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how do i know if a company has a competitive advantage | if a business can increase its market share through increased efficiency or productivity it will have a competitive advantage over its competitors | |
how can a company increase its competitive advantage | lasting competitive advantages tend to be things competitors cannot easily replicate or imitate warren buffet calls sustainable competitive advantages economic moats which businesses can figuratively dig around themselves to entrench competitive advantages this can include strengthening one s brand raising barriers to new entrants such as through regulations and the defense of intellectual property | |
why do larger companies often have competitive advantages | competitive advantages that accrue from economies of scale typically refer to supply side advantages such as the purchasing power of a large restaurant or retail chain but advantages of scale also exist on the demand side they are commonly referred to as network effects this happens when a service becomes more valuable to all of its users as the service adds more users the result can often be a winner take all dynamic in the industry | |
how is competitive advantage different from comparative advantage | comparative advantage mostly refers to international trade it posits that a country should focus on what it can produce and export relatively the cheapest thus if one country has a competitive advantage in producing both products a b it should only produce product a if it can do it better than b and import b from some other country the bottom linea company s competitive advantage is the way it excels compared to its rivals this advantage may be through cost leadership differentiation or focus identifying a company s competitive advantage helps show how it is positioned to be more successful than its competitors creating more revenue and generating greater profits | |
what is a compliance officer | a compliance officer is an employee of a company that ensures the firm is in compliance with its outside regulatory and legal requirements as well as internal policies and bylaws the chief compliance officer is usually the head of a firm s compliance department compliance officers have a duty to their employer to work with management and staff to identify and manage regulatory risk their objective is to ensure that an organization has internal controls that adequately measure and manage the risks it faces compliance officers provide an in house service that effectively supports business areas in their duty to comply with relevant laws and regulations and internal procedures the compliance officer is usually the company s general counsel but not always | |
how compliance officers work | a compliance officer is an employee of a company who helps that company maintain policies and procedures to remain within an industry s regulatory framework the duties of a compliance officer may include reviewing and setting standards for outside communications by requiring disclaimers in emails or examining facilities to ensure they are accessible and safe compliance officers may also design or update internal policies to mitigate the risk of the company breaking laws and regulations and lead internal audits of procedures a compliance officer must have a thorough knowledge of the company and an awareness of where possible regulatory breaches may occur it is essential that the compliance officer effectively communicate the company s key ethical principles and compliance regulations compliance officers organize regular training sessions for employees to communicate key regulatory changes and updates this is particularly important in a heightened regulatory environment where change is constant the compliance officer must work with business units and management to ensure appropriate contingency plans are in place that set guidelines on how to respond to a possible compliance breach in the event of a regulatory breach it is important for the compliance officer to have appropriate disciplinary measures in place to avoid a future recurrence it is the compliance officer s duty to ensure continual monitoring and review of compliance procedures to help identify possible areas where improvements could be made compliance officers are expected to provide an objective view of company policies influence by other employees including management and executives to overlook infractions may result in significant fines or sanctions that may lead to financial loss or even business closure larger companies typically have a chief compliance officer cco to direct compliance related activities compliance officers play an active role in managing a firm s risk and reducing financial crime becoming a compliance officera compliance officer requires a unique skill set to ensure a company s operations fully comply with regulations and procedures it is critical that a compliance officer possess high ethical standards and honesty as this individual is responsible for ensuring a company adheres to required regulations compliance officers continually review the work of others and so it is essential they have polished people skills and work well with colleagues compliance officers need to be reliable showing commitment and unity in relation to a company s regulations and procedures and it is crucial that they demonstrate this to colleagues leading by example compliance officers must also have strong attention to detail they need the ability to notice actions that may result in liability a position as a compliance officer or manager is not typically deemed as entry level bachelor s degrees are normally a minimum requirement and some employers may look for advanced degrees like a law degree or a master s degree in business administration mba especially to qualify for a higher level position compliance officers in other sectors have the opportunity to complete the certified compliance and ethics professional program ccep through the society of corporate compliance and ethics scce the ccep requires participation in an intensive prerequisite course along with the successful passing of an exam similar designation and certification courses are available through the ethics and compliance officer association ecoa according to bls s may 2020 statistics annual salaries for compliance professions range from 40 160 to 115 220 and hourly wages from 19 31 to 55 39 1 a lower income earner in a compliance officer position is more likely to have minimal past work experience or hold a degree not directly related to the industry in which they work a worker with a higher income often has substantial tenure in his position or has earned advanced degrees in business accounting law or finance of course those who work at a large institution are more likely to have access to fringe benefits that increase the total compensation package with chief compliance officers possessing those on a par with other c suite executives | |
what is the compound annual growth rate cagr | the compound annual growth rate is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance assuming the profits were reinvested at the end of each period of the investment s life span | |
how to calculate compound annual growth rate cagr | c a g r e v b v 1 n 1 100 where e v ending value b v beginning value n number of years begin aligned cagr left left frac ev bv right frac1n 1 right times100 textbf where ev text ending value bv text beginning value n text number of years end aligned cagr bvev n1 1 100where ev ending valuebv beginning valuen number of years to calculate the cagr of an investment the cagr formula gives an annualized rate of return which is useful for comparing the performance of different investments over time | |
what the cagr can tell you | the compound annual growth rate isn t a true return rate but rather a representational figure it is essentially a number that describes the rate at which an investment would have grown if it had grown at the same rate every year and the profits were reinvested at the end of each year for stock market investors this can be particularly useful in comparing the performance of different stocks the cagr does not take into account the discount rate which is critical in assessing the present value of future returns in reality this sort of performance is unlikely however the cagr can be used to smooth returns so that they may be more easily understood compared to alternative methods example of how to use cagrimagine you invested 10 000 in a portfolio with the returns outlined below we can see that on an annual basis the year to year growth rates of the investment portfolio were quite different as shown in the parentheses on the other hand the compound annual growth rate smooths the investment s performance and ignores the fact that 2018 and 2020 were vastly different from 2019 the cagr over that period was 23 86 and can be calculated as follows c a g r 19 000 10 000 1 3 1 100 23 86 cagr left frac 19 000 10 000 right frac 1 3 1 times100 23 86 cagr 10 000 19 000 31 1 100 23 86 the cagr of 23 86 over the three year investment period can help an investor compare alternatives for their capital or make forecasts of future values for example imagine an investor is comparing the performance of two uncorrelated investments in any given year during the period one investment may be rising while the other falls this could be the case when comparing high yield bonds to stocks or a real estate investment to emerging markets using cagr would smooth the annual return over the period so the two alternatives would be easier to compare as another example let s say an investor bought 55 shares of amazon com amzn stock in december 2017 at 1 180 per share for a total investment of 64 900 after three years in december 2020 the stock has risen to 3 200 per share and the investor s investment is now worth 176 000 1 what is the cagr using the cagr formula we know that we need the so to calculate the cagr for this simple example we would enter that data into the formula as follows 176 000 64 900 1 3 1 39 5 additional cagr usesthe cagr can be used to calculate the average growth of a single investment as we saw in our example above due to market volatility the year to year growth of an investment will likely appear erratic and uneven for example an investment may increase in value by 8 in one year decrease in value by 2 the following year and increase in value by 5 in the next cagr helps smooth returns when growth rates are expected to be volatile and inconsistent the cagr produces a geometric mean which can be used to compare different investment types with one another for example suppose that in 2015 an investor placed 10 000 into an account for five years with a fixed annual interest rate of 1 and another 10 000 into a stock mutual fund the rate of return in the stock fund will be uneven over the next few years so a comparison between the two investments would be difficult assume that at the end of the five year period the savings account s balance is 10 510 10 and although the other investment has grown unevenly the ending balance in the stock fund was 15 348 52 using the cagr to compare the two investments can help an investor understand the difference in returns savings account cagr 10 510 10 10 000 1 5 1 100 1 00 text savings account cagr left frac 10 510 10 10 000 right frac 1 5 1 times 100 1 00 savings account cagr 10 000 10 510 10 51 1 100 1 00 and stock fund cagr 15 348 52 10 000 1 5 1 100 8 95 text stock fund cagr left frac 15 348 52 10 000 right frac 1 5 1 times 100 8 95 stock fund cagr 10 000 15 348 52 51 1 100 8 95 on the surface the stock fund may look like a better investment with nearly nine times the return of the savings account on the other hand one of the drawbacks of the cagr is that by smoothing the returns the cagr cannot tell an investor how volatile or risky the stock fund was however the cagr can be used in the mar ratio which adjusts for risk using the cagr alongside metrics like net present value npv provides a more comprehensive view of an investment s potential the cagr can also be used to track the performance of various business measures of one or multiple companies alongside one another for example over a five year period big sale stores market share cagr was 1 82 but its customer satisfaction cagr over the same period was 0 58 in this way comparing the cagrs of measures within a company reveals strengths and weaknesses comparing the cagrs of business activities across similar companies will help evaluate competitive weaknesses and strengths for example big sale s customer satisfaction cagr might not seem so low compared with superfast cable s customer satisfaction cagr of 6 31 during the same period | |
how investors use the cagr | understanding the formula used to calculate cagr is an introduction to many other ways that investors evaluate past returns or estimate future profits the formula can be manipulated algebraically into a formula to find the present value or future value of money or to calculate a hurdle rate of return for example imagine that an investor knows that they need 50 000 for a child s college education in 18 years and they have 15 000 to invest today how much does the average rate of return need to be to reach that objective the cagr calculation can be used to find the answer to this question as follows required return 50 000 15 000 1 18 1 100 6 90 text required return left frac 50 000 15 000 right frac 1 18 1 times 100 6 90 required return 15 000 50 000 181 1 100 6 90 this version of the cagr formula is just a rearranged present value and future value equation for example if an investor knew that they needed 50 000 and they felt it was reasonable to expect an 8 annual return on their investment they could use this formula to find out how much they needed to invest to meet their goal modifying the cagr formulaan investment is rarely made on the first day of the year and then sold on the last day of the year imagine an investor who wants to evaluate the cagr of a 10 000 investment that was entered on june 1 2013 and sold for 16 897 14 on sept 9 2018 before the cagr calculation can be performed the investor will need to know the fractional remainder of the holding period they held the position for 213 days in 2013 a full year in 2014 2015 2016 and 2017 and 251 days in 2018 this investment was held for 5 271 years which is calculated by the following the total number of days that the investment was held was 1 924 days to calculate the number of years divide the total number of days by 365 1 924 365 which equals 5 271 years the total number of years that the investment was held can be placed in the denominator of the exponent inside cagr s formula as follows investment cagr 16 897 14 10 000 1 5 271 1 100 10 46 text investment cagr left frac 16 897 14 10 000 right frac 1 5 271 1 times 100 10 46 investment cagr 10 000 16 897 14 5 2711 1 100 10 46 smooth rate of growth limitationthe most important limitation of the cagr is that because it calculates a smoothed rate of growth over a period it ignores volatility and implies that the growth during that time was steady returns on investments are uneven over time except for bonds that are held to maturity deposits and similar investments also the cagr does not account for when an investor adds funds to a portfolio or withdraws funds from the portfolio over the period being measured for example if an investor had a portfolio for five years and injected funds into the portfolio during the five year period then the cagr would be inflated the cagr would calculate the rate of return based on the beginning and ending balances over the five years and would essentially count the deposited funds as part of the annual growth rate which would be inaccurate other cagr limitationsbesides the smoothed rate of growth the cagr has other limitations a second limitation when assessing investments is that no matter how steady the growth of a company or investment has been in the past investors cannot assume that the rate will remain the same in the future the shorter the time frame used in the analysis the less likely it will be for the realized cagr to meet the expected cagr when relying on historical results a third limitation of the cagr is a limitation of representation say that an investment fund was worth 100 000 in 2016 71 000 in 2017 44 000 in 2018 81 000 in 2019 and 126 000 in 2020 if the fund managers represented in 2021 that their cagr was a whopping 42 01 over the past three years they would be technically correct they would however be omitting some very important information about the fund s history including the fact that the fund s cagr over the past five years was a modest 4 73 cagr vs irrthe cagr measures the return on an investment over a certain period of time the internal rate of return irr also measures investment performance but is more flexible than the cagr the most important distinction is that the cagr is straightforward enough that it can be calculated by hand in contrast more complicated investments and projects or those that have many different cash inflows and outflows are best evaluated using irr to back into the irr a financial calculator excel or portfolio accounting system is ideal those interested in learning more about cagr and other financial topics may want to consider enrolling in one of the best investing courses currently available | |
what is an example of compound annual growth rate cagr | the cagr is a measurement used by investors to calculate the rate at which a quantity grew over time the word compound denotes the fact that the cagr takes into account the effects of compounding or reinvestment over time for example suppose you have a company with revenue that grew from 3 million to 30 million over a span of 10 years in that scenario the cagr would be approximately 25 89 | |
what counts as a good cagr will depend on the context but generally speaking investors will evaluate this by thinking about their opportunity cost as well as the riskiness of the investment for example if a company grew by 25 in an industry with an average cagr closer to 30 then its results might seem lackluster by comparison but if the industry wide growth rates were lower such as 10 or 15 then its cagr might be very impressive | in general a higher cagr is better | |
what is the difference between the cagr and a growth rate | the main difference between the cagr and a growth rate is that the cagr assumes the growth rate was repeated or compounded each year whereas a traditional growth rate does not many investors prefer the cagr because it smooths out the volatile nature of year by year growth rates for instance even a highly profitable and successful company will likely have several years of poor performance during its life these bad years could have a large effect on individual years growth rates but would have a relatively small impact on the company s cagr can the cagr be negative yes a negative cagr would indicate losses over time rather than gains | |
what is risk adjusted cagr | to compare the performance and risk characteristics among various investment alternatives investors can use a risk adjusted cagr a simple method for calculating a risk adjusted cagr is to multiply the cagr by one minus the investment s standard deviation if the standard deviation i e its risk is zero then the risk adjusted cagr is unaffected the larger the standard deviation the lower the risk adjusted cagr will be the bottom linecagr is a valuable metric for investors to gauge the performance of their investments over time by smoothing out annual returns it provides a clearer picture of an investment s growth trajectory however while cagr can help compare different investments and predict future values it does not account for volatility or risk investors should use cagr alongside other measures to make well informed decisions understanding its limitations in reflecting the full scope of investment performance | |
what is compound interest | compound interest is interest that applies not only to the initial principal of an investment or a loan but also to the accumulated interest from previous periods in other words compound interest involves earning or owing interest on your interest the power of compounding helps a sum of money grow faster than if just simple interest were calculated on the principal alone and the greater the number of compounding periods the greater the compound interest growth will be for savings and investments compound interest is your friend as it multiplies your money at an accelerated rate but if you have debt compounding of the interest you owe can make it increasingly difficult to pay off investopedia julie bang | |
how compound interest works | compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one the total initial principal or amount of the loan is then subtracted from the resulting value the formula for calculating compound interest is | |
where | as an example take a 3 year loan of 10 000 at an interest rate of 5 compounding annually what would be the amount of interest in this case it would be the rule of 72 is another way to estimate compound interest if you divide 72 by your rate of return you find out how long it will take your money will double in value for example if you have 100 that was earning a 4 return it would grow to 200 in 18 years 72 4 18 1the power of compound interestbecause compound interest includes interest accumulated in previous periods it grows at an ever accelerating rate in the example above though the total interest payable over the loan s three years is 1 576 25 the interest amount is not the same as it would be with simple interest the interest payable at the end of each year is shown in the table below compound interest can significantly boost investment returns over the long term over 10 years a 100 000 deposit receiving 5 simple annual interest would earn 50 000 in total interest but if the same deposit had a monthly compound interest rate of 5 interest would add up to about 64 700 while compound interest is interest on interest cumulative interest is the addition of all interest payments order your copy of investopedia s what to do with 10 000 magazine for more wealth building advice compounding periods are the time intervals between when interest is added to the account interest can be compounded annually semi annually quarterly monthly daily continuously or on any other basis 2interest on an account may accrue daily but only credited monthly only when the interest is credited or added to the existing balance does the interest begin to earn additional interest standard compounding frequency schedules are usually applied to financial instruments some banks also offer continuously compounding interest which adds interest to the principal as regularly as possible for practical purposes it doesn t accrue that much more than daily compounding interest unless you want to put money in and take it out on the same day more frequent compounding of interest is beneficial to the investor or creditor for a borrower the opposite is true the basic rule is that the higher the number of compounding periods the greater the amount of compound interest 6the following table demonstrates the difference that the number of compounding periods can make for a 10 000 loan with an annual 10 interest rate over a 10 year period compound interest start saving earlyyoung people often neglect to save for retirement they may have other expenses they feel more urgent with more time to save yet the earlier you start saving the more compounding interest can work in your favor even with relatively small amounts saving small amounts can pay off massively down the road far more than saving higher amounts later in life here s one example of its effect let s say you start saving 100 a month at age 20 you earn an average of 4 annually compounded monthly across 40 years you earn 151 550 by age 65 your principal investment was just 54 100 your twin doesn t begin investing until age 50 they invest 5 000 initially then 500 monthly for 15 years also averaging a monthly compounded 4 return by age 65 your twin has only earned 132 147 with a principal investment of 95 000 | |
when you hit your 45 year savings mark and your twin would have saved for 15 years your twin will have less although they would have invested roughly twice your principal investment | the same logic applies to opening an individual retirement account ira and taking advantage of an employer sponsored retirement account such as a 401 k or 403 b plan start early and be consistent with your payments to get the maximum power of compounding pros and cons compound interestcan help build wealth long term in savings and investmentsmitigates wealth erosion riskscompounding can work for you when making loan repaymentsworks against consumers making minimum payments on high interest loans or credit card debtsreturns are taxablechallenging to calculatecompound interest in investingan investor opting for a brokerage account s dividend reinvestment plan drip is essentially using the power of compounding in their investments assets that have dividends like dividend stocks or mutual funds offer a one way for investors to take advantage of compound interest reinvested dividends are used to purchase more shares of the asset then more interest can grow on a larger investment investors can also get compounding interest with the purchase of a zero coupon bond traditional bond issues provide investors with periodic interest payments based on the original terms of the bond issue because these payments are paid out in check form the interest does not compound zero coupon bonds do not send interest checks to investors instead this type of bond is purchased at a discount to its original value and grows over time zero coupon bond issuers use the power of compounding to increase the value of the bond so it reaches its full price at maturity 9tools for calculating compound interestyou can use several tools to help you calculate compound interest including microsoft excel which you can use in three different ways the first way to calculate compound interest is to multiply each year s new balance by the interest rate suppose you deposit 1 000 into a savings account with a 5 interest rate that compounds annually and you want to calculate the balance in five years the second way to calculate compound interest is to use a fixed formula the compound interest formula is p 1 i n p where p is the principal i is the annual interest rate and n is the number of periods a third way to calculate compound interest is to create a macro function online calculators for compound interestyou can also use several free compound interest calculators online | |
how can i tell if interest is compounded | the truth in lending act tila requires that lenders disclose loan terms to potential borrowers including the total dollar amount of interest to be repaid over the life of the loan and whether interest accrues simply or is compounded 13 | |
what is a simple definition of compound interest | compound interest simply means you re earning interest on both your original saved money and any interest you earn on that original amount although the term compound interest includes the word interest the concept applies beyond interest bearing bank accounts and loans including investments such as mutual funds 14who benefits from compound interest compound interest benefits investors across the spectrum banks benefit from compound interest lending money and reinvesting interest received into additional loans depositors benefit from compound interest receiving interest on their bank accounts bonds or other investments the bottom linethe long term effect of compound interest on savings and investments is indeed powerful because it grows your money much faster than simple interest compound interest is a central factor in increasing wealth it also mitigates a rising cost of living caused by inflation for young people compound interest offers a chance to take advantage of the time value of money remember when choosing your investments that the number of compounding periods is just as important as the interest rate | |
what is compounding | compounding is the process in which an asset s earnings from either capital gains or interest are reinvested to generate additional earnings over time this growth calculated using exponential functions occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods compounding therefore differs from linear growth where only the principal earns interest each period sydney saporito investopediaunderstanding compoundingcompounding typically refers to the increasing value of an asset due to the interest earned on both a principal and an accumulated interest this phenomenon which is a direct realization of the time value of money tmv concept is also known as compound interest compounding is crucial in finance and the gains attributable to its effects are the motivation behind many investing strategies for example many corporations offer dividend reinvestment plans drips that allow investors to reinvest their cash dividends to purchase additional shares of stock reinvesting in more of these dividend paying shares compounds investor returns because the increased number of shares will consistently increase future income from dividend payouts assuming steady dividends investing in dividend growth stocks on top of reinvesting dividends adds another layer of compounding to this strategy that some investors refer to as double compounding in this case not only are dividends being reinvested to buy more shares but these dividend growth stocks are also increasing their per share payouts formula for compound interestthe formula for the future value fv of a current asset relies on the concept of compound interest it takes into account the present value of an asset the annual interest rate the frequency of compounding or the number of compounding periods per year and the total number of years the generalized formula for compound interest is 1f v p v 1 i n n t where f v future value p v present value i annual interest rate n number of compounding periods per time period t the time period begin aligned fv pv times big 1 frac i n big nt textbf where fv text future value pv text present value i text annual interest rate n text number of compounding periods per time period t text the time period end aligned fv pv 1 ni ntwhere fv future valuepv present valuei annual interest raten number of compounding periods per time periodt the time period this formula assumes that no additional changes outside of interest are made to the original principal balance curious what 100 daily compounding looks like one grain of rice the folk tale by demi is centered around a reward where a single grain of rice is awarded on the first day and the number of grains of rice awarded each day is doubled over 30 days at the end of the month over 536 million grains of rice would be awarded on the last day 2increased compounding periodsthe effects of compounding strengthen as the frequency of compounding increases assume a one year time period the more compounding periods throughout this one year the higher the future value of the investment naturally two compounding periods per year are better than one and four compounding periods per year are better than two to illustrate this effect consider the following example given the above formula assume that an investment of 1 million earns 20 per year the resulting future value based on a varying number of compounding periods is as evident the future value increases by a smaller margin even as the number of compounding periods per year increases significantly the frequency of compounding over a set length of time has a limited effect on an investment s growth this limit based on calculus is known as continuous compounding and can be calculated using the formula 3f v p e r t where e irrational number 2 7183 r interest rate t time begin aligned fv p times e rt textbf where e text irrational number 2 7183 r text interest rate t text time end aligned fv p ertwhere e irrational number 2 7183r interest ratet time in the above example the future value with continuous compounding equals fv 1 000 000 2 7183 0 2 x 1 1 221 404 compounding is an example of the snowball effect where a situation of small significance builds upon itself into a larger more serious state compounding on investments and debtcompound interest works on both assets and liabilities while compounding boosts the value of an asset more rapidly it can also increase the amount of money owed on a loan as interest accumulates on the unpaid principal and previous interest charges even if you make loan payments compounding interest may result in the amount of money you owe being greater in future periods the concept of compounding is especially problematic for credit card balances not only is the interest rate on credit card debt high but the interest charges also may be added to the principal balance and incur interest assessments on itself in the future for this reason the concept of compounding is not necessarily good or bad the effects of compounding may work for or against an investor depending on their specific financial situation example of compoundingto illustrate how compounding works suppose 10 000 is held in an account that pays 5 interest annually after the first year or compounding period the total in the account has risen to 10 500 a simple reflection of 500 in interest being added to the 10 000 principal in year two the account realizes 5 growth on both the original principal and the 500 of first year interest resulting in a second year gain of 525 and a balance of 11 025 after 10 years assuming no withdrawals and a steady 5 interest rate the account would grow to 16 288 95 without having added or removed anything from our principal balance except for interest the impact of compounding has increased the change in balance from 500 in period 1 to 775 66 in period 10 in addition without having added new investments on our own our investment has grown 6 288 95 in 10 years had the investment only paid simple interest 5 on the original investment only annual interest would have only been 5 000 500 per year for 10 years | |
what is the rule of 72 | the rule of 72 is a heuristic used to estimate how long an investment or savings will double in value if there is compound interest or compounding returns the rule states that the number of years it will take to double is 72 divided by the interest rate if the interest rate is 5 with compounding it would take around 14 years and five months to double 4 | |
what is the difference between simple interest and compound interest | simple interest pays interest only on the amount of principal invested or deposited for instance if 1 000 is deposited with 5 simple interest it would earn 50 each year compound interest however pays interest on interest so in the first year you would receive 50 but in the second year you would receive 52 5 1 050 0 05 and so on | |
how do i compound my money | in addition to compound interest investors can receive compounding returns by reinvesting dividends this means taking the cash received from dividend payments to purchase additional shares in the company which will themselves pay out dividends in the future | |
which type of average is best suited to compounding | there are different types of average mean calculations used in finance when computing the average returns of an investment or savings account that has compounding it is best to use the geometric average in finance this is sometimes known as the time weighted average return or the compound annual growth rate cagr | |
what is the best example of compounding | high yield savings accounts are a great example of compounding let s say you deposit 1 000 in a savings account in the first year you will earn a given amount of interest if you never spend any money in the account and the interest rate at least stays the same as the year before the amount of interest you earn in the second year will be higher this is because savings accounts add interest earned to the cash balance that is eligible to earn interest the bottom linecompounding and compound interest play a very important part in shaping the financial success of investors if you take advantage of compounding you ll earn more money faster if you take on compounding debt you ll be stuck in a growing debt balance longer by compounding interest financial balances are able to exponentially grow faster than straight line interest | |
what is comprehensive income | comprehensive income is the variation in the value of a company s net assets from non owner sources during a specific period it includes net income and unrealized income unrealized income can be unrealized gains or losses on for example hedge derivative financial instruments and foreign currency transaction gains or losses comprehensive income provides a complete view of a company s income some of which may not be fully captured on the income statement investopedia laura porterunderstanding comprehensive incomecomprehensive income is the sum of a company s net income and other comprehensive income for companies comprehensive income sheds light on changes in equity since it includes net income and unrealized income and losses it provides the big picture of a company s value for investors comprehensive income is useful because the information can help their decision making where the company s feasibility as a potential investment is concerned the purpose of comprehensive income is to show all operating and financial events that affect non owner interests as well as net income comprehensive income includes unrealized gains and losses on available for sale investments it also includes cash flow hedges which can change in value depending on the securities market value and debt securities transferred from available for sale to held to maturity which may also incur unrealized gains or losses gains or losses can also be incurred from foreign currency translation adjustments and in pensions and or post retirement benefit plans income excluded from the income statement is reported under accumulated other comprehensive income of the shareholders equity section income from non owner sources increases the value of a company however since it is not from the ongoing operations of the company s normal line of business it is not appropriate to include it in the traditional income statements comprehensive income excludes owner caused changes in equity such as the sale of stock or purchase of treasury shares statement of comprehensive incomea company s income statement details revenues and expenses including taxes and interest its bottom line is net income however net income only recognizes earned income and incurred expenses a statement of comprehensive income which covers the same period as the income statement reflects net income as well as other comprehensive income the latter being unrealized gains and losses on assets that aren t shown on the income statement the statement of comprehensive income gives company management and investors a fuller more accurate idea of income the net income section provides information derived from the income statement about a company s total revenues and expenses the amount is adjusted to account for non owner activities net income is arrived at by subtracting cost of goods sold general expenses taxes and interest from total revenue the other comprehensive income section provides information on the company s unrealized gains losses revenue and expenses here are some examples of other comprehensive income that you may find on the comprehensive income statement at the end of the statement is the comprehensive income total which is the sum of net income and other comprehensive income in some circumstances companies combine the income statement and statement of comprehensive income or it will be included as footnotes however a company with other comprehensive income will typically file this form separately the statement of comprehensive income is not required if a company does not meet the criteria to classify income as comprehensive income financial statements including those showing comprehensive income only portray activity from a certain period or specific time they can t guarantee future performance comprehensive income examplelike other publicly traded companies ford motor company files quarterly and annual reports with the sec in its first quarter filing for 2023 it published its consolidated statements of comprehensive income which combines comprehensive income from all of its activities and subsidiaries featured below 1pros and cons of the statement of comprehensive incomeit provides a more comprehensive view of a company s income than the income statement alonecompany management can use the added information about income to inform smarter planning for revenue and costs as well as operational decisionsinvestors can gain better insight into a company s profitability and the stability of earnings they can use it as a tool to compare companies as potential investmentsthe inclusion of unrealized gains and or losses can distort the view of a company s financial healththe values for other comprehensive income relate to assumptions not actual resultscomprehensive income doesn t assure future profitability it only presents a picture of a company s profitability for a particular period of time in the past | |
what s other comprehensive income | contrary to net income other comprehensive income is income gains and losses not yet realized it reflects income that cannot be accounted for by the income statement some examples of other comprehensive income are foreign currency hedge gains and losses cash flow hedge gains and losses and unrealized gains and losses for securities that are available for sale | |
what s the benefit of the comprehensive income statement | it provides a comprehensive view for company management and investors of a company s profitability picture it s also a way for a company to record more than simply net income the statement shows net income as well as other comprehensive income | |
what s the difference between net income and comprehensive income | net income is the actual profit or gain that a company makes in a particular period comprehensive income is the sum of that net income plus the value of yet unrealized profits or losses in the same period the bottom linecomprehensive income is the sum of a company s net income as recorded on the income statement and unrealized income or other comprehensive income that is not included on an income statement but is recorded in the statement of comprehensive income the statement of comprehensive income displays both net income details and other comprehensive income details it is appreciated for its more comprehensive view of a company s profitability picture for a particular period | |
what is comprehensive income | comprehensive income is the variation in the value of a company s net assets from non owner sources during a specific period it includes net income and unrealized income unrealized income can be unrealized gains or losses on for example hedge derivative financial instruments and foreign currency transaction gains or losses comprehensive income provides a complete view of a company s income some of which may not be fully captured on the income statement investopedia laura porterunderstanding comprehensive incomecomprehensive income is the sum of a company s net income and other comprehensive income for companies comprehensive income sheds light on changes in equity since it includes net income and unrealized income and losses it provides the big picture of a company s value for investors comprehensive income is useful because the information can help their decision making where the company s feasibility as a potential investment is concerned the purpose of comprehensive income is to show all operating and financial events that affect non owner interests as well as net income comprehensive income includes unrealized gains and losses on available for sale investments it also includes cash flow hedges which can change in value depending on the securities market value and debt securities transferred from available for sale to held to maturity which may also incur unrealized gains or losses gains or losses can also be incurred from foreign currency translation adjustments and in pensions and or post retirement benefit plans income excluded from the income statement is reported under accumulated other comprehensive income of the shareholders equity section income from non owner sources increases the value of a company however since it is not from the ongoing operations of the company s normal line of business it is not appropriate to include it in the traditional income statements comprehensive income excludes owner caused changes in equity such as the sale of stock or purchase of treasury shares statement of comprehensive incomea company s income statement details revenues and expenses including taxes and interest its bottom line is net income however net income only recognizes earned income and incurred expenses a statement of comprehensive income which covers the same period as the income statement reflects net income as well as other comprehensive income the latter being unrealized gains and losses on assets that aren t shown on the income statement the statement of comprehensive income gives company management and investors a fuller more accurate idea of income the net income section provides information derived from the income statement about a company s total revenues and expenses the amount is adjusted to account for non owner activities net income is arrived at by subtracting cost of goods sold general expenses taxes and interest from total revenue the other comprehensive income section provides information on the company s unrealized gains losses revenue and expenses here are some examples of other comprehensive income that you may find on the comprehensive income statement at the end of the statement is the comprehensive income total which is the sum of net income and other comprehensive income in some circumstances companies combine the income statement and statement of comprehensive income or it will be included as footnotes however a company with other comprehensive income will typically file this form separately the statement of comprehensive income is not required if a company does not meet the criteria to classify income as comprehensive income financial statements including those showing comprehensive income only portray activity from a certain period or specific time they can t guarantee future performance comprehensive income examplelike other publicly traded companies ford motor company files quarterly and annual reports with the sec in its first quarter filing for 2023 it published its consolidated statements of comprehensive income which combines comprehensive income from all of its activities and subsidiaries featured below 1pros and cons of the statement of comprehensive incomeit provides a more comprehensive view of a company s income than the income statement alonecompany management can use the added information about income to inform smarter planning for revenue and costs as well as operational decisionsinvestors can gain better insight into a company s profitability and the stability of earnings they can use it as a tool to compare companies as potential investmentsthe inclusion of unrealized gains and or losses can distort the view of a company s financial healththe values for other comprehensive income relate to assumptions not actual resultscomprehensive income doesn t assure future profitability it only presents a picture of a company s profitability for a particular period of time in the past | |
what s other comprehensive income | contrary to net income other comprehensive income is income gains and losses not yet realized it reflects income that cannot be accounted for by the income statement some examples of other comprehensive income are foreign currency hedge gains and losses cash flow hedge gains and losses and unrealized gains and losses for securities that are available for sale | |
what s the benefit of the comprehensive income statement | it provides a comprehensive view for company management and investors of a company s profitability picture it s also a way for a company to record more than simply net income the statement shows net income as well as other comprehensive income | |
what s the difference between net income and comprehensive income | net income is the actual profit or gain that a company makes in a particular period comprehensive income is the sum of that net income plus the value of yet unrealized profits or losses in the same period the bottom linecomprehensive income is the sum of a company s net income as recorded on the income statement and unrealized income or other comprehensive income that is not included on an income statement but is recorded in the statement of comprehensive income the statement of comprehensive income displays both net income details and other comprehensive income details it is appreciated for its more comprehensive view of a company s profitability picture for a particular period | |
conditional probability is used when two or more events are not independent this means the likelihood of one event is influenced by whether another event occurred it asks if we know a has happened what s the chance of b also happening it s calculated by multiplying the probability of the preceding event by the updated probability of the succeeding or conditional event we ll walk you through the calculation below | conditional probability can be contrasted with unconditional probability the latter is also called marginal probability which measures the chance of a single event without depending on any other in contrast conditional probability determines the likelihood of one event given that another event has occurred linking them other terms for probabilities include independent probability which doesn t have that interconnectedness and instead looks at the probability of some event in isolation because it s believed to be independent a joint probability is the likelihood of two events occurring together from these ideas one can get to bayes theorem which provides a way to flip conditional probabilities mathematically if you know the chance of event b happening given event a bayes formula lets you reverse calculate the conditional probability of a given b overall while marginal and joint probabilities measure individual and paired events conditional probability can measure precedence and dependence between events understanding conditional probabilityconditional probabilities are contingent on a previous event it measures the likelihood of an event or outcome based on the occurrence of some earlier event two events are said to be independent if one event occurring does not affect the probability that the other event will occur however if one event occurring or not does affect the likelihood that the other event will happen the two events are said to be dependent for example a company s stock price increasing after reporting higher than expected earnings if events are independent then the probability of some event b is not contingent on what happens with event a for example an increase in apple s shares and a drop in wheat prices conditional probability is often written as the probability of a given b and notated as p a b conditional probability is used in a variety of fields such as insurance economics politics and different fields of mathematics conditional probability formulap b a p a a n d b p a p b a p a and b p a p b a p aandb p a or p b a p a b p a p b a p a b p a p b a p a b p a | |
where the letters are for the following | p probabilitya event ab event bunconditional probability is also known as marginal probability and measures the chance of something happening while ignoring any knowledge of previous or external events since this probability also ignores new information it remains constant examples of conditional probabilityan example of conditional probability using marbles is illustrated below the steps are as follows step 1 understand the scenarioinitially you re given a bag with six red marbles three blue marbles and one green marble thus there are 10 marbles in the bag step 2 identify the eventsnext two events are defined step 3 calculate the probability of event b p b event b is drawing a marble that is not green there are 10 marbles altogether nine of which are not green the six red and three blue marbles p b n u m b e r o f m a r b l e s t h a t a r e n o t g r e e n t o t a l n u m b e r o f m a r b l e s 9 10 p b number of marbles that are not green total number of marbles 9 10 p b numberofmarblesthatarenotgreen totalnumberofmarbles 9 10step 4 identify the intersection of events a and b p a b the intersection of events a and b involves drawing a red marble that is also not green since all red marbles are not green the intersection is simple the event of drawing a red marble step 5 calculate the probability of the intersection of events a and b p a b p a b n u m b e r o f r e d m a r b l e s t o t a l n u m b e r o f m a r b l e s 6 10 3 5 p a b number of red marbles total number of marbles 6 10 3 5 p a b numberofredmarbles totalnumberofmarbles 6 10 3 5step 6 calculate the conditional probability p a b using the conditional probability formula p a b that is the probability of drawing a red marble given that the marble drawn is not green the probability is calculated p a b p a b p b 3 5 9 10 2 3 p a b p a b p b 3 5 9 10 2 3 p a b p a b p b 3 5 9 10 2 3the conditional probability of drawing a red marble given that the marble drawn is not green is 2 3 let s practice with another example of conditional probability using a fair die the steps are as follows step 1 understand the scenarioyou have a fair six sided die you want to determine the probability of rolling an even number given that the number rolled is greater than four step 2 identify the eventsthe possible outcomes sample space for a six sided die are the numbers one through six from this list you can define the two events step 3 calculate the probability of each eventthe probability of each event can be calculated by dividing the number of favorable outcomes the ones you re looking for by the total number of outcomes in the sample space p a is the probability of rolling an even number there are three even numbers 2 4 6 out of the six possible outcomes thus p a 3 6 1 2 p b is the probability of rolling a number greater than four two numbers are greater than four 5 6 out of the six possible outcomes thus p b 4 6 2 3 step 4 identify the intersection of events a and bthe intersection of events a and b includes the outcomes that satisfy both conditions simultaneously in this case that means rolling a number that is even and also greater than four the only outcome that does both is rolling a six step 5 calculate the probability of the intersection of events a and bwe ll spell this out even if it s easy given the above because other examples might prove more difficult p a b is the probability of rolling six since six is the only outcome that is both even and greater than six there is one outcome out of six possibilities so p a b 1 6 step 6 calculate the conditional probability p b a the formula for conditional probability is as follows p b a p a b p a p b a p a b p a p b a p a b p a | |
when the values are substituted into the formula here is the result | p b a 1 6 1 2 1 3 p b a 1 6 1 2 1 3 p b a 1 6 1 2 1 3this means that given the die rolled is even the probability that this number is also greater than four is 1 3 another scenario involves a student applying for admission to a college who hopes to get a scholarship and a stipend for books meals and housing the steps to determine the conditional probability of getting a stipend and the scholarship are as follows step 1 understand the scenariofirst the student wants to know the likelihood of being accepted to the university then if accepted the student would like to receive an academic scholarship moreover if possible the student would also like to receive a stipend for books meals and housing if they get the scholarship step 2 define the eventsthere are three events step 3 calculating the probability of being accepted event a the university accepts 100 out of every 1 000 applicants who have applications similar to the student s thus the probability of a student being accepted is p a 100 1000 0 10 or 10 step 4 determining the probability of receiving a scholarship once accepted p b a it s known that out of the students accepted 10 out of every 500 receive a scholarship thus the probability of receiving a scholarship given acceptance is as follows p b a 10 500 0 02 2 p b a 10 500 0 02 2 p b a 10 500 0 02 2 step 5 calculating the probability of being accepted and receiving a scholarshipto calculate the probability of being accepted and also receiving a scholarship the likelihood of acceptance is multiplied by the conditional probability of receiving a scholarship given acceptance p a b p a p b a 0 1 0 02 0 002 0 2 p a b p a p b a 0 1 0 02 0 002 0 2 p a b p a p b a 0 1 0 02 0 002 0 2 step 6 determining the probability of receiving a stipend having gotten a scholarship p c b it s also known that among the scholarship recipients 50 receive a stipend for books meals and housing thus p c b 0 5 50 step 7 calculating the probability of being accepted receiving a scholarship and receiving a stipendto calculate the probability of a student being accepted receiving a scholarship and then also receiving a stipend the probabilities of the events are multiplied p a b c p a p b a p c b 0 1 0 02 0 5 0 001 0 1 p a b c p a p b a p c b 0 1 0 02 0 5 0 001 0 1 p a b c p a p b a p c b 0 1 0 02 0 5 0 001 0 1 this step by step breakdown illustrates how the probabilities for each scenario are calculated using basic probability formulas and conditional probability conditional probability vs joint probability and marginal probabilitylet s now differentiate calculating conditional probability from other kinds of probability the example this time is a regular deck of cards two events are defined a standard deck has 52 cards divided into four suits hearts diamonds clubs and spades hearts and diamonds are red and clubs and spades are black each suit has 13 cards ace then two through 10 and then the face cards jack queen and king the deck contains 26 red cards 13 hearts and 13 diamonds thus the probability of drawing a red card is p b 26 52 1 2 within the red cards are a four of hearts and a four of diamonds therefore if a red card has to be drawn a subset of the deck that includes only these 26 red cards needs to be considered given that a red card has been drawn the probability of it being a four is calculated as follows p a b n u m b e r o f r e d f o u r s t o t a l n u m b e r o f r e d c a r d s 2 26 1 13 p a b number of red fours total number of red cards 2 26 1 13 p a b numberofredfours totalnumberofredcards 2 26 1 13the marginal probability p a is the probability of an event a happening on its own it does not consider the occurrence of any other event since event a is drawing a four p a is calculated by dividing the number of fours by the total number of cards in the deck p a n u m b e r o f f o u r s i n t h e d e c k t o t a l n u m b e r o f c a r d s i n d e c k 4 52 1 13 p a number of fours in the deck total number of cards in deck 4 52 1 13 p a numberoffoursinthedeck totalnumberofcardsindeck 4 52 1 13joint probability is the likelihood of two or more events happening at the same time this is denoted as p a b the probability of events a and b occurring assuming that the previous events are the same that is event a is the occurrence of drawing a card that is a four and event b is drawing a red card we can find the joint probability of drawing a card that is both a four and red there are two cards that meet both criteria the four of hearts and the four of diamonds thus the joint probability of drawing a card that is both a four and red is calculated as follows p a b n u m b e r o f r e d f o u r s t o t a l n u m b e r o f c a r d s 2 52 1 26 p a b number of red fours total number of cards 2 52 1 26 p a b numberofredfours totalnumberofcards 2 52 1 26bayes theorem and conditional probabilitybayes theorem is used to calculate conditional probabilities when dealing with uncertain events in investing this allows you to update your probability estimates of a market outcome when you get new relevant data for example suppose you wanted to know the probability that the s p 500 would return a positive percentage this year given initial gross domestic product gdp figures in that case you d start with bayes theorem considering the index s historical return rates to get an initial estimate of projected economic expansion you would then revise this first probability using the latest gdp estimates to provide more refined probability assessments incorporating all evidence as the year progresses while a bit complex mathematically bayes theorem is quite logical if an investor discovers new economic information relevant to potential market returns it makes sense to integrate this data to get a more precise calculation the 18th century english minister thomas bayes devised this statistical technique which remains central across financial modeling and other fields requiring predictions under uncertain conditions bayes theorem is well suited to and widely used in machine learning | |
what is a conditional probability calculator | a conditional probability calculator is an online tool that will calculate conditional probability it will provide the probability of the first and second events occurring a conditional probability calculator saves the user from doing the mathematics manually | |
what is the difference between probability and conditional probability | probability looks at the likelihood of one event occurring conditional probability looks at two events occurring in relation to one another it looks at the probability of a second event occurring based on the probability of the first event occurring | |
what is prior probability | prior probability is the probability of an event occurring before any data has been gathered it is the probability as determined by a prior belief prior probability is a part of bayesian statistical inference since you can revise these beliefs and arrive mathematically at a posterior probability | |
what is compound probability | compound probability looks to determine the likelihood of two independent events occurring compound probability multiplies the probability of the first event by the probability of the second event the most common example is a coin flipped twice and finding if the second result will be the same as the first the bottom lineconditional probability examines the likelihood of an event occurring based on the likelihood of a preceding event occurring the second event is dependent on the first event for example we might want to know the probability that some stock will go up if the index for its sector is on the rise the conditional probability calculation takes into account both how likely the first event is the stock rising in price as well as how much the two events overlap | |
what is conditional value at risk cvar | conditional value at risk cvar also known as the expected shortfall is a risk assessment measure that quantifies the amount of tail risk an investment portfolio has cvar is derived by taking a weighted average of the extreme losses in the tail of the distribution of possible returns beyond the value at risk var cutoff point conditional value at risk is used in portfolio optimization for effective risk management understanding conditional value at risk cvar generally speaking if an investment has shown stability over time then the value at risk may be sufficient for risk management in a portfolio containing that investment however the less stable the investment the greater the chance that var will not give a full picture of the risks as it is indifferent to anything beyond its own threshold conditional value at risk cvar attempts to address the shortcomings of the var model which is a statistical technique used to measure the level of financial risk within a firm or an investment portfolio over a specific time frame while var represents a worst case loss associated with a probability and a time horizon cvar is the expected loss if that worst case threshold is ever crossed cvar in other words quantifies the expected losses that occur beyond the var breakpoint conditional value at risk cvar formulasince cvar values are derived from the calculation of var itself the assumptions that var is based on such as the shape of the distribution of returns the cut off level used the periodicity of the data and the assumptions about stochastic volatility will all affect the value of cvar calculating cvar is simple once var has been calculated it is the average of the values that fall beyond the var cvar 11 c 1varxp x dxwhere p x dx the probability density of getting a return with value x c the cut off point on the distribution where the analyst sets the var breakpointvar the agreed upon var level begin aligned cvar frac 1 1 c int var 1 xp x dx textbf where p x dx text the probability density of getting a return with qquad qquad text value x text c text the cut off point on the distribution where the analyst quad text sets the var text breakpoint var text the agreed upon var text level end aligned cvar 1 c1 1var xp x dxwhere p x dx the probability density of getting a return with value x c the cut off point on the distribution where the analyst sets the var breakpointvar the agreed upon var level conditional value at risk and investment profilessafer investments like large cap u s stocks or investment grade bonds rarely exceed var by a significant amount more volatile asset classes like small cap u s stocks emerging markets stocks or derivatives can exhibit cvars many times greater than vars ideally investors are looking for small cvars however investments with the most upside potential often have large cvars financially engineered investments often lean heavily on var because it doesn t get bogged down in outlier data in models however there have been times where engineered products or models may have been better constructed and more cautiously used if cvar had been favored history has many examples such as long term capital management which depended on var to measure its risk profile yet still managed to crush itself by not properly taking into account a loss larger than forecasted by the var model 1 cvar would in this case have focused the hedge fund on the true risk exposure rather than the var cutoff in financial modeling a debate is almost always going on about var versus cvar for efficient risk management | |
a confidence interval in statistics refers to the probability that a population parameter will fall between a set of values for a certain proportion of times analysts often use confidence intervals that contain either 95 or 99 of expected observations thus if a point estimate is generated from a statistical model of 10 00 with a 95 confidence interval of 9 50 to 10 50 it means one is 95 confident that the true value falls within that range | statisticians and other analysts use confidence intervals to understand the statistical significance of their estimations inferences or predictions if a confidence interval contains the value of zero or some other null hypothesis then one cannot satisfactorily claim that a result from data generated by testing or experimentation is to be attributable to a specific cause rather than chance understanding confidence intervalsconfidence intervals measure the degree of uncertainty or certainty in a sampling method they can take any number of probability limits with the most common being a 95 or 99 confidence level confidence intervals are conducted using statistical methods such as a t test statisticians use confidence intervals to measure uncertainty in an estimate of a population parameter based on a sample for example a researcher selects different samples randomly from the same population and computes a confidence interval for each sample to see how it may represent the true value of the population variable the resulting datasets are all different some intervals include the true population parameter and others do not a confidence interval is a range of values bounded above and below the statistic s mean that likely would contain an unknown population parameter confidence level refers to the percentage of probability or certainty that the confidence interval would contain the true population parameter when you draw a random sample many times or in the vernacular we are 99 certain confidence level that most of these samples confidence intervals contain the true population parameter the biggest misconception regarding confidence intervals is that they represent the percentage of data from a given sample that falls between the upper and lower bounds for example one might erroneously interpret the aforementioned 99 confidence interval of 70 to 78 inches as indicating that 99 of the data in a random sample falls between these numbers this is incorrect though a separate method of statistical analysis exists to make such a determination doing so involves identifying the sample s mean and standard deviation and plotting these figures on a bell curve confidence interval and confidence level are interrelated but are not exactly the same calculating confidence intervalssuppose a group of researchers is studying the heights of high school basketball players the researchers take a random sample from the population and establish a mean height of 74 inches the mean of 74 inches is a point estimate of the population mean a point estimate by itself is of limited usefulness because it does not reveal the uncertainty associated with the estimate you do not have a good sense of how far away this 74 inch sample mean might be from the population mean what s missing is the degree of uncertainty in this single sample confidence intervals provide more information than point estimates by establishing a 95 confidence interval using the sample s mean and standard deviation and assuming a normal distribution as represented by the bell curve the researchers arrive at an upper and lower bound that contains the true mean 95 of the time assume the interval is between 72 inches and 76 inches if the researchers take 100 random samples from the population of high school basketball players as a whole the mean should fall between 72 and 76 inches in 95 of those samples if the researchers want even greater confidence they can expand the interval to 99 confidence doing so invariably creates a broader range as it makes room for a greater number of sample means if they establish the 99 confidence interval as being between 70 inches and 78 inches they can expect 99 of 100 samples evaluated to contain a mean value between these numbers a 90 confidence level on the other hand implies that you would expect 90 of the interval estimates to include the population parameter and so forth | |
what does a confidence interval reveal | a confidence interval is a range of values bounded above and below the statistic s mean that likely would contain an unknown population parameter confidence level refers to the percentage of probability or certainty that the confidence interval would contain the true population parameter when you draw a random sample many times | |
why are confidence intervals used | statisticians use confidence intervals to measure uncertainty in a sample variable for example a researcher selects different samples randomly from the same population and computes a confidence interval for each sample to see how it may represent the true value of the population variable the resulting datasets are all different where some intervals include the true population parameter and others do not | |
what is a common misconception about confidence intervals | the biggest misconception regarding confidence intervals is that they represent the percentage of data from a given sample that falls between the upper and lower bounds in other words it would be incorrect to assume that a 99 confidence interval means that 99 of the data in a random sample falls between these bounds what it actually means is that one can be 99 certain that the range will contain the population mean | |
what is a t test | confidence intervals are conducted using statistical methods such as a t test a t test is a type of inferential statistic used to determine if there is a significant difference between the means of two groups which may be related to certain features calculating a t test requires three key data values they include the difference between the mean values from each data set called the mean difference the standard deviation of each group and the number of data values of each group | |
how do you interpret p values and confidence intervals | a p value is a statistical measurement used to validate a hypothesis against observed data that measures the probability of obtaining the observed results assuming that the null hypothesis is true in general a p value less than 0 05 is considered to be statistically significant in which case the null hypothesis should be rejected this can somewhat correspond to the probability that the null hypothesis value which is often zero is contained within a 95 confidence interval the bottom lineconfidence intervals allow analysts to understand the likelihood that the results from statistical analyses are real or due to chance when trying to make inferences or predictions based on a sample of data there will be some uncertainty as to whether the results of such an analysis actually correspond with the real world population being studied the confidence interval depicts the likely range within which the true value should fall | |
what is a conflict of interest | a conflict of interest occurs when an entity or individual becomes unreliable because of a clash between personal or self serving interests and professional duties or responsibilities such a conflict occurs when a company or person has a vested interest such as money status knowledge relationships or reputation which puts into question whether their actions judgment or decision making can be unbiased some examples of a conflict of interest could be | |
when such a situation arises the party with the conflict of interest is usually asked to remove themselves and it is often legally required of them | investopedia yurle villegasunderstanding conflict of interesta conflict of interest in business normally refers to a situation in which an individual s personal interests conflict with the professional interests owed to their employer or the company in which they are invested a conflict of interest arises when a person chooses personal gain over the duties to an organization in which they are a stakeholder or exploits their position for personal gain in some way all corporate board members have fiduciary duties and a duty of loyalty to the corporations they oversee if one of the directors chooses to take action that benefits them at the detriment of the firm they are harming the company with a conflict of interest one example might be the board member of a property insurance company who votes on the induction of lower premiums for companies with fleet vehicles when they in fact own a truck company even if the institution of lower premiums isn t a bad business move for the insurer it could still be considered a conflict of interest because the board member has a special interest in the outcome in legal circles representation by a lawyer or party with a vested interest in the outcome of the trial would be considered a conflict of interest and the representation would not be allowed 1 additionally judges who have a relationship with one of the parties involved in a case or lawsuit will recuse themselves from presiding over the case 2special considerationsa conflict of interest may lead to legal ramifications as well as job loss however if there is a perceived conflict of interest and the person has not yet acted maliciously it s possible to remove that person from the situation or decision in which a possible conflict of interest can arise using the prior example of a board member who owns a truck company they could simply remove themselves from all decisions that could positively or negatively affect their personal business common types of conflicts of interestself dealing is the most common type of conflict of interest in the business world it occurs when a management level professional accepts a transaction from another organization that benefits the manager and harms the company or the company s clients gift issuance is also a very common conflict of interest it happens when a corporate manager or officer accepts a gift from a client or a similar type of person companies normally circumvent this issue by prohibiting gifts from customers to individual employees troublesome situations may also arise when in the course of professional duties an individual collects confidential information any information of this type used for personal gain by an employee is a huge conflict of interest at least in the united states the financial industry constantly grapples with this type of conflict of interest in the form of insider trading finally the hiring of or showing favorable workplace treatment to a relative or spouse known as nepotism can result in a potential conflict of interest a financial advisor who knowingly advises clients to purchase financial products which are not in their best interests too expensive too risky or not in line with stated goals but which earn the advisor a bigger commission would be guilty of conflict of interest real world example of conflict of interestin the financial industry an agency problem refers to a type of conflict of interest where agents don t fully represent the best interests of their principals the enron scandal is an extreme example of an agency problem that led to the collapse of what was at the time one of the largest companies in the united states in 2001 enron corporation declared bankruptcy after it was revealed that the top leaders in the company had used mark to market accounting and special purpose vehicles spvs to hide financial losses this made the company appear more profitable than it really was 3while enron s executives had a legal responsibility to protect the interests of its shareholders some executives instead engaged in illegal activities to camouflage the company s massive losses and debts share prices dropped from over 90 a share to under 1 a share several executives were indicted for their actions and eventually sent to prison | |
what is conflict theory | conflict theory as associated with karl marx is a social theory that posits that society is in a state of perpetual conflict because of competition for limited resources 1conflict theory holds that social order is maintained by domination and power rather than by consensus and conformity according to conflict theory those with wealth and power try to hold on to it by any means possible chiefly by suppressing the poor and powerless a basic premise of conflict theory is that individualcs and groups within society will work to try to maximize their own wealth and power 1theresa chiechi investopediaunderstanding conflict theoryphilosophers and sociologists have long sought to use conflict theories to explain a wide range of phenomena including wars revolutions poverty discrimination and domestic violence marx s version of conflict theory focused on the conflict between two primary classes each class consists of a group of people bound by mutual interests and a certain degree of property ownership marx theorized about the bourgeoisie a group that represented members of society who hold the majority of the wealth and means the proletariat is the other group comprised of those considered working class or poor with the rise of capitalism marx theorized that the bourgeoisie a minority within the population would use their influence to oppress the proletariat the majority class this way of thinking is tied to a common image associated with conflict theory based models of society 2 adherents to this philosophy tend to believe in a pyramid arrangement in terms of how goods and services are distributed in society at the top of the pyramid is a small group of elites that dictate terms and conditions to the larger portion of society because they have an outsized amount of control over resources and power uneven distribution within society was predicted to be maintained through ideological coercion the bourgeoisie would force acceptance of the current conditions by the proletariat conflict theory assumes that the elite will set up systems of laws traditions and other societal structures in order to further support their own dominance while preventing others from joining their ranks marx theorized that as the working class and poor were subjected to worsening conditions a collective consciousness would raise more awareness about inequality and this would potentially result in revolt if after the revolt conditions were adjusted to favor the concerns of the proletariat the conflict circle would eventually repeat but in the opposite direction the bourgeoisie would eventually become the aggressor and revolter grasping for the return of the structures that formerly maintained their dominance special considerationsmarx viewed capitalism as part of a historical progression of economic systems he believed capitalism was rooted in commodities or things that are purchased and sold for example he believed that labor is a type of commodity because laborers have little control or power in the economic system because they don t own factories or materials their worth can be devalued over time this can create an imbalance between business owners and their workers which can eventually lead to social conflicts he believed these problems would eventually be fixed through a social and economic revolution 3max weber a german sociologist philosopher jurist and political economist adapted many aspects of marxist conflict theory and later further refined some of marx s ideas 4 weber believed that conflict over property was not limited to one specific scenario rather he believed that there were multiple layers of conflict existing at any given moment and in every society whereas marx framed his view of conflict as one between owners and workers weber also added an emotional component to his ideas about conflict 5 weber s beliefs about conflict extend beyond marx s because they suggest that some forms of social interaction including conflict generate beliefs and solidarity between individuals and groups within a society in this way an individual s reactions to inequality might be different depending on the groups with which they are associated whether they perceive those in power to be legitimate and so on conflict theorists of the later 20th and early 21st centuries have continued to extend conflict theory beyond the strict economic classes posited by marx although economic relations remain a core feature of the inequalities across groups in the various branches of conflict theory conflict theory is highly influential in modern and postmodern theories of sexual and racial inequality peace and conflict studies and the many varieties of identity studies that have arisen across western academia in the past several decades examples of conflict theoryconflict theorists view the relationship between a housing complex owner and a tenant as being based mainly on conflict instead of balance or harmony even though there may be more harmony than conflict they believe that they are defined by getting whatever resources they can from each other in the above example some of the limited resources that may contribute to conflicts between tenants and the complex owner include the limited space within the complex the limited number of units the money that tenants pay to the complex owner for rent and so on ultimately conflict theorists see this dynamic as one of conflict over these resources the complex owner however gracious is fundamentally focused on getting as many apartment units filled as possible so that they can make as much money in rent as possible especially if bills such as mortgages and utilities must be covered this may introduce conflict between housing complexes among tenant applicants looking to move into an apartment and so forth on the other side of the conflict the tenants themselves are looking to get the best apartment possible for the least amount of money in rent the financial crisis of 2008 and the subsequent bank bailouts are good examples of real life conflict theory according to authors alan sears and james cairns in their book a good book in theory they view the financial crisis as the inevitable outcome of the inequalities and instabilities of the global economic system which enable the largest banks and institutions to avoid government oversight and take huge risks that only reward a select few 6sears and cairns note that large banks and big businesses subsequently received bailout funds from the same governments that claimed to have insufficient funds for large scale social programs such as universal healthcare 6 this dichotomy supports a fundamental assumption of conflict theory which is that mainstream political institutions and cultural practices favor dominant groups and individuals this example illustrates that conflict can be inherent in all types of relationships including those that don t appear on the surface to be antagonistic it also shows that even a straightforward scenario can lead to multiple layers of conflict | |
what is conflict theory | conflict theory is a sociopolitical theory that is heavily associated with karl marx it seeks to explain political and economic events in terms of an ongoing struggle over finite resources in this struggle marx emphasizes the antagonistic relationship between social classes in particular the relationship between the owners of capital whom marx calls the bourgeoisie and the working class whom he calls the proletariat conflict theory had a profound influence on 19th and 20th century thought and continues to influence political debates to this day 1 | |
what are some common criticisms of conflict theory | one common criticism of conflict theory is that it fails to capture the way in which economic interactions can mutually benefit the different classes involved for example conflict theory describes the relationship between employers and employees as one of conflict in which the employers wish to pay as little as possible for the employees labor while the employees wish to maximize their wages in practice however employees and employers often have a harmonious relationship moreover institutions such as pension plans and stock based compensation can further blur the boundary between workers and corporations by giving workers an additional stake in the success of their employer who is credited with inventing conflict theory philosophers and sociologists have long used conflict theory to analyze societies marxist conflict theory refers to conflict theory as put forward by the 19th century political philosopher who led the development of communism as a school of thought in economics karl marx s two most famous works are the communist manifesto which he published in 1848 and das kapital published in 1867 although he lived in the 19th century marx had a substantial influence on politics and economics in the 20th century and is generally considered one of history s most influential and controversial thinkers | |
what is a conglomerate | a conglomerate is a corporation of several different sometimes unrelated businesses in a conglomerate one company owns a controlling stake in several smaller companies conducting business separately and independently conglomerates often diversify business risk by participating in many different markets although some conglomerates such as those in mining elect to participate in a single sector industry economists however warn that large and far flung conglomerates can become inefficient and costly to maintain eroding value for shareholders understanding conglomeratesconglomerates are large parent companies made up of smaller independent entities that may operate across multiple industries each of a conglomerate s subsidiary businesses runs independently of the other business divisions but the subsidiaries managers report to the senior management of the parent company many conglomerates are thus multinational and multi industry corporations taking part in many different businesses can help a conglomerate company diversify the risks posed by being in a single market doing so may also help the parent lower total operating costs and require fewer resources however there are also times when such a company grows too large and loses efficiency to deal with this the conglomerate may divest this is known as the conglomerate curse of bigness there are many different types of more specialized conglomerates today ranging from manufacturing to media to food a media conglomerate may start out owning several newspapers then purchase television and radio stations and book publishing companies a food conglomerate may start by selling potato chips the company may decide to diversify buy a soda company and then expand by purchasing other companies that make different food products conglomeration is the term that describes the process by which a conglomerate is created when a parent company begins to acquire subsidiaries | |
how conglomerates come to exist | companies can become conglomerates can be created in a variety of ways and sometimes in a combination of ways the most common way is via acquisitions simply buying other companies if a target firm is big enough it might not become a mere subsidiary instead it and the acquiring company might actually merge combining their talent assets resources and personnel into one new legal entity a conglomerate merger occurred when the walt disney company merged with the american broadcasting company abc in 1995 for example 1another approach is that of organic expansion this strategy is more of corporate restructuring and reorganization and sometimes the creation of a parent company to own various smaller ones for example in 2015 google inc restructured the corporate parent became known as alphabet and google became a separate subsidiary within it in a move intended to separate the company s core business the well known search engine from a rapidly increasing array of other business ventures that alphabet was developing or acquiring 2yet another approach is that of an expansion of a family business or a historic one sector business into new industries or areas berkshire hathaway see real world examples of conglomerates below can be considered an example of this the company sprang from two 19th century massachusetts cotton mills that merged in 1955 3 when warren buffett gained control of it in 1965 he took it out of the textile business and turned berkshire hathaway into a holding company one that existed to invest in other businesses rather than manufacture products or provide services on its own 4of course there can be overlap among these approaches and some conglomerates are the result of all three case in point mo t hennessy louis vuitton lvmuy commonly referred to as lvmh this french luxury conglomerate began as a family business in 1854 a luggage and leather goods maker named after louis vuitton after its founder lvmh came into being over a century later the result of a merger between vuitton and wine spirits company mo t hennessy 5lvmh itself acts as the holding company for 75 different subsidiaries or houses as it calls them in six different sectors the original louis vuitton mo t chandon and hennessy the latter two owned by mo t hennessy are three of those houses most of the others have been bought by lvmh and while they all tend to be producers of upscale discretionary consumer goods their fields range from jewelry tiffany co and cosmetics givenchy parfums to publications le parisien and designer clothing fendi 6benefits of conglomeratesfor the management team of a conglomerate a wide array of companies in different industries can be a real boon for their bottom line poorly performing companies or industries can be offset by other sectors and cyclical companies can be balanced by counter cyclical or noncyclicals by participating in several unrelated businesses the parent corporation is able to reduce costs by utilizing fewer inputs that may be shared across subsidiaries and by diversifying business interests as a result the risks inherent in operating in a single market are mitigated in addition companies owned by conglomerates have access to internal capital markets enabling greater ability to grow as a company a conglomerate can allocate capital for one of their companies if external capital markets aren t offering as kind terms the company wants one additional advantage of conglomeration is that it can provide immunity from the takeover of the parent company as it grows ever larger disadvantages of conglomerateseconomists have discovered that the size of conglomerates can hurt the value of their stock a phenomenon known as the conglomerate discount the sum of the values of the individual companies held by a conglomerate tends to be greater than the value of the conglomerate s stock up to 15 7history has shown that conglomerates can become so vastly diversified and complicated that they grow too challenging to manage efficiently layers of management add to the overhead of their businesses and depending on how wide ranging a conglomerate s interests are management s attention can be drawn thin the financial health of a conglomerate is difficult to discern by investors analysts and regulators because the numbers are usually announced in a group making it hard to discern the performance of any individual company held by a conglomerate this lack of transparency may also dissuade some investors since the height of their popularity from the 1960s to the 1980s many conglomerates have reduced the number of businesses under their management to a few choice subsidiaries through divestiture and spinoffs the peak year of the conglomeration trend in the united states according to the book the go go years the drama and crashing finale of wall street s bullish 60s around 4 500 mergers occurred in that year and 10 of the country s 200 largest companies were conglomerates by that time 8examples of conglomeratesas mentioned above warren buffett s berkshire hathaway brk a is a well known conglomerate that has successfully managed companies involved in everything from plane manufacturing and textiles to insurance and real estate berkshire is well respected and has become one of the world s largest and most influential companies buffett s approach is to manage the capital allocation and allow companies near total discretion when managing the operations of their own business berkshire hathaway has a majority stake in over 50 companies and minority holdings in dozens more 9 still the company has only a small headquarters office staffed with a relatively small number of people another example is general electric ge initially founded by renowned inventor thomas edison as an electronics company and innovation lab the company has expanded to own firms working in energy real estate finance media and healthcare the company comprises several distinct arms that operate independently but are all interlinked this inter linkage lends itself to ge s initial mandate of extensive research and development r d on technologies that can be applied to a broad range of products conglomerates in the 1960sthe first significant conglomerate boom occurred in the 1960s and these early conglomerates were initially deemed as overvalued by the market interest rates were low at the time so leveraged buyouts were easier for managers of big companies to justify because the money came relatively cheap as long as company profits were more than the interest to be paid on loans the conglomerate could be ensured a return on investment roi banks and capital markets were willing to lend companies money for these buyouts because they were generally seen as safe investments at the same time the theory of synergy was becoming fashionable in business management and economic circles the idea that the cross combining of companies products and markets can enhance efficiency and profitability this the whole is greater than the sum of its parts concept helped justify mergers and acquisitions even if the target firms were pretty far from the parent company s core business this optimism kept stock prices high and allowed companies to guarantee loans the glow wore off of big conglomerates as interest rates were adjusted as a response to steadily rising inflation that ended up peaking in 1980 10it also became clear that the purchased companies weren t necessarily improving their performance which disproved the popularly held idea that they would become more efficient after being acquired in fact mismanaged and misunderstood by the parent they often performed worse and dragged down the entire corporation s bottom line so much for synergy in response to falling profits the majority of conglomerates began divesting the companies they bought downsizing and returning to their core businesses a few continued on as shell corporations foreign conglomeratesconglomerate companies take on slightly different forms in different countries many conglomerates in china are state owned 11japan s conglomerate is called keiretsu where companies own small shares in one another and are centered around a core bank in some ways this business structure is a defensive one protecting companies from wild rises and falls in the stock market and hostile takeovers mitsubishi is an excellent example of a company engaged in a keiretsu model 12south korea s corollary when it comes to conglomerates is called chaebol a type of family owned company where the position of president is inherited by family members who ultimately have more control over the company than shareholders or members of the board well known chaebol companies include samsung hyundai and lg 13 | |
what company is the biggest conglomerate | the biggest conglomerate in the world based on market value is reliance industries whose market capitalization is 257 52 billion as of july 5 2024 14 | |
is facebook a conglomerate | although the company itself doesn t love the term facebook now known as meta platforms inc meta can indeed be considered a conglomerate it has acquired a number of firms throughout the 2010s major acquisitions include instagram whatsapp oculus vr onavo and beluga 15 | |
is amazon a conglomerate | amazon amzn doesn t describe itself as a conglomerate and some business journalists and analysts agree they feel it doesn t fit the traditional model of a sprawling corporate empire populated by diverse independently operating acquired companies 16in the last decade amazon has bought a variety of businesses some of them fairly far afield from its roots as an online bookseller major acquisitions include whole foods groceries kiva systems robotics pillpack pharmacy twitch interactive video games and the pending mgm films tv programs still ecommerce and digital property activities remain a unifying theme in most of its purchases and amazon works hard to bring newcomers into the fold you can order whole foods deliveries on the amazon site perhaps the way to think of amazon is as a 21st century corporate giant or as the new york times put it one of these new economy conglomerates 17 | |
what is a multinational conglomerate | a multinational conglomerate is a company that owns other companies or businesses in at least one country other than its own the one where it s headquartered though similar to a multinational corporation mnc it s not quite the same as an mnc could simply be a firm with subsidiaries operations or other holdings in foreign nations as opposed to separate companies the bottom linea conglomerate is a corporation composed of several different independent businesses one company owns a controlling stake in several smaller companies all of which conduct business separately and independently | |
what is consignment | consignment is an arrangement in which goods are left in the possession of an authorized third party to sell 1 goods sold in this way are said to be consigned to a third party for sale items sold on consignment are typically sold by consignment shops which receive a percentage of the revenue from the sale sometimes a very large percentage in the form of commission consignment deals are made on a variety of products such as artwork clothing and accessories and books some types of retail sales may be viewed as a special form of consignment where producers rely on retail stores to sell their products to consumers although secondhand stores and thrift stores are more typically associated with the practice of consignment consignment arrangements however would not include retailers such as walmart or most supermarkets which purchase goods outright from wholesalers and then sell their items at a markup understanding consignmentin the 21st century so called consignment shops have become trendy especially those offering specialty products infant wear pet care and high end fashion items the millennial generation in particular is known for its frugal shopping habits which include eschewing high end stores and designer boutiques in favor of bargains found at thrift and consignment shops economists list rising student debt stagnant wages and the psychological effects of the great recession of 2007 2009 as factors pushing younger shoppers toward consignment shops and other discount stores advantages of consignmentselling on consignment is a great option for an individual or business that does not have a brick and mortar presence although consignment arrangements can also exist in cyberspace to a certain degree online companies such as ebay are consignment shops for a percentage of the sale they offer people a marketplace to exhibit and sell their wares this removes the necessity for an individual to have to create their own website attract customers and set up payment processes likewise items marketed and sold through television channels such as the as seen on tv phenomenon are forms of consignment sellers who do not have the time or the desire to advertise their product for sale to take time off work to accommodate prospective buyers schedules to conduct pricing research and to endure the tasks associated with selling an item firsthand often find that consignment fees are a small price to pay to put the work in someone else s hands particularly if they are successful in negotiating a low fee disadvantages of consignmentthe primary disadvantage of the consignment model for producers or owners is that consignment shops typically charge a high level of commission on consignment sales for artworks for example it s not uncommon for galleries to charge a 50 commission since this commission comes out of the share returned to the owner or producer of the goods sold it can reduce their profits significantly another disadvantage of the consignment model is that sellers can lose control over how their products are marketed and sold the consignment shop will generally take control of every aspect of marketing and presentation for a given product this can mean that products are presented in a way that the owner or producer does not approve of sometimes issues like this are covered in consignment agreements but often selling on consignment means ceding a great deal of control to the consignment seller consignment payment structurea person wishing to sell an item on consignment delivers it to a consignment shop or a third party to do the selling on their behalf before the third party takes possession of the good an agreement must be reached as to the revenue split when the item is sold most consignment shops have standard fee schedules that indicate the percentage of the sales price that is paid to the shop and the percentage paid to the seller however many consignment shops are willing to negotiate particularly for larger ticket items such as artwork that offer greater revenue potential depending on the consignment shop and the item being sold the seller may concede 25 to 60 of the sales price in consignment fees consignment arrangements typically are in effect for a set period of time after this time if a sale is not made the goods are returned to their owner alternatively the consignment period may be extended upon mutual agreement products sold through consignmentsome types of product are commonly sold through consignment these include clothing athletic equipment furniture musical instruments art and jewelry for example an artist might have five large pieces of artwork to sell but has no place to showcase the work for prospective buyers the artist decides to employ an art gallery to show and sell their works of art the gallery does not charge the artist a fee for the wall space but will charge a sales commission for any works sold which is incorporated into the price another example of consignment would be bethany visiting her grandmother s house and finding an old case full of clothes from the 1940s she keeps a few pieces that she likes and decides to sell the rest she takes the clothes to a thrift store to sell the clothes on consignment bethany and the thrift store come to an agreement that bethany will receive 60 of the revenues from the items sold while the thrift store will receive the remaining 40 this business model is used by many second hand stores | |
what does consignment mean | consignment is an arrangement in which goods are left in the possession of an authorized third party to sell a consignment shop for example will sell items produced or supplied by someone else and pay them a portion of the profit | |
what does consignment only mean | this is a phrase used by many second hand shops consignment only refers to an arrangement where goods are placed in the care of store until the item is bought by a buyer the owner of the goods the consignor retains ownership of the items until they sell | |
is consignment worth it | it depends providing or producing products for sale by consignment can mean a far bigger audience for your goods and more sales on the other hand you ll have to pay a commission fee if you make a sale and this can be a significant proportion of the value of the product the bottom lineconsignment is an arrangement in which goods are left in the possession of an authorized third party to sell a consignment shop for example will sell items produced or supplied by someone else and pay them a portion of the profit the party that sells the goods on consignment receives a portion of the profits either as a flat rate fee or commission selling via a consignment arrangement can be a low commission low time investment way of selling items or services but can be costly items commonly sold by consignment include clothing athletic equipment furniture musical instruments art and jewelry | |
what does it mean to consolidate | to consolidate consolidation is to combine assets liabilities and other financial items of two or more entities into one in the context of financial accounting the term consolidate often refers to the consolidation of financial statements wherein all subsidiaries report under the umbrella of a parent company consolidation also refers to the union of smaller companies into larger companies through mergers and acquisitions m a mira norian investopedia | |
how consolidation works | the term consolidate comes from from the latin consolidatus which means to combine into one body whatever the context to consolidate involves bringing together some larger amount of items into a single smaller number for instance a traveler may consolidate all of their luggage into a single larger bag in finance and accounting consolidation has more specific nuance consolidation involves taking multiple accounts or businesses and combining the information into a single point in financial accounting consolidated financial statements provide a comprehensive view of the financial position of both the parent company and its subsidiaries rather than one company s stand alone position in consolidated accounting the information from a parent company and its subsidiaries is treated as though it comes from a single entity the cumulative assets from the business as well as any revenue or expenses are recorded on the balance sheet of the parent company this information is also reported on the income statement of the parent company consolidated financial statements are used when the parent company holds a majority stake by controlling more than 50 of the subsidiary business parent companies that hold more than 20 qualify to use consolidated accounting if a parent company holds less than a 20 stake it must use equity method accounting in business consolidation occurs when two or more businesses combine to form one new entity with the expectation of increasing market share and profitability and the benefit of combining talent industry expertise or technology also referred to as amalgamation consolidation can result in the creation of an entirely new business entity or a subsidiary of a larger firm this approach may combine competing firms into one cooperative business for example in 2015 target corp moved to sell the pharmacy portion of its business to cvs health a major drugstore chain as part of the agreement cvs health intended to rebrand the pharmacies operating within target stores changing the name to minuteclinic the consolidation was friendly in nature and lessened overall competition in the pharmacy marketplace a consolidation differs in practical terms from a merger in that the consolidated companies may also result in a new entity whereas in a merger one company absorbs the other and remains in existence while the other is dissolved within the consumer market consolidation includes using a single loan to pay off all of the debts that are part of the consolidation this transfers the debt owed from multiple creditors allowing the consumer to have a single point of payment to pay down the total often debt consolidation achieves more manageable monthly payments and may result in a lower overall interest rate for instance it may wrap a high interest credit card payment into a more reasonable home equity line of credit heloc consolidation is also a technical analysis term referring to security prices oscillating within a corridor and is generally interpreted as market indecisiveness put another way consolidation is used in technical analysis to describe the movement of a stock s price within a well defined pattern of trading levels consolidation is generally regarded as a period of indecision which ends when the price of the asset moves above or below the prices in the trading pattern the consolidation pattern in price movements is broken upon a major news release that materially affects a security s performance or the triggering of a succession of limit orders consolidation is also defined as a set of financial statements that presents a parent and a subsidiary company as one company | |
what is the impact of consolidation in accounting | consolidation refers to consolidated financial statements in financial accounting the statements provide a comprehensive view of the financial position of both the parent company and its subsidiaries rather than one company s stand alone position | |
what is the impact of consolidation in business | consolidation in business refers to two or more businesses combining to form one new entity expecting to increase market share and profitability and benefit from combining talent industry expertise or technology | |
where else does consolidation apply | consolidation can refer to using a single loan to pay off multiple consumer debts it is also used in technical analysis to describe a stock s price movement within a well defined pattern of trading levels the bottom linein financial accounting to consolidate is for all subsidiaries to report in financial statements under the umbrella of a parent company in business to consolidate is for smaller companies to unite with larger companies through mergers and acquisitions m a | |
what is the consolidated omnibus budget reconciliation act cobra | the consolidated omnibus budget reconciliation act cobra is a landmark federal law passed in 1985 that provides for continuing group health insurance coverage for some employees and their families after a job loss or other qualifying event 1understanding the consolidated omnibus budget reconciliation act cobra the consolidated omnibus budget act cobra for short or the cobra act as it is sometimes called despite the redundancy offers the continuation of medical coverage for workers who would otherwise lose their health insurance when they lose their employment basically cobra allows them to stay on their employer s group health plan albeit at a greater cost in addition to the employees themselves cobra can also provide health coverage to spouses former spouses and dependent children 1as part of the american rescue plan act of 2021 the federal government will pay cobra insurance premiums for individuals and their covered relatives who lost their job as a result of the coronavirus pandemic from april 1 through sept 30 2021 2cobra only applies to health plans offered by private sector businesses and companies with more than 20 employees as well as to state and local governments it doesn t apply to plans offered by the federal government churches or some church related organizations the events that may qualify an employee or their family for cobra coverage include voluntary or involuntary job loss reduction in hours worked the death of the employee or the divorce or legal separation of the employee and their spouse 3cobra coverage generally lasts for a maximum of 18 months but may be extended to 36 months under certain circumstances employers also have the option of extending coverage for a longer period than cobra requires 4advantages and disadvantages of cobracobra isn t free participants are often required to pay the full premium for their coverage that is both their share and the share that their employer might have previously paid plus an administrative fee for a total of up to 102 of the plan cost 5because employers typically pay 67 to 84 of insurance premiums according to the kaiser family foundation s 2020 employer health benefits survey opting for cobra coverage often means an individual s out of pocket costs for coverage will rise substantially 6though cobra participants will generally pay more for their insurance than active employees will cobra may still be less expensive than buying an individual non group health plan with comparable benefits especially if the participant doesn t qualify for an affordable care act subsidy 5the health coverage itself shouldn t change in fact as the u s employee benefits security administration notes if you elect continuation coverage the coverage you are given must be identical to the coverage currently available under the plan to similarly situated active employees and their families generally this is the same coverage that you had immediately before the qualifying event 7special considerationsgroup health plans are required to make employees aware of their eligibility for cobra coverage after a layoff or other qualifying event cobra coverage is typically available to full time and some part time employees if their companies group health plan was in effect in the prior year 8eligibility for cobra coverage generally begins the day after an employee is terminated or experiences another qualifying event employees must be given at least 60 days to decide whether to accept or decline the coverage if the employee elects to take cobra coverage the employer will sometimes make the first payment after that it s the participant s responsibility to pay the premiums to keep the coverage in effect 9companies that do not offer group health benefits to their employees are exempt from offering cobra coverage similarly companies that are going out of business typically do not have to adhere to cobra s requirements with certain exceptions for retirees that are covered under a company plan at the time of bankruptcy cobra coverage can also be denied under certain circumstances such as when employees were fired for misconduct that was related to their jobs 10in addition to the federal regulations many states have their own laws that govern the continuation of health coverage after a qualifying event for example while federal cobra generally applies to firms with more than 20 employees some states mandate cobra coverage to firms with as few as two workers 11 | |
what is consolidation | consolidation in technical analysis refers to an asset oscillating between a well defined pattern of trading levels consolidation is generally interpreted as market indecisiveness which ends when the asset s price moves above or below the trading pattern in financial accounting consolidation is defined as a set of statements that presents consolidates a parent and subsidiary company as one company understanding consolidationperiods of consolidation can be found in price charts for any time interval and these periods can last for days weeks or months technical traders look for support and resistance levels in price charts and then use these levels to make buy and sell decisions a consolidation pattern could be broken for several reasons such as the release of materially important news or the triggering of a succession of limit orders consolidation support vs resistancethe lower and upper bounds of an asset s price create the support and resistance levels within a consolidation pattern a resistance level is the top end of the price pattern while the support level is the lower end once the price breaks through the identified areas of support or resistance volatility quickly increases and so does the opportunity for short term traders to generate a profit technical traders believe a breakout above resistance means the price will climb further so the trader buys on the other hand a breakout below the support level indicates the price is falling even lower and the trader sells accounting consolidationin financial accounting consolidated financial statements are used to present a parent and subsidiary company as one combined company a parent company may own a majority percentage of a subsidiary with a non controlling interest nci owning the remainder or the parent may own the entire subsidiary with no other firm holding ownership to create consolidated financial statements the assets and liabilities of the subsidiary are adjusted to fair market value and those values are used in the combined financial statements if the parent and nci pay more than the fair market value of the net assets assets minus liabilities the excess amount is posted to a goodwill asset account and goodwill is moved into an expense account over time a consolidation eliminates any transactions between the parent and subsidiary or between the subsidiary and the nci the consolidated financials only includes transactions with third parties and each of the companies continues to produce separate financial statements example of accounting consolidationassume xyz corporation buys 100 of the net assets of abc manufacturing for a price of 1 million and the fair market value of abc s net assets is 700 000 when an accounting firm puts together the consolidated financial statements abc s net assets are listed with a value of 700 000 and the 300 000 amount paid above the fair market value is posted to a goodwill asset account | |
what is a construction loan | a construction loan is used to finance the building of commercial or residential real estate the loan applicant may be a real estate developer or an individual building a custom house the loan is often short term and is then replaced by longer term mortgage financing construction loans are considered relatively risky and usually have higher interest rates than traditional mortgage loans | |
how a construction loan works | construction loans are usually for only one year after construction is complete you can either refinance the construction loan into a permanent home mortgage or get a new loan to pay off the construction loan sometimes called an end loan some borrowers take out a construction loan that is automatically converted to a mortgage loan once the home is completed this is known as a construction to permanent loan the borrower might be required to make interest only payments on a construction loan while the project is underway some construction loans may require the balance be paid off entirely by the time the project is complete 1if a construction loan is taken out by someone who wants to build a home the mortgage lender might pay the funds directly to the contractor rather than to the borrower the payments may be made in installments as the project completes new stages of development construction loans can also be taken out to finance rehabilitation and restoration projects as well as to build new homes 2construction loans allow borrowers to build a custom home but due to the risks involved they have higher interest rates they also require larger down payments than traditional mortgages eligibility requirements for construction loansconstruction loans tend to have tougher credit requirements than conventional mortgage loans because they are not collateralized the home doesn t yet exist so it can t be seized for non payment of the loan construction loans are usually offered by local credit unions or regional banks local banks tend to be familiar with the housing market in their area and are more comfortable making home construction loans to borrowers in their community most lenders require a 20 minimum down payment on a construction loan and some require as much as 25 borrowers will face difficulty securing a construction loan if they have a limited or damaged credit history or too much other debt outstanding to gain approval for a construction loan the borrower will need to give the lender a comprehensive list of construction details also known as a blue book the borrower will also have to prove that a qualified builder is involved in the project construction loans vs owner builder construction loansborrowers who intend to act as their own general contractors or build the home with their own resources are unlikely to qualify for a construction loan these borrowers will have to take out a variant called an owner builder construction loan it can be difficult to qualify for an owner builder construction loan potential borrowers must offer a well researched construction plan that convincingly lays out their home building knowledge and abilities the borrower should also be able to set aside a contingency fund for unexpected costs example of a construction loansay you decide that you can build your new house for a total of 500 000 and secures a one year construction loan from your local bank for that amount you agree on a drawdown schedule for the loan in the first month 50 000 is required to cover costs so you take only that amount and pay interest only on that amount you continues to take funds as needed guided by the drawdown schedule you pay interest only on the total that you have drawn down rather than paying interest on the whole 500 000 for the entire term of the loan at the end of the year you refinance the loan folding the construction costs into a lower interest mortgage on your dream home frequently asked questions faqs | |
when does a homebuyer need a construction loan | a homebuyer needs a construction loan for a custom built home located outside of a newly constructed subdivision of homes a buyer of a home in a subdivision is contracting with a developer the developer is responsible for financing the construction whether your house is finished or is still a hole in the ground 3 | |
what s the difference between a renovation loan and a construction loan | depending on how extensive your renovation is it might well require a construction loan to get the job done however if you have equity in your home you might have many more options in the loan product you seek for example a home equity line of credit heloc gets you access to a revolving line of credit probably at a lower rate of interest since your home is serving as collateral | |
is a construction loan harder to get than a mortgage | construction loans generally involve more paperwork require higher down payments and charge more interest than mortgages at least they re short term for a year rather than 20 or 30 years note that many loan applicants apply for both the construction loan and the mortgage home at the same time and at the same bank once the home is completed the construction loan is converted into a long term mortgage the bottom lineif you want a unique home and don t possess a fortune in cash a construction loan could be an answer to your dreams to qualify however you must be prepared to prove to a bank that you have a complete project plan in place and a qualified contractor to carry it out | |
what is consumer credit in financial services | consumer credit or consumer debt is personal debt taken on to purchase goods and services although any type of personal loan could be labeled consumer credit the term is more often used to describe unsecured debt of smaller amounts a credit card is one type of consumer credit in finance but a mortgage is not considered consumer credit because it is backed with the property as collateral learn more about the different types of consumer credit 1types of consumer credit in financeconsumer credit in finance is extended by lenders to enable consumers to make purchases immediately and pay off the balance over time with interest it is broadly divided into two classifications installment credit and revolving credit installment credit is a loan of a defined amount issued in a lump sum and is then repaid for a set period of time payments are usually made monthly in equal installments 2installment credit can be used for a variety of reasons including major purchases such as major appliances cars and furniture installment credit usually offers lower interest rates than revolving credit in some cases revolving credit which includes credit cards may be used for any purchase the credit is revolving in the sense that the line of credit remains open and can be used up to the maximum limit repeatedly as long as the borrower keeps paying a minimum monthly payment on time 3it may in fact never be paid off in full as the consumer pays the minimum and allows the remaining debt to accumulate interest from month to month revolving credit is available at a relatively high interest rate because it is not secured by collateral | |
how consumer credit in finance works | consumer credit use reflects the portion of a family or individual s spending that goes to goods and services that depreciate quickly it includes necessities such as food and discretionary purchases such as cosmetics or dry cleaning services consumer credit use from month to month is closely measured by economists because it is considered an indicator of economic growth or contraction if consumers overall are willing to borrow and confident they can repay their debts on time the economy gets a boost if consumers cut back on their spending they are indicating concerns about their own financial stability in the near future the economy will contract consumer credit allows consumers to get an advance on income to buy products and services in an emergency such as a car breakdown consumer credit can help you get the funds you need credit cards are a commonly accepted form of payment so using this type of revolving credit can be convenient banks and financial institutions department stores and many other businesses offer consumer credit many credit cards also provide rewards such as cash back or travel points the main disadvantage of using revolving consumer credit is the cost to consumers who fail to pay off their entire balances every month and continue to accrue additional interest charges from month to month the average annual percentage rate on all credit cards was 23 24 as of february 2023 a single late payment can boost the cardholder s interest rate even higher | |
do installment loans hurt your credit | you credit can be affected by an installment loan it can hurt your credit if you do not make your payments on time if you make all your payments on time an installment loan can help you establish history as a responsible borrower 4 | |
what is a disadvantage of revolving credit | if you don t use revolving credit like credit cards responsibly you can potentially face financial hardship if you don t make your minimum payments on time your credit score will likely decline and if you spend more than you can afford to pay back your debt can quickly compound with interest | |
what are examples of consumer credit | examples of consumer credit include credit cards car loans personal loans student loans mobile home loans and home improvement loans consumer credit is smaller loans issued to individuals that does not have collateral so a mortgage is not considered to be an example of consumer credit 1the bottom lineconsumer credit can be a valuable financial tool to help you make purchases to pay off over time so you can maintain cash flow if you don t use consumer credit responsibly your credit score could suffer understanding how each type of consumer credit works is key to helping you establish good credit history | |
what is consumer discretionary | consumer discretionary is a term that describes goods and services that consumers consider non essential but desirable if their available income is sufficient to purchase them examples of consumer discretionary products and services can include durable goods high end apparel entertainment leisure activities and automobiles companies that supply these types of goods and services are usually either called consumer discretionaries or consumer cyclicals the consumer discretionary sector of the economy encompasses various industries the companies of which produce consumer discretionary products individuals can focus their investing on this sector by buying consumer discretionary stocks mutual funds and etfs investopedia michela buttignolunderstanding consumer discretionarythe purchase of consumer discretionary products is often compared with the purchase of consumer staples both product classifications are influenced by cycles of the economy in general when the economy is strong consumers earn more and spend more on consumer discretionary products on the other hand when an economy is contracting consumers usually earn less and focus their spending more on products essential to their needs these are known as consumer staples also referred to as consumer defensive economic cycles have a big influence on earnings power and consumer spending in an economy there are four stages of an economic cycle they are defined as expansion peak contraction and trough a growing economy expansion to peak is usually characterized by stronger earnings for businesses and consumers this coincides with more spending a contracting economy contraction to trough generally has the opposite effect that is weaker earnings and less spending | |
when an economy is growing it is usually expected that consumers will have more disposable income to spend on discretionary items they ll be less concerned with saving for tough times this leads to a greater demand for consumer discretionary products | alternatively in a weakening or weak economy consumers are more likely to forego the purchases of non essential consumer discretionary products in favor of adding to their savings these consumers however still need to buy consumer staples such essential and basic household items as toilet paper paper towels food beverages and gas consumer discretionary and economic indicatorsthere are several economic indicators that help economists to determine the state of an economy these indicators are also important for predicting trends for the consumer discretionary and consumer staples sectors typically gross domestic product gdp is the number one metric for analyzing an economy when gdp is growing it indicates a strengthening economy where people and businesses are willing to spend more conversely when gdp is decreasing it is an indication of economic contraction and the need for spending prudence consumer confidence can also be relevant the consumer confidence indicator can shed light on future consumption and saving behaviors of households this insight is tied to answers households provide when surveyed about their expected financial circumstances it s also based on how they feel about economic conditions and unemployment typically in a weakening economy consumer confidence declines and consumers tighten their belts for example they may postpone vacations and delay the purchase of products that aren t essential for daily living these products might include high end clothing big screen televisions and expensive new cars the reduced demand for consumer discretionary products is usually a precursor of lower sales for the companies that produce these products lower sales can lead to worsening economic conditions and greater economic contraction as of december 2022 the cci was 108 3 up from 101 4 in november a level above 100 indicates increasing consumer confidence this means that they ll most likely save less and instead make major purchases in the following 12 months levels below 100 point to a pessimistic outlook for the economy this may result in greater saving and less spending 1the bureau of economic analysis bea releases a monthly report on personal income and outlays it includes consumer income and spending figures the latter is known as personal consumption expenditures pce the report also includes the personal consumption expenditures price index pcepi a gauge of price inflation that is closely followed by the federal reserve fed 23the report documents the spending behavior of consumers in growth phases personal income and personal spending tends to increase leading to more purchases of consumer discretionary products during contractions personal income and personal spending are usually lower and spending on consumer discretionary products decreases interest rates can be an interesting metric to follow during all types of economic cycles in general interest rates rise in growth phases and fall during contractions the level of interest rates is important for companies that tap the credit markets for business funding u s monetary policy usually seeks to lower interest rates in contractionary phases to provide a business stimulus other closely followed indicators that can indicate consumer discretionary trends include the following consumer discretionaries vs consumer staples | |
when an economy is growing many sectors see stock values increase and this can make equities attractive the higher values are due to increasing profits and more discretionary consumer income | the stock shares of consumer discretionary companies tend to lead a general stock market decline at the beginning of a contraction investing in consumer discretionariesmany investors like to put their money into sector exchange traded funds etfs to navigate through different types of economic cycles etfs can limit risks with broadened diversification while allowing for the concentration of investment positions for the consumer discretionary sector state street global advisors ssga offers one of the market s top options the consumer discretionary select sector spdr fund xly includes the s p 500 s consumer discretionary stocks its top five holdings as of january 2023 were the following 4for those interested in the consumer staples sector the ssga offers the consumer staples select sector spdr fund xlp it includes the s p 500 s consumer staples stocks its top five holdings as of january 2023 were the following 5the demand for consumer discretionary stocks normally increases or decreases as the economy grows or weakens and since consumers typically purchase non essential goods when they have discretionary income anything else that threatens that income such as lower wages or increasing prices may also affect stock values here are several widely recognized consumer discretionary stocks in addition to those mentioned above the consumer discretionary sector consists of a variety of industries that can be sensitive to changing economic conditions and bellwethers of consumer spending the companies included in these industries react and adjust to changes in consumer discretionary income and purchases of non essential products and services industry performance is a useful gauge of trends in consumer spending consumer discretionary industries tend to thrive when people feel confident about income and spending is strong the consumer discretionary sector s manufacturing segment includes automotive household durable goods textiles apparel and leisure equipment the services segment includes hotels restaurants and leisure facilities media production and related services and consumer retailing and services here are the industries in the consumer discretionary sector | |
what does consumer discretionary refer to | the term describes products and services that are desirable for consumers but not essential to their daily living in other words rather than having to buy these products because they are necessities they have the freedom to decide the discretion to purchase them or not consumer discretionary purchasing usually increases when consumers have more money to spend | |
how do consumer staples relate to consumer discretionaries | while consumer discretionary products are non essential items that consumers typically can choose to buy when money is plentiful consumer staples are items that consumers feel are essential to their daily living these are such things as toilet paper food beverages medicine toothpaste and gas people reduce spending on consumer discretionaries and focus on consumer staples as the economy weakens | |
what are some examples of consumer discretionary companies | some of the companies in consumer discretionary industries include amazon com inc starbucks ford motor company ebay tractor supply company mcdonald s the home depot marriott international and domino s pizza | |
how can i invest in consumer discretionary companies | you can buy the stocks of companies found in the various industries within the consumer discretionary sector for convenience and diversification purposes you can buy a mutual fund that invests in them such as the vanguard consumer discretionary index fund admiral shares additionally you can purchase an exchange traded fund that follows the sector such as the consumer discretionary select sector spdr fund the bottom linethe term consumer discretionary refers to non essential products and services that consumers tend to purchase when the economy is strong consumer confidence is positive and individuals have discretionary income to spend the consumer discretionary sector of the economy consists of manufacturing and services industries with consumer discretionary companies normally these companies and their industries are sensitive to changing economic conditions | |
what are consumer goods | consumer goods are finished products bought by individual buyers for their use also called final goods or retail goods consumer goods are the end result of production and manufacturing clothing food products and appliances are all common consumer goods consumer goods are broadly categorized as durable non durable and service goods non durable goods include such essentials as food and clothing types of consumer goodsconsumer goods include nearly all retail products sold they are manufactured with the intention of selling them to the final consumer they fall into several broad categories a product recall is a request to return exchange or replace a product after a manufacturer or consumer watch group discovers defects that may affect product performance or harm consumers marketing consumer goods | |
how the consumer views and uses a product determines the way companies market their goods | convenience goods are those that are consumed regularly and are readily available for purchase they are often nondurable and low priced items examples of convenience goods include candy bars and tobacco products shopping goods are bought less frequently they are more durable and usually more expensive than convenience goods examples include furniture and televisions specialty consumer goods are relatively rare and are often considered luxury purchases they are usually marketed by brand and geared to a niche market of affluent consumers sports cars and fine art are examples unsought consumer goods are necessities that are rarely sought out by the consumer without an immediate need or a nudge from an advertisement or a sales pitch examples include life insurance and pre paid funeral expenses | |
what are fast moving consumer goods | fast moving consumer goods are nondurable products like food and drinks that move rapidly through the supply chain from producers to distributors and retailers to consumers for consumers they represent convenience for retailers they offer high shelf space turnover opportunities | |
what is the consumer goods sector | the consumer goods sector is made up of all of the companies that produce or import final products ready for consumers to buy and use from toilet paper to televisions investors can participate in the consumer goods sector through mutual funds or exchange traded funds that focus on producers of consumer goods one of the largest consumer goods etfs is the ishares u s consumer staples etf iyk with 59 stock holdings and 1 2 billion in net assets under management aum as of june 2024 the fund s top holdings are procter gamble pepsico coca cola philip morris and mondelez international 1 | |
what is the difference between capital goods and consumers goods | capital goods are physical assets that a company uses to manufacture products and services that consumers will use buildings machinery equipment vehicles and tools are all capital goods consumer goods are purchased and used at the retail level as such they have no future productive use | |
which companies rank as most trusted for consumer goods in the u s | nestl pepsico lvmh mo t hennessy louis vuitton and proctor gamble were the top four ranked companies in 2023 for consumer goods in a survey conducted by econsumer goods technology and ensemble iq 2 | |
how has e commerce affected demand for consumer goods | according to the u s census bureau americans spent 289 2 billion on retail e commerce during the first quarter of 2024 this was an increase of 2 1 from the second quarter of 2023 and made up 14 9 of total retail sales 3while manufacturing and wholesale sales still make up a larger percentage of e commerce sales retail sales of consumer goods make up a growing portion of e commerce 4the bottom linea consumer good or final good is a finished product ready for purchase from a retailer consumer goods can be classified as durable non durable or services marketing of consumer goods depends upon the use price and features of the item | |
what are consumer packaged goods cpg | consumer packaged goods are items used daily by average consumers that need to be replaced or replenished regularly these can include goods such as food beverages clothes makeup toilet paper and other household products while consumer demand for consumer packaged goods sometimes known as cpgs largely remains constant it is still a highly competitive sector this is primarily due to high market saturation and low consumer switching costs where consumers can easily and cheaply switch their brand loyalties depending on price or quality real or perceived understanding consumer packaged goods cpg despite experiencing a slowdown in growth over recent years the consumer packaged goods industry is one of the largest sectors in north america the sector contributes approximately 2 trillion to the united states gross domestic product gdp 1 it is led by well established companies like coca cola procter gamble and l or al although cpg makers generally enjoy healthy margins and robust balance sheets they must continuously fight for shelf space in stores even well known companies must continuously invest in advertising in an ongoing effort to increase brand recognition and stimulate sales | |
when investing in companies in the consumer packaged goods sector it is best to evaluate key points of the company s financial data for information about accounts receivable and inventory turnover | consumer packaged goods generally have short lifespans and are intended to be used quickly the name originates in their packaging which traditionally is easily recognizable wrapping that consumers can quickly identify on store shelves for example cosmetics typically have limited shelf lives as these products quickly deteriorate if exposed to extreme temperature fluctuations they are sold in individual packages at varying price points depending on the brand s position in the market after using the products consumers either discard or recycle the empty vessels frozen dinners are another popular example of consumer packaged goods these high volume perishable items are sold at retailers worldwide and are often purchased for immediate use by consumers consumers then replenish their frozen meals each time they visit the grocery store often choosing the brands they already recognize and enjoy consumer packaged goods vs durable goodsconsumer packaged goods are cheaply sold and replaced often by contrast durable goods are intended to last for several years and enjoyed for extended use consequently the purchase of a durable good typically involves considerable thought and substantial comparison shopping given the higher price tags attached to these investments computers and automobiles are examples of durable goods economic slumps often trigger flagging durable goods sales because people are more likely to hold onto their cash in times of economic uncertainty this is especially true with consumers who own older versions of a durable good a family may opt to squeeze a few more years from an outmoded washing machine rather than upgrade to a newer model by contrast sales of consumer packaged goods staples like bread milk and toothpaste are less affected by market fluctuations consumers consume or run out of these goods faster and must replace them or do without entirely during tough economic times consumers may spend extra on consumer packaged goods in place of more expensive luxuries during the economic downturn from the 2008 recession sales of nail polish went up as consumers splurged on at home nail treatments instead of pricey salon manicures in 2009 though consumer spending on cosmetics overall declined nail polish sales grew by 14 3 2 | |
what are examples of consumer packaged goods | consumer packaged goods are bought consumed and replenished quickly and regularly examples are food beverages tobacco products cosmetics toilet paper shampoo cleaning supplies and other household items | |
what is another name for consumer packaged goods | consumer packaged goods are sometimes known as fast moving consumer goods fmcgs because they sell quickly and are consumed quickly consumer packaged goods are also a type of non durable good non durable goods are goods with a lifespan of less than three years | |
where are consumer packaged goods sold | consumer packaged goods have traditionally been sold at brick and mortar retailers such as grocery stores or pharmacies however consumers now frequently turn to online retailers like amazon for consumer packaged goods other platforms such as instacart allow consumers to make digital purchases of consumer packaged goods that someone else buys for them in store the bottom lineconsumer packaged goods or cpgs are goods used daily by average consumers they are used quickly and therefore must be repurchased quickly examples are food beverages personal care items and cleaning supplies they are different from durable goods such as computers or washing machines which are more expensive and last many years the consumer packaged goods industry is one of the largest sectors in the u s economy consumers continue to purchase consumer packaged goods even during economic downturns though they may hold off on buying durable goods during the same time | |
what is the consumer price index cpi | the consumer price index cpi measures the monthly change in prices paid by u s consumers the bureau of labor statistics bls calculates the cpi as a weighted average of prices for a basket of goods and services representative of aggregate u s consumer spending the cpi is one of the most popular measures of inflation and deflation the cpi report uses a different survey methodology price samples and index weights than the producer price index ppi which measures changes in the prices received by u s producers of goods and services investopedia katie kerpelunderstanding the consumer price index cpi the bls collects about 80 000 prices monthly from some 23 000 retail and service establishments although the two cpi indexes calculated from the data both contain the word urban the more broad based and widely cited of the two covers 93 of the u s population 12shelter category prices accounting for a third of the overall cpi are based on a survey of rental prices for 50 000 housing units which is then used to calculate the rise in rental prices as well as owners equivalents 23the owners equivalent category models the rent equivalent for owner occupied housing to properly reflect housing costs share of consumer spending user fees and sales or excise taxes are included while income taxes and the prices of investments such as stocks bonds or life insurance policies are not part of the cpi 32the calculation of the cpi indexes from the data factors in substitution effects consumers tendency to shift spending away from products and categories has grown relatively more expensive it also adjusts price data for changes in product quality and features the weighting of the product and service categories in the cpi indexes corresponds to recent consumer spending patterns derived from a separate survey 45the cpi u increased 3 3 over the 12 months ending may 2024 before seasonal adjustment the index remained unchanged in may 2024 on a seasonally adjusted basis after increasing 0 3 in april 6types of consumer price indexes cpis the bls publishes two indexes each month the consumer price index for all urban consumers cpi u represents 93 of the u s population not living in remote rural areas it doesn t cover spending by people living in farm households institutions or on military bases cpi u is the basis of the widely reported cpi numbers that matter to financial markets the bls also publishes the consumer price index for urban wage earners and clerical workers cpi w the cpi w covers 29 of the u s population living in households with income derived predominantly from clerical employment or jobs with an hourly wage 2cpi w is used to adjust social security payments as well as other federal benefits and pensions for changes in the cost of living it also shifts federal income tax brackets to ensure taxpayers aren t subjected to a higher marginal rate as a result of inflation 72consumer price index cpi formulasthe more common cpi u calculation entails two primary formulas the first is used to determine the current cost of the weighted average basket of products while the second is used to analyze the year over year change to calculate the annual cpi the bls divides the value of a specific basket of goods today compared to one year ago as noted above the basket of goods and services used in the cpi calculation is a composite of popular items commonly purchased by americans the weight of each component of the basket is in proportion to how they are sold the annual cpi is reported as a whole number and the figure is often greater than 100 assuming current market prices are appreciating then the bls uses the current year s cpi and the prior year s cpi to calculate the inflation rate the inflation rate can be calculated for a given month or annual period in either case the appropriate new and prior period must be selected the inflation rate is reported as a percentage and is often positive assuming current market prices are appreciating investopedia maddy priceconsumer price index cpi categoriesthe monthly cpi release from the bls leads with the change from the prior month for the overall cpi u as well as its key subcategories along with the unadjusted change year over year the bls s detailed tables show price changes for a variety of goods and services organized by eight umbrella spending categories subcategories estimate price changes for everything from tomatoes and salad dressing to auto repairs and sporting events tickets price changes for each subcategory are provided with and without seasonal adjustment 8in addition to the national cpi indexes bls publishes cpi data for u s regions sub regions and major metropolitan areas the metro data is subject to wider fluctuations and is useful mainly for identifying price changes based on local conditions 9the table below represents the cpi basket weighted distribution for food energy and all other items 10 |
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