instruction
stringlengths 5
1.05k
| output
stringlengths 6
22.3k
| input
stringclasses 1
value |
|---|---|---|
why is business ethics important | there are several reasons business ethics are essential for success in modern business most importantly defined ethics programs establish a code of conduct that drives employee behavior from executives to middle management to the newest and youngest employees | |
when combined all these factors affect a business revenues those who fail to set ethical standards and enforce them are doomed to eventually find themselves alongside enron arthur andersen wells fargo lehman brothers bernie madoff and many others | types of business ethicsthere are various types of business ethics what mainly makes a business stand out are its corporate social responsibility practices transparency and trustworthiness fairness and technological practices corporate social responsibility csr is the concept of meeting the needs of stakeholders while accounting for the impact meeting those needs has on employees the environment society and the community in which the business operates finances and profits are important but they should be secondary to the welfare of society customers and employees in fact studies have concluded that corporate governance and ethical practices increase financial performance 2a greater focus on business ethics is an expense that tends to pay off over time it boosts revenues and limits damaging lawsuits 3it s essential for companies to ensure they are reporting their financial performance in a way that is transparent this not only applies to required financial reports but all reports in general most of these reports outline not only the submitted reports to regulators but how and why decisions were made if goals were met and factors that influenced performance ceos write summaries of the company s annual performance and give their outlooks press releases are another way companies can be transparent events important to investors and customers should be published regardless of whether it is good or bad news the growing use of technology of all forms in business operations inherently comes with a need to ensure the technology and information being gathered is used ethically additionally it should ensure that the technology is secured to the utmost of its ability especially as many businesses store customer information and collect data that those with nefarious intentions can use a workplace should be inclusive diverse and fair for all employees regardless of race religion beliefs age or identity a fair work environment is where everyone can grow be promoted and become successful in their own way | |
how to implement good business ethics | fostering an environment of ethical behavior and decision making takes time and effort and starts at the top most companies need to create a code of conduct ethics guiding principles reporting procedures and training programs to enforce and encourage ethical behavior once conduct is defined and programs are implemented continuous communication with employees becomes vital leaders should constantly encourage employees to report concerning behavior additionally there should be assurances that whistle blowers will not face adversarial actions a pipeline for anonymous reporting can help businesses identify questionable practices and reassure employees that they will not face any consequences for reporting an issue monitoring and reporting unethical behaviorto prevent unethical behavior and repair its adverse side effects companies often look to managers and employees to report any unethical acts they observe or experience however barriers within the company culture such as fear of retaliation for reporting misconduct can prevent this from happening published by the ethics compliance initiative eci the annual global business ethics survey reaches out to thousands of employees in 42 countries about various ethics related topics including the strength of the ethics culture in their workplace whether they have witnessed any misconduct where they work and if their employer is making efforts to promote integrity in the 2023 survey published in may 2024 65 of the employees surveyed said they had observed at least one act deemed to be a violation of their organization s standards or the law in the past 12 months and 72 of them said they had reported it worryingly 46 of these employees then went on to admit that they had been retaliated against for raising concerns 4indeed fear of retaliation is one of the primary reasons employees cite for not reporting unethical behavior in the workplace eci says companies should work toward improving their corporate culture by reinforcing the idea that reporting suspected misconduct is beneficial to the company additionally they should acknowledge and reward the employee s courage in making the report | |
what is business ethics | business ethics concerns ethical dilemmas or controversial issues faced by a company often business ethics involve a system of practices and procedures that help build trust with the consumer on one level some business ethics are embedded in the law such as minimum wages insider trading restrictions and environmental regulations on another business ethics can be influenced by management behavior with wide ranging effects across the company | |
what are business ethics and example | business ethics guide executives managers and employees in their daily actions and decision making for example consider a company that has decided to dump chemical waste that it cannot afford to dispose of properly on a vacant lot it has purchased in the local community this action has legal environmental and social repercussions that can damage a company beyond repair | |
what are the 12 ethical principles | business ethics is an evolving topic generally there are about 12 ethical principles honesty fairness leadership accountability integrity compassion respect responsibility loyalty respect for the law transparency and environmental concerns the bottom linebusiness ethics concerns employees customers society the environment shareholders and stakeholders therefore every business should develop ethical models and practices that guide employees in their actions and ensure they prioritize the interests and welfare of those the company serves doing so creates a positive work environment and builds trust with consumers and business partners which can all contribute to higher revenues and profits | |
what is a business exit strategy | a business exit strategy is an entrepreneur s strategic plan to sell his or her ownership in a company to investors or another company an exit strategy gives a business owner a way to reduce or liquidate his stake in a business and if the business is successful make a substantial profit if the business is not successful an exit strategy or exit plan enables the entrepreneur to limit losses an exit strategy may also be used by an investor such as a venture capitalist in order to plan for a cash out of an investment business exit strategies should not be confused with trading exit strategies used in securities markets understanding business exit strategyideally an entrepreneur will develop an exit strategy in their initial business plan before actually going into business the choice of exit plan can influence business development decisions common types of exit strategies include initial public offerings ipo strategic acquisitions and management buyouts mbo which exit strategy an entrepreneur chooses depends on many factors such as how much control or involvement if any they want to retain in the business whether they want the company to be run in the same way after their departure or whether they re willing to see it shift provided they are paid well to sign off a strategic acquisition for example will relieve the founder of his or her ownership responsibilities but will also mean the founder is giving up control ipos are often seen as the holy grail of exit strategies since they often bring along the greatest prestige and highest payoff on the other hand bankruptcy is seen as the least desirable way to exit a business a key aspect of an exit strategy is business valuation and there are specialists that can help business owners and buyers examine a company s financials to determine a fair value there are also transition managers whose role is to assist sellers with their business exit strategies business exit strategy and liquiditydifferent business exit strategies also offer business owners different levels of liquidity selling ownership through a strategic acquisition for example can offer the greatest amount of liquidity in the shortest time frame depending on how the acquisition is structured the appeal of a given exit strategy will depend on market conditions as well for example an ipo may not be the best exit strategy during a recession and a management buyout may not be attractive to a buyer when interest rates are high while an ipo will almost always be a lucrative prospect for company founders and seed investors these shares can be extremely volatile and risky for ordinary investors who will be buying their shares from the early investors business exit strategy which is best the best type of exit strategy also depends on business type and size a partner in a medical office might benefit by selling to one of the other existing partners while a sole proprietor s ideal exit strategy might simply be to make as much money as possible then close down the business if the company has multiple founders or if there are substantial shareholders in addition to the founders these other parties interests must be factored into the choice of an exit strategy as well | |
what are business expenses | business expenses are costs incurred in the ordinary course of business every business from the smallest corner store to the largest corporation tracks these expenses throughout the year for tax purposes business expenses are subtracted from revenue to arrive at a company s taxable net income business expenses are also referred to as deductions these are generally divided into two major categories capital expenditures and operational expenditures understanding business expensessection 162 of the internal revenue code irc details the guidelines for business expenses the irc allows businesses to report any expense that may be ordinary and necessary 1business expenses need not be required to be considered ordinary or necessary generally ordinary means that the expense is common in the industry and most business owners in the same line of business or trade would normally expense these things necessary means that the expenses are appropriate and a business owner might not be able to manage without making the expenditure 2an expense that meets the definition of ordinary and necessary for business purposes can be expensed and therefore is tax deductible some business expenses may be fully deductible while others are only partially deductible below are some examples of fully deductible expenses income statement reportingthe income statement is the primary financial statement used by businesses to record their expenses and determine their taxes most have three categories of expenses broken down by direct costs indirect costs and interest the value of inventory on hand at the beginning and the end of each tax year is used in determining the cost of goods sold cogs which is a large direct expense for many companies cogs is deducted from an entity s total revenue to determine gross profit for the year any expenses included in cogs cannot be deducted again expenses that are included in calculating cogs may include direct labor costs factory overhead storage costs of products and costs of raw materials 2indirect costs are subtracted from gross profit to identify operating profit typical indirect costs include executive compensation general expenses depreciation and marketing costs subtracting indirect costs from gross profit results in operating profit which is also known as earnings before interest and tax 4expensing of business assets is usually done by depreciation depreciation is a tax deductible expense on the income statement and is classified as an indirect expense depreciation expenses can be deducted over a number of years they typically include the costs of computers furniture property equipment trucks and more 5the irs places limits on costs associated with gifts meals and entertainment for example you can usually deduct 50 of the cost of providing meals to employees although certain meals may be fully deducted 6the last section of the income statement involves expenses for interest and tax interest is the last expense a company subtracts to arrive at its taxable income sometimes called adjusted taxable income personal expensesin some cases expenses incurred by a business owner may be both personal and business related for example a small business owner might use the same car for personal purposes and business related activities in this case the portion of miles used for business purposes can be deducted in the case of home offices costs associated with the portion of the home that is exclusively used for business are generally deductible 7non deductible expensessome expenses incurred by a business are not reportable these expenses include bribes lobbying costs penalties fines and contributions made to political parties or candidates 8 | |
what is an ordinary and necessary business expense | this is irs speak for the type of expense that a business can properly deduct generally ordinary means normal and widespread in the industry necessary means appropriate and useful while falling short of absolutely essential 2 | |
what is not a deductible business expense | any expense that has a personal benefit rather than a business benefit is non deductible granted this can be a gray area if you go to los angeles for business purposes and spend a day at disneyland while there your tickets to the park are not deductible your flight to and from l a should be deductible as long as you re ready to prove that you spent most of your time there doing business can i deduct my car if i use it for my llc if you use a car entirely for business purposes you can deduct the related expenses if you have a car that you use for both business and personal trips only the costs related to its business use are deductible that means keeping receipts and a careful log of mileage and other costs associated with the vehicle 9the bottom linethe key to business tax reporting is ordinary and necessary expenses that s the phrase the irs uses to describe the costs of doing business those costs are deducted from income in order to arrive at taxable income for the period being reported | |
what is commercial insurance | commercial insurance also known as business insurance protects businesses from losses due to unexpected events during normal business operations such as lawsuits natural disasters or accidents there are many types of commercial insurance for businesses including coverage for property damage legal liability and employee related risks among others companies evaluate their commercial insurance needs based on potential risks which can vary depending on the type of business and its environment learn about the types of business insurance and what they provide | |
how commercial insurance works | small business owners must carefully consider and evaluate their risks because they may have personal financial exposure in the event of a loss commercial insurance protects business owners from potential losses due to unexpected events that they couldn t afford to cover on their own this allows businesses to operate when it might otherwise be too risky to do so work with a reputable and licensed insurance broker if you need business insurance you can get a list of licensed agents in your state through your state s department of insurance or the national association of insurance commissioners commercial policies are different from personal lines insurance because they protect a business not an individual types of commercial insurancefederal regulations require certain types of insurance such as workers compensation additionally certain states may require certain types of businesses to have additional coverage types 1 in most situations it s advisable for business to protect themselves by having coverages that aren t legally required here are seven common types of business insurance commercial general liability insurance is a type of policy for all businesses it s considered comprehensive insurance although it does not protect against all risks general liability provides coverage for bodily injury property damage medical expenses libel slander defending lawsuits and settlement bonds or judgments unlike general liability insurance which is for any business professional liability insurance pli is designed for businesses that provide services coverage is for loss caused by the service provided it protects against expenses related to malpractice negligence or errors property insurance is designed for businesses with significant physical property such as equipment signage inventory and furniture it protects the business from losses in events such as fire storm or theft property insurance can cover for example damage to things like inventory computers furniture or signage commercial property insurance typically doesn t cover the costs of events like floods and earthquakes if your area is at risk for these events you ll need a separate policy if you re operating a home based business you will likely need additional coverage for equipment and inventory standard homeowner s policies don t typically cover home based businesses like commercial property insurance covers businesses you can add home based business insurance to a homeowner s policy as a rider for a small amount of coverage for equipment and a small amount of liability coverage a business owner s policy is an insurance package that is often ideal for small businesses and home based businesses it is essentially typical insurance options in one bundle so you can buy it efficiently and save money product liability insurance is designed for businesses that are involved with products such as manufacturers wholesale distributors and retailers product liability insurance protects a business from costs associated with damages caused by products such as a defective product causing bodily injury or harm without product liability insurance a business can be vulnerable to paying for expensive lawsuits any vehicles used for business should be insured whether you have vans busses tractor trailers or passenger cars you will need insurance in case of damage to the vehicles or cargo or injuries to others each state has a minimum amount of required insurance several factors can affect the price of vehicle insurance such as the driver s driving record and the condition of the vehicles business interruption or continuation policies are a type of insurance that is especially applicable to companies that have physical locations such as retail stores or manufacturing facilities business interruption insurance compensates a business for its lost income due to events that cause a disruption to the normal course of business it s typically added as a rider to a property insurance policy or as part of a business owner s policy policies may also include a civil authority provision that details compensation in the event of a government action that closes the business | |
how much does commercial insurance cost | the price of a commercial insurance policy will depend on a number of factors about your business and the insurance coverage progressive reports the median monthly cost of a business owners policy to be 70 2 the hartford shares that the median monthly cost of its commercial policies is 55 3 | |
what affects how much business insurance costs | several factors can influence the price of a business insurance policy including the number of employees you have the location of your business and the amount of coverage you want generally the more employees you have and the more coverage you need the more expensive your policy will be prices also vary from region to region depending on the associated risks | |
how do you get commercial insurance | you can get commercial insurance through an insurance agency that provides the type of policy you need you can work with an insurance agent at an insurance company who can give you a quote and guide you through your options and application process you can often get a policy online or by calling the insurance agency the bottom linecommercial insurance can be a valuable tool as it protects a business against potential losses related to unexpected events when shopping for business insurance explore several policy options and make sure you fully understand the terms for each consider consulting a professional financial advisor who can review the options of policy types that may best suit your business | |
what is business intelligence bi | business intelligence bi is a process driven by technology that analyzes business data in order to provide information that can be actioned so that executives and managers can make better informed business decisions business intelligence is a broad term that encompasses data mining process analysis performance benchmarking and descriptive analytics bi parses all the data generated by a business and presents easy to digest reports performance measures and trends that inform management decisions understanding business intelligence bi the need for bi was derived from the concept that managers with inaccurate or incomplete information will tend on average to make worse decisions than if they had better information creators of financial models recognize this as garbage in garbage out bi attempts to solve this problem by analyzing current data that is ideally presented on a dashboard of quick metrics designed to support better decisions most companies can benefit from incorporating bi solutions managers with inaccurate or incomplete information will tend on average to make worse decisions than if they had better information | |
how bi can be useful | to be useful bi must seek to increase the accuracy timeliness and amount of data these requirements mean finding more ways to capture information that is not already being recorded checking the information for errors and structuring the information in a way that makes broad analysis possible in practice however companies have data that is unstructured or in diverse formats that do not make for easy collection and analysis software firms thus provide business intelligence solutions to optimize the information gleaned from data these are enterprise level software applications designed to unify a company s data and analytics although software solutions continue to evolve and are becoming increasingly sophisticated data scientists still need to manage the trade offs between speed and the depth of reporting some of the insights emerging from big data have companies scrambling to capture everything but data analysts can usually filter out sources to find a selection of data points that can represent the health of a process or business area as a whole this can reduce the need to capture and reformat everything for analysis saving analytical time and increasing the reporting speed types of bi tools and softwarebi tools and software come in a wide variety of forms let s take a quick look at some common types of bi solutions benefits of business intelligencethere are many reasons why companies adopt bi many use it to support functions as diverse as hiring compliance production and marketing bi is a core business value it is difficult to find a business area that does not benefit from better information to work with some of the many benefits companies can experience after adopting bi into their business models include faster more accurate reporting and analysis improved data quality better employee satisfaction reduced costs increased revenues and the ability to make better business decisions bi was derived to help businesses avoid the problem of garbage in and garbage out resulting from inaccurate or insufficient data analysis if for example you are in charge of production schedules for several beverage factories and sales are showing strong month over month growth in a particular region you can approve extra shifts in near real time to ensure your factories can meet demand similarly you can quickly idle down that same production if a cooler than normal summer starts impacting sales this manipulation of production is a limited example of how bi can increase profits and reduce costs when used properly examples of bicoca cola bottling had a problem with its daily manual reporting processes they restricted access to real time sales and operations data however by replacing the manual process with an automated bi system the company completely streamlined the process and saved 260 hours a year or more than six 40 hour work weeks now the company s team can quickly analyze metrics like delivery operations budget and profitability with just a few clicks 1 | |
what is power bi | power bi is a business analytics product offered by software giant microsoft according to the company it allows both individuals and businesses to connect to model and visualize data using a scalable platform 2 | |
what is self service bi | self service bi is an approach to analytics that allows individuals without a technical background to access and explore data in other words it gives people throughout the organization not just those in the it department to have control over the data | |
what are the disadvantages of self service bi | drawbacks to self service bi include a false sense of security in end users high licensing costs a lack of data granularity and sometimes too much accessibility | |
what is ibm s bi product | one of ibm s main bi products is its cognos analytics tool which the company touts as an all inclusive ai powered bi solution 3the bottom linepart of the responsibilities of executives and managers is to make their companies more efficient profitable and competitive along with improving the workplace environment for employees companies can do this with technology driven processes known as business intelligence allowing them to achieve these goals faster and correctly | |
what is a business model | the term business model refers to a company s plan for making a profit it identifies the products or services the business plans to sell its identified target market and any anticipated expenses business models are important for both new and established businesses they help companies attract investment recruit talent and motivate management and staff businesses should regularly update their business model or they ll fail to anticipate trends and challenges ahead business models also help investors to evaluate companies that interest them and employees to understand the future of a company they may aspire to join investopedia laura porterunderstanding business modelsa business model is a high level plan for profitably operating a business in a specific marketplace this plan helps the company to identify the best way to go about doing its business while also serving to attract investors and talent a primary component of the business model is the value proposition this is a description of the goods or services that a company offers and why they are desirable to customers or clients it should ideally be stated in a way that differentiates the product or service from its competitors a new enterprise s business model should also cover projected startup costs and financing sources the target customer base for the business marketing strategy a review of the competition and projections of revenues and expenses the plan may also define opportunities in which the business can partner with other established companies for example the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost and they are subject to change many businesses revise their business models periodically to reflect changing business environments and market demand | |
when evaluating a company as a possible investment the investor should find out exactly how it makes its money this means looking through the company s business model fortunately it s not hard to find most companies outline their business model on their website and in their annual reports | admittedly the business model may not tell you everything about a company s prospects investors need to fill in the blanks look beyond the sales pitch and recognize that sensitive information or any flouting of rules of ethics to gain an advantage won t be mentioned the investor who understands the business model even on a basic level can make better sense of the financial data evaluating successful business modelsa common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable counting costs up to the introduction of a product is not enough a company has to keep the business running until its revenues exceed its expenses one way analysts and investors evaluate the success of a business model is by looking at the company s gross profit gross profit is a company s total revenue minus the cost of goods sold cogs comparing a company s gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model gross profit alone can be misleading however analysts also want to see cash flow or net income that is gross profit minus operating expenses which is an indication of just how much real profit the business is generating the two primary levers of a company s business model are pricing and costs a company can raise prices and it can find inventory at reduced costs both actions increase gross profit many analysts consider gross profit to be more important in evaluating a business plan a good gross profit suggests a sound business plan in that case if expenses are out of control the management team could be at fault and the problems are correctable as this suggests many analysts believe that companies that run on the best business models can run themselves | |
when evaluating a company as a possible investment find out exactly how it makes its money not just what it sells but how it sells it that s the company s business model | types of business modelsthere isn t one type of business model not all companies are the same and each has different ways of making money business models can vary considerably an aerospace company such as boeing for example may operate similarly to a peer such as airbus but won t share much in common in terms of how it makes money with say a shoe store or bar direct sales franchising advertising based and brick and mortar stores are all examples of traditional business models there are hybrid models as well such as businesses that combine internet retail with brick and mortar stores or with sporting organizations like the nba below are some common types of business models note that the examples given may fall into multiple categories one of the more common business models most people interact with regularly is the retailer model a retailer is the last entity along a supply chain they often buy finished goods from manufacturers or distributors and interface directly with customers example costco wholesalea manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor machinery and equipment a manufacturer may make custom goods or highly replicated mass produced products and can sell what it makes to distributors retailers or directly to customers example ford motor companyinstead of selling products fee for service business models are centered around labor and providing services a fee for service business model may charge an hourly rate or a fixed cost for a specific agreement fee for service companies are often specialized offering insight that may not be common knowledge or may require specific training example dla piper llpsubscription based business models strive to attract clients in the hopes of luring them into long time loyal patrons this is done by offering a product that requires ongoing payment usually in return for a fixed duration of benefit though largely offered by digital companies for access to software subscription business models are also popular for physical goods such as monthly reoccurring agriculture produce subscription box deliveries example spotifyfreemium business models attract customers by introducing them to basic limited scope products then with the client using their service the company attempts to convert them to a more premium advance product that requires payment although a customer may theoretically stay on freemium forever a company tries to show the benefit of becoming an upgraded member example linkedin linkedin premiumsome companies can reside within multiple business model types at the same time for the same product for example spotify a subscription based model also offers a free version and a premium version if a company is concerned about the cost of attracting a single customer it may attempt to bundle products to sell multiple goods to a single client bundling capitalizes on existing customers by attempting to sell them different products this can be incentivized by offering pricing discounts for buying multiple products example at tmarketplaces receive compensation for hosting a platform for business to be conducted although transactions could occur without a marketplace this business model attempts to make transacting easier safer and faster example ebayaffiliate business models are based on marketing and the broad reach of a specific entity or person s platform companies pay an entity to promote a good and that entity often receives compensation in exchange for their promotion that compensation may be a fixed payment a percentage of sales derived from their promotion or both example social media influencers such as lele pons zach king or chiara ferragniaptly named after the product that invented the model this business model aims to sell a durable product below cost to then generate high margin sales of a disposable component needed to use that product also referred to as the razor and blade model razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run example hp printers and ink tying is an illegal razor blade model strategy that requires the purchase of an unrelated good prior to being able to buy a different and often required good for example imagine gillette released a line of lotion and required all customers to buy three bottles before they were allowed to purchase disposable razor blades 1instead of relying on high margin companion products a reverse razor blade business model tries to sell a high margin product upfront then to use the product low or free companion products are provided this model aims to promote that upfront sale as further use of the product is not highly profitable example apple iphones applications the franchise business model leverages existing business plans to expand and reproduce a company at a different location often food hardware or fitness companies franchisers work with incoming franchisees to finance the business promote the new location and oversee operations in return the franchisor receives a percentage of earnings from the franchisee example domino s pizzainstead of charging a fixed fee some companies may implement a pay as you go business model where the amount charged depends on how much of the product or service was used the company may charge a fixed fee for offering the service in addition to an amount that changes each month based on what was consumed example utility companiesa brokerage business model connects buyers and sellers without directly selling a good themselves brokerage companies often receive a percentage of the amount paid when a deal is finalized most common in real estate brokers are also prominent in construction development and freight example re max | |
how to create a business model | there is no one size fits all when making a business model different professionals may suggest taking different steps when creating a business and planning your business model here are some broad steps someone can take to create a plan instead of reinventing the wheel consider what competing companies are doing and how you can position yourself in the market you may be able to easily spot gaps in the business model of others criticism of business modelsjoan magretta the former editor of the harvard business review suggests there are two critical factors in sizing up business models when business models don t work she states it s because the story doesn t make sense and or the numbers just don t add up to profits 2complicated business models can put off investors and hinder a company s growth people are less eager to invest in a company they don t understand moreover some business models can be less profitable and at risk of being compromised what works one year isn t guaranteed to continue doing so in the future take the airline industry for years major carriers such as american airlines delta and continental built their businesses around a hub and spoke structure in which all flights were routed through a handful of major airports by ensuring that most seats were filled most of the time the business model produced big profits however a competing business model arose that made the strength of the major carriers a burden carriers like southwest and jetblue shuttled planes between smaller airports at a lower cost they avoided some of the operational inefficiencies of the hub and spoke model while forcing labor costs down that allowed them to cut prices increasing demand for short flights between cities as these newer competitors drew more customers away the old carriers were left to support their large extended networks with fewer passengers the problem became even worse when traffic fell sharply following the september 11 terrorist attacks in 2001 3 to fill seats these airlines had to offer more discounts at even deeper levels the hub and spoke business model no longer made sense example of business modelsconsider the vast portfolio of microsoft over the past several decades the company has expanded its product line across digital services software gaming and more various business models all within microsoft include but are not limited to | |
what is a business model | a business model is a strategic plan of how a company will make money the model describes the way a business will take its product offer it to the market and drive sales a business model determines what products make sense for a company to sell how it wants to promote its products what type of people it should try to cater to and what revenue streams it may expect | |
what is an example of a business model | best buy target and walmart are some of the largest examples of retail companies these companies acquire goods from manufacturers or distributors to sell directly to the public retailers interface with their clients and sell goods though retailers may or may not make the actual goods they sell | |
what are the main types of business models | there are various types of business models examples include subscription models bundling and franchising business models can sometimes also be loosely defined by industry for example manufacturers produce their own goods and may or may not sell them directly to the public whereas retailers buy goods to later resell to the public | |
how do i build a business model | there are many steps to building a business model and there is no single consistent process among business experts in general a business model should identify your customers understand the problem you are trying to solve select a business model type to determine how your clients will buy your product and determine the ways your company will make money it is also important to periodically review your business model once you ve launched evaluate your plan and adjust your target audience product line or pricing as needed the bottom linea company isn t just an entity that sells goods it s an ecosystem that must have a plan on who to sell to what to sell what to charge and what value it is creating a business model describes what an organization does to make a profit after building a business model a company should have a stronger direction on how it wants to operate and what its financial future appears to be | |
what is a business plan | a business plan is a document that outlines a company s goals and the strategies to achieve them it s valuable for both startups and established companies for startups a well crafted business plan is crucial for attracting potential lenders and investors established businesses use business plans to stay on track and aligned with their growth objectives this article will explain the key components of an effective business plan and guidance on how to write one investopedia ryan oakleyunderstanding business plansany new business should have a business plan in place before beginning operations banks and venture capital firms often want to see a business plan before considering making a loan or providing capital to new businesses even if a company doesn t need additional funding having a business plan helps it stay focused on its goals research from the university of oregon shows that businesses with a plan are significantly more likely to secure funding than those without one 1 moreover companies with a business plan grow 30 faster than those that don t plan 2 according to a harvard business review article entrepreneurs who write formal plans are 16 more likely to achieve viability than those who don t 3a business plan should ideally be reviewed and updated periodically to reflect achieved goals or changes in direction an established business moving in a new direction might even create an entirely new plan there are numerous benefits to creating and sticking to a well conceived business plan it allows for careful consideration of ideas before significant investment highlights potential obstacles to success and provides a tool for seeking objective feedback from trusted outsiders a business plan may also help ensure that a company s executive team remains aligned on strategic action items and priorities while business plans vary widely even among competitors in the same industry they often share basic elements detailed below a well crafted business plan is essential for attracting investors and guiding a company s strategic growth it should address market needs and investor requirements and provide clear financial projections 4 | |
how to write a business plan | while there are any number of templates that you can use to write a business plan it s best to try to avoid producing a generic looking one let your plan reflect the unique personality of your business many business plans use some combination of the sections below with varying levels of detail depending on the company common elements of a business planthe length of a business plan can vary greatly from business to business regardless gathering the basic information into a 15 to 25 page document is best any additional crucial elements such as patent applications can be referenced in the main document and included as appendices common elements in many business plans include investors want to see a clear exit strategy expected returns and a timeline for cashing out it s likely a good idea to provide five year profitability forecasts and realistic financial estimates 42 types of business plansbusiness plans can vary in format often categorized into traditional and lean startup plans according to the u s small business administration sba the traditional business plan is the more common of the two 5 | |
why do business plans fail | a business plan isn t a surefire recipe for success the plan may have been unrealistic in its assumptions and projections markets and the economy might change in ways that couldn t have been foreseen a competitor might introduce a revolutionary new product or service all this calls for building flexibility into your plan so you can pivot to a new course if needed | |
what does a lean startup business plan include | the lean startup business plan is ideal for quickly explaining a business especially for new companies that don t have much information yet key sections may include a value proposition major activities and advantages resources staff intellectual property and capital partnerships customer segments and revenue sources the bottom linea well crafted business plan is crucial for any company whether it s a startup looking for investment or an established business wanting to stay on course it outlines goals and strategies boosting a company s chances of securing funding and achieving growth as your business and the market change update your business plan regularly this keeps it relevant and aligned with your current goals and conditions think of your business plan as a living document that evolves with your company not something carved in stone | |
what is business process outsourcing bpo | business process outsourcing bpo is a method of subcontracting various business related operations to third party vendors although bpo originally applied solely to manufacturing entities such as soft drink manufacturers that outsourced large segments of their supply chains bpo now applies to the outsourcing of various products and services understanding business process outsourcing bpo many businesses from small startups to large companies opt to outsource processes as new and innovative services are increasingly available in today s ever changing highly competitive business climate broadly speaking companies adopt bpo practices in the two main areas of back office and front office operations back office bpo refers to a company contracting its core business support operations such as accounting payment processing it services human resources regulatory compliance and quality assurance to outside professionals who ensure the business runs smoothly by contrast front office bpo tasks commonly include customer related services such as tech support sales and marketing special considerations the breadth of a business bpo options depends on whether it contracts its operations within or outside the borders of its home country bpo is deemed offshore outsourcing if the contract is sent to another country where there is political stability lower labor costs and or tax savings a u s company using an offshore bpo vendor in singapore is one such example of offshore outsourcing bpo is referred to as nearshore outsourcing if the job is contracted to a neighboring country such would be the case if a u s company partnered with a bpo vendor located in canada a third option known as onshore outsourcing or domestic sourcing occurs when bpo is contracted within the company s own country even if its vendor partners are located in different cities or states bpo is often referred to as information technology enabled services ites because it relies on technology infrastructure that enables external companies to efficiently perform their roles the attraction of bpocompanies are often drawn to bpo because it affords them greater operational flexibility by outsourcing non core and administrative functions companies can reallocate time and resources to core competencies like customer relations and product leadership which ultimately results in advantages over competing businesses in their industry bpo offers businesses access to innovative technological resources that they might not otherwise have exposure to bpo partners and companies constantly strive to improve their processes by adopting the most recent technologies and practices since the u s corporate income tax is among the highest in the developed world american companies benefit from outsourcing operations to countries with lower income taxes and cheaper labor forces as viable cost reduction measures bpo also offers companies the benefits of quick and accurate reporting improved productivity and the ability to swiftly reassign its resources when necessary some disadvantages of bpowhile there are many advantages of bpo there are also disadvantages a business that outsources its business processes may be prone to data breaches or have communication issues that delay project completion and such businesses may underestimate the running costs of bpo providers another disadvantage could be customer backlash against outsourcing if they perceive this to be of inferior quality or at the expense of domestic employment business process outsourcing is a fast growing sector of the economy which makes it attractive as a career path or startup opportunity according to industry research the bpo market was valued at nearly 250 billion in 2021 and is projected to grow at 9 per year over the next decade 1according to data from zip recruiter bpo jobs in america pay an average of 91 100 as of 2022 2 | |
what is the goal of bpo and what are its types | bpo is the abbreviation for business process outsourcing which refers to when companies outsource business processes to a third party external company the primary goal is to cut costs free up time and focus on core aspects of the business two types of bpo are front office and back office back office bpo entails the internal aspects of a business such as payroll inventory purchasing and billing front office bpo focuses on activities external to the company such as marketing and customer service | |
what are the advantages of bpo | there are numerous advantages to bpo one of the primary advantages is that it lowers costs performing a certain job function internally costs a specific amount bpo can reduce these costs by outsourcing this job to an external party often in a less cost intensive country reducing the overall cost of performing that job function other advantages include a company being allowed to focus on core business functions that are critical to its success rather than administrative tasks or other aspects of running a company that are not critical bpo also helps with growth particularly in global expansion if a company is interested in opening an overseas branch or operating overseas utilizing a bpo company that has experience in the local industry and that speaks the language is extremely beneficial | |
what are the types of bpo companies | there are three primary types of bpo companies these are local outsourcing offshore outsourcing and nearshore outsourcing local outsourcing is a company that is in the same country as your business offshore outsourcing is a company that is in another country and nearshore outsourcing is a company that is in a country that is not too far from your country | |
what is a bpo call center | a bpo call center handles outsourced incoming and outgoing customer calls on behalf of other businesses many bpo call centers will have agents that can individually handle customer complaints or inquiries standing in for a number of different companies often within a particular specialty for instance one call center agent may be able to field tech support phone calls for a variety of vendors or manufacturers the bottom linebusiness process outsourcing bpo utilizes third party specialists to carry out some part of a business process or operation as opposed to outsourcing the entire production bpo can lower a company s costs increase efficiency and provide flexibility at the same time the bpo industry is rapidly growing which means that in our increasingly global economy process outsourcing is not going anywhere | |
what is business risk | business risk is the exposure a company or organization has to factor s that will lower its profits or lead it to fail anything that threatens a company s ability to achieve its financial goals is considered a business risk there are many factors that can converge to create business risk sometimes it is a company s top leadership or management that creates situations where a business may be exposed to a greater degree of risk however sometimes the cause of risk is external to a company because of this it is impossible for a company to completely shelter itself from risk however there are ways to mitigate the overall risks associated with operating a business most companies accomplish this by adopting a risk management strategy xiaojie liu investopediaunderstanding business risk | |
when a company experiences a high degree of business risk it may impair its ability to provide investors and stakeholders with adequate returns for example the chief executive officer ceo of a company may make certain decisions that affect its profits or the ceo may not accurately anticipate certain events in the future causing the business to incur losses or fail | business risk is influenced by a number of different factors including a company with a higher amount of business risk may decide to adopt a capital structure with a lower debt ratio to ensure that it can meet its financial obligations at all times with a low debt ratio when revenues drop the company may not be able to service its debt and this may lead to bankruptcy on the other hand when revenues increase a company with a low debt ratio experiences larger profits and is able to keep up with its obligations to calculate risk analysts use four ratios contribution margin operation leverage effect financial leverage effect and total leverage effect for more complex calculations analysts can incorporate statistical methods business risk usually occurs in one of four ways strategic risk compliance risk operational risk and reputational risk types of business riskstrategic risk arises when a business does not operate according to its business model or plan when a company does not operate according to its business model its strategy becomes less effective over time and the company may struggle to reach its defined goals for example imagine abc store is a big box store that strategically positions itself as a low cost provider for working class shoppers its main competitor is xyz store which is seen as a destination for more middle class consumers however if xyz decides to undercut abc s prices this becomes a strategic risk for abc the second form of business risk is compliance risk sometimes known as regulatory risk compliance risk primarily arises in industries and sectors that are highly regulated for example in the wine industry there is a three tier system of distribution that requires wholesalers in the united states to sell wine to a retailer which then sells it to consumers this system prohibits wineries from selling their products directly to retail stores in some states 1however many u s states do not have this type of distribution system compliance risk arises when a brand fails to understand the individual requirements of the state in which it is operating in this situation a brand risks becoming noncompliant with state specific distribution laws and may face fines or other legal action 12the third type of business risk is operational risk this risk arises from within the corporation especially when the day to day operations of a company fail to perform for example in 2012 the multinational bank hsbc faced a high degree of operational risk and as a result incurred a large fine from the u s department of justice when its internal anti money laundering aml operations team was unable to adequately stop money laundering in mexico 3anytime a company s reputation is ruined either by an event that was the result of a previous business risk or by a different occurrence it runs the risk of losing customers and its brand loyalty suffering the reputation of hsbc faltered in the aftermath of the fine it was levied for poor anti money laundering practices reducing business riskbusiness risk cannot be entirely avoided because it is unpredictable however there are many strategies that businesses employ to cut back the impact of all types of business risk including strategic compliance operational and reputational risk the first step that brands typically take is to identify all sources of risk in their business plan these aren t just external risks they may also come from within the business itself taking action to cut back the risks as soon as they present themselves is key management should come up with a plan to deal with any identifiable risks before they become too great finally most companies adopt a risk management strategy this can be done either before the business begins operations or after it experiences a setback ideally a risk management strategy will help the company be better prepared to deal with risks as they present themselves the plan should have tested ideas and procedures in place in case risk presents itself once the management of a company has come up with a plan to deal with the risk it s important that they take the extra step of documenting everything in case the same situation arises again after all business risk isn t static it tends to repeat itself during the business cycle by recording what led to risk the first time as well as the processes used to mitigate it the business can implement those strategies a second time with greater ease this reduces the time frame in which unaddressed risk can impact the business as well as lowering the cost of risk management | |
what are the 4 main types of business risk | the four main types of risk that businesses encounter are strategic compliance regulatory operational and reputational risk these risks can be caused by factors that are both external and internal to the company | |
why is risk management important in business | businesses face a great deal of uncertainty in their operations much of it outside their control this uncertainty creates risk that can jeopardize a company s short term profits and long term existence because risk is unavoidable risk management is an important part of running a business when a business has a thorough and carefully created risk management plan in place and when it is able to iterate on that plan to deal with new and unexpected risks the business is more likely to survive the impact of both internal and external risk | |
what are internal risks that can impact a business | internal risks that can impact a business often come from decisions made by the management or executive team in pursuit of growth these decisions can create physical or tangible risks for example on site risks such as fires equipment malfunctions or hazardous materials can jeopardize production endanger employees and lead to legal or financial penalties policies that guarantee a safe working environment would in this instance be an effective strategy for managing internal risks the bottom linein business risks are factors that an organization encounters that may lower its profits or cause it to fail sources of risk can be external such as changes in what consumers want changes in competitor behavior external economic factors and government rules or regulations they can also be internal such as decisions made by management or the executive team no company can completely avoid risks especially because many risk factors are external however businesses can put risk management strategies into place these strategies can be used to reduce risk and to mitigate the impact of risks when they arise by documenting the sources of risk and creating a strategic plan that can be repeated businesses can reduce the overall impact of risk and deal with it more efficiently and effectively in the future | |
what is business to business b2b | business to business b2b also called b to b is a form of transaction between businesses such as a manufacturer and wholesaler or a wholesaler and a retailer business to business refers to commerce that s conducted between companies rather than companies and individual consumers business to business stands in contrast to business to consumer b2c and business to government b2g transactions lara antal investopediaunderstanding business to business b2b business to business transactions are common in a typical supply chain because companies must typically purchase components and raw materials for use in their manufacturing processes finished products can then be sold to individuals via business to consumer transactions in the context of communication business to business refers to methods by which employees from different companies can connect through outlets such as social media this type of communication between the employees of two or more companies is called b2b communication grand view research has reported that the b2b e commerce market was estimated at 18 665 5 billion in 2023 and that it s expected to grow at a rate of about 18 2 annually from 2024 through 2030 it attributes the growth to rapid technology improvements 1the internet provides a robust environment in which businesses can find out about products and services and lay the groundwork for future business to business transactions company websites allow interested parties to learn about a business s products and services and to initiate contact online product and supply exchange websites allow businesses to search for products and services and initiate procurement through e procurement interfaces specialized online directories provide information about particular industries and companies and the products and services they provide this also facilitates b2b transactions special considerationssuccessful business to business transactions require planning they rely on a company s account management personnel to establish business client relationships business to business relationships must also be nurtured for successful transactions to take place typically through professional interactions before sales traditional marketing practices also help businesses connect with business clients trade publications aid in this effort offering opportunities to advertise in print and online a business s presence at conferences and trade shows also builds awareness of its products and the services it provides to other businesses examples of business to business b2b commercebusiness to business transactions and large corporate accounts are commonplace for firms in manufacturing samsung is one of apple s largest suppliers in the production of the iphone apple also holds b2b relationships with firms like intel panasonic and semiconductor producer micron technology as of fiscal year 2022 2b2b transactions are also the backbone of the automobile industry many vehicle components are manufactured independently and auto manufacturers purchase these parts to assemble automobiles tires batteries electronics hoses and door locks are typically manufactured by various companies and sold directly to automobile manufacturers service providers also engage in b2b transactions companies specializing in property management housekeeping and industrial cleanup often sell these services exclusively to other businesses rather than to individual consumers | |
what is the e commerce market | e commerce includes all transactions that are accomplished from start to finish on the internet products and services are purchased online and payments for products and services are also transmitted electronically but this doesn t mean that a company can t also engage in brick and mortar transactions with customers or clients 3 | |
what are some common b2b purchases | a retailer who purchases merchandise from manufacturers for resale to consumers has engaged in a b2b purchase but the purchases don t necessarily have to be resold they can include software that s used for business purposes or shared business or office spaces 4 | |
what is a business to government b2g transaction | a b2g transaction involves selling information services or products to a government these are generally e commerce exchanges but they re not limited to online activity they re typically entered into under contract a business submits bids and the government selects one of those bids and takes it to contract 5the bottom lineb2b transactions usually occur between wholesalers and retailers a wholesaler will sell products to a retailer and that retailer then places price tags on them and offers them to consumers for a profit they can also involve a manufacturer purchasing necessary raw materials from a supplier to create a product that can eventually be sold to consumers in any case the cost generally trickles down to consumers | |
what is business to consumer b2c | the term business to consumer b2c refers to the process of selling products and services directly between a business and consumers who are the end users of its products or services most companies that sell directly to consumers can be referred to as b2c companies b2c became immensely popular during the dotcom boom of the late 1990s when it was mainly used to refer to online retailers who sold products and services to consumers through the internet as a business model business to consumer differs significantly from the business to business b2b model which refers to commerce between two or more businesses business to consumer b2c understanding business to consumer b2c business to consumer b2c is among the most popular and widely known sales models michael aldrich first utilized the idea of b2c in 1979 and used television as the primary medium to reach out to consumers 1b2c traditionally referred to mall shopping eating out at restaurants pay per view movies and infomercials however the rise of the internet created a whole new b2c business channel in the form of e commerce or selling goods and services over the internet although many b2c companies fell victim to the subsequent dotcom bust as investor interest in the sector dwindled and venture capital funding dried up b2c leaders such as amazon and priceline survived the shakeout and have since seen tremendous success any business that relies on b2c sales must maintain good relations with its customers to ensure they return the company must regularly review its marketing for good performance and adjust it when necessary business to business b2b marketing campaigns are geared to demonstrate the value of a product or service companies that rely on b2c usually try to catch the eye of the consumer and elicit an emotional response to their marketing b2c storefronts vs internet retailerstraditionally many manufacturers sold their products to retailers with physical locations retailers made profits on the markup they added to the price paid to the manufacturer but that changed once the internet came new businesses arose that promised to sell directly to the consumer thus cutting out the middle person the retailer and lowering prices during the bust of the dotcom boom in the 1990s businesses fought to secure a web presence many retailers were forced to shut their doors and went out of business decades after the dotcom revolution b2c companies with a web presence continue to dominate over their traditional brick and mortar competitors companies such as amazon priceline and ebay are survivors of the early dotcom boom they have gone on to expand upon their early success to become industry disruptors online b2c can be broken down into five categories direct sellers online intermediaries advertising based b2c community based and fee based b2c in the digital worldthere are typically five types of online b2c business models that most companies use online to target consumers 1 direct sellers this is the most common model in which people buy goods from online retailers these may include manufacturers or small businesses or simply online versions of department stores that sell products from different manufacturers 2 online intermediaries these are liaisons or go betweens who don t actually own products or services that put buyers and sellers together sites like expedia trivago and etsy fall into this category 3 advertising based b2c this model uses free content to get visitors to a website those visitors in turn come across digital or online ads large volumes of web traffic are used to sell advertising which sells goods and services one example is media sites like huffpost a high traffic site that mixes advertising with its native content 4 community based sites like meta formerly facebook which build online communities based on shared interests help marketers and advertisers promote their products directly to consumers websites typically target ads based on users demographics and geographical location 5 fee based direct to consumer sites like netflix charge a fee so consumers can access their content the site may also offer free but limited content while charging for most of it the new york times and other large newspapers often use a fee based b2c business model b2c companies and mobiledecades after the e commerce boom b2c companies are continuing to eye a growing market mobile purchasing with smartphone apps and traffic growing year over year b2c companies have shifted attention to mobile users and capitalized on this popular technology 2throughout the early 2010s b2c companies were rushing to develop mobile apps just as they were with websites decades earlier in short success in a b2c model is predicated on continuously evolving with consumers appetites opinions trends and desires because of the nature of the purchases and relationships between businesses sales in the b2b model may take longer than those in the b2c model b2c vs b2bas mentioned above the business to consumer model differs from the business to business b2b model while consumers buy products for their personal use businesses buy products to use for their companies large purchases such as capital equipment generally require approval from those who head up a company this makes a business purchasing power more complex than that of the average consumer unlike the b2c business model pricing structures tend to be different in the b2b model with b2c consumers often pay the same price for the same products however prices are not necessarily the same businesses tend to negotiate prices and payment terms | |
what is business to consumer and how does it differ from business to business | after surging in popularity in the 1990s business to consumer b2c increasingly became a term that referred to companies with consumers as their end users this stands in contrast to business to business b2b or companies whose primary clients are other businesses b2c companies operate on the internet and sell products to customers online amazon meta formerly facebook and walmart are some examples of b2c companies | |
what is an example of a business to consumer company | one example of a major b2c company today is shopify which has developed a platform for small retailers to sell their products and reach a broader audience online before the advent of the internet however business to consumer was a term that was used to describe take out restaurants or companies in a mall for instance in 1979 michael aldrich further utilized this term to attract consumers through television 1 | |
what are the 5 types of business to consumer models | typically b2c models fall into the following five categories direct sellers online intermediaries advertising based b2c community based and fee based the most frequently occurring is the direct seller model where goods are purchased directly from online retailers by contrast an online intermediary model would include companies like expedia which connect buyers and sellers meanwhile a fee based model includes services such as disney which charges a subscription to stream their video on demand content the bottom lineb2c or the business to consumer model refers to companies that sell directly to their consumers without going through retailers or other intermediaries b2c sales originally relied on television advertisements to reach consumers and gained greater prominence when the internet became widespread b2c sales are contrasted with b2b models in which companies direct their sales at other businesses | |
what is business to government b2g | business to government b2g is the sale and marketing of goods and services to federal state or local agencies in modern lingo there are three basic business models business to consumer b2c business to business b2b and business to government b2g b2g is not an insignificant chunk of business by the end of may 2024 the federal government had spent over 3 8 trillion in the fiscal year to date 1 notably a portion of its business is supposed to be spent on small business suppliers understanding business to government b2g b2b business can be as modest as a small business providing it support services to a town government it can be as big as boeing which builds helicopters missile defense systems fighter jets and surveillance aircraft among many other products for the u s department of defense dod 2at the federal level the general services administration gsa is the government s official buying arm developing and implementing regulations on a vast array of products and services purchased for the u s government 3governments generally solicit services from the private sector through requests for proposal rfps the gsa website gsaadvantage gov is a shopping portal for government agencies and gives an idea of the sheer breadth of products purchased by the federal government 4not surprisingly given the enormous numbers and range of federal state and local purchasing requirements an entire sector of the internet is devoted to matching businesses to government agencies advantages and disadvantages of business to government b2g businesses that are used to interacting with other businesses or directly with consumers often encounter unexpected hurdles when working with government agencies governments tend to take more time than private companies to approve and to begin work on a given project layers of regulation can drag on the overall efficiency of the contracting process while businesses may find that government contracts involve additional paperwork time and vetting there are advantages to providing goods and services to the public sector government contracts are often large and more stable than analogous private sector work a company with a history of successful government contracting usually finds it easier to get the next contract special considerationsfederal requirements often specify that certain amounts of appropriated funds must be spent on contracts with small businesses this potentially can give smaller businesses an advantage in b2g activity or at least offset some of the advantages that large well established government contractors may already enjoy the small business administration sba offers an online guide to help small businesses win federal contracts 5in order to qualify as a small business contractor a business must be properly registered as such demonstrating that it is independently owned and operated and makes a significant contribution to the u s economy among other requirements 6in addition to small businesses federal laws and regulations often mandate certain amounts of spending be directed toward groups such as veterans women and racial or ethnic minorities small businesses owned by members of these groups may enjoy special advantages in obtaining b2g contracts 7 | |
what are b2g examples | because of the scale of government spending at local state and federal levels there are a broad range of b2g examples some of the most evident involve infrastructure spending at a national scale think about construction firms contracted to build interstate freeways or to repair railroads b2g can also look like a food service provider contracted to supply produce to local public schools | |
why is b2g important | b2g contracts benefit both parties involved in a contract the government agency obtains a good or service from a firm with experience in a given sector and the contracted firm receives revenue for its products | |
what is b2a | b2a is virtually synonymous with b2g while b2g stands for business to government b2a stands for business to administration this refers to commerce conducted between businesses and administrative branches of government the two concepts are often used interchangeably the bottom linebusiness to government b2g refers to the provisions of goods and services to the government sector it s a distinct form of business model much like business to business b2b and business to consumer b2c models both established firms and small businesses alike can seek to obtain b2g contracts by responding to requests for proposals because of the scale of government spending b2g contracts are often highly coveted | |
what is a business valuation | a business valuation also known as a company valuation is the process of determining the economic value of a business during the valuation process all areas of a business are analyzed to determine its worth and the worth of its departments or units a company valuation can be used to determine the fair value of a business for a variety of reasons including sale value establishing partner ownership taxation and even divorce proceedings owners will often turn to professional business evaluators for an objective estimate of the value of the business investopedia katie kerpelthe basics of business valuationthe topic of business valuation is frequently discussed in corporate finance business valuation is typically conducted when a company is looking to sell all or a portion of its operations or looking to merge with or acquire another company the valuation of a business is the process of determining the current worth of a business using objective measures and evaluating all aspects of the business a business valuation might include an analysis of the company s management its capital structure its future earnings prospects or the market value of its assets the tools used for valuation can vary among evaluators businesses and industries common approaches to business valuation include a review of financial statements discounting cash flow models and similar company comparisons valuation is also important for tax reporting the internal revenue service irs requires that a business is valued based on its fair market value some tax related events such as sale purchase or gifting of shares of a company will be taxed depending on valuation 1estimating the fair value of a business is an art and a science there are several formal models that can be used but choosing the right one and then the appropriate inputs can be somewhat subjective methods of valuationthere are numerous ways a company can be valued you ll learn about several of these methods below market capitalization is the simplest method of business valuation it is calculated by multiplying the company s share price by its total number of shares outstanding for example as of january 3 2018 microsoft inc traded at 86 35 2 with a total number of shares outstanding of 7 715 billion the company could then be valued at 86 35 x 7 715 billion 666 19 billion under the times revenue business valuation method a stream of revenues generated over a certain period of time is applied to a multiplier which depends on the industry and economic environment for example a tech company may be valued at 3x revenue while a service firm may be valued at 0 5x revenue instead of the times revenue method the earnings multiplier may be used to get a more accurate picture of the real value of a company since a company s profits are a more reliable indicator of its financial success than sales revenue is the earnings multiplier adjusts future profits against cash flow that could be invested at the current interest rate over the same period of time in other words it adjusts the current p e ratio to account for current interest rates the dcf method of business valuation is similar to the earnings multiplier this method is based on projections of future cash flows which are adjusted to get the current market value of the company the main difference between the discounted cash flow method and the profit multiplier method is that it takes inflation into consideration to calculate the present value this is the value of shareholders equity of a business as shown on the balance sheet statement the book value is derived by subtracting the total liabilities of a company from its total assets liquidation value is the net cash that a business will receive if its assets were liquidated and liabilities were paid off today this is by no means an exhaustive list of the business valuation methods in use today other methods include replacement value breakup value asset based valuation and still many more accreditation in business valuationin the u s accredited in business valuation abv is a professional designation awarded to accountants such as cpas who specialize in calculating the value of businesses the abv certification is overseen by the american institute of certified public accountants aicpa and requires candidates to complete an application process pass an exam meet minimum business experience and education requirements 3 and pay a credential fee as of mar 11 2022 the annual fee for the abv credential was 380 4maintaining the abv credential also requires those who hold the certification to meet minimum standards for work experience and lifelong learning successful applicants earn the right to use the abv designation with their names which can improve job opportunities professional reputation and pay in canada chartered business valuator cbv is a professional designation for business valuation specialists it is offered by the canadian institute of chartered business valuators cicbv | |
what is a butterfly spread | the term butterfly spread refers to an options strategy that combines bull and bear spreads with a fixed risk and capped profit these spreads are intended as a market neutral strategy and pay off the most if the underlying asset does not move prior to option expiration they involve either four calls four puts or a combination of puts and calls with three strike prices understanding butterfly spreadsbutterfly spreads are strategies used by options traders remember that an option is a financial instrument that is based on the value of an underlying asset such as a stock or a commodity options contracts allow buyers to buy or sell the underlying asset by a specific expiration or exercise date 1as noted above a butterfly spread combines both a bull and a bear spread this is a neutral strategy that uses four options contracts with the same expiration but three different strike prices the options with the higher and lower strike prices are the same distance from the at the money options if the at the money options have a strike price of 60 the upper and lower options should have strike prices equal dollar amounts above and below 60 at 55 and 65 for example these strikes are both 5 away from 60 puts or calls can be used for a butterfly spread combining the options in various ways will create different types of butterfly spreads each designed to either profit from volatility or low volatility a spread strategy can be characterized by its payoff or the visualizations of its profit loss profile types of butterfly spreadsthe long butterfly call spread is created by buying one in the money call option with a low strike price writing two at the money call options and buying one out of the money call option with a higher strike price net debt is created when entering the trade the maximum profit is achieved if the price of the underlying at expiration is the same as the written calls the max profit is equal to the strike of the written option less the strike of the lower call premiums and commissions paid the maximum loss is the initial cost of the premiums paid plus commissions the short butterfly spread is created by selling one in the money call option with a lower strike price buying two at the money call options and selling an out of the money call option at a higher strike price a net credit is created when entering the position this position maximizes its profit if the price of the underlying is above or the upper strike or below the lower strike at expiry the maximum profit is equal to the initial premium received less the price of commissions the maximum loss is the strike price of the bought call minus the lower strike price less the premiums received the long put butterfly spread is created by buying one put with a lower strike price selling two at the money puts and buying a put with a higher strike price net debt is created when entering the position like the long call butterfly this position has a maximum profit when the underlying stays at the strike price of the middle options the maximum profit is equal to the higher strike price minus the strike of the sold put less the premium paid the maximum loss of the trade is limited to the initial premiums and commissions paid the short put butterfly spread is created by writing one out of the money put option with a low strike price buying two at the money puts and writing an in the money put option at a higher strike price this strategy realizes its maximum profit if the price of the underlying is above the upper strike or below the lower strike price at expiration the maximum profit for the strategy is the premiums received the maximum loss is the higher strike price minus the strike of the bought put less the premiums received the iron butterfly spread is created by buying an out of the money put option with a lower strike price writing an at the money put option writing an at the money call option and buying an out of the money call option with a higher strike price the result is a trade with a net credit that s best suited for lower volatility scenarios the maximum profit occurs if the underlying stays at the middle strike price the maximum profit is the premiums received the maximum loss is the strike price of the bought call minus the strike price of the written call less the premiums received the reverse iron butterfly spread is created by writing an out of the money put at a lower strike price buying an at the money put buying an at the money call and writing an out of the money call at a higher strike price this creates a net debit trade that s best suited for high volatility scenarios maximum profit occurs when the price of the underlying moves above or below the upper or lower strike prices the strategy s risk is limited to the premium paid to attain the position the maximum profit is the strike price of the written call minus the strike of the bought call less the premiums paid example of a long call butterfly spreadlet s say verizon vz stock trades at 60 an investor believes it will not move significantly over the next several months they choose to implement a long call butterfly spread to potentially profit if the price stays where it is the investor writes two call options on verizon at a strike price of 60 and also buys two additional calls at 55 and 65 in this scenario the investor makes the maximum profit if verizon stock is priced at 60 at expiration if verizon is below 55 at expiration or above 65 the investor realizes their maximum loss which is the cost of buying the two wing call options the higher and lower strike reduced by the proceeds of selling the two middle strike options if the underlying asset is priced between 55 and 65 a loss or profit may occur but the premium paid to enter the position is key assume that it costs 2 50 to enter the position based on that if verizon is priced anywhere below 60 minus 2 50 the position would experience a loss the same holds true if the underlying asset is priced at 60 plus 2 50 at expiration in this scenario the position profits if the underlying asset s price falls between 57 50 and 62 50 at expiration this scenario does not include the cost of commissions which can add up when trading multiple options | |
what are the characteristics of a butterfly spread | butterfly spreads use four option contracts with the same expiration but three different strike prices a higher strike price an at the money strike price and a lower strike price the options with the higher and lower strike prices are the same distance from the at the money options each type of butterfly has a maximum profit and a maximum loss a similar trading strategy is the christmas tree which uses six call or put options | |
how is a long call butterfly spread constructed | the long call butterfly spread is created by buying a one in the money call option with a low strike price writing selling two at the money call options and buying one out of the money call option with a higher strike price net debt is created when you enter the trade the maximum profit is achieved if the price of the underlying asset at expiration is the same as the written calls the max profit is equal to the strike of the written option less the strike of the lower call premiums and commissions paid the maximum loss is the initial cost of the premiums paid plus commissions | |
how is a long put butterfly spread constructed | the long put butterfly spread is created by buying one out of the money put option with a low strike price selling writing two at the money put options and buying one in the money put option with a higher strike price net debt is created when entering the position like the long call butterfly this position has a maximum profit when the underlying asset stays at the strike price of the middle options the maximum profit is equal to the higher strike price minus the strike of the sold put less the premium paid the maximum loss of the trade is limited to the initial premiums and commissions paid | |
what is buy and hold | buy and hold is a passive investment strategy in which an investor buys stocks or other types of securities such as etfs and holds them for a long period regardless of fluctuations in the market an investor who uses a buy and hold strategy actively selects investments but has no concern for short term price movements and technical indicators many legendary investors such as warren buffett and jack bogle praise the buy and hold approach as ideal for individuals seeking healthy long term returns | |
how buy and hold works | conventional investing wisdom shows that with a long time horizon equities render a higher return than other asset classes such as bonds there is however some debate over whether a buy and hold strategy is superior to an active investing strategy both sides have valid arguments but a buy and hold strategy has tax benefits because the investor can defer capital gains taxes on long term investments to purchase shares of common stock is to take ownership of a company ownership has its privileges which include voting rights and a stake in corporate profits as the company grows shareholders function as direct decision makers with their number of votes being equal to the number of shares they hold shareholders vote on critical issues such as mergers and acquisitions and elect directors to the board activist investors with substantial holdings wield considerable influence over management often seeking to gain representation on the board of directors recognizing that change takes time committed shareholders adopt buy and hold strategies rather than treating ownership as a short term vehicle for profit in the mode of a day trader buy and hold investors keep shares through the bull and bear markets equity owners thus bear the ultimate risk of failure or the supreme reward of substantial appreciation buy and hold is often also called position trading active versus passive managementthe debate over passive versus active management styles persists a buy and hold investor reflects a passive management style in the case of a mutual fund or exchange traded fund indexed portfolios mirror that of a common benchmark as indices rebalance and weightings increase relative to market capitalization turnover rates which are often under 5 among passive funds such as an s p 500 index portfolio remain ultra low as managers focus on issues across the broad market stocks are held for as long as they remain components of the indices even though you hold the securities you buy for the long term you still need to consider price fluctuations and pay attention to their performance real world example of buy and holdan example of a buy and hold strategy that would have worked quite well is the purchase of apple aapl stock if an investor had bought 100 shares at its closing price of 18 per share in january 2008 and held onto the stock until january 2019 the stock climbed to 157 per share that s a return of nearly 900 in just over 10 years those arguing against using a long term strategy claim that investors forsake gains by riding out volatility rather than locking in gains and miss out on timing the market there are some professionals who regularly succeed with short term trading strategies but the risks can be higher investment success is also realized by loyalty commitment to ownership and the simple pursuit of standing pat or not moving from a chosen position | |
what is a buy and sell agreement | a buy and sell agreement or buy sell agreement is a legally binding contract that stipulates how a partner s share of a business may be reassigned if that partner dies or otherwise leaves the business most often the buy and sell agreement stipulates that the available share be sold to the remaining partners or to the partnership buy sell agreements often use life insurance policies to fund the potential buyout in the event of a partner s death a buy and sell agreement may also be called a buyout agreement a business will or a business prenup | |
how a buy and sell agreement works | buy and sell agreements are commonly used by sole proprietorships partnerships and closed corporations in an attempt to smooth transitions in ownership when a partner dies retires or decides to exit the business the buy and sell agreement requires that the business share be sold to the company or the remaining members of the business according to a predetermined formula in the case of the death of a partner the estate must agree to sell to fund the purchase of the shares by the surviving partners life insurance policies are taken out reciprocally by each partner on the lives of the others which can be paid for by the company as a business expense where the partners are the named beneficiaries upon the death of a partner the life insurance death benefit will be paid out to the remaining partners who will use the funds to purchase the deceased s shares from their estate ensuring continuity of the business and its ownership structure having a buy sell agreement avoids costly battles for control with surviving spouses or children and having to use probate court types of buy sell agreementsthere are two common forms of buy sell agreements some partners also opt for a mix of the two with some portions available for purchase by individual partners and the remainder bought by the partnership a wait and see agreement combines elements from each of these two where neither the partners nor the entity is explicitly named at the time when it becomes necessary the agreement will become either one or the other depending on what s best for business continuity | |
when a sole proprietor dies a key employee may be designated as the buyer or successor | partners should work with both an attorney and a certified public accountant when crafting a buy and sell agreement along with a life insurance professional key considerations in buy sell agreementsbuy and sell agreements are designed to help partners manage potentially difficult situations in ways that protect the business and their own personal and family interests for example the agreement can restrict owners from selling their interests to outside investors without approval from the remaining owners similar protection can be provided in the event of a partner s death a typical agreement might stipulate that a deceased partner s interest be sold back to the business or remaining owners this prevents the estate from selling the interest to an outsider in addition to controlling ownership of the business buy and sell agreements spell out the means to be used in assessing the value of a partner s share this can have uses outside the question of buying and selling shares for example if there is a dispute among owners about the value of the company or of a partner s interest the valuation methods included in the buy and sell agreement would be used there are several online resources that offer low cost or free templates for drawing up a buy sell agreement which can be especially useful for new or small companies as your business grows or if it has a large number of partners from the onset it is better to have a lawyer draft the document | |
how do you establish a buy and sell agreement | a buy sell agreement also known as a shotgun clause is a contract that sets out how a partner s shares will be obtained by the remaining partners or owners of a firm in case of their death or departure this is usually done with the aid of a knowledgeable attorney in order to ensure that funds are available partners in business commonly purchase life insurance policies on the other partners in the event of a death the proceeds from the policy will be used towards the purchase of the deceased s business interest this part of the agreement should be done through a life insurance agent with experience in this type of agreement | |
what should be included in a buy and sell agreement | the following pieces of information should be spelled out in a buy and sell agreement | |
what is the benefit of a buy and sell agreement | a buy and sell agreement assures a smooth transition of ownership and business continuity in the event of a departure of a partner or large equity owner the agreement is a legally binding contract that establishes how the departing owners shares will be obtained by the remaining partners without such an agreement there can be legal battles and contestation for instance if a partner dies without an agreement their shares may be passed automatically to their spouse who may decide to keep them or the spouse may want to sell them but the remaining partners do not have the funds available to buy the shares the bottom linebusiness continuity is important especially when there are multiple partners or important equity holders involved in the running of a business a buy and sell agreement buy sell agreement is a legal remedy for establishing a clear plan of how to distribute the shares of a departed or deceased partner to the remaining ones in the case of a death life insurance policies are used to fund the buyout of shares from the deceased s estate | |
what is a buy in | a buy in in the financial markets is an occurrence in which an investor is forced to repurchase shares of security because the seller of the original shares did not deliver the securities in a timely fashion or did not deliver them at all a buy in can also be a reference to a person or entity buying shares or a stake in a company or other holding in psychological terms the buy in is the process of someone getting on board with an idea or concept that is not their own but nonetheless appeals to them understanding buy insthose who fail to deliver the securities as promised are generally notified with a buy in notice a buyer will send notice to exchange officials as a result officials will usually notify the seller of their delivery failure the stock exchange e g nasdaq or nyse supports the investor in buying the stocks a second time from another seller typically the original seller must make up any price difference between the original price of the stock and the second purchase price of the stock by the buyer failure to answer the buy in notice results in a broker buying the securities and delivering them on the client s behalf the client is then required to pay back the broker at a pre determined price the difference between a buy in and a forced buy inthe difference between a traditional and forced buy in is that in a forced buy in shares are repurchased to cover an open short position a forced buy in occurs in a short seller s account when the original lender of the shares recalls them this can also occur when the broker is no longer able to borrow shares for the shorted position in some cases an account holder might not be notified before a forced buy in a forced buy in is the opposite of forced selling or forced liquidation settlement of securitiessecurities transactions typically settle in t 2 business days following the transaction t 0 which applies to the majority of securities such as stocks and corporate bonds some transactions have a settlement of t 1 business day while others can even settle on the same day as the trade date same day transactions are called cash trades in the above transactions the trades will settle according to their respective settlement dates however if the securities fail to be delivered a buy in will occur | |
what is buy in management buyout bimbo | a buy in management buyout bimbo is a form of a leveraged buyout lbo that incorporates characteristics of both a management buyout mbo along with a management buy in mbi a bimbo occurs when existing management along with outside managers decide to buy out a company the existing management represents the buyout portion while the outside managers represent the buy in portion understanding buy in management buyout bimbo buy in management buyout bimbo is a term that originated in europe to describe a type of lbo that combines new external management with internal management to refresh the direction of the company and streamline operations a leveraged buyout is the acquisition of a company using a significant amount of borrowed money to meet the cost of acquisition the assets of the company being acquired are often used as collateral for these loans along with the assets of the acquiring company this option provides advantages of buy in and buyout the transfer will be made much more efficiently and without disruption because the existing members of management are already familiar with the business this management buyout is complemented with management buy in which results in the influx of leaders with expertise to fill in areas of need be it in a new product or service under development marketing operations management or finance a management buy in is a corporate action in which an outside manager or management team purchases a controlling ownership stake in an outside company and replaces its existing management team a management buyout is a transaction where a company s existing management team purchases the assets and operations of the business they manage taking care of a buy in management buyoutnew and existing managers must get along for the bimbo to work energized new managers may have novel ideas that they wish to implement right away while existing managers may fall into a turf protection mode employees may take sides conflicts are inevitable as they are in all organizations but if they become too pronounced or distracting the business may not run as envisioned before the transaction took place an lbo involves an increase of debt on the balance sheet that must be managed responsibly by the management team the risk is that debt service may not be handled smoothly causing some financial stress in the new company however since each of the managers is now an owner of the company each has every incentive to behave like owners which means making rational decisions to increase the odds of success | |
what is a buy limit order | a buy limit order is an order to purchase an asset at or below a specified price allowing traders to control how much they pay by using a limit order to make a purchase the investor is guaranteed to pay that price or less while the price is guaranteed the order being filled is not after all a buy limit order won t be executed unless the asking price is at or below the specified limit price if the asset does not reach the specified price the order is not filled and the investor may miss out on the trading opportunity said another way by using a buy limit order the investor is guaranteed to pay the buy limit order price or better but it is not guaranteed that the order will be filled if an investor expects the price of an asset to decline then a buy limit order is a reasonable order to use if the investor doesn t mind paying the current price or higher if the asset starts to move up then a market order to buy stop limit order is the better bet investopedia jessica olahbenefits of a buy limit ordera buy limit order ensures the buyer does not get a worse price than they expect buy limit orders provide investors and traders with a means of precisely entering a position for example a buy limit order could be placed at 2 40 when a stock is trading at 2 45 if the price dips to 2 40 the order is automatically executed it will not be executed until the price drops to 2 40 or below another advantage of a buy limit order is the possibility of price improvement when a stock gaps from one day to the next if the trader places a buy order at 2 40 and the order is not triggered during the trading day as long as that order remains in place it could benefit from a gap down if the price opens the next day at 2 20 the trader will get the shares at 2 20 as that was the first price available at or below 2 40 while the trader is paying a lower price than expected they may want to consider why the price gapped down so aggressively and if they still want to own the shares unlike a market order in which the trader buys at the current offer price whatever that may be a buy limit order is placed on a broker s order book at a specified price the order signifies that the trader is willing to buy a specific number of shares of the stock at the specified limit price as the asset drops toward the limit price the trade is executed if a seller is willing to sell at the buy order price since a buy limit sits on the book signifying that the trader wants to buy at that price the order will be bid usually below the current market price of the asset if the price moves down to the buy limit price and a seller transacts with the order the buy limit order is filled the investor will have bought at the bid and thus avoided paying the spread this may be helpful for day traders who seek to capture small and quick profits for large institutional investors who take very large positions in a stock incremental limit orders at various price levels are used in an attempt to achieve the best possible average price for the order as a whole buy limit orders are also useful in volatile markets assume a trader wants to buy a stock but knows the stock has been moving wildly from day to day they could place a market buy order which takes the first available price or they could use a buy limit order or a buy stop order assume the stock closed yesterday at 10 the investor could place a buy limit at 10 assuring they won t pay more than that if the stock opens the next day at 11 they won t be filled on the order but they have also saved themselves from paying more than they wanted to disadvantages of a buy limit ordera buy limit order does not guarantee execution execution only occurs when the asset s price trades down to the limit price and a sell order transacts with the buy limit order the asset trading at the buy limit order price isn t enough the trader may have 100 shares posted to buy at that price but there may be thousands of shares ahead of them also wanting to buy at that price therefore the price will often need to completely clear the buy limit order price level in order for the buy limit order to fill the earlier the order is put in the earlier in the queue the order will be at that price and the greater the chance the order will have of being filled if the asset trades at the buy limit price buy limit orders can also result in a missed opportunity the price of the asset has to trade at the buy limit price or lower but if it doesn t the trader doesn t get into their trade controlling costs and the amount paid for an asset is important but so is seizing an opportunity when an asset is quickly rising it may not pull back to the buy limit price specified before roaring higher since the trader s goal was to catch a move higher they missed out by placing an order that was unlikely to be executed if the trader wants to get in at any cost they could use a market order if they don t mind paying a higher price yet want to control how much they pay a buy stop limit order is effective some brokers charge a higher commission for a buy limit order than for a market order this is largely an outdated practice though as most brokers charge either a flat fee or no fee per order or charge based on the number of shares traded or dollar amount and don t charge based on order type buy limit order exampleapple stock is trading at a 125 25 bid and a 125 26 offer when an investor decides they want to add apple to their portfolio they have several choices in terms of order types they could use a market order and buy the stock at 125 26 assuming the offer stays the same and there are enough shares at that price to fill the market buy order or they could use a buy limit at any price of 125 25 or below maybe the trader believes the price will fall slightly over the next several weeks so they place a buy limit order at 121 if apple stock trades down to 121 ideally 120 99 to assure the order is filled then the investor will own shares at 121 which means significant savings from the 125 25 26 price the investor first saw the price may not drop to 121 though instead it may move from a 125 25 bid up to 126 then 127 then 140 over the next several weeks the price rise the investor wanted to participate in has been missed because their buy limit order at 121 was never executed | |
how do you place a buy limit order | to place a buy limit order you will first need to determine your limit price for the security you want to buy the limit price is the maximum amount you are willing to pay to buy the security if your order is triggered it will be filled at your limit price or lower | |
what is the buy side | the financial institutions of a free market economy include a segment called the buy side firms that purchase investment securities these include insurance firms mutual funds hedge funds and pension funds that buy securities for their own accounts or for investors with the goal of generating a return opposite of the buy side professional is the sell side unlike the buy side sell side efforts do not include making a direct investment instead they assist the investing market with all activities related to the sale of securities to the buy side such as underwriting for initial public offerings ipos providing clearing services and generating research material and analysis jointly these two sides buy and sell make up the main activities of financial markets understanding the buy sidea business involved in buy side activities will purchase stocks bonds and other financial products based on the needs and strategy of their company s or client s portfolio the buy side activity takes place in many settings not limited to the financial institutions mentioned above they also include trusts equity funds and high net worth individuals the whole point of buy side investing is to create value for a firm s clients they do this by identifying and purchasing underpriced assets that they believe will appreciate over time since the buy side involves buying large blocks of market securities the most prestigious companies often have a great deal of market power these market titans are also closely watched by investors and the media the value of blackrock s assets under management aum as of dec 31 2020 blackrock is the largest investment manager in the world in terms of assets 1 firms like blackrock and vanguard can significantly sway market prices as they make large scale investments in single names however these investments are typically not disclosed in real time and can be somewhat ghost like for market traders the securities and exchange commission s sec 13f filing requires public disclosure by buy side managers for all holdings bought and sold every quarter following buy side investingthe quarterly 13f filing is a recommended source for all types of investors in following some of the market s top investments and investors warren buffett and his firm berkshire hathaway brk a b are examples of how following buy side investors can guide investment approaches further many investors will look at these larger investors holdings and changes in those holdings in particular securities as a consideration for making a transaction themselves this data is available through several online resources benefits of the buy sidebuy side investors have many advantages over other traders they can place large lot transactions that minimize trading costs they also have access to a very broad array of internal trading resources that helps them to analyze identify and act on investment opportunities in real time the buy side analyst will also follow the regulations of the international organization of securities commissions iosco while buy side investors are required to disclose their holdings in a 13f this information is only available quarterly overall it can generally be advantageous for buy side analysts and investment firms to keep their investment research and watch lists proprietary the high level of competition in the buy side market and the nature of its business typically results in privacy around all trading ideas for the most optimal trading advantages duties of a buy side analystthe buy side analyst performs a pivotal role in the buy side exchange buy side analysts regularly work in non brokerage firms including pension and mutual fund providers these analysts provide recommendations based on research meant only for the use of these large fund providers individual investors may see sell side recommendations but buy side work is behind the scenes at the big firms and research strategies and the results of their analysis are kept private analysts employed on the buy side engage in financial research of companies and investment strategy development which typically involves in depth research and financial modeling they may also talk directly to companies in which they have an investment interest buy side analysts primarily are looking for companies that are a good fit for a portfolio s strategy based on certain investing parameters and companies that will generate the highest returns over time since the roles of buy side and sell side analysts are distinctly different some firms may deploy certain policies to ensure that research efforts are divided at firms with both buy side and sell side analysts a chinese wall can be constructed to separate the two departments which usually entails procedures and security policies that prevent interactions between the two units example of the buy sidejohn smith works for a large investment bank investing his company s money in the stock market utilizing a strategy he created himself over 10 years his strategy has done extremely well outperforming the market by 10 he decides to leave his firm and start his own investment management firm and invest money for high net worth individuals in essence mr smith is creating a hedge fund he spends time marketing his firm based on his strategy s returns over the past 10 years and is able to raise 10 million in capital from a variety of investors he starts investing this capital and buys a variety of securities including stocks bonds futures and options all aligning with his strategy mr smith s firm and his actions of buying these securities are an example of the buy side | |
what is a buy stop order | a buy stop order instructs a broker to purchase a security when it reaches a pre specified price once the price hits that level the buy stop becomes either a limit or a market order fillable at the next available price this type of stop order can apply to stocks derivatives forex or a variety of other tradable instruments the buy stop order can serve a variety of purposes with the underlying assumption that a share price that climbs to a certain height will continue to rise basics of a buy stop ordera buy stop order is most commonly thought of as a tool to protect against the potentially unlimited losses of an uncovered short position an investor is willing to open that short position to place a bet that the security will decline in price if that happens the investor can buy the cheaper shares and profit the difference between the short sale and the purchase of a long position the investor can protect against a rise in share price buy placing a buy stop order to cover the short position at a price that limits losses when used to resolve a short position the buy stop is often referred to as a stop loss order the short seller can place their buy stop at a stop price or strike price either lower or higher than the point at which they opened their short position if the price has declined significantly and the investor is seeking to protect their profitable position against the subsequent upward movement they can place the buy stop below the original opening price an investor looking only to protect against catastrophic short position loss from significant upward movement will open a buy stop order above the original short sale price buy stop orders for bullsthe strategies described above use the buy stop to protect against bullish movement in a security another lesser known strategy uses the buy stop to profit from anticipated upward movement in share price technical analysts often refer to levels of resistance and support for a stock the price may go up and down but it is bracketed at the high end by resistance and by support on the low end these can also be referred to as a price ceiling and a price floor some investors however anticipate that a stock that does eventually climb above the line of resistance in what is known as a breakout will continue to climb a buy stop order can be very useful to profit from this phenomenon the investor will open a buy stop order just above the line of resistance to capture the profits available once a breakout has occurred a stop loss order can protect against subsequent decline in share price example of a buy stop orderconsider the price movement of a stock abc that is poised to break out of its trading range of between 9 and 10 let s a say a trader bets on a price increase beyond that range for abc and places a buy stop order at 10 20 once the stock hits that price the order becomes a market order and the trading system purchases stock at the next available price the same type order can be used to cover short positions in the above scenario assume that the trader has a large short position on abc meaning that she is betting on a future decline in its price to hedge against the risk of the stock s movement in the opposite direction i e an increase of its price the trader places a buy stop order that triggers a buy position if abc s price increase thus even if the stock moves in the opposite direction the trader stands to offset her losses | |
what is a buy stop order | a buy stop order instructs a broker to purchase a security when it reaches a pre specified price once the price hits that level the buy stop becomes either a limit or a market order fillable at the next available price this type of stop order can apply to stocks derivatives forex or a variety of other tradable instruments the buy stop order can serve a variety of purposes with the underlying assumption that a share price that climbs to a certain height will continue to rise basics of a buy stop ordera buy stop order is most commonly thought of as a tool to protect against the potentially unlimited losses of an uncovered short position an investor is willing to open that short position to place a bet that the security will decline in price if that happens the investor can buy the cheaper shares and profit the difference between the short sale and the purchase of a long position the investor can protect against a rise in share price buy placing a buy stop order to cover the short position at a price that limits losses when used to resolve a short position the buy stop is often referred to as a stop loss order the short seller can place their buy stop at a stop price or strike price either lower or higher than the point at which they opened their short position if the price has declined significantly and the investor is seeking to protect their profitable position against the subsequent upward movement they can place the buy stop below the original opening price an investor looking only to protect against catastrophic short position loss from significant upward movement will open a buy stop order above the original short sale price buy stop orders for bullsthe strategies described above use the buy stop to protect against bullish movement in a security another lesser known strategy uses the buy stop to profit from anticipated upward movement in share price technical analysts often refer to levels of resistance and support for a stock the price may go up and down but it is bracketed at the high end by resistance and by support on the low end these can also be referred to as a price ceiling and a price floor some investors however anticipate that a stock that does eventually climb above the line of resistance in what is known as a breakout will continue to climb a buy stop order can be very useful to profit from this phenomenon the investor will open a buy stop order just above the line of resistance to capture the profits available once a breakout has occurred a stop loss order can protect against subsequent decline in share price example of a buy stop orderconsider the price movement of a stock abc that is poised to break out of its trading range of between 9 and 10 let s a say a trader bets on a price increase beyond that range for abc and places a buy stop order at 10 20 once the stock hits that price the order becomes a market order and the trading system purchases stock at the next available price the same type order can be used to cover short positions in the above scenario assume that the trader has a large short position on abc meaning that she is betting on a future decline in its price to hedge against the risk of the stock s movement in the opposite direction i e an increase of its price the trader places a buy stop order that triggers a buy position if abc s price increase thus even if the stock moves in the opposite direction the trader stands to offset her losses | |
what is buy to cover | buy to cover refers to a buy order made on a stock or other listed security to close out an existing short position a short sale involves selling shares of a company that an investor does not own as the shares are borrowed from a broker but need to be repaid at some point understanding buy to covera buy to cover order of purchasing an equal number of shares to those borrowed covers the short sale and allows the shares to be returned to the original lender typically the investor s own broker dealer who may have had to borrow the shares from a third party a short seller bets on a stock price going down and seeks to buy the shares back at a lower price than the original short sale price the short seller must pay each margin call and repurchase the shares to return them to the lender specifically when the stock begins to rise above the price at which the shares were shorted the short seller s broker may require that the seller execute a buy to cover order as part of a margin call to prevent this from happening the short seller should always keep enough buying power in their brokerage account to make any needed buy to cover trades before the market price of the stock triggers a margin call buy to cover and margin tradesinvestors can make cash transactions when buying and selling stocks meaning they can buy with cash in their own brokerage accounts and sell what they have previously bought alternatively investors can buy and sell on margin with funds and securities borrowed from their brokers thus a short sale is inherently a margin trade as investors are selling something they do not already own trading on margin is riskier for investors than using cash or their own securities because of potential losses from margin calls investors receive margin calls when the market value of the underlying security is moving against the positions they have taken in margin trades namely the decline of security values when buying on margin and the rise of security values when selling short investors must satisfy margin calls by depositing additional cash or making relevant buy or sell trades to make up for any unfavorable changes in the value of the underlying securities | |
when an investor is selling short and the market value of the underlying security has risen above the short selling price the proceeds from the earlier short sale would be less than what is needed to buy it back this would result in a losing position for the investor if the market value of the security continues to rise the investor would have to pay increasingly more to buy back the security if the investor does not expect the security to fall below the original short selling price in the near term they should consider covering the short position sooner than later | example of buy to coversuppose a trader opens a short position in stock abc after their research they believe abc s stock price which is trading at 100 currently will fall in the coming months because the company s financials are signaling that the company is in distress to profit from their thesis the trader borrows 100 shares of abc from a broker and sells them in the open market at the current price of 100 subsequently abc s stock falls to 90 and the trader places a buy to cover order to buy abc s shares at the new price and return the 100 shares they borrowed back to the broker the trader must place the buy to cover order before a margin call the transaction nets the trader a profit of 1 000 10 000 sale price 9 000 purchase price | |
what is buy to open | buy to open is a term used by brokerages to represent the establishment of a new opening long call or put position in options if a new options investor wants to buy a call or put that investor should buy to open a buy to open order indicates to market participants that the trader is establishing a new position rather than closing out an existing position the sell to close order is used to exit a position taken with a buy to open order establishing a new short position is called sell to open which would be closed out with a buy to close order if a new options investor wants to sell a call or a put that investor should sell to open 1understanding buy to open ordersthe buy and sell terminology for options trading is not as straightforward as it is for stock trading instead of merely placing a buy or sell order as they would for stocks options traders must choose among buy to open buy to close sell to open and sell to close a buy to open position may indicate to market participants that the trader initiating the order believes something about the market or has an ax to grind that is particularly true if the order is large however that does not have to be the case in fact options traders frequently engage in spreading or hedging activities where a buy to open may actually offset existing positions buying to open an out of the money put when purchasing a stock is an excellent way to limit risk the exchange may declare that only closing orders can take place during specific market conditions so a buy to open order might not execute that could happen if a stock with options available is scheduled for delisting or the exchange halts trading of the stock for an extended time stock considerationsthe term buy to open can be applied to stocks as well when an investor decides to establish a new position in a particular stock the first buy transaction is considered buy to open because it opens the position by opening the position the stock is established as a holding in the portfolio the position remains open until it is closed out by selling all the shares that is known as selling to close because it closes the position selling a partial position means that some but not all stocks have been sold a position is considered closed when no more of a particular stock remains in a portfolio buy to close orders also come into play when covering a short sell position a short sell position borrows the shares through the broker and is closed out by buying back the shares in the open market the last transaction to completely close out the position is known as the buy to close order this transaction removes the exposure completely the intent is to buy back the shares at a lower price to generate a profit from the difference of the short sell price and the buy to close price in cases where the share price moves sharply higher a short seller may have to buy to close at a loss to prevent even greater losses from occurring in a worst case scenario the broker may execute a forced liquidation as a result of a margin call then the broker would demand that the investor place money in the margin account due to a shortfall that would generate a buy to cover order to close out the position at a loss due to insufficient account equity buy to open vs buy to closeif an investor wants to buy a call or a put to profit from a price movement of the underlying security then that investor must buy to open buying to open initiates a long options position that gives a speculator the potential to make an extremely large profit with very low risk on the other hand the security must move in the right direction within a limited time or the option will lose all of its value to time decay option sellers have an advantage over buyers because of time decay but they may still want to buy to close their positions when an investor sells options the investor remains obligated by the terms of those options until the expiration date however movements in the price of the security can allow options sellers to take most of their profits much earlier or motivate them to cut losses suppose someone sells at the money puts lasting for a year and then the underlying stock goes up 10 after three months the options seller can buy to close and get most of the profits right away if the stock falls 10 after three months instead the options seller will have to pay more to buy to close and limit potential losses example of buy to opensuppose a trader has done some analysis and believes that the price of xyz stock will go from 40 to 60 in the next year the trader could buy to open a call for xyz the strike price might be 50 with an expiration date about a year from now | |
what is a buyback | a buyback is a company s purchase of its outstanding stock shares buybacks reduce the number of shares available on the open market companies usually buy back shares of their stock to increase the value of the remaining shares by reducing the supply of them they may also buy back shares to prevent a major shareholder from taking a controlling stake in the company investopedia yurle villegasunderstanding buybacksbuybacks are also known as share repurchases they allow companies to invest in themselves reducing the number of shares outstanding on the market increases the proportion of shares owned by investors a company may launch a buyback because it believes its shares are undervalued and to provide investors with a better return it increases the proportion of earnings that each share is worth this stock price will rise if the same price to earnings p e ratio is maintained 1by reducing the number of existing shares each share is worth a greater percentage of the corporation the stock s earnings per share eps thus increases while the p e ratio decreases or the stock price increases 2a share repurchase demonstrates to investors that the business has sufficient cash set aside for emergencies and a low probability of economic troubles companies usually give their employees and executives stock rewards and stock options as part of their compensation a company can buy back shares and issue them to employees and management this strategy helps avoid the dilution of existing shareholders 3the practice is not without controversy congress attempted to address the issue with the stock buyback reform and worker dividend act of 2019 but the bill never made it past the senate 4because share buybacks are carried out using a firm s retained earnings the net economic effect to investors would be the same as if those retained earnings were paid out as shareholder dividends tax considerations aside the buyback processbuybacks are carried out in two ways a company may fund its buyback by taking on debt with cash on hand or with its cash flow from operations 7an expanded share buyback is an increase in a company s existing share repurchase plan an expanded share buyback accelerates a company s share repurchase plan to achieve a faster contraction of its share float the market impact of an expanded share buyback depends on its magnitude a large expanded buyback is likely to cause the share price to rise the buyback ratio considers the buyback dollars spent over the past year divided by its market capitalization at the beginning of the buyback period 8 the buyback ratio enables a comparison of the potential impact of repurchases across different companies it is also a good indicator of a company s ability to return value to its shareholders since companies that engage in regular buybacks have historically outperformed the broad market criticism of buybacksnot all investors applaud a company s stock buyback a share buyback can give investors the impression that the corporation has failed to identify profitable new opportunities which is an issue for growth investors looking for increases in revenue and profit repurchasing shares puts a business in a precarious situation if the economy takes a downturn or the corporation faces financial issues right after spending its cash reserves others allege that buybacks can be used to inflate a company s share price artificially in the market possibly to produce higher executive bonuses 9as part of the inflation reduction act of 2022 certain stock buybacks for domestic public companies will incur a 1 excise tax making them more expensive for corporations this applies to buybacks after dec 31 2022 10expenditure on buybacks by s p 500 companies in 2023 that s a drop from the 922 7 billion companies spent in 2022 11advantages and disadvantages of buybackscompanies can attract new investors after a share buyback that s because buybacks often boost the stock s eps which reduces its p e ratio if the stock price stays the same new investors may believe the share price is a better value completing a share buyback allows companies to reward shareholders by putting money back in their pockets this is especially true for businesses that believe their shares are undervalued in the market buybacks involve spending capital this may leave investors wondering why the company isn t using its money to grow the business it can leave the impression that the business isn t making the best use of its capital companies should be cautious about doing buybacks because it can cause higher stock prices to drop a price drop may indicate problems within the company even if a buyback is underway share value may increase and attract new investorsputs money back into shareholders pocketsmay lead to increase in share pricesome investors prefer to see cash spent on growthmay lead to drop in share priceexample of a buybacka company s stock price has underperformed its competitor s stock even though it has had a solid year financially to reward investors and provide a return to them the company announces a share buyback program to repurchase 10 of its outstanding shares at the current market price the company had 1 million in earnings and one million outstanding shares before the buyback equating to eps of 1 trading at a 20 per share stock price its p e ratio is 20 with all else being equal 100 000 shares would be repurchased and the new eps would be 1 11 or 1 million in earnings spread out over 900 000 shares to keep the same p e ratio of 20 shares would need to trade up 11 to 22 22 | |
why would a company do a buyback | a buyback allows a company to invest in itself more of its shares will wind up in the company s hands if a company feels that its shares are undervalued it may do a buyback to reward investors by repurchasing shares it reduces available open market shares making each worth a greater percentage of the corporation companies with cash on hand can use buybacks for employees and management compensation purposes using the shares for employee stock options the buyback helps avoid the dilution of existing shareholders finally a buyback can be a way to prevent a major shareholder from acquiring a controlling stake and launching a takeover bid 12 | |
how is a buyback done | a company can make a tender offer to shareholders at a premium over the current market price the shareholders would have the option to submit all or some of their shares within a set time frame 5alternatively a company may create a share repurchase program and purchase shares on the open market at certain times or at regular intervals 6a company can fund its buyback by taking on debt with cash on hand or with the cash flow earned in its operations 7 | |
what are criticisms of buybacks | a buyback can create a perception that a business does not have other pathways for revenue growth it also can deplete the company s cash reserves leaving it less able to withstand a downturn buybacks also are criticized for artificially inflating the share price 9the bottom linecompanies buy back their shares to reduce the number of share outstanding the expectation is that if the float or number of shares outstanding is reduced this will have a positive effect on the stock price a company may consider a share buyback program for any number of reasons one of the more controversial of these is to reward company executives who often get a large proportion of their pay in stock options | |
what is a buyer s market | a buyer s market is an environment that favors buyers over sellers it typically develops when changes to the underlying economic conditions that shape supply and demand mean that purchasers have an advantage over sellers in price negotiations understanding a buyer s marketa buyer s market is created by market conditions that favor buyers over sellers anything that increases the urgency of sellers to sell or decreases the urgency of buyers to buy contributes to a buyer s market a buyer s market usually means that prices are lower either because buyers have more leverage to negotiate with sellers or because sellers must set lower prices to attract buyers in terms of economic theory this can be described using the law of supply and demand which states that a supply increase amid constant demand or a decrease in demand with constant supply will put downward pressure on prices factors that can increase supply include factors that can decrease demand meanwhile include by changing the shape of supply and demand in a way that implies a lower market equilibrium price these factors can create an advantage for buyers to negotiate for lower prices the term buyer s market is commonly used to describe real estate markets but it applies to any type of market in which there is more product available than there are people who want to buy it the opposite of a buyer s market is a seller s market an environment in which supply is low and or demand is high giving sellers an advantage over buyers in price negotiations buyer s market characteristicsin a real estate buyer s market houses tend to sell for less and sit on the market for a longer period of time before receiving an offer more competition in the marketplace occurs between sellers who often must engage in a price war to entice buyers to make offers on their homes a seller s market by contrast is characterized by higher prices and shorter sales times rather than sellers competing to attract buyers the buyers compete against one another for the limited supply of homes available consequently bidding wars between buyers often transpire in a seller s market resulting in homes selling for more than their list prices buyer s market exampleduring the housing bubble of the early to mid 2000s the real estate market was considered a seller s market properties were in high demand and likely to sell even if they were overpriced or in poor condition in many cases a home would receive multiple offers and the price would be bid up above the seller s initial asking price the subsequent housing market crash created a buyer s market in which a seller had to work much harder to generate interest in their property a buyer expected a home to be in excellent condition or priced at a discount and could often secure a purchase agreement for less than the seller s asking price for the property | |
are home prices lower in a buyer s market or a seller s market | in a buyer s market prices are generally lower and there is less competition a buyer s market is usually created when there is more supply and lower demand which means there are more houses than buyers for those houses because of this home sellers must compete to attract homebuyers which means prices stay lower | |
what is the benefit of a buyer s market | a buyer s market benefits buyers buyers have more options from which to choose because supply exceeds demand prices stay lower because sellers must compete to attract buyers buyers also have more room to negotiate on price and other elements of a sale such as closing costs in a real estate transaction | |
is a home s market value the same as its selling price | a home s fair market value is not the same thing as its selling price fair market value is the property s worth as estimated by a real estate professional this estimate is usually based on factors such as the age of the house its condition location and the value of similar homes in that location selling price is what someone is willing to pay for it in a sale which can be higher or lower than the fair market value the bottom linea buyer s market is an environment in which buyers have an advantage over sellers this usually happens when demand exceeds supply as a result prices stay low buyers have a higher number of options to choose from sellers must keep prices low and buyers have more room to negotiate a buyer s market usually refers to real estate markets however it can also be used to describe any market in which buyers have an advantage the opposite of a buyer s market is a seller s market | |
what is buying on margin | buying on margin occurs when an investor buys an asset by borrowing the balance from a bank or broker buying on margin refers to the initial payment made to the broker for the asset for example 10 down and 90 financed the investor uses the marginable securities in their broker account as collateral the buying power an investor has in their brokerage account reflects the total dollar amount of purchases they can make with any margin capacity short sellers of stock use margin to trade shares understanding buying on marginthe federal reserve board sets the margins securities as of 2023 under federal reserve regulation t an investor must fund at least 50 of a security s purchase price with cash or other collateral the investor may borrow the remaining 50 from a broker or a dealer 1however many brokers set higher margin requirements for their customers in addition some securities cannot be purchased on margin as with any loan when an investor buys securities on margin they must eventually pay back the money borrowed plus interest which varies by brokerage firm on a given loan amount monthly interest on the principal is charged to an investor s brokerage account essentially buying on margin implies that an individual is investing with borrowed money although there are benefits the practice is thus risky for the investor with limited funds buying on margin exampleto see how buying on margin works we are going to simplify the process by taking out the monthly interest costs although interest does impact returns and losses it is not as significant as the margin principal itself consider an investor who purchases 100 shares of company xyz stock at 100 per share the investor funds half the purchase price with their own money and buys the other half on margin bringing the initial cash outlay to 5 000 one year later the share price rises to 200 the investor sells their shares for 20 000 and pays back the broker the 5 000 borrowed for the initial purchase ultimately in this case the investor triples their money making 15 000 on a 5 000 investment if the investor had purchased the same number of shares using their own money they would only have doubled their investment from 5 000 to 10 000 now consider that instead of doubling after a year the share price falls by half to 50 the investor sells at a loss and receives 5 000 since this equals the amount owed to the broker the investor loses 100 of their investment if the investor had not used margin for their initial investment the investor would still have lost money but they would only have lost 50 of their investment 2 500 instead of 5 000 | |
how to buy on margin | the broker sets the minimum or initial margin and the maintenance margin that must exist in the account before the investor can begin buying on margin the amount is based largely on the investor s creditworthiness a maintenance margin is required of the broker which is a minimum balance that must be retained in the investor s brokerage account suppose an investor deposits 15 000 and the maintenance margin is 50 or 7 500 if the investor s equity dips below 7 500 the investor may receive a margin call at this point the investor is required by the broker to deposit funds to bring the balance in the account to the required maintenance margin the investor can deposit cash or sell securities purchased with borrowed money if the investor does not comply the broker may liquidate the investor s collateral to restore the maintenance margin who should buy on margin generally speaking buying on margin is not for beginners it requires a certain amount of risk tolerance and any trade using margin needs to be closely monitored seeing a stock portfolio lose and gain value over time is often stressful enough for people without the added leverage furthermore the high potential for loss during a stock market crash makes buying on margin particularly risky for even the most experienced investors however some types of trading such as commodity futures trading are almost always purchased using margin while other securities such as options contracts have traditionally been purchased using all cash buyers of options can now buy equity options and equity index options on margin provided the option has more than nine months until expiration the initial maintenance margin requirement is 75 of the cost market value of a listed long term equity or equity index put or call option 2for most individual investors primarily focused on stocks and bonds buying on margin introduces an unnecessary level of risk advantages and disadvantages of buying on marginmargin trading allows investors to leverage their existing assets to make much larger trades than they could make with their own assets for skilled traders this represents an opportunity to exploit market opportunities even with relatively limited investment capital margin trading allows a trader to leverage their existing assets without having to sell them if a trader liquidates their existing stock for cash they may generate a taxable event that could offset their potential investment gains however a trader who uses their existing stock as margin collateral will be able to trade without selling their stocks while margin traders can make higher profits they can also incur larger losses it is even possible for a margin trader to lose more money than they originally had to invest meaning that they would have to make up the difference with additional assets in addition to risks traders must also pay additional fees for their margin positions typically this ranges at around 10 depending on the federal funds rate for example as of january 13 2023 fidelity investments charged between 8 25 and 12 575 for margin loans depending on the size of the trader s margin position 3 if a certain position takes a long time to generate a profit these fees may offset any expected returns higher returns | |
what is buying power | buying power also referred to as excess equity is the money an investor has available to buy securities in a trading context buying power equals the total cash held in the brokerage account plus all available margin | |
how buying power works | while buying power can take on a different meaning depending on the context or industry in finance buying power refers to the amount of money available for investors to purchase securities in a leveraged account this is referred to as a margin account as traders take out a loan based on the amount of cash held in their brokerage account regulation t established by the federal reserve board frb mandates that an investor s initial margin requirement in this account type must be at least 50 meaning the trader has two times buying power 1buying power of margin accountsthe amount of margin a brokerage firm can offer a particular customer depends on the firm s risk parameters and the customer typically equity margin accounts offer investors twice as much as the cash held in the account although some forex broker margin accounts offer buying power of up to 50 1 the more leverage a brokerage house gives an investor the harder it is to recover from a margin call in other words leverage gives the investor an opportunity to make increased gains with the use of more buying power but it also increases the risk of having to cover the loan for a non margin account or cash account the buying power is equal to the amount of cash in the account for example if a non margin account has 10 000 that is the investor s buying power buying power of day trading accountspattern day trading accounts work differently to regular margin accounts in that they require a minimum equity requirement of 25 000 as opposed to 2 000 while a trader has to finance 50 of their stock positions in a standard margin account which provides two times equity in buying power they only have to fund 25 of the cost of securities purchased in a pattern day trading account giving the trader four times equity buying power for example suppose sam has 50 000 in a day trading account they could purchase up to 200 000 worth of open trades within the trading day 50 000 x 4 200 000 buying power example of buying powerlet s assume alex has 100 000 in a brokerage margin account and wants to purchase shares in apple inc aapl alex s initial margin requirement is 50 to enter a trade some brokers may have an initial margin requirement greater than 50 to calculate alex s total buying power divide the amount of cash in the brokerage account by the initial margin percentage here divide the cash balance of 100 000 by 50 as a result alex can purchase up to 200 000 worth of apple shares 100 000 50 200 000 that said the value of the margin account changes with the value of the securities held the closer it gets to the margin limits the greater chance alex has of receiving a margin call | |
what is buyout | a buyout is the acquisition of a controlling interest in a company and is used synonymously with the term acquisition if the stake is bought by the firm s management it is known as a management buyout and if high levels of debt are used to fund the buyout it is called a leveraged buyout buyouts often occur when a company is going private understanding buyoutsbuyouts occur when a buyer acquires more than 50 of the company leading to a change of control firms that specialize in funding and facilitating buyouts act alone or together on deals and are usually financed by institutional investors wealthy individuals or loans in private equity funds and investors seek out underperforming or undervalued companies that they can take private and turn around before going public years later buyout firms are involved in management buyouts mbos in which the management of the company being purchased takes a stake they often play key roles in leveraged buyouts which are buyouts that are funded with borrowed money many partnerships include clauses called buy sell agreements or shotgun clauses which can force the other partners to agree to buying out an offering partner the clause can also force partners to sell their shares sometimes a buyout firm believes it can provide more value to a company s shareholders than the existing management types of buyoutsmanagement buyouts mbos provide an exit strategy for large corporations that want to sell off divisions that are not part of their core business or for private businesses whose owners wish to retire the financing required for an mbo is often quite substantial and is usually a combination of debt and equity that is derived from the buyers financiers and sometimes the seller leveraged buyouts lbo use significant amounts of borrowed money with the assets of the company being acquired often used as collateral for the loans the company performing the lbo may provide only 10 of the capital with the rest financed through debt this is a high risk high reward strategy where the acquisition has to realize high returns and cash flows in order to pay the interest on the debt the target company s assets are typically provided as collateral for the debt and buyout firms sometimes sell parts of the target company to pay down the debt examples of buyoutsin 1986 safeway s board of directors bod avoided hostile takeovers from herbert and robert haft of dart drug by letting kohlberg kravis roberts complete a friendly lbo of safeway for 5 5 billion safeway divested some of its assets and closed unprofitable stores after improvements in its revenues and profitability safeway was taken public again in 1990 roberts earned almost 7 2 billion on his initial investment of 129 million in another example in 2007 blackstone group bought hilton hotels for 26 billion through an lbo blackstone put up 5 5 billion in cash and financed 20 5 billion in debt before the financial crisis of 2009 hilton had issues with declining cash flows and revenues hilton later refinanced at lower interest rates and improved operations blackstone sold hilton for a profit of almost 10 billion | |
what is a c corporation | a c corporation or c corp is a legal structure for a corporation in which the owners or shareholders are taxed separately from the entity c corporations the most prevalent of corporations are also subject to corporate income taxation the taxing of profits from the business is at both corporate and personal levels creating a double taxation situation c corps can be compared with s corporations and limited liability companies llcs which also separate a company s assets from its owners but with different legal structures and tax treatment a newer type of organization is the b corporation benefit corporation which is a for profit firm but different from c corps in purpose accountability and transparency but aren t different in how they re taxed 1investopedia ryan oakley | |
how c corporations work | c corporations can pay corporate taxes on earnings before distributing their profits to their shareholders in the form of dividends if they choose to do so individual shareholders are then subject to personal income taxes on the dividends they receive 2another clear advantage is the separation between management and the owners or shareholders this allows longer continuity of c corporations beyond the life of the owners which can include partial owners called shareholders this allows the institutionalization of these corporations and the possibility of passive income through ownership for the owners 1a c corporation is required to hold at least one meeting each year for shareholders and directors minutes must be maintained to display transparency in business operations a c corporation must keep voting records of the company s directors and a list of the owners names and ownership percentages further the business must have company bylaws on the premises of the primary business location c corporations will file annual reports financial disclosure reports and financial statements 3 | |
how to create a c corporation | creating a c corporation is similar to the process of formalizing other types of business entities these are the procedures for establishing one c corporations are the most common type of corporation versus s corporations or llcs advantages and disadvantages of a c corporationc corporations limit the personal liability of the directors shareholders employees and officers in this way the legal obligations of the business cannot become a personal debt obligation of any individual associated with the company the c corporation continues to exist as owners change and members of management are replaced 3a c corporation can have many owners and shareholders however it is required to register with the securities and exchange commission sec when selling securities the ability to offer shares of stock allows the corporation to obtain large amounts of capital which may fund new projects and future expansions 8however there are some drawbacks filing the articles of incorporation for a c corp can be more expensive than other business structures and incur greater legal fees they are also subject to greater regulatory scrutiny which can increase the company s legal expenses there are also tax considerations the profits of a c corporation are effectively taxed twice first when the company files its income taxes and again when those profits are distributed as dividends and unlike an s corp shareholders in a c corporation cannot deduct business losses on their tax returns 29limited liability for directors shareholders and other company officers c corps can raise capital by issuing and selling shares of stock c corporations must register with the sec upon reaching certain thresholds they are subject to greater regulation than other business structures incurring higher legal fees shareholders cannot deduct their losses and business profits are double taxed as dividends are issued c corporation vs s corporationan s corporation is another type of business structure that allows a company to pass its income deductions and losses to its shareholders both a c corp and an s corp offer limited liability protection and the process of incorporation is similar for both the main differences relate to taxation and ownership as explained above one major disadvantage for c corporations is that profits are effectively taxed twice first on the company s income taxes and again when shareholders receive dividends an s corporation is a pass through entity meaning that it does not pay corporate income taxes instead profits are taxed at the shareholder level s corporations also have greater restrictions on ownership while a c corporation can have an unlimited number of shareholders an s corporation can have no more than 100 shareholders in addition an s corp cannot be owned by a c corp other s corps or a limited liability entity 9tax considerationsthe current tax on corporations is 21 president biden has consistently sought to increase the corporate tax rate from 21 to 28 and again proposed this for the 2025 budget this has not been enacted into law but it is on the table as biden included it in the budget proposal he sent to congress for approval 10 | |
what is the difference between a c corporation and an s corporation | an s corporation is similar to a c corporation in that both allow the owners and officers of a business to be legally distinct from the business itself however there are important differences with regard to taxation an s corp is a pass through entity meaning that it can be used to pass profits and tax credits on to its shareholders the profits of a c corp are taxed twice first as corporate income and again as shareholder dividends 92 | |
what is the difference between an llc and a c corporation | a limited liability company or llc is another business structure that shields its owners from the liabilities of the business entity however an llc is more suited to a small business or sole proprietorship unlike a c corporation the profits of an llc are not taxed directly but are passed on directly to the company s members 1 | |
how do you report income from a c corporation | a c corporation should use irs form 1120 to report its corporate income taxes the company may also have employment social security or medicare tax liabilities and these can increase the cost of filing taxes as well compared to the other forms of companies 2the bottom linea c corporation is a business structure that allows the owners of a business to become legally separate from the business itself this allows a company to issue shares and pass on profits while limiting the liability of the shareholders and directors | |
what is the c suite | c suite or c level is a widely used vernacular that describes the upper echelons of a corporation s senior executives and managers c suite gets its name from the titles of top senior executives which tend to start with the letter c for chief they include the chief executive officer ceo chief financial officer cfo chief operating officer coo and chief information officer cio michela buttignol investopediaunderstanding the c suitethe c suite is deemed the most important and influential group of individuals within a company reaching this high echelon typically requires a great deal of experience and finely honed leadership skills many c level executives formerly relied on functional know how and technical skills to climb the lower rungs of the corporate ladder but most have cultivated more visionary perspectives that are necessary to make sound upper management decisions the ceo cfo and coo are the most well known c suite executives but several other positions fall into this level as well other c suite officers include 1the ceo is invariably the highest level corporate executive traditionally serving as the face of the company they frequently consult other c suite members for advice on major decisions the ceo plans for the company s future guides its direction and is the number one person in charge of running the corporation ceos can come from any career background provided that they ve cultivated substantial leadership and decision making skills along their career paths the cfo position represents the top of the corporate ladder for financial analysts and accountants who are striving for upward mobility in the financial industry portfolio management accounting investment research financial management securing financing for the business and financial analysis are the domains of cfos cfos have global mindsets and work closely with ceos to source new business opportunities while weighing each potential venture s financial risks and benefits the cio is a leader in information technology these officers usually start as business analysts and then work toward c level glory while developing technical skills in disciplines such as programming coding project management and mapping cios are usually skilled at applying these functional skills to risk management business strategy and finance activities cios may also be referred to as chief technology officers ctos in many companies but some companies may host both positions the number of c level positions varies depending on variables such as a company s size mission and sector larger companies may require both a chrm and a coo but smaller operations may only need a coo to oversee human resources activities the coo is usually second in command to the ceo this position is very broad and may touch on all aspects of the business the coo helps to implement the plans and direction of the ceo and other officers the job entails ensuring that all departments of the business work together smoothly to accomplish company objectives the coo makes adjustments to business strategy and helps improve the efficiency of operations human resources and ensuring a pleasant work environment also often fall under the coo cmos typically work their way up to the c suite from sales or marketing roles their main responsibility is to plan manage and direct all the company s marketing activities and ensure that they fit into a cohesive strategy and brand image these execs are skilled at managing social innovation and product development initiatives across both brick and mortar establishments and electronic platforms as well which have become highly essential in the digital era this officer aims to grow the business a chief technology officer cto is the executive in charge of an organization s technological needs as well as its research and development r d also known as a chief technical officer this individual examines an organization s short and long term needs and uses capital to make investments designed to help the organization reach its objectives the cto usually reports directly to the ceo of the firm responsibilities at the c levelc level executives have many perks but they also have numerous responsibilities c level members work in concert to ensure that a company s strategies and operations align with its established plans and policies activities of public companies that don t lean toward increased profits for shareholders are routinely corrected under the purview of c level management personnel c suite execs occupy stressful high stakes positions and are rewarded with high compensation packages | |
which positions are part of the c suite | the c suite refers to a company s top management positions where the c stands for chief various chief officers such as the ceo cio and cfo are the occupants of the c suite they re highly paid and influential managers but they re still employees of the firm the number of c level positions varies by firm depending on variables such as a company s size mission and sector | |
how can i start a career that ends in the c suite | there isn t a standard road map for reaching the c suite being proactive and thoughtful about formulating your career path will be essential for some others might get by with simply being aggressive and rubbing elbows with the right people most will begin as junior staff members in the bullpen of a company hard work and a skilled track record are a must in any case and there s no room for complacency having proper credentials such as an mba from a top business school is also a plus |
Subsets and Splits
No community queries yet
The top public SQL queries from the community will appear here once available.