after the time of purchase alternatively a trade line may be delayed on showing on your report up to 45 days depending on the timing of the purchase each credit reporting agency may have varying terms on how long a trade line is maintained in general a trade line is often maintained on your account 10 years after the trade line has been closed trade lines with a negative history are generally closed between seven to 10 years trade lines for fraudulent or erroneous reports can be disputed after credit bureau agencies receive valid proof these trade lines are often removed within 30 days of review 2 | |
what is a trade sanction | trade sanctions are legal restrictions on trade with a country trade sanctions are a subcategory of economic sanctions which are economic penalties imposed on a country to accomplish policy goals beyond the sanctioned economic activity 1 | |
what is a trade secret | a trade secret is any practice or process of a company that is generally not known outside of the company information considered a trade secret gives the company a competitive advantage over its competitors and is often a product of internal research and development to be legally considered a trade secret in the united states a company must make a reasonable effort in concealing the information from the public the secret must intrinsically have economic value and the trade secret must contain information trade secrets are a part of a company s intellectual property unlike a patent a trade secret is not publicly known understanding a trade secrettrade secrets may take a variety of forms such as a proprietary process instrument pattern design formula recipe method or practice that is not evident to others and may be used as a means to create an enterprise that offers an advantage over competitors or provides value to customers trade secrets are defined differently based on jurisdiction but all have the following characteristics in common if a trade secret holder fails to safeguard the secret or if the secret is independently discovered released or becomes general knowledge protection of the secret is removed as confidential information as trade secrets are known in some jurisdictions trade secrets are the classified documents of the business world just as top secret documents are closely guarded by government agencies because the cost of developing certain products and processes is much more expensive than competitive intelligence companies have an incentive to figure out what makes their competitors successful to protect its trade secrets a company may require employees privy to the information to sign non disclosure agreements nda upon hire non compete agreements were also used but the ftc banned them in april 2024 1trade secret treatmentin the united states trade secrets are defined and protected by the economic espionage act of 1996 outlined in title 18 part i chapter 90 of the u s code and also fall under state jurisdiction as a result of a 1974 ruling each state may adopt its own trade secret rules some 47 states and the district of columbia have adopted some version of the uniform trade secrets act usta 2 the most recent legislation addressing trade secrets came in 2016 with the defend trade secrets act which gives the federal government cause for action in cases involving the misappropriation of trade secrets the federal law defines trade secrets as all forms and types of the following information such information according to federal law includes the above includes according to federal law tangible or intangible and whether or how stored compiled or memorialized physically electronically graphically photographically or in writing 3 the law also provides the condition that the owner has taken reasonable measures to keep such information secret and that the information derives independent economic value actual or potential from not being generally known to and not being readily ascertainable through proper means by another person who can obtain economic value from the disclosure or use of the information 3 other jurisdictions may treat trade secrets somewhat differently some consider them property while others consider them as an equitable right real world examplesthere are many examples of trade secrets that are tangible and intangible for example google s search algorithm exists as intellectual property in code and is regularly updated to improve and protect its operations the secret formula for coca cola which is locked in a vault is an example of a trade secret that is a formula or recipe since it has not been patented it has never been revealed the new york times bestseller list is an example of a process trade secret while the list does factor in book sales by compiling chain and independent store sales as well as wholesaler data the list is not merely sales numbers books with lower overall sales may make the list while a book with higher sales may not | |
what is a trade signal | a trade signal is a trigger for action either to buy or sell a security or other asset generated by analysis that analysis can be human generated using technical indicators or it can be generated using mathematical algorithms based on market action possibly in combination with other market factors such as economic indicators | |
how a trade signal works | trade signals can use a variety of inputs from several disciplines typically technical analysis is a major component but fundamental analysis quantitative analysis and economics may also be inputs as well as sentiment measures and even signals from other trade signal systems the goal is to give investors and traders a mechanical method devoid of emotion to buy or sell a security or other asset aside from simple buy and sell triggers trade signals can also be used to modify a portfolio by determining when it might be a good time to buy more of one particular sector such as technology and lighten up on another such as consumer staples bond traders meanwhile could have signals for adjusting the duration of their portfolios by selling one maturity and buying a different maturity finally it can also help with asset class allocation such as shifting money among stocks bonds and gold there is no limit to how complex a trade signal can be however traders tend to keep things simple by using only a handful of inputs for practical purposes it is far easier to manage a simple signal generator and periodically test it to see what components need adjusting or replacing too many inputs would introduce complexity requiring more time than a trader has to offer and since markets change over time often with great speed complex strategies could be rendered obsolete before testing is even finished example of a trade signaltrade signals tend to be associated with quick in and out trading however in reality some signals are less frequent and based on reversion and dip buying in equities great trading signals of this sort would be to look for periods where price action doesn t line up with the underlying fundamentals an example would be if the market is selling off due to fear headlines but the fundamental data indicates good health traders may decide to buy the dip if their signal is flashing good deal creating a trade signalthere are endless possibilities when coming up with a trade signal but traders tend to just want to automate their thinking an example might be for a stock with lower than a certain price to earnings ratio p e ratio buy when a certain technical formation breaks out to the upside and prices are above a certain moving average while interest rates are falling here are several of the more common inputs traders can combine them as they wish to meet whatever criteria they use to select trades | |
what is a trade surplus | a trade surplus is an economic measure of a positive balance of trade where a country s exports exceed its imports a trade surplus represents a net inflow of domestic currency from foreign markets it is the opposite of a trade deficit which represents a net outflow and occurs when the result of the above calculation is negative in the united states trade balances are reported monthly by the bureau of economic analysis bea 1understanding trade surplusa trade surplus occurs when trade balance is positive trade balance is equal to the total value of exports minus the total value of imports a trade surplus can create employment and economic growth but may also lead to higher prices and interest rates within an economy a country s trade balance can also influence the value of its currency in the global markets as it allows a country to have control of the majority of its currency through trade in many cases a trade surplus helps to strengthen a country s currency relative to other currencies affecting currency exchange rates however this is dependent on the proportion of goods and services traded by a country in comparison to other countries as well as other market factors | |
when focusing solely on trade effects a trade surplus means there is high demand for a country s goods in the global market which pushes the price of those goods higher and leads to a direct strengthening of the domestic currency | a trade surplus implies there is high demand from overseas for a country s goods and services which tends to push its prices up and contribute to a strengthening of the domestic currency trade surplus vs trade deficitthe opposite of a trade surplus is a trade deficit a trade deficit occurs when a country imports more than it exports a trade deficit typically also has the opposite effect on currency exchange rates when imports exceed exports demand for a country s currency is lower lower demand for currency makes it less valuable in the international markets special considerationswhile in most cases trade balances highly affect currency fluctuations there are a few factors countries can manage that make trade balances less influential countries can manage a portfolio of investments in foreign accounts to control the volatility and movement of the currency additionally countries can also agree on a pegged currency rate that keeps the exchange rate of their currency constant at a fixed rate if a currency is not pegged to another currency its exchange rate is considered floating floating exchange rates are highly volatile and subject to daily trading whims within the currency market which is one of the global financial market s largest trading arenas | |
is a trade surplus good or bad | generally selling more than buying is considered a good thing a trade surplus means the things the country produces are in high demand which should create lots of jobs and fuel economic growth however that doesn t mean the countries with trade deficits are necessarily in a mess each economy operates differently and those that historically import more such as the u s often do so for a good reason take a look at the countries with the highest trade surpluses and deficits and you ll soon discover that the world s strongest economies appear across both lists 2 | |
which countries have a trade surplus | in 2022 the countries with the highest trade surplus were china russia ireland saudi arabia and singapore 2 | |
what increases a trade surplus | a trade surplus rises when a country increasingly sells more to other countries than it buys from other countries this isn t always sustainable as growing demand tends to push the value of the currency up making it more expensive for foreign clients to keep buying the bottom linetrade surpluses are generally more popular than trade deficits protecting domestic industry has become a big theme of late among politicians and led in some cases to a series of trade wars and tariffs global tensions and a rise in nationalism have painted a picture of importers being losers however that s not necessarily the case especially when everyone is on good terms trade between countries and importing things when it makes sense financially can be seen as a positive in fact some of the strongest economies in the world are running a trade deficit implying that trade is not a zero sum game and that importing more than one exports isn t necessarily bad 2 | |
what is a trade war | a trade war happens when one country retaliates against another by raising import tariffs or placing other restrictions on the other country s imports trade wars can commence if one country perceives that a competitor nation has unfair trading practices domestic trade unions or industry lobbyists can pressure politicians to make imported goods less attractive to consumers pushing international policy toward a trade war also trade wars are often a result of a misunderstanding of the widespread benefits of free trade understanding a trade wartrade wars are usually considered a side effect of protectionism protectionism refers to government actions and policies that restrict international trade a country will generally undertake protectionist actions to shield domestic businesses and jobs from foreign competition protectionism is also a method used to balance trade deficits a trade deficit occurs when a country s imports exceed the amounts of its exports a tariff is a tax or duty imposed on the goods imported into a nation in a global economy a trade war can become very damaging to the consumers and businesses of both nations and the contagion can grow to affect many aspects of both economies a trade war that begins in one sector can grow to affect other sectors likewise a trade war that begins between two countries can affect other countries not initially involved in the trade war as noted above this import tit for tat battle can result from a protectionist penchant a trade war is distinct from other actions taken to control imports and exports such as sanctions instead the trade war has detrimental effects on the trading relationship between two countries because its goals are related specifically to trade sanctions for example may also have philanthropic goals in addition to tariffs protectionist policies can be implemented by placing a cap on import quotas setting clear product standards or implementing government subsidies for processes to deter outsourcing history of trade warstrade wars are not an invention of modern society such battles have been going on for as long as nations have conducted trade with one another for example colonial powers fought with each other over the right to trade exclusively with overseas colonies in the 17th century the british empire has a long history of such trade battles an example can be seen in the opium wars of the 19th century with china the british had been sending india produced opium into china for years when the chinese emperor decreed it to be illegal attempts to settle the conflict failed and the emperor eventually sent troops to confiscate the drugs however the might of the british navy prevailed and china conceded additional entry of foreign trade into the nation in 1930 the united states enacted the smoot hawley tariff act raising tariffs to protect american farmers from european agricultural products 1 this act increased the already hefty import duties to almost 40 2 in response several nations retaliated against the united states by imposing their own higher tariffs and global trade declined worldwide as america entered the great depression aided greatly by disastrous trade policies president roosevelt began to pass several acts to reduce trade barriers including the reciprocal trade agreements act beginning in january 2018 former president trump imposed a series of tariffs on everything from steel and aluminum to solar panels and washing machines these duties impacted goods from the european union eu and canada as well as china and mexico canada retaliated by imposing a series of temporary duties on american steel and other products the eu also imposed tariffs on american agricultural imports and other products including harley davidson motorcycles 3by may 2019 tariffs on chinese imports impacted nearly 200 billion of imports 4 as with all trade wars china retaliated and imposed stiff duties on american imports a study by the international monetary fund imf shows that u s importers of goods have primarily shouldered the cost of the imposed tariffs on chinese goods these costs are eventually passed on to the american consumer in the form of higher prices which is the exact opposite of what the trade war is intended to accomplish 5although the united states and russia are not engaged in a trade war u s president joe biden announced sanctions against russia on feb 22 2022 in response to russia s military aggression against ukraine the sanctions include blocking two russian banks that finance the military market restrictions on russian sovereign debt and targeting individual russian elites 6advantages and disadvantages of a trade warthe advantages and disadvantages of trade wars in particular and protectionism in general are the subjects of fierce and ongoing debate proponents of protectionism argue that well crafted policies provide competitive advantages by blocking or discouraging imports protective policies throw more business toward the domestic producers which ultimately creates more american employment these policies also serve to overcome a trade deficit additionally proponents believe that painful tariffs and trade wars may also be the only effective way to deal with a nation that continues to behave unfairly or unethically in its trading policies protects domestic companies from unfair competitionincreases demand for domestic goodspromotes local job growthimproves trade deficitspunishes nation with unethical trade policiesincreases costs and induces inflationcauses marketplace shortages reduces choicediscourages tradeslows economic growthhurts diplomatic relations cultural exchangecritics argue that protectionism often hurts the people it is intended to protect long term by choking off markets and slowing economic growth and cultural exchange consumers may begin to have less choice in the marketplace they may even face shortages if there is no ready domestic substitute for the imported goods that tariffs have impacted or eliminated having to pay more for raw materials hurts manufacturers profit margins as a result trade wars can lead to price increases with manufactured goods in particular becoming more expensive sparking inflation in the local economy overall example of a trade warwhile running for president in 2016 president donald trump expressed his disdain for many current trade agreements promising to bring manufacturing jobs back to the united states from other nations where they had been outsourced such as china and india after his election he embarked on a protectionist campaign president trump also threatened to pull the united states out of the world trade organization wto an impartial international entity that regulates and arbitrates trade among the 164 countries that belong to it 7in early 2018 president trump stepped up his efforts particularly against china threatening a substantial fine over alleged intellectual property ip theft and significant tariffs the chinese retaliated with a 25 tax on over 100 u s products throughout 2018 the two nations continued to threaten each other releasing lists of proposed tariffs on various goods although china responded with tariffs of its own the american duties did have an impact on the chinese economy hurting manufacturers and causing a slowdown in december each nation agreed to halt imposing any new taxes the tariff war cease fire continued into 2019 in the spring china and the united states seemed on the verge of a trade agreement at the beginning of may chinese officials took a new hard line in negotiations refusing to make changes in their company subsidizing laws and insisting on the lifting of the current tariffs angered by this apparent backtracking the president doubled down announcing on may 5 2019 that he was going to increase tariffs as of may 10 from 10 to 25 on 200 billion worth of chinese imports 4 he may have felt emboldened by the fact that the u s trade deficit with china had fallen to its lowest level since 2014 china halted all imports of farm products by state owned firms in retaliation the asian nation s central bank also weakened the yuan above the seven per dollar reference rate for the first time in over a decade leading to concerns about a currency war perhaps realizing that this was mutually destructive the united states and china agreed to a trade deal that was signed on jan 15 2020 8 but the subsequent covid 19 pandemic threatened a further escalation of trade tensions between the two nations | |
what is a trademark | the term trademark refers to a recognizable insignia phrase word or symbol that denotes a specific product and legally differentiates it from all other products of its kind a trademark exclusively identifies a product as belonging to a specific company and recognizes the company s ownership of the brand trademarks are generally considered a form of intellectual property and may or may not be registered understanding trademarkstrademarks not only help distinguish products within the legal and business systems but just as significantly with consumers they are used to identify and protect words and design elements that identify the source owner or developer of a product or service they can be corporate logos slogans bands or the brand name of a product similar to a trademark a service mark identifies and distinguishes the source of a service rather than a product and the term trademark is often used to refer to both trademarks and service marks using a trademark prevents others from using a company or individual s products or services without their permission they also prohibit any marks that have a likelihood of confusion with an existing one this means that a business cannot use a symbol or brand name if it looks or sounds similar or has a similar meaning to one that s already on the books especially if the products or services are related for instance a soft drink company can t legally use a symbol that looks like that of coca cola and it can t use a name that sounds like coke a trademark does not need to be registered for the owner to prevent others from using it or a confusingly similar mark trademarks in the united states are registered through the united states patent and trademark office uspto and are identified with the symbol 2 but trademarks don t have to be registered in order to give the company or individual protection rights unregistered trademarks can be recognized with the symbol by using this symbol the trademark user indicates they are using common law to protect their interests 3the laws governing trademarks never expire this means the holder has the right to the trademark for the life of the product or service but there are certain exceptions the user is required to make continuous lawful use of the trademark in order to take advantage of trademark laws so a company or individual must regularly manufacture produce market and sell a product with a particular trademark in order for the trademark law to be enforceable this can be done every five years by filing a section 8 declaration through the uspto failure to file this can result in the loss of registration 14special considerationstrademarks can be bought and sold trademarks also can be licensed to other companies for an agreed upon time or under certain conditions which can result in crossover brands take the relationship lego has with certain movie franchises for example the private company licenses many famous sub brands such as star wars and dc comics to produce lego versions of popular products as mentioned above trademarks are also used as an effective way to market brand names in fact the power of branding in business is critical and can fill volumes and the use of brands in marketing is legendary some brands like kleenex are so prominent and have such successful brand identities that they have almost replaced the noun that was the original word for the item or service like asking for a kleenex instead of a tissue kimberly clark kmb owns the kleenex trademark and launched the brand in 1924 as a disposable tissue for removing cosmetics in 1930 the company launched the brand again this time as a substitute for handkerchiefs since then kleenex has been the number one selling facial tissue in the world 5similarly we generally don t ask for a self adhesive bandage with sterile cotton liner but are more apt to ask for a band aid consumer goods and pharma giant johnson johnson jnj began making sterile gauze dressings as early as 1887 but it wasn t until 1920 that the company launched its band aid brand adhesive bandage a cotton buyer for johnson johnson earle dickson invented the band aid 6trademark vs patent vs copyrighttrademarks are distinctly different from patents and copyrights a patent grants the design process and invention rights to a piece of property to its inventor in order to be registered the inventor must make full disclosure of the invention the design and the process itself through the uspto this gives the inventor full protection over the product or service in question for a certain period of time usually 20 years anyone can make use of the invention by producing marketing and selling it after the patent expires 8 this is common in the pharmaceutical industry a drug company that patents a drug has exclusive rights over it for a certain period of time before other companies can market and sell generic brands to the public 9copyrights on the other hand give protection to the owners of intellectual property to legally copy it 10 copyright owners and those who have the authority can exclusively reproduce the associated work for monetary gain for a specific period of time usually until 70 years after their death 11 software art film music and designs are just some of the examples of work that are covered by copyrights brand names slogans and logos however are not covered in order to get a copyright and prevent copyright infringement the filer must make an application with the u s copyright office 10 | |
the definition of a trader | a trader is an individual who engages in the buying and selling of assets in any financial market either for themself or on behalf of another person or institution the main difference between a trader and an investor is the duration for which the person holds the asset investors tend to have a longer term time horizon while traders tend to hold assets for much shorter periods to capitalize on short term trends the role of a traderthe main objective of a trader is to generate profits by buying at a low price and selling at a higher price what they buy and sell are financial assets that include stocks bonds currencies commodities and derivatives the profit generation is achieved through various approaches such as fundamental technical and quantitative analyses which aid in identifying market trends and opportunities 1traders also manage risks associated with their profession including market risk credit risk and liquidity risk they may use hedging strategies to mitigate these risks traders play a critical role in providing liquidity to financial markets their activities are essential for the smooth functioning of financial markets and the allocation of capital to productive uses skill requirements of traderstraders need to possess several quantitative and qualitative skills to be successful the skills are a combination of technical analytical and behavioral qualities it is a prerequisite for traders to be experts of the financial markets traders need to have a deep understanding of the asset classes market dynamics and various strategies in these markets traders have to be analytical they need to figure out how to process large amounts of data quickly and correctly to make informed decisions about the financial markets in which they trade numeracy skills are also important traders have to be able to calculate complex financial problems 1traders also need to be masters of risk management they must constantly monitor their current and potential positions to ensure that the risks they take are optimal traders must effectively use their stop loss and limit orders to maintain profitability and margins communication is also a key skill for a trader their colleagues clients bosses and other stakeholders need to quickly and effectively understand what their trader is saying so that they can make informed decisions finally traders should have high emotional intelligence trading is an intense profession and traders need to effectively manage their emotions in a highly stressful environment trading strategiestraders employ many strategies to produce and maintain profitability some of these strategies include scalping day trading swing trading event trading and position trading it should be noted that no trading strategy is foolproof there are advantages and disadvantages to any trading strategy traders also consider risks when employing their strategies scalping entails the buying and selling of financial instruments such as stocks futures currencies and commodities in quick succession with the goal of producing small gains on the positions scalpers attempt to profit from short term price movements the time frame that scalp traders hold positions ranges from seconds to minutes the risk in scalping lies in the quick generation of successive losses rather than gains 2the strategy of day trading involves taking positions in financial assets such as stocks futures currencies and commodities within the same trading day day traders tend to hold an abundance of trades over minutes and hours as they maneuver their transactions through changing market conditions they tend to amplify their trades through leveraged positions the use of leverage poses an additional risk for day traders 3swing trading involves profiting from short to medium term price movements in various financial instruments such as stocks futures currencies or commodities unlike scalpers and day traders swing traders hold their positions for longer time periods this can be for several days weeks or even months and is dependent on the asset the trend and the other existing positions of the swing trader generally swing trading is considered to be less risky than scalping or day trading because swing traders have more time to make decisions nonetheless there are risks involved news or events can affect the price trends of the swing trader s portfolio 4the strategy of event trading entails profiting from short term price movements triggered from a specific economic or financial event such as mergers or acquisitions earnings releases regulatory decisions inflation data labor market data or gross domestic product gdp data event traders need to execute their positions quickly seconds before the data release to profit from the position also event traders tend to use leverage to amplify their profits the use of leverage comes with additional risks to the strategy 5a position trader or a position trading firm is an individual or entity that buys financial assets for the long term these professionals hold positions for weeks months or even years the time frame of holding the position is highly dependent on the position trader s investment thesis as well as the economic and financial market outlook with the longer term view position trading is considered to be less risky than the other short term trading strategies as these traders have more time to endure the short term price fluctuations 6places where traders perform their dutiestraders tend to work in a variety of places those traders who work for themselves may have a home office or may rent one if that isn t the case traders will have roles in investment banks brokerage firms proprietary trading firms asset management firms hedge funds or exchanges traders may work in the physical office or remotely depending on the nature of the trading activity and the firm s policies trader operations institution vs own accountmany large financial institutions have trading rooms where traders are employees who buy and sell a wide range of products on behalf of the company each trader is given a limit as to how large of a position they can take the position s maximum maturity and how much of a mark to market loss they can have before a position must be closed out the company has the underlying risk and keeps most of the profit the trader receives a salary and bonuses on the other hand most people who trade on their own account work from home or in a small office and they often use a discount broker and electronic trading platforms their limits are dependent on their own cash and credit but they will often keep all profits discount brokers an important resource for tradersdiscount brokerage firms charge significantly lower commissions per transaction but provide little or no financial advice individuals can t trade directly on a stock or commodity exchange on their own account so using a discount broker is a cost effective way to gain access to the markets many discount brokers offer margin accounts which let traders borrow money from the broker to buy assets this increases the size of the positions they can take but also increases the potential loss 7foreign exchange trading platforms match currency buyers and sellers in the spot forward and options markets they sharply increase the amount of price information available to individual traders thus narrowing price spreads and reducing commissions the type of information that traders usetraders use a variety of techniques to source information this is essential to make informed decisions and be profitable in their activities the types of information that traders access include fundamental technical or market timing noise and sentiment with this information traders can even develop a contrarian view or find arbitrage opportunities fundamental information or fundamentals refers to data that provide insights into the underlying intrinsic value of the financial asset such as a stock bond future currency or commodity fundamentals are generally gleaned from economic industry specific and financial data and include economic data industry trends company news and events and financial statements | |
when using technical and market timing information traders analyze past and current market data to spot patterns and trends this is to anticipate future price movements in assets such as stocks bonds futures currencies or commodities | traders use technical analysis and other market timing information to identify buying and selling opportunities they use charting techniques and momentum indicators such as moving averages and oscillators to accomplish this examples of market timing information include economic and financial releases as well as market sentiment indicators noise trading involves making decisions on factors that seem to be helpful but would usually generate profits equivalent to a random choice some of these factors can include rumors gossip or emotions noise can create market imbalances that rational traders can profit from also noise traders are often associated with retail or inexperienced investors who lack the necessary tools to profit from trading sentiment refers to the overall view of financial market participants this can be bullish neutral or bearish these views can be toward the financial markets or various assets such as stocks currencies or commodities market sentiment can be attributed to factors such as economic and financial data geopolitical events or company news sentiment indicators are based on data comprising trading volume price movements and news coverage of financial instruments or markets sentiment is also developed through the quantification of surveys or polls the data helps to gauge the level of optimism or pessimism in the financial markets contrarian trading involves analyzing market conditions and taking an opposing side of the prevailing consensus view of the financial markets this is based on the premise that market participants often overreact to events leading to significant price movements in financial markets contrarian traders identify overbought or oversold conditions in conjunction with trend reversals high conviction in the trades are required as the contrarian view by its very definition is often unpopular successful contrarian traders employ a rigorous analytical process to identify potential opportunities and carefully manage risks to avoid significant losses 8arbitrage refers to exploiting price discrepancies between two or more instruments or markets the assumption calls for taking advantage of mispricing in different markets buying an asset in one market at a lower price and selling the same asset in another market at a higher price producing a profit these opportunities can occur in stocks bonds currencies and commodities over different exchanges or geographical regions arbitrage occurs because of market inefficiencies or temporary imbalances in supply and demand 9becoming a traderearning a role as a trader in the financial markets can involve a significant amount of preparation including education training and licensing most entry level trading jobs require at least a bachelor s degree with employers often seeking graduates who have majored in business economics and accounting a master s in business administration mba may be an important qualification for higher level positions at trading firms 10companies that hire traders generally offer employee training programs that focus on the business and the particular types of assets sold by the firm brokers and investment bankers working with registered firms must obtain a license from the financial industry regulatory authority finra which involves passing a series of examinations to verify their knowledge of the financial markets additional professional certifications such as the chartered financial analyst cfa designation and the chartered market technician cmt designation may expand a trader s opportunities and chances for career advancement 10salary and employment outlookmany people may be interested in working as a trader because of the possibility of earning a substantial paycheck for traders working on their own behalf generating income will depend on implementing a successful trading strategy and effectively managing risk meanwhile traders working for financial firms may earn a base salary with the potential for a substantial bonus based on their performance 11according to the u s bureau of labor statistics bls as of may 2021 the median annual wage came to 62 910 for securities commodities and financial services sales agents a broader category that includes many traders those working specifically in securities commodity contracts and other financial investments and related activities earn a median annual wage of 98 030 11if that level of income seems attractive there is good news about the employment outlook for the industry as predictions call for a healthy availability of jobs over the coming years the bls estimates that employment for securities commodities and financial services sales agents will grow 10 from 2021 to 2031 exceeding the average for all occupations while competition for these positions may be intense given the necessary skills involved the bls estimates that 46 600 job openings per year in this area over the decade 12 | |
why is trading important in finance | there are several reasons why trading is important in finance trading in financial instruments produces price discovery generates liquidity brings out capital flows and aids in price efficiency through trading market participants converge toward the fair value of financial assets also with trading liquidity is generated enabling the quick transfer of stocks bonds futures commodities and currencies | |
what is the difference between trading and investing | there are two major approaches to the financial markets trading and investing while they share some similarities trading and investing differ in terms of time horizon risk tolerance and investment style as well as approach trading is short term in nature while investing is long term in nature with investing a more passive approach is taken investors will adjust their portfolios occasionally to reflect their long term goals trading is much more active with the frequent buying and selling of securities | |
what are the asset types for traders | stocks bonds currencies or foreign exchange options futures commodities cryptocurrencies and exchange traded funds etfs are the most common type of assets that are traded the asset class is dependent on the traders preference expertise and the market in which they operate also traders can choose to specialize in one asset class or more depending on their goals and skills | |
what are the benefits of being a trader | there are several potential benefits of being a trader traders have a high propensity to generate earnings traders tend to work in a fast paced and exciting environment this would appeal to people who like being in a highly dynamic space traders can have the flexibility to work remotely and work nonstandard hours traders gain significant exposure to the financial markets as they have to actively and closely monitor them along with the factors that drive the respective markets | |
what are the limitations of being a trader | in any role there are advantages and disadvantages for traders there are a handful of limitations trading can be a high stress and competitive profession which isn t suitable for everyone there is also a risk of financial loss moreover traders work long hours when markets are in a downturn there is a high potential for traders to lose their jobs to be a successful trader people often need to attain specialized education training and experience which can be time consuming and expensive the bottom linetrading is a highly skilled profession that provides price discovery and liquidity in a multitude of financial markets including stocks bonds currencies commodities or derivatives traders can either be entrepreneurs or work for investment banks hedge funds or proprietary trading firms also they use various strategies and tools to look for opportunities as well as to exploit market inefficiencies or mispricing to gain an edge traders analyze market data and news as well as economic and financial indicators also traders may use technical analysis quantitative models or algorithms to execute their orders traders need to have strong analytical quantitative and problem solving skills beyond that they need to be able to manage risks and work under pressure successful traders can make huge sums of money but trading is also associated with sizable risk and potential losses | |
how a trading account works | a trading account can hold securities cash and other investment vehicles just like any other brokerage account the term can describe a wide range of accounts including tax deferred retirement accounts in general however a trading account is distinguished from other investment accounts by the level of activity purpose of that activity and the risk it involves the activity in a trading account typically constitutes day trading the financial industry regulatory authority finra defines a day trade as the purchase and sale of a security within the same day in a margin account finra defines pattern day traders as investors who satisfy the following two criteria brokerage firms can also identify clients as pattern day traders based on previous business or another reasonable conclusion these firms will allow clients to open cash or margin accounts but day traders typically choose margin for the trading accounts finra enforces special margin requirements for investors it considers to be pattern day traders opening a trading account requires certain minimum personal information including your social security number and contact details depending on the jurisdiction and business details your brokerage firm may have other requirements as well finra margin requirements for trading accountsmaintenance requirements for pattern day trading accounts are considerably higher than those of non pattern trading the base requirements of all margin investors are outlined by the federal reserve board s regulation t finra includes additional maintenance requirements for day traders in rule 4210 day traders must maintain a base equity level of 25 000 1 the trader is permitted a purchasing power of up to four times any excess over that minimum requirement equity held in non trading accounts is not eligible for this calculation a trader who fails to meet these requirements will receive a margin call from their broker and trading will be restricted if the call is not covered within five days 2 | |
how do i open a trading account | you can open a trading account with your brokerage or investment firm of choice by filling out an application with your personal information and funding the account if you want margin capabilities for trading you ll need to complete the margin agreement and submit to initial margin requirements house margin requirements and all applicable regulatory policies 3 | |
what are the disadvantages of a trading account | with a trading account you run some risks you wouldn t encounter with regular brokerage cash accounts for instance trading on margin increases your risk of loss because of the leverage used and you may encounter interest charges on your margin funds as well plus you risk margin calls and securities liquidation as a day trader with a margin account | |
is it safe to keep money in a trading account | yes it s generally safe to keep money in a trading account most reputable brokerages provide securities investor protection corp sipc insurance for up to 500 000 this doesn t protect you from investment losses but rather from the risk of investment firm failure 4the bottom linea trading account is necessary if you d like to buy and sell securities you can open a trading account with your brokerage of choice but if you d like a margin account for day trading you ll have to meet the brokerage s margin requirements pattern day traders have additional requirements they must meet including a base equity level of 25 000 as per finra | |
what is a trading book | a trading book is the portfolio of financial instruments held by a brokerage or bank financial instruments in a trading book are purchased or sold for several reasons for example they might be bought or sold to facilitate trading actions for customers to profit from trading spreads between the bid and ask prices or to hedge against different forms of risk trading books can range in size from hundreds of thousands of dollars to tens of billions depending on the size of the institution understanding a trading bookmost institutions employ sophisticated risk metrics to manage and mitigate risk in their trading books trading books function as a form of accounting ledger by tracking the securities held by the institution that are regularly bought and sold additionally trading history information is tracked within the trading book by creating a simple way to review the institution s previous activities of associated securities this differs from a banking book as securities in a trading book are not intended to be held until maturity while the securities in the banking book will be held long term securities held in a trading book must be eligible for active trading trading books are subject to gains and losses as prices of the included securities change since these securities are held by the financial institution and not by individual investors these gains and losses impact the financial fitness of the institution directly impact and examples of trading book lossesthe trading book can be a source of massive losses within a financial institution losses arise due to the extremely high degrees of leverage employed by an institution to build the trading book another source of trading book losses is disproportionate and highly concentrated wagers on specific securities or market sectors by errant or rogue traders trading book losses can have a cascading global effect when they hit numerous financial institutions at the same time such as during the long term capital management ltcm collapse the russian debt crisis of 1998 and the lehman brothers bankruptcy in 2008 the global credit crunch and financial crisis of 2008 was significantly attributable to the hundreds of billions of losses sustained by global investment banks in the mortgage backed securities portfolios held within their trading books during that crisis value at risk var models were used to quantify trading risks in trading books banks transferred their risk from the banking book to trading books because var values were low attempts to disguise mortgage backed security trading book losses during the financial crisis ultimately resulted in criminal charges being brought against a former vice president of credit suisse group 1 in 2014 citigroup inc purchased the commodity trading books held by credit suisse credit suisse participated in the sale in response to regulatory pressure and their intent to lower their involvement in commodities investing 2 | |
what is included in the trading book | all of a financial institution s tradeable assets are listed in the trading book | |
what is the difference between a bank book and a trading book | the trading book lists assets intended for short term trading while the bank book lists all other assets intended for earning interest | |
what are the benefits of a trading book | the trading book is considered a legal document that can be used as evidence in court and as a planning tool for future trades the bottom linea trading book is an accounting ledger used by a brokerage or financial institution to account for its portfolio or all of its tradeable assets depending on the size of the institution these portfolios can track billions of dollars in investments | |
what is a trading desk | a trading desk is a physical location where transactions for buying and selling securities occur depending on the type of financial institution the trading desk may be filled by traders trading for their own proprietary account brokers who act as agents matching buyers and sellers or some mixture of both trading desks are found in most financial firms that are involved in facilitating trade executions in markets such as equities fixed income securities futures commodities and currencies these facilities are crucial to providing market liquidity a trading desk may also be known as a dealing desk understanding trading deskstraders operating in the financial markets usually converge in a room known as the trading floor or trading room the trading floor is made up of desks that share a large open space each desk formally called a trading desk specializes in a security type or market segment trading desks are where buying and selling of securities occur within a financial institution before the 1970s many banks split their capital markets business into many different departments across several regions these institutions began consolidating these departments in the 1970s following the launch of the nasdaq which required all investment firms to have equity trading desks today many asset managers outsource their trading desks to these larger institutions trading desks are manned by licensed traders who specialize in a given investment type such as equities or commodities these traders primarily use electronic trading systems and market makers to identify the best prices for their clients the personnel on trading desks receive clients orders from the sales desk which is in charge of suggesting trading ideas to institutional and high net worth investors in addition to trading activities trading desks also help clients with structuring financial products watching for opportunities or supporting agreements between companies and investors | |
how trading desks work | trading desks generate an income by charging a commission on trades they transact for example a hedge fund may deal through an equity trading desk at an investment bank and pay a modest fee for each trade in some cases brokers may operate their own trading desk by being the counterparty for their client s trades these trades may never reach the interbank market and may stay within the confines of the broker s own liquidity pool there are many different types of trading desks depending on the security being traded oftentimes these desks are separated and may be located at certain central exchanges types of trading deskssome common trading desks include each of these sectors can be further subdivided for instance fixed income is a very broad category and can deal with anything from ultra safe u s treasuries to ultra risky low grade company bonds also known as junk bonds larger investment banks may subdivide their trading desks to specialize in narrower categories within these main sectors many brokers also offer trading desks for their clients especially in the foreign exchange market and equity day trading market with the ability to instantly execute trades these brokers set themselves apart from other brokers acting as intermediaries most large financial institutions have their own trading desks in place to assist their internal teams and external clients in placing orders | |
what is a trading halt | a trading halt is a temporary suspension of trading for a particular security or securities at one exchange or across numerous exchanges trading can be halted in anticipation of a news announcement to correct an order imbalance as a result of a technical glitch due to regulatory concerns or because the price of the security or an index has moved rapidly enough to trigger a halt based on exchange rules when a trading halt is in effect open orders may be canceled and options still may be exercised trading halts are different from a trading suspension ordered by the securities and exchange commission sec under u s securities law the sec may suspend public trading in any stock for up to 10 days to protect investors and the public interest 1 | |
how a trading halt works | a trading halt can be regulatory or non regulatory regulatory halts are those applied when there is doubt the security continues to meet listing standards to give market participants time to assess important news as in the event of a u s food and drug administration decision on a new drug application for example 2a trading halt ensures wide access to the news likely to move the price and prevents those who receive it first from profiting from others late to the information other material developments that may warrant a regulatory trading halt include corporate acquisitions and restructurings regulatory or legal decisions or changes in management a regulatory trading halt in a security by its primary u s exchange is honored by other u s exchanges 2a non regulatory trading halt can occur on the new york stock exchange nyse but not the nasdaq to correct a large imbalance between buy and sell orders 2 such trading halts typically last no more than a few minutes until order balance is restored and the trading resumes companies will often wait until the market closes to release sensitive information to the public to give investors time to evaluate the information and determine whether it is significant this practice however can lead to a large imbalance between buy orders and sell orders in the lead up to the market opening in such an instance an exchange may decide to institute an opening delay or a trading halt immediately at the market opening these delays are usually in effect for no more than a few minutes while the balance between buy orders and sell orders is restored 3a federal u s securities law also grants the securities and exchange commission sec the power to impose a suspension of trading in any publicly traded stock for up to 10 days 1 the sec will use this power if it believes that the investing public is put a risk by continued trading of the stock typically it will exercise this power when a publicly traded company has failed to file periodic reports like quarterly or annual financial statements 4circuit breaker trading haltsu s securities exchanges have standing rules for market wide trading halts in instances were dramatic price declines threaten market liquidity cumulative declines of 7 and 13 from the prior s day closing level in the p 500 index trigger a 15 minute market wide trading halt if they occur before 3 25 p m et a 20 decline in the s p 500 from the prior s day close halts the stock market for the remainder of the trading day no matter when it happens 5circuit breakers can also apply to trading in any stock under u s trading rules for stocks priced above 3 and included in the s p 500 or the russell 1000 indices as well as certain exchange traded products like etfs trading is halted for five minutes after sudden moves of more than 5 and lasting more than 15 seconds up or down from the average price over the prior 5 minutes for other stocks priced above 3 the sudden price move required for a trading halt is 10 while those priced between 0 75 and 3 are halted after a sudden gain or loss of 20 or more 65 | |
what is a trading house | a trading house is a business that specializes in facilitating transactions between a home country and foreign countries a trading house is an exporter importer and also a trader that purchases and sells products for other businesses trading houses provide a service for businesses that want international trade experts to receive or deliver goods or services a trading house may also refer to a firm that buys and sells both commodity futures and physical commodities on behalf of customers and for their own accounts prominent commodity trading houses include cargill vitol and glencore understanding trading housesa trading house serves as an intermediary it might purchase t shirts wholesale from china then sell them to a retailer in the united states the u s retailer would still receive wholesale pricing but the price would be slightly higher than if the retailer purchased directly from the chinese company the trading house must mark up the price of the goods it sells to cover its costs and earn a profit however the t shirt retailer avoids the hassles of importing the retailer also may be able to simplify its operations by dealing with one or two trading houses to get its inventory instead of dealing directly with numerous wholesalers small businesses that use a trading house can benefit from its expertise and insight into international markets they operate in as well as get access to vendor financing through direct loans and trade credits advantages of trading housesa trading house typically has a large portfolio of clients that provide economies of scale benefits for example a large trading house can use its significant buying power to receive discounts from manufacturers and suppliers a trading house can also reduce transportation costs if it ships to customers in large quantities trading houses have an extensive network of contacts in international markets that help them secure favorable deals and find new customers they may also have staff working in foreign offices to work with customs officials and manage legal issues to ensure the smooth operation of the business because a trading house is continually importing and exporting products they have expertise in managing currency risk trading houses use risk management techniques such as hedging to avoid getting exposed to adverse currency fluctuations for example a trading house that has a future payment in euros may use a currency forward contract to lock in the current eur usd exchange rate example of trading housesjapan is scarce in resources whether it is food or natural resources and imports most of them through five trading houses known as s g sh sha the trading houses were developed in japan during the meiji restoration period to bolster its economy during a period of rebuilding they also helped prop up the country s economy after its defeat and devastation in the second world war the role of s g sh shas is not confined to a specific sector of japan s economy they import goods and services across multiple industries vital to the nation s economy from automobiles to infrastructure to clothing the five biggest s g sh shas are mitsubishi corp mitsui co ltd sumitomo corp itochu corp and marubeni corp | |
what is a trading platform | a trading platform is a software system that is used to trade securities it allows investors to open close and manage market positions online through a financial intermediary such as an online broker trading platforms are frequently offered by brokers for free or at a discount in exchange for maintaining a funded account and or making a specified number of trades per month the best trading platforms offer a mix of robust features and low fees understanding trading platformsa trading platform is a software system offered to investors and traders by financial institutions such as brokerages and banks they essentially enable investors and traders to place trades and monitor their accounts platforms allow investors to open a variety of brokerage or trading accounts including margin accounts cash accounts retirement accounts and self directed accounts through these accounts traders can make buy and sell orders for stocks bonds exchange traded funds etfs and mutual funds among others trading platforms often include other features that help investors make important investment decisions these features can include real time quotes and interactive charts along with a range of charting tools streaming news feeds and premium research platforms also may be tailored to specific markets such as stocks currencies options or futures markets types of trading platformsthere are two types of trading platforms commercial and proprietary platforms the market for online trading platforms was estimated to be worth 10 03 billion in 2024 this figure is expected to grow to over 14 20 billion by 2031 1 | |
what to look for in a trading platform | traders and investors should consider whether the features offered meet their trading needs when choosing a trading platform day traders and other short term traders may require features like level 2 quotes and access to market information such as price levels order size and volume to assist them in timing their orders traders may also need technical analysis tools such as live charts with a range of technical indicators options traders may need tools that are specifically designed to help them research analyze and test their trading strategies fees are also important to consider when choosing a trading platform for example traders who employ scalping as a trading strategy will gravitate towards platforms with low fees lower fees are generally always preferable but there may be trade offs to consider for example low fees may not be advantageous if they translate to fewer or less powerful features some trading platforms aren t connected to a specific intermediary or broker while others are only available when you work with a particular intermediary or broker as a result investors should consider carefully the reputation of the intermediary or broker before committing to a specific trading platform to execute trades and manage their accounts be sure a provider stands solidly behind all that a platform offers trading platforms may have specific requirements that must be met before you can open an account and or trade for example day trading platforms may require that traders have at least 25 000 in equity in their accounts and be approved for margin trading options platforms may require that traders be approved to trade various types of options before they can use the trading platform charles schwab officially acquired td ameritrade for about 22 billion in 2020 the acquisition resulted in client assets valued at over 6 trillion and approximately 28 million brokerage accounts 2popular trading platformsthere are hundreds if not thousands of different trading platforms including these four popular options the most popular platform for many foreign exchange forex market participants is metatrader which is a trading platform that interfaces with many different brokers its mql scripting language has become a popular tool for those looking to automate their trading in currencies 8 | |
what s a trading platform | a trading platform is essentially a software system typically offered through a brokerage or other financial institution that lets you trade online on your own a trading platform gives investors an online interface through which they can access various markets place trades monitor positions and manage their accounts trading platforms can offer a number of other features as well broadly speaking these include real time quotes live business and financial news feeds instant access to a wealth of streaming and historical financial data technical analysis tools investment research and educational resources | |
is there a good trading platform for beginning traders | e trade and td ameritrade are choices that beginners may want to consider td ameritrade has excellent educational resources that can help novice traders understand the markets and become more comfortable with trading before actually placing trades e trade s user friendly interface can eliminate the frustrations a beginner might have trying to navigate a trading platform | |
what is a day trader | a day trader is a trader who makes multiple trades in a single day rarely if ever holding a position overnight day traders try to take advantage of intraday price movements and market inefficiencies to make money they tend to use technical analysis to help them time their market entries and exits day trading requires focus dedication and discipline the bottom linetrading platforms make it easier for people to invest their money and reach their goals these portals are usually online giving the individual freedom to choose to invest on their own or with the guidance of an investment professional choosing the right trading platform depends on how much capital you have your needs and goals and your experience make sure you do your due diligence and research before you commit to one | |
what is a trading strategy | a trading strategy is a systematic methodology used for buying and selling in the securities markets a trading strategy is based on predefined rules and criteria used when making trading decisions a trading strategy may be simple or complex and involve considerations such as investment style e g value vs growth market cap technical indicators fundamental analysis industry sector level of portfolio diversification time horizon or holding period risk tolerance leverage tax considerations and so on the key is that a trading strategy be set using objective data and analysis and is adhered to diligently at the same time a trading strategy should be periodically re evaluated and tweaked as market conditions or individual goals change 1understanding trading strategiesa trading strategy includes a well considered investing and trading plan that specifies investing objectives risk tolerance time horizon and tax implications ideas and best practices need to be researched and adopted then adhered to planning for trading includes developing methods that include buying or selling stocks bonds etfs or other investments and may extend to more complex trades such as options or futures 1placing trades means working with a broker or broker dealer and identifying and managing trading costs including spreads commissions and fees once executed trading positions are monitored and managed including adjusting or closing them as needed risk and return are measured as well as portfolio impacts of trades and tax implications the longer term tax results of trading are a major factor and may encompass capital gains or tax loss harvesting strategies to offset gains with losses developing a trading strategythere are many types of trading strategies but they are based largely on either technicals or fundamentals the common thread is that both rely on quantifiable information that can be backtested for accuracy technical trading strategies rely on technical indicators to generate trading signals technical traders believe all information about a given security is contained in its price and that it moves in trends 2 for example a simple trading strategy may be a moving average crossover whereby a short term moving average crosses above or below a long term moving average fundamental trading strategies take fundamental factors into account for instance an investor may have a set of screening criteria to generate a list of opportunities these criteria are developed by analyzing factors such as revenue growth and profitability 3there is a third type of trading strategy that has gained prominence in recent times a quantitative trading strategy is similar to technical trading in that it uses information relating to the stock to arrive at a purchase or sale decision however the matrix of factors that it takes into account to arrive at a purchase or sale decision is considerably larger compared to technical analysis a quantitative trader uses several data points regression analysis of trading ratios technical data price to exploit inefficiencies in the market and conduct quick trades using technology 4special considerationstrading strategies are employed to avoid behavioral finance biases and ensure consistent results for example traders following rules governing when to exit a trade would be less likely to succumb to the disposition effect which causes investors to hold on to stocks that have lost value and sell those that rise in value trading strategies can be stress tested under varying market conditions to measure consistency 5profitable trading strategies are difficult to develop however and there is a risk of becoming over reliant on a strategy for instance a trader may curve fit a trading strategy to specific backtesting data which may engender false confidence the strategy may have worked well in theory based on past market data but past performance does not guarantee future success in real time market conditions which may vary significantly from the test period 6 | |
what is a trading session | a trading session is a period of time that matches the primary daytime trading hours for a given locale this phrase will refer to different hours depending on the markets and locations being discussed generally a single day of business in the local financial market from that market s opening bell to its closing bell is the trading session that the individual investor or trader will reference the markets for forex futures stocks and bonds all have different characteristics that define their respective trading sessions for a given day and the primary trading hours naturally differ from one country to another due to contrasting time zones | |
how a trading session works | trading session hours can vary by asset class and country the regular trading session for u s stocks starts at 9 30 a m and ends at 4 00 p m eastern time et on weekdays holidays excepted 1 these times are primarily driven by the working hours of the new york stock exchange nyse which closes early at 1 00 p m et on several occasions throughout the year associated with holidays 2the regular weekday trading session for the u s bond market is 8 00 a m to 5 00 p m et 3 futures markets meanwhile have different trading hours depending upon the exchange and the type of commodity being traded traders should be aware of trading session hours for any securities and derivatives that they re interested in trading beforehand to prevent any unexpected problems from arising in addition to regular trading hours some markets may have pre market or after hours trading sessions other markets even have 24 hour trading sessions pre market and after hours trading sessionspre market trading for u s stocks occurs between 4 00 a m and 9 30 a m et on weekdays after hours trading on the other hand is from 4 00 p m to 8 00 p m et on weekdays although these times may vary slightly by exchange 4pre market and after hours trading is a compelling way to capitalize on important news announcements or other factors that occur outside of regular trading hours with that in mind here are a number of factors that investors should be mindful of when trading outside of regular hours in particular the securities and exchange commission sec notes eight such risk factors 24 hour trading sessionsthere are some markets with a 24 hour trading session among the most notable is the global foreign exchange forex market in which currencies are traded the forex market is the largest most liquid market in the world 6unlike the equity market the forex market has no physical exchange rather it consists of a number of large banks and brokerage firms that trade currencies with themselves the forex market is open 24 hours a day five days per week from sunday evening until friday night 7 | |
what is a traditional ira | a traditional individual retirement account ira allows individuals to direct pre tax income toward investments that can grow tax deferred the irs assesses no capital gains or dividend income taxes until the beneficiary makes a withdrawal individual taxpayers can contribute from qualified earned compensation 1income thresholds may also apply contributions to a traditional ira may be tax deductible depending on the taxpayer s income tax filing status and other factors retirement savers may open a traditional ira through their broker including online brokers or robo advisors or financial advisor | |
how traditional iras work | traditional iras let individuals contribute pre tax dollars to a retirement investment account which can grow tax deferred until retirement withdrawals occur at age 59 or later custodians including commercial banks and retail brokers hold traditional iras and place the invested funds into different investment vehicles according to the account holder s instruction and based on the offerings available 4contributions to traditional iras are tax deductible in most cases for instance if someone contributes 6 000 to their ira they can claim that amount as a deduction on their income tax return and the internal revenue service irs will not apply income tax to those earnings but when that individual withdraws money from the account during retirement earnings are taxed at their ordinary income tax rate 5the irs restricts contributions to a traditional ira each year depending on the account holder s age the contribution limit for the 2023 tax year is 6 500 for savers under 50 years of age and 7 000 in 2024 for people aged 50 and above higher annual contribution limits apply via a catch up contribution provision allowing for an additional 1 000 this means it s a total of 7 500 in 2023 and 8 000 in 2024 67under the secure act of 2019 age restrictions on contributions to a traditional ira were lifted as long as the account holder has earned income to qualify they are eligible to contribute to a traditional ira regardless of age 8traditional iras and 401 k s or other employer plans | |
when you have both a traditional ira and an employer sponsored retirement plan the irs may limit the amount of your traditional ira contributions that you can deduct from your taxes | if a taxpayer participates in an employer sponsored program such as a 401 k or pension program and files as a single person they would only be eligible to take the full deduction on a traditional ira if their modified adjusted gross income magi was 73 000 or less for 2023 that amount increases to 77 000 for 2024 married taxpayers filing a joint return are subject to limits of 116 000 or less for 2023 and 123 000 for the 2024 tax year with magis of 83 000 for singles in 2023 87 000 for 2024 and 136 000 for married couples in 2023 143 000 for 2024 the irs allows no deductions the deduction is phased out should the filer s income fall between the minimum and maximum levels 9ira contributions must also be made by the tax filing deadline for most taxpayers this is on or around april 15 of each year 10income tax is ultimately paid on ira money at the time of withdrawal subject to one s tax bracket during retirement therefore traditional iras are more often recommended for investors who expect to be in lower tax brackets at retirement than they are currently in traditional ira distributions | |
when you receive distributions from a traditional ira the irs treats the money as ordinary income and subjects it to income tax account holders can take distributions as early as age 59 11 | the age for required minimum distributions rmds from traditional iras depends on your age and when you were born you must begin taking distributions by april 1 the year after you turn funds that are withdrawn before age 59 incur a 10 penalty of the amount withdrawn and taxes at standard income tax rates there are exceptions to these penalties for certain situations these include the following an individual needs to check with a tax attorney or the irs to be sure that the particulars of their situation qualify for a waiver of the 10 penalty 16traditional iras vs other ira typesother variations of the ira include the roth ira simple ira and sep ira the last two are employer generated but individuals can set up a roth ira if they meet the income limitations these individual accounts can be created through a broker you can check out some of the best options with investopedia s list of the best brokers for iras unlike a traditional ira roth ira contributions are not tax deductible and qualified distributions are tax free this means you contribute to a roth ira using after tax dollars but as the account grows you do not face any taxes on investment gains because you paid taxes on your contributions you can actually withdraw them penalty free at any time however you cannot withdraw earnings until age 59 without being subject to the 10 early withdrawal penalty | |
when you reach age 59 you can withdraw from the account without incurring any income taxes on your withdrawals roth iras do not have rmds if you don t need the money you don t have to take it out of your account and worry about penalties for failing to do so you can also pass the money to your heirs if you don t end up needing to use it 1718 | roth ira contributions are the same as traditional iras 6 500 unless you are 50 or older and can qualify for the catch up contribution which raises the limit to 7 500 in 2023 7 000 and 8 000 respectively in 2024 the catch is that not everyone qualifies to contribute to a roth ira there are income limitations with contributions gradually phased out as your magi increases 197if you earn above those amounts you can t contribute to a roth at all simple iras and sep iras are benefit plans instituted by an employer so individuals cannot open them although self employed or sole proprietors may generally these iras function similarly to traditional iras but they have higher contribution limits and may allow for company matching 21a simplified employee pension sep or sep ira is a retirement plan that an employer or self employed individual can establish the employer is allowed a tax deduction for contributions made to the sep plan and makes contributions to each eligible employee s sep ira on a discretionary basis fundamentally a sep ira can be considered a traditional ira with the ability to receive employer contributions one major benefit it offers employees is those employer contributions are vested immediately 22a simple ira is a retirement savings plan that can be used by most small businesses with 100 or fewer employees simple stands for savings incentive match plan for employees employers can choose to make a 2 retirement account contribution to all employees or an optional matching contribution of up to 3 23employees can contribute a maximum of 15 500 annually in 2023 16 000 for 2024 the maximum is increased periodically to account for inflation retirement savers age 50 and older may make an additional catch up contribution of 3 500 bringing their annual maximum to 19 000 in 2023 the catch up contribution for 2024 is also 3 500 bringing the total contribution amount to 19 500 2425opening a traditional irayou can open a traditional ira as long as you received taxable compensation during the year you want to contribute or your spouse earned taxable compensation and you will file a joint return if both you and your spouse have compensation both parties can open their own traditional ira a variety of organizations financial institutions or brokerage firms can assist in setting up a personal traditional ira the account is subject to irs code requirements and the custodian of your account often the brokerage firm you choose such as fidelity or vanguard will manage the account requirements on your behalf contributions into a traditional ira can be made immediately through your account holder in the form of cash check or money order physical property is not an allowable contribution type when setting up an account there is no minimum balance or starting investment required 26 | |
what is the difference between a traditional ira and a roth ira | the primary difference between a traditional and a roth ira is the tax treatment of each account traditional ira contributions are deductible from taxable income when the contributions are made however earnings are taxable alternatively roth contributions are not deductible but can grow tax free in addition there are differences in the mechanisms of each ira roth ira contributions can be withdrawn for no penalty while traditional iras cannot in addition some roth earnings may be able to be withdrawn for no penalties for specific uses i e the down payment for one s first home 27 | |
what are the rules for a traditional ira | there are several rules for a traditional ira the maximum contribution amount is set every tax year and the irs requires individuals to begin taking money out of their traditional ira beginning april 1 the year after they turn 73 on or after jan 1 2023 and 72 if they reach age 70 between jan 1 2020 and dec 31 2022 1213the traditional ira is subject to income taxes and a 10 penalty if unqualified withdrawals occur before 59 years old lastly your annual contribution to a traditional ira can be at most what you earned in the contribution year 27 | |
what are the different types of iras | the two most common types of iras are the traditional ira and roth ira less popular types of iras include sep iras often best for self employed or small business owners simple iras often best for small companies that still have numerous employees or self directed iras often used by experienced investors seeking specific alternative asset investments 2821 | |
what are the disadvantages of traditional iras | like other retirement savings vehicles funds can often not be withdrawn without tax and fine penalties therefore traditional iras are very illiquid savings accounts in addition traditional iras do not grow tax free earnings withdrawn before age 59 are subject to tax 27 | |
does a traditional ira grow tax free | no a traditional ira does not grow tax free contributions into a traditional ira receive favorable tax treatment and are often deducted from an employee s taxable income when it is time to withdraw earnings any growth on the investment is taxable in the meantime earnings are tax deferred this is the opposite treatment of roth iras where initial investments cannot be deducted from income but their growth can be withdrawn tax free at retirement 27the bottom lineone of the more common vehicles used for saving for retirement is the traditional ira a traditional ira allows savers to contribute money into a tax deferred vehicle using pre tax deductible contributions although this investment vehicle can t be accessed until 59 without taxes and penalties taxes on the growth of your investment are deferred until then | |
what is the tragedy of the commons | a common resource or commons is any resource such as water or land that provides users with tangible benefits but which nobody has an exclusive claim the tragedy of the commons is an economic problem where the individual consumes a resource at the expense of society if an individual acts in their best interest it can result in harmful over consumption to the detriment of all this phenomenon may result in under investment and total depletion of a shared resource investopedia julie bangeconomic theorythe tragedy of the commons is an economic theory claiming that individuals tend to exploit shared resources so that demand outweighs supply and it becomes unavailable for the whole 1in 1968 evolutionary biologist garrett hardin published the tragedy of the commons in the peer reviewed journal science which addressed the growing concern of overpopulation hardin used an example of sheep grazing land taken from the early english economist william forster lloyd 2grazing lands that are held as private property are prudently used by the landholder to preserve the land and the health of the herd common grazing lands become over saturated with livestock because the food the animals consume is shared among all sheepherders hardin equated his point to humans who over consume the commonly accessible scarce resource making it harder to find 2supply and demandthe tragedy of the commons occurs when an economic good is rivalrous in consumption non excludable scarce and a common pool resource each consumer consumes as much as they can as fast as they can before others deplete the good and no one has the incentive to reinvest in maintaining or reproducing the good preventing the tragedy of the commonsinstitutional and technological factors play a role in the rivalry and excludability of a good societies have developed methods of dividing and enforcing exclusive rights to economic goods and natural resources or punishing those who over consume common resources top down government regulation or direct control of a common pool resource can reduce over consumption and government investment in the conservation and renewal of the resource can help prevent its depletion government regulation can limit how many cattle may graze on government lands or issue fish catch quotas assigning private property rights over resources to individuals can convert a common pool resource into a private good technologically it may mean developing a way to identify measure and mark units or parcels of the common pool resource into private holdings such as branding cattle william forster lloyd argued for this around the time of the english parliament s enclosure acts which stripped traditional common property arrangements to grazing lands and fields and divided the land into private holdings 2economists led by nobelist elinor ostrom touted customary arrangements among rural villagers and aristocratic lords including common access to most grazing and farmlands and managing their use and conservation 3 practices such as crop rotation seasonal grazing and enforceable sanctions against overuse and abuse of the resource meant collective action arrangements readily overcame the tragedy of the commons elinor ostrom was the first woman and one of just two women to win the nobel prize in economics 3collective action is used where technical or natural physical challenges prevent the division of a common pool resource into small private parcels by instead relying on measures to address the good s rivalry in consumption by regulating consumption | |
has the tragedy of the commons led to extinction of a resource | the extinction of the dodo bird is a historical example of the tragedy of the commons an easy to hunt flightless bird native to only a few small islands the dodo was a source of meat for sailors traveling the southern indian ocean due to overhunting the dodo was driven to extinction less than a century after its discovery by dutch sailors in 1598 4 | |
where is the tragedy of the commons evident in industry | before the 1960s the grand banks fishery off the coast of newfoundland was abundant with codfish because the fishery supported all the cod fishing they could do with existing fishing technology while reproducing itself each year through the natural spawning cycle however advancements in fishing technology made it so fisherfolk could catch massive amounts of codfish unsupportable with natural replenishment with no framework of property rights or institutional common regulation the entire industry collapsed by 1990 5 | |
how is the tragedy of the commons handled when different nations share resources | within individual countries governments at the local level can manage shared resources with clear boundaries at the international level rules regarding shared resources are difficult to enforce across jurisdictions when resources cannot be divided international law regarding shared resources is essentially voluntary according to the economist scott barrett at columbia university 6the bottom linethe tragedy of the commons occurs when individuals overconsume a resource at the expense of society when a common resource such as water or land is rivalrous in consumption non excludable scarce and a common pool resource the tragedy of the commons occurs a common resource is any resource that provides users with tangible benefits but to which nobody has a claim | |
what is trailing 12 months ttm | trailing 12 months ttm is a term that describes the past 12 consecutive months of a company s performance data used for reporting financial figures these figures represent a more current picture of a business s financial performance than using its annual filings and reports which at times can contain information that is nearly one year old the 12 months studied do not necessarily coincide with a fiscal year ending period ttm figures are produced for various metrics including earnings eps p e and yield investopedia mira norianunderstanding trailing 12 months ttm analysts and investors use ttm to dissect a wide swath of financial data such as balance sheet figures income statements and cash flows the methodology for calculating ttm data may differ from one financial statement to the next in the equity research space some analysts report earnings quarterly while others do so annually but investors who seek daily information about stock prices and other current data may look to ttms as more relevant measures because they re more current and seasonally adjusted ttm figures can also be used to calculate financial ratios the price earnings ratio is often called the p e ttm and is calculated as the stock s current price divided by a company s trailing 12 month earnings per share eps much of fundamental analysis involves comparing a measurement against a like measurement from a prior term to decipher how much growth was realized for example although the company that reports 1 billion in revenues is undoubtedly impressive this achievement is even more notable if that same company s revenues increased from 500 million to 1 billion within the last 12 months this marked improvement provides a clear snapshot of the company s growth trajectory | |
where to find the ttm measures | the 12 month measure is typically reported on a company s balance sheet which is customarily updated every quarter to comply with generally accepted accounting principles gaap however some analysts take an average of the first and last quarters line items on the cash flow statement e g working capital capital expenditures and dividend payments should be treated based on the feeding financial statement for example working capital is compiled from balance sheet line items which are averaged however depreciation is deducted from income on a quarterly basis so analysts look at the last four quarters as reported on the income statement ttm revenuettm revenue describes the revenue that a company earns over the trailing 12 months ttm of business this data is instrumental in determining whether or not a company has experienced meaningful top line growth and can pinpoint precisely where that growth is coming from however this figure is often overshadowed by a company s profitability and capability to generate earnings before interest tax depreciation and amortization ebitda to calculate ttm revenue simply add up the previous four quarters of revenues so if xyz corp generated 29 4 billion in revenue in q1 33 5 billion in q4 30 billion in q3 and 21 9 billion in q2 ttm revenue would be ttm yieldused to analyze mutual fund or exchange traded fund etf performance ttm yield is the percentage of income a portfolio has returned to investors over the last 12 months this number is calculated by taking the weighted average of the yields of all holdings housed within a fund whether they be stock bonds or other funds ttm yield can also refer to the dividend yield for a stock paid out over the prior 12 months for instance if a company with 100 stock paid a 0 10 quarterly dividend over the past four quarters the ttm yield would be 0 10 0 10 0 10 0 10 100 0 4 ttm price earning ratiottm is also used to examine the trailing p e ratio of a company s stock trailing p e is a relative valuation multiple based on the last 12 months of actual earnings it is calculated by taking the current stock price and dividing it by the ttm earnings per share eps trailing p e can be contrasted with the forward p e which instead uses projected future earnings to calculate the price to earnings ratio |
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