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when a debtor declares bankruptcy the court notifies the creditor of the proceedings in some bankruptcy cases all of the debtor s non essential assets are sold to repay debts and the bankruptcy trustee repays the debts in order of their priority | tax debts and child support typically rank highest along with criminal fines and overpayments of federal benefits for repayment unsecured loans such as credit cards are prioritized last giving those creditors the smallest chance of recouping funds from debtors during bankruptcy proceedings original creditor vs debt collectorwhile creditors lend money and are owed that money a debt collector does not lend money a creditor is the original lender because they made the loan to you debt collectors purchase delinquent loans from the original creditor such as a bank usually at a discount and aim to then collect on that loan for example john may owe bank abc 10 000 dollars but has not been able to pay it back his loan goes into default rather than continuously attempting to collect on this loan bank abc sells the loan to debt collector xyz for 6 000 this way the bank has recouped some of its losses and can focus on its core business of lending not chasing down delinquent loans debt collector xyz then seeks to collect the entire 10 000 from john which it is legally allowed to do | |
what is the fair debt collection practice act | a creditor often seeks repayment through the process outlined in the loan agreement the fair debt collection practices act fdcpa protects the debtor from aggressive or unfair debt collection practices and establishes ethical guidelines for the collection of consumer debts | |
what is chapter 11 | chapter 11 is a form of bankruptcy that involves the reorganization of a debtor s business affairs debts and assets and allows a company to stay in business and restructure its obligations | |
what information do creditors report to credit bureaus | individuals often rely on credit scores to obtain loans and extensions of credit creditors and lenders are not required by law to report anything to credit bureaus however many businesses report on time payments late payments purchases loan terms credit limits and balances owed information used by credit bureaus to construct credit scores who is a creditor and who is a debtor creditors are individuals or entities that have lent money to another individual or entity they typically charge interest and the money is owed back to them for example a bank lending money to a person to purchase a house is a creditor a debtor is an individual or entity that borrows money from another individual or entity and needs to pay that money back within a certain time frame with interest for example a person who borrows money from a bank to buy a house is a debtor | |
what are the different types of creditors | creditors can include friends or family that you borrow money from and have to pay back unsecured creditors are those that lend money without any collateral secured creditors are those that lend money with collateral so that if you default on your loan they may repossess the asset pledged as collateral to cover the money they have lost the bottom linea creditor is an individual or institution that extends credit to another party to borrow money usually by a loan agreement or contract on secured loans creditors can repossess collateral like homes or cars and creditors can sue debtors for repayment of unsecured loans the fair debt collection practices act fdcpa established ethical guidelines for the collection of consumer debts by creditors | |
what is creditworthiness | creditworthiness is a measure of how likely you will default on your debt obligations according to a lender s assessment or how worthy you are to receive new credit your creditworthiness is what creditors consider before they approve any new credit 1understanding creditworthinessyour creditworthiness tells a creditor just how suitable you are for the loan or credit card application that you filled out the decision that the lender makes is based on how you ve dealt with credit in the past lenders periodically review different factors your overall credit report credit score and payment history your credit report outlines how much debt you carry the high balances the credit limits and the current balance of each account it will also flag any important information for the potential lender including whether you ve had any past due amounts defaults bankruptcies or collection items 1creditworthiness is determined by several factors including your repayment history and credit score some lending institutions also consider available assets and the number of liabilities you have when they determine the probability of default 1your creditworthiness is also measured by your credit score which is a three digit number based on factors in your credit report a high credit score means your creditworthiness is high while a lower credit score indicates lower creditworthiness payment history also plays a key role in determining your creditworthiness lenders generally don t extend credit to someone whose history demonstrates late payments missed payments and overall financial irresponsibility if you ve been up to date with all your payments the payment history on your credit report should reflect that payment history counts for 35 of your fico credit score so it s a good idea to stay in check even if you have to just make the minimum payment 3your creditworthiness is important because it will determine whether you get approved for a new loan like a car loan or a credit card the more creditworthy you are the more likely you will be approved for better interest rates which can save you significant money it can also affect employment eligibility insurance premiums business funding and professional certifications or licenses 1checking your creditworthinessthe three prominent credit reporting agencies that measure creditworthiness are equifax experian and transunion lenders pay credit reporting agencies to access credit data on potential or existing customers in addition to using their own credit scoring systems to grant approval for credit every consumer should keep track of their credit score because it is the factor used by financial institutions to decide if an applicant is eligible for credit preferred interest rates and specific credit limits you can request a free copy of your credit report once each year at annualcreditreport com or you can join a free credit monitoring site like credit karma credit sesame or another credit monitoring service | |
how to improve your creditworthiness | there are several ways that you can improve your credit score to establish creditworthiness first you can pay your bills on time then you can pay more than the minimum monthly payment to pay down debt faster and improve your credit utilization ratio some financial experts suggest keeping credit card utilization rates below 30 although 10 is ideal 4you should understand your debt to income dti ratio an acceptable dti is 35 but 28 is ideal dti can be calculated by dividing your total monthly debt by your total gross monthly income lenders use dti when assessing an individual s creditworthiness 5you can also order a free copy of your equifax experian and transunion credit reports review all of the information for accuracy and dispute any errors provide supporting documentation to substantiate your dispute claim in addition you can dispute inaccurate information with the company reporting the error 6 | |
how do i find my credit score for free | you can find your credit score for free by checking online with your credit card company or visiting www annualcreditreport com you are entitled to one free credit report per year 7 | |
why is creditworthiness important | creditworthiness is very important when you are applying for loans because your creditworthiness determines whether you are approved for the loan and under what terms the better your credit score and credit history the better terms you can get on a loan which means you can save money in the long term 1 | |
how can i improve my creditworthiness | you can improve your creditworthiness by ensuring that your credit reports are correct reducing your debt by paying more than the minimum balance and by paying all your bills on time avoid applying for too many credit cards and loans and using all of your available credit 1the bottom lineit s important to understand your creditworthiness even if you are not applying for credit you can track your credit score and credit report annually to ensure that your creditworthiness is strong 3 if you need to improve your credit you can take steps such as reducing your debt and avoiding overspending with revolving lines of credit like credit cards 1 | |
what is cross culture | cross culture in the business world refers to a company s efforts to ensure that its employees interact effectively with professionals from other backgrounds like the adjective cross cultural it implies a recognition of national regional and ethnic differences in manners and methods and a desire to bridge them understanding cross culturea field of study cross cultural communication has emerged to define and teach the many ways that the different peoples of the world communicate with each other verbally and non verbally the concept of cross culture has become critically important with the globalization of business many companies that seek to expand the markets for their products and services devote substantial resources to training employees in how to communicate and interact effectively with those from other cultures for example when employees of an international company transfer to another country they need to master aspects of that country s culture they must not only learn to understand and speak the language but adapt to its social norms as well today cross culture education is considered imperative for employees acting in managerial capacities abroad failure to effectively communicate with colleagues and subordinates or to understand their actions can lead to cascading problems within the business many corporations strive to be multicultural organizations they employ workers who encompass people from diverse backgrounds these organizations also tend to have an absence of prejudice and discrimination cross culture differencesevery culture shapes how its most minute and important social societal and professional behaviors are interpreted and that inevitably carries over into business some cultures view the association between a manager and a subordinate as a symbiotic relationship in others the manager is expected to rule from a distance cross culture extends to body language physical contact and perceptions of personal space in cultures that adhere to strict religious standards interactions between members of the opposite sex even in the business sphere may be complicated body language such as hand gestures may be frowned upon or worse yet may have meanings that are entirely unintended in some cultures casual touching is common while in others it is viewed as rude disrespectful or worse 1in certain cultures food and business may or may not mix for instance in italy and the united arab emirates don t expect to make important business decisions during a meal before establishing a good relationship 23cross culture examplesfailing to observe any of the customs listed below would be a serious cross culture faux pas | |
is cross culture training useful for employees | yes it is useful because it can help develop awareness and understanding for the values social norms acceptable gender related actions and particular business behaviors of people in different countries with such training employees can better represent their companies | |
why does cross culture awareness matter | an awareness of the beliefs practices and requirements of businesses in other parts of the world can lead to clear and meaningful communications this can aid and enhance business government and personal relationships between peoples unfamiliar with each other and that can smooth the way for mutually beneficial interaction | |
what specific actions support cross culture success | some actions include learning about another country s language and manner of communicating observing what you learn by maintaining rules of etiquette listening carefully when others speak showing respect for different behaviors and activities taking part in those activities when invited to do so the bottom linedealing with businesses beyond one s own border is becoming the norm for many companies seeking new outlets for their products and services it s vital to study and learn about a country s approach to business relationships and decision making business dining and social etiquette and more your cross culture business success may depend on it | |
what is cross elasticity of demand | the cross elasticity of demand is an economic concept that measures the responsiveness in the quantity demanded of one good when the price for another good changes it s also referred to as cross price elasticity of demand this measurement is calculated by taking the percentage change in the quantity demanded of one good and dividing it by the percentage change in the price of the other good cross elasticity of demand formula e x y percentage change in quantity of x percentage change in price of y e x y q x q x p y p y e x y q x q x p y p y e x y q x p y p y q x where q x quantity of good x p y price of good y change begin aligned e xy frac text percentage change in quantity of x text percentage change in price of y phantom e xy frac frac displaystyle delta q x displaystyle q x frac displaystyle delta p y displaystyle p y phantom e xy frac delta q x q x times frac p y delta p y phantom e xy frac delta q x delta p y times frac p y q x textbf where q x text quantity of good x p y text price of good y delta text change end aligned exy percentage change in price of ypercentage change in quantity of x exy py py qx qx exy qx qx py py exy py qx qx py where qx quantity of good xpy price of good y change | |
how to calculate cross elasticity of demand | the next step is how to use the formula to make your calculations here s a step by step run through of how to do so understanding cross elasticity of demandthe cross elasticity of demand refers to how sensitive the demand for a product is to changes in the price of another product it measures how demand for one good changes when the price of another typically related good does cross elasticity is one of the main types of demand elasticity 1you can use the formula to make comparisons of products that are considered perfect substitutes for each other or those that are complementary to each other the cross elasticity of demand for substitute goods remains positive prices increase when demand for one good rises demand for complementary goods drops when the price rises for another good this is referred to as negative cross elasticity of demand unrelated products don t affect each other an increase in the price of eggs doesn t directly relate to an increase in demand for olives the cross elasticity of demand for substitute goods is always positive because the demand for one good increases when the price for the substitute good increases 2the quantity demanded for tea a substitute beverage increases as consumers switch to a less expensive yet substitutable alternative if coffee prices increase this is reflected in the cross elasticity of the demand formula because both the numerator percentage change in the demand for tea and denominator the price of coffee show positive increases items with a coefficient of 0 are unrelated items they re independent of each other items may be weak substitutes because the two products have a positive but low cross elasticity of demand this is often the case for product substitutes such as tea versus coffee items that are strong substitutes have a higher cross elasticity of demand such as different brands of tea a price increase in one company s green tea has a higher impact on another company s green tea demand toothpaste is an example of a substitute good the demand for a competitor s brand of toothpaste increases in turn if the price of one brand of toothpaste increases the cross elasticity of demand for complementary goods is negative an item closely associated with that item and necessary for its consumption decreases as the price for one item increases because the demand for the main good has also dropped 3the quantity demanded for coffee stir sticks drops as consumers drink less coffee and purchase fewer sticks because the price of coffee has increased the numerator quantity demanded of stir sticks is negative and the denominator the price of coffee is positive this results in a negative cross elasticity the usefulness of cross elasticity of demandcompanies use the cross elasticity of demand to establish prices to sell their goods products with no substitutes can be sold at higher prices because there s no cross elasticity of demand to consider but incremental price changes to goods with substitutes are analyzed to determine the appropriate level of demand desired and the associated price of the good complementary goods are also strategically priced based on the cross elasticity of demand printers may be sold at a loss with the understanding that the demand for future complementary goods such as printer ink should increase examples of cross elasticity of demandlet s take a look at two substitute goods chicken burritos from two restaurants suppose both restaurants sell their burritos for 6 each but restaurant a decides it wants to make more in profits so it raises the price to 8 most people don t want to spend the extra money and the two goods are equal substitutes so there s a very good chance that demand for restaurant b s chicken burritos will increase now let s take a look at complementary goods and how they re affected by the cross price elasticity of demand consider burgers and fries they aren t necessarily related but they tend to go hand in hand people who eat burgers also tend to eat fries demand for fries may increase if the price drops for burgers | |
what does a positive cross elasticity of demand indicate | a positive cross elasticity of demand means that the demand for good a will increase as the price of good b goes up goods a and b are good substitutes people are happy to switch to a if b gets more expensive an example would be the price of milk consumers may switch to 2 milk if whole milk goes up in price whole milk becomes more in demand if 2 milk rises in price instead | |
what does a negative cross elasticity of demand indicate | a negative cross elasticity of demand indicates that the demand for good a will decrease as the price of b goes up this suggests that a and b are complementary goods such as a printer and printer toner demand for the printer will drop if its price goes up less toner will also be sold as a result of fewer printers being sold | |
how does cross elasticity of demand differ from demand elasticity | cross elasticity looks at the proportional changes in demand among two goods demand elasticity or price elasticity of demand looks at the change in demand of a single item as its price changes | |
how does cross elasticity of demand differ from the cross elasticity of supply | the cross elasticity of supply measures the proportional change in the quantity supplied or produced in relation to changes in the price of a good this is in contrast to changes in demand for two goods in response to prices the bottom lineprices and demand often go hand in hand in economics economic theory generally dictates that demand for another good generally goes up when the price of one good goes up too this is called the cross price elasticity of demand you can easily calculate this figure by taking the percentage change in the quantity demanded of one good by the percentage change in price for another good | |
what is a cross sell | to cross sell is to sell related or complementary products to a customer cross selling is one of the most effective methods of marketing in the financial services industry examples of cross selling include selling different types of investments or products to investors or tax preparation services to retirement planning clients for instance if a bank client has a mortgage its sales team may try to cross sell that client a personal line of credit or a savings product like a cd | |
how cross selling works | cross selling to existing clients is one of the primary methods of generating new revenue for many businesses including financial advisors this is perhaps one of the easiest ways to grow their business as they have already established a relationship with the client and are familiar with their needs and objectives however advisors need to be careful when they use this strategy a money manager who cross sells a mutual fund that invests in a different sector can be a good way for the client to diversify their portfolio however an advisor who tries to sell a client a mortgage or other product that is outside the advisor s scope of knowledge can be a disservice to a customer and damage the business relationship | |
when done efficiently cross selling can translate into significant profits for stockbrokers insurance agents and financial planners licensed income tax preparers can offer insurance and investment products to their tax clients and this is among the easiest of all sales to make effective cross selling is a good business practice and is a useful financial planning strategy as well | not to be confused with cross selling upselling is the act of selling a more comprehensive or higher end version of the current product becoming proficient at cross sellingadvisors who cross sell financial products or services need to be thoroughly familiar with the products that they are selling a stockbroker who primarily sells mutual funds will need substantial additional training if they are assigned to start selling mortgages to clients a simple referral to another department that actually sells and processes the mortgage may lead to situations where referrals are made whether they are needed or not as the broker may not understand when the client really needs this service but is only motivated to earn a referral fee advisors need to know how and when the additional product or service fits into their client s financial picture so that they can make a more effective referral and stay compliant with suitability standards finra may use the information that it collects from its inquiry to develop and implement a new set of rules that govern how cross selling can be done in addition to understanding financial products advisors need to understand the assortment of products their company can provide imagine a new staff member joining a firm interacting with clients but not knowing the full extent of advisory services the company is capable of in this example the new hire needs to become familiarized with the company to become more proficient at recognizing opportunities to cross sell cross selling in financial servicesuntil the 1980s the financial services industry was easy to navigate with banks offering savings accounts brokerage firms selling stocks and bonds credit card companies pitching credit cards and life insurance companies selling life insurance that changed when prudential insurance company the most prominent insurance company in the world at that time acquired a medium sized stock brokerage firm call bache group inc in an effort to offer broader services 1the mergers of wells fargo co with wachovia securities and bank of america with merrill lynch co both in 2008 occurred at a time of declining profits for both banks and of financial crisis for the brokerages 23 to a large extent they were aiming to expand their retail distribution arms by buying large and established distribution channels of the brokerages hoping for synergy between banking and investment products and services with few exceptions cross selling failed to catch on within many of the merged companies as an example bank of america lost merrill lynch brokers through the insistence that the brokers cross sell bank products to their investment clients wells fargo has been more effective in instituting cross selling because its merger with wachovia brought a relatively similar culture into the fold it can be difficult for large firms to effectively integrate different types of products h r block inc failed in this proposition when it acquired olde discount broker in a push to offer investment services to its tax customers 4 the company ultimately decided to jettison the brokerage enterprises and focus solely on taxes 5 after acquiring olde for 850 million in 1999 h r block sold that division of its operations for 315 million less than 10 years later cross selling vs upsellingcross selling and upselling are sales tactics used to convince customers to purchase more however there are differences to consider upselling also known as suggestive selling is the practice of persuading customers to purchase an upgraded or more expensive version of a product or service the goal is to maximize profits and create a better experience for the customer that experience can translate into an increase in the customer s perceived value and an increased customer lifetime value clv the total contribution a customer makes to a company companies are 60 to 70 more likely to sell to an existing customer whereas the likelihood of selling to a new customer is 5 to 20 6for companies it is easier to upsell to their existing customer base than it is to upsell to a new customer existing customers trust the brand and find value in the products and or services this trust drives the success of upselling for instance if a customer trusts a brand they will generally trust the brand when it presents a seemingly better option alternatively cross selling is the sales tactic whereby customers are enticed to buy items related or complementary to what they plan to purchase cross selling techniques include recommending offering discounts on and bundling related products like upselling the company seeks to earn more money per customer and increase perceived value by addressing and satisfying consumer needs advantages and disadvantages of cross sellingcompanies employ different sales tactics to increase revenues and one of the most effective is cross selling cross selling is not just offering customers other products to purchase it requires skill the business must understand consumer behaviors and needs and how complementary products fulfill those needs and add value customers purchase from brands they trust and have had positive experiences with therefore it becomes easier to sell to an existing customer than to a new one existing customers are more likely to purchase products that relate to or complement what they already plan to purchase as consumers begin to use more of a company s products they become increasingly loyal to the brand on the other hand cross selling can have adverse effects on customer loyalty if done incorrectly it can appear as a pushy self seeking sales tactic this is evident when a salesperson aggressively tries to sell a related product or attempts to sell without understanding the customer s need for it not only does this affect the sale but it also negatively affects the brand s reputation additionally cross selling to the wrong type of customer could be counterproductive 7 some customers have high service demands and the more products they buy the more service they command as their service demands increase so do the costs associated with providing those services lastly some customers habitually return or exchange products when cross selling to this segment profits are not realized initially their purchases generate substantial revenues however they often return or default of payments costing the company more than what the customer generated in revenues may potential increase revenue by increase sales quantities especially in less popular goodsmay increase brand loyalty as customers are further exposed to an assortment of one company s productsmay fulfill all of a customer s needs stealing them from approaching a competitor for other requirementsmay result in increased service related costs as it may be more expensive to cross sell compared to other strategiesmay negatively impact relationships if the cross selling technique is found to be pushymay result in a negative public perception of requiring or demanding multiple products be paired togetherreal world example of cross sellingin 2013 a group of southern california wells fargo employees opened without consent new bank and credit card accounts for unsuspecting customers 8 the motivation to meet cross selling quotas after an internal investigation more than 30 employees were terminated 9to identify how widespread the issue was wells fargo hired an independent consulting firm to review new accounts opened since 2011 they also created new procedures for validating new accounts as well as implemented new training programs and security protocols the consulting firm found that over two million accounts were fraudulently opened within a five year period and 115 000 of those accounts incurred fees eventually over 3 5 million fraudulent accounts were discovered 10 wells fargo returned more than 2 8 million to affected customers and more than 5 300 people were terminated without notice and an explanation then ceo john stumpf resigned 11 in 2016 wells fargo was hit with a 185 million fine for this scandal 12 | |
how can you increase your cross selling effectiveness | there are several strategies you can employ to make cross selling effective consider using an email drip campaign to periodically introduce complementary products and services wait until you have developed a relationship and have proven success with the customer make sure your products and services are aligned to the needs and goals of the customer offering something that serves no purpose is counterproductive and can detract from customer satisfaction | |
when cross selling consider your loyal customers who are more likely to purchase again build campaigns focusing on satisfied customers and promote additional products to them train associates to recognize satisfied customers and assess their needs | on the other hand don t assume that customers are aware of your other offerings educate them and help them understand how those products can deliver value when speaking to a customer do so in a personable manner otherwise it comes across as a sales pitch lastly avoid unhappy customers as it can further the divide between them and your brand | |
is cross selling ethical | cross selling is a valid and ethical business practice to bring in more business cross selling isn t meant to trick a customer it is meant to inform them of alternative goods that may fit a different need it s simply good business practice is discuss winter coat sales with a sporting enthusiast who is out shopping for new skis | |
what is cross selling on ebay | ebay features a cross promotion connections program whereby ebay sellers can connect with each other 13 when a buyer wins a bid they are able to see the seller s other listings as well as their connections listings previously ebay featured a no cost cross selling tool that allowed sellers to promote related products 14 sellers could choose to either promote related items or promote discounts for larger orders this feature was discontinued and is only allowed for select users at certain times the bottom linecross selling is a sales tactic that if done well can increase a company s bottom line and customer loyalty if done poorly it can erode profits create dissatisfied customers and damage a company s reputation regardless of how you cross sell it can be an effective tool to increase revenues and care for a customer s unmet needs | |
what is crowdfunding | crowdfunding involves raising small amounts of money from a large number of individuals to finance a new business venture it leverages the wide reach of social media and crowdfunding websites to connect investors and entrepreneurs potentially increasing entrepreneurship by expanding the pool of investors beyond the traditional circle of owners relatives and venture capitalists the 2008 financial crisis led to the rise of crowdfunding as banks enforced stricter lending policies post recession small businesses struggled to secure credit prompting many to seek alternative funding methods in 2023 the global crowdfunding market volume was estimated at 1 17 billion showing a slight increase from previous years according to statista the transaction value of the global crowdfunding sector is expected to grow by 1 48 annually from 2024 to 2028 reaching a market volume of 1 27 billion by 2028 1 | |
how crowdfunding works | raising capital is key to any company s growth larger established corporations often find it easier to secure investments or additional debt from lenders however smaller companies and startups often face significant challenges in this area this is where crowdfunding proves valuable crowdfunding has allowed entrepreneurs to raise substantial amounts of money from a wide pool of investors for example one humorous kickstarter project involved an individual seeking to create a new potato salad recipe with a modest goal of 10 but ended up raising over 55 000 from 6 911 backers investors can choose from numerous projects and invest as little as 10 crowdfunding sites typically earn revenue by taking a percentage of the funds raised 2investors can select from hundreds of projects and invest as little as 10 crowdfunding sites generate revenue from a percentage of the funds raised for example kickstarter applies a 5 fee to the funds collected 3special considerationsthe first instance of crowdfunding was recorded in 1997 when a music group from the united kingdom raised money for a concert tour from fans artistshare which was the first crowdfunding site was launched three years later almost a decade later it became a key source for companies to raise capital 4crowdfunding platforms were largely unregulated when they first became popular however things changed over time as several countries including the united states began placing restrictions on certain types of crowdfunding 5these restrictions apply to who can fund a new business and how much they are allowed to contribute similar to the restrictions on hedge fund investing these regulations are supposed to protect unsophisticated or non wealthy investors from putting too much of their savings at risk because so many new businesses fail their investors face a high risk of losing their principal the crowdfunding industry is regulated under the jobs act enacted on april 5 2012 which established equity crowdfunding in the u s initially limited to accredited investors provisions like title iv and title iii later expanded access to non accredited investors and early stage startups the sec oversees these regulations ensuring transactions occur through registered intermediaries these rules aim to protect investors and maintain transparency in crowdfunding investments 5many crowdfunding projects offer rewards to investors such as participating in a product launch or receiving gifts for example a filmmaker might offer a behind the scenes tour of the movie set while a chef launching a new cookbook might provide a private cooking class these experiential rewards aim to create a personal connection between the project and its supporters 6types of crowdfundingthe two most traditional uses of the term reflect the type of crowdfunding done by startup companies looking to bring a product or service into the world or by individuals who experienced some type of emergency for example people affected by natural disasters or high medical expenses often turn to crowdfunding platforms for support recently crowdfunding platforms like patreon and substack have expanded crowdfunding s reach enabling artists writers musicians and podcasters to sustain their creative work through ongoing financial support from their audiences popular crowdfunding websitescrowdfunding websites such as kickstarter indiegogo and gofundme attract hundreds of thousands of people hoping to create or support the next big thing gofundme is the largest crowdfunding platform since its founding in 2010 the site has raised over 30 billion with 150 million people either sending or receiving money through the platform 7 it s most popular for individuals seeking to recover from medical expenses or disasters such as house fires natural disasters or unexpected emergency expenses start up companies tend to use kickstarter kickstarter is another popular choice founded in 2009 the platform has successfully funded more than 250 000 projects with more than 8 billion pledged across all kickstarter projects 8kickstarter is the leading crowdfunding platform for aspiring businesses aiming to raise capital and reach a broader audience unlike gofundme kickstarter is exclusively for creating shareable projects additionally kickstarter can t be used for charity or cause donations and projects can t offer incentives like equity revenue sharing or investment opportunities kickstarter also prohibits projects involving items claiming to diagnose cure treat or prevent illnesses political fundraising drugs or alcohol and any form of contests coupons gambling or raffles 9indiegogo started as a crowdfunding site for independent films but expanded to all project categories a year after its 2008 launch 10indiegogo is seen as a less strict and more flexible platform than kickstarter as it gives backers more flexibility by allowing campaigners to choose between fixed and flexible funding models while kickstarter releases funds only if the campaign meets its funding goal indiegogo allows campaigners to receive funds as they come in or wait until the target is reached flexible funding such as receiving funds as they come might be easier and less risky for a campaigner however regardless of the amount raised campaigners must still deliver on any promises made for a backer fixed funding is more attractive as it s associated with much less risk crowdfunding platform fees range from 5 to 12 11 before choosing a crowdfunding platform be sure to examine the fee structures for any punitive charges pros and cons of crowdfundingthe most obvious advantage of crowdfunding for a start up company or individual is its ability to provide access to a larger and more diverse group of investors or supporters with the ubiquity of social media crowdfunding platforms are an incredible way for businesses and individuals to both grow their audience and receive the funding they need equity based crowdfunding is growing in popularity because it allows startup companies to raise money without giving up control to venture capital investors in some cases it also offers investors the opportunity to earn an equity position in the venture in the united states the securities and exchange commission sec regulates equity based crowdfunding potential disadvantages of crowdfunding include the possible damage to your or your company s reputation from using crowdfunding the fees associated with the platform and the risk that if you don t reach your funding goal the pledged funds will be returned to investors leaving you with nothing great way to interact with potential consumersability to gauge public opinion on your productpledged financing is returned to investors if the funding goal isn t reachedmay damage start up company s reputationexamples of crowdfundingmany of the products and businesses crowdfunded on kickstarter became very successful and lucrative endeavors for instance oculus vr an american company specializing in virtual reality hardware and software products was funded through the site in 2012 founder palmer luckey launched a kickstarter campaign to raise money to make virtual reality headsets designed for video gaming available to developers the campaign crowdfunded 2 4 million 10 times the original goal of 250 000 12 in march 2014 meta meta acquired oculus vr for 2 3 billion in cash and stock another example of a company that rose to success through kickstarter campaigns is m3d a company founded by two friends that manufactures small 3d printers david jones and michael armani raised 3 4 million for their micro 3d printer on the crowdfunding site in 2014 13 the tiny 3d printer which comes with a variety of durable 3d inks is now available at staples amazon amzn brookstone and elsewhere critical role a weekly live streamed tabletop roleplaying game featuring a group of prominent voice actors raised 4 7 million in just 24 hours for its latest animated special the legend of vox machina no other kickstarter campaign in 2019 raised that amount over their entire 30 to 60 day raising period 14in 2023 the gpd win 4 a handheld gaming pc raised nearly 4 million on indiegogo becoming the platform s highest funded product the device showcases the growing interest and investment in portable gaming solutions 15 | |
what is crowdfunding and how does it work | crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture depending on the type of crowdfunding investors either donate money altruistically or get rewards such as equity in the company that raised the money | |
do you pay back crowdfunding | for crowdfunding that operates on a donation basis the company does not need to pay back investors however many companies offer incentives for early backers such as an advance copy of the product | |
is crowdfunding legal in australia | yes in 2017 the australian government amended the 2001 corporations act to provide a legislative framework for crowd sourced funding 16 | |
is crowdfunding legal in nigeria | all micro small and medium enterprises incorporated as companies in nigeria with a minimum two year operating track record are eligible to raise funds through a crowdfunding portal in exchange for the issuance of shares debentures or such other investment instrument as the commission may determine from time to time 17the bottom linethe digital age has given rise to crowdfunding a unique method for organizations and individuals to raise capital from a large group of people for those seeking funds it involves creating a compelling pitch and setting a target on a crowdfunding site like gofundme indiegogo or kickstarter while large donations are beneficial it s often the many smaller contributions that help capital seekers reach their goals | |
what is the crowding out effect | the crowding out effect is an economic theory that argues that rising public sector spending drives down or even eliminates private sector spending to spend more the government needs added revenue it obtains it by raising taxes or by borrowing through the sale of treasury securities higher taxes can mean reduced income and spending by individuals and businesses treasury sales can increase interest rates and borrowing costs that can reduce borrowing demand and spending all told these government activities are thought to result in the crowding out of spending by private individuals and companies investopedia nez riazunderstanding the crowding out effectthe crowding out effect is based on the supply of and demand for money according to the theory as the government takes revenue raising actions such as increasing taxes or debt security sales the consumer and business demand for resulting higher interest rate loans decreases so does their desire to spend a potentially reduced amount of income their desire to earn a higher rate of interest on their savings may also come into play thus the government crowds out their spending by increasing its own bear in mind that the crowding out effect theory runs counter to older well known economic theories that hold that government spending during periods of slowing economic activity actually increases spending by consumers and businesses by essentially putting more money in their pockets one of the most common forms of crowding out takes place when a large government such as that of the u s increases its borrowing and sets in motion a chain of events that results in the curtailing of private sector spending the sheer scale of this type of borrowing can lead to substantial rises in the real interest rate this can absorb the economy s lending capacity and discourage businesses from making capital investments companies often fund capital projects in part or entirely through financing the increased cost of borrowing money makes traditionally profitable projects that are funded through loans cost prohibitive increased borrowing by large governments is considered to be a common cause of crowding out the borrowing can force interest rates higher and dampen loan demand by those in the private sector types of crowding out effectsreductions in corporate capital spending can partially offset benefits brought about through government borrowing such as those of economic stimulus however this is only likely when the economy is operating at capacity in this respect government stimulus is theoretically more effective when the economy is below capacity if this is the case however an economic downswing may occur this can reduce the revenues that the government collects through taxes and spur it to borrow even more money theoretically this in turn can lead to a vicious cycle of borrowing and crowding out crowding out may also take place because of social welfare albeit indirectly when governments raise taxes to introduce or expand welfare programs individuals and businesses are left with less discretionary income this can reduce charitable contributions in this respect public sector expenditures for social welfare can reduce private sector giving for social welfare offsetting the government s spending on the same causes similarly the creation or expansion of public health insurance programs such as medicaid can prompt those covered by private insurance to switch to the public option left with fewer customers and a smaller risk pool private health insurance companies may have to raise premiums leading to further reductions in private coverage another form of crowding out can occur because of government funded infrastructure development projects these can discourage private enterprise from launching similar projects in the same area of the market because they re now perceived as undesirable or corporate number crunchers might indicate that such investments are projected to be unprofitable this often occurs with bridges and roadways as government funded development deters companies from building toll roads or other related infrastructure example of the crowding out effectsuppose a firm has been planning a capital project with an estimated cost of 5 million an assumed 3 interest rate on its loans and a projected return of 6 million the firm anticipates earning 1 million in net income ni due to the shaky state of the economy however the government announces a stimulus package that will help businesses in need this raises the interest rate on the firm s new loans to 4 because the interest rate that the firm originally factored into its accounting has increased by 33 3 its profit model shifts the firm now estimates that it will need to spend 5 75 million on the project in order to make the same 6 million in return its projected earnings drop by 75 to 250 000 therefore the company decides that it would be better off pursuing a different project or halting major projects for the time being crowding out vs crowding inchartalism post keynesian economics and other macroeconomic theories posit that government borrowing in a modern economy operating significantly below capacity can actually increase demand it does so by generating employment and thereby stimulating private spending this process is often referred to as crowding in the crowding in theory has gained some currency among economists in recent years after it was noted that during the great recession of 2007 2009 massive spending by the federal government on bonds and other securities actually had the effect of reducing interest rates 1 | |
is crowding out good or bad | crowding out if it exists can be seen as negative because it can slow economic activity and growth this can happen as higher taxes reduce spendable income and increased government borrowing raises borrowing costs and reduces private sector demand for loans | |
why is crowding out important to understand | it s important to understand because it contradicts the well understood theory that government spending boosts private sector spending and supports a vibrant economy | |
how does crowding out affect aggregate demand | according to the theory s effect it should reduce aggregate demand because it discourages spending and the demand for borrowing due to higher interest rates and reduced income the bottom linethe crowding out effect is a theory that suggests that increased government spending ultimately decreases private sector spending this is due to the higher cost of loans and reduced income that can result when the government increases taxes or borrows by selling treasuries to obtain more revenue for its own spending | |
what is crude oil | crude oil is a naturally occurring liquid petroleum product composed of hydrocarbon deposits and other organic materials formed from the remains of animals and plants that lived millions of years ago these organisms were covered by layers of sand silt and rock subject to heat and pressure and eventually turned into a type of fossil fuel that is refined into usable products including gasoline diesel liquefied petroleum gases and feedstock for the petrochemical industry 1crude oil is a nonrenewable resource which means that it can t be replaced naturally at the rate we consume it and is therefore a limited resource investopedia nono floresunderstanding crude oilcrude oil is typically obtained through drilling where it is usually found alongside other resources such as natural gas which is lighter and therefore sits above the crude oil and saline water which is denser and sinks below after its extraction crude oil is refined and processed into a variety of forms such as gasoline kerosene and asphalt for sale to consumers crude oil is one of the world s most important commodities and its price can have ripple effects through the broader economy rising oil prices mean higher gasoline prices at the pump higher shipping costs and increased input costs for producers crude oil prices are driven mainly by the principles of supply and demand oversupply and shrinking demand lower prices while rising demand and short supply push prices up perceived supply and demand changes can be driven by geopolitical events or natural disasters that affect oil producing nations investors and speculators can trade oil via futures markets spot markets or exchange traded funds etfs although fossil fuels such as coal have been harvested for centuries crude oil was first discovered and developed during the industrial revolution and its industrial uses were developed in the 19th century newly invented machines revolutionized the way we do work and they depended on these resources to run 2today the world s economy is largely dependent on fossil fuels such as crude oil and the demand for these resources often sparks political unrest as a small number of countries control the largest reservoirs like any industry supply and demand heavily affect the prices and profitability of crude oil the united states saudi arabia and russia are the leading producers of oil in the world 3in the late 19th and early 20th centuries the u s was one of the world s leading oil producers and u s companies developed the technology to make oil into useful products like gasoline 4 during the middle and last decades of the 20th century u s oil production fell dramatically and the u s became an energy importer in 2021 however crude oil net imports were at the second lowest annual level since 1985 56its major supplier was the organization of the petroleum exporting countries opec founded in 1960 which consists of the world s largest by volume holders of crude oil and natural gas reserves 7 as such the opec nations had a great deal of economic leverage in determining supply and therefore the price of oil in the late 20th century in the early 21st century the development of new technology particularly hydro fracturing known as fracking created a second u s energy boom largely decreasing opec s importance and influence 8 heavy reliance on fossil fuels is cited as one of the main causes of global warming a topic that has gained traction in the past several decades risks surrounding oil drilling include oil spills and ocean acidification which damage the ecosystem 9 also in the 21st century many manufacturers have begun creating products that rely on alternative sources of energy such as cars run by electricity homes powered by solar panels and communities powered by wind turbines 10oil is often called black gold yet crude oil has a range of viscosity and can vary in color from black to yellow depending on its hydrocarbon composition 11 distillation the process by which oil is heated and separated into different components is the first stage in refining crude oil vs petroleumpetroleum a name that comes from the latin words petra meaning rock and oleum meaning oil is often used interchangeably with crude oil essentially petroleum is a more general word that refers to crude oil the raw unprocessed oil that is extracted out of the ground and other petroleum products formed from refined crude oil 12petroleum products cover everything that a refinery produces from crude oil or natural gas these products include diesel gasoline fuel oil and more investing in oilinvestors may purchase two types of oil contracts spot contracts and futures contracts to the individual investor oil can be a speculative asset a portfolio diversifier or a hedge against related positions 13large financial institutions and energy companies can also invest in oil and gas production through the use of volumetric production payments vpps which allow oil and gas companies to monetize their fields or proven orders the price of the spot contract reflects the current market price for oil whereas the futures price reflects the price that buyers are willing to pay for oil on a delivery date set at some point in the future the futures price is no guarantee that oil will actually hit that price in the current market when that date comes it is just the price that at the time of the contract purchasers of oil are anticipating the actual price of oil on that date depends on many factors most commodity contracts that are bought and sold on the spot markets take effect immediately money is exchanged and the purchaser accepts delivery of the goods in the case of oil the demand for immediate delivery vs future delivery is limited in no small part due to the logistics of transporting oil investors of course don t intend to take delivery of commodities at all although there have been cases of investor errors that have resulted in unexpected deliveries so futures contracts are more commonly used by traders and investors an oil futures contract is an agreement to buy or sell a certain number of barrels of oil at a predetermined price on a predetermined date when futures are purchased a contract between buyer and seller is signed and secured with a margin payment that covers a percentage of the total value of the contract end users of oil purchase on the futures market to lock in a price investors buy futures essentially as a gamble on what the price will actually be down the road and they profit if they guess correctly typically they will liquidate or roll over their futures holdings before they would have to take delivery there are two major oil contracts that are closely watched by oil market participants in north america the benchmark for oil futures is west texas intermediate wti crude which trades on the new york mercantile exchange nymex 14 in europe africa and the middle east the benchmark is north sea brent crude which trades on the intercontinental exchange ice 15while the two contracts move somewhat in unison wti is more sensitive to american economic developments and brent responds more to those in other countries there are multiple futures contracts open at once with most trading in the front month contract the nearest futures contract for this reason the front month is also known as the most active contract futures prices for crude oil can be higher lower or equal to spot prices the price difference between the spot market and the futures market says something about the overall state of the oil market and expectations for it if the futures prices are higher than the spot prices this usually means that purchasers expect the market will improve so they are willing to pay a premium for oil to be delivered at a future date if the futures prices are lower than the spot prices this means that buyers expect the market to deteriorate backwardation and contango are two terms used to describe the relationship between expected future spot prices and actual futures prices when a market is in contango the futures price is above the expected spot price when a market is in normal backwardation the futures price is below the expected future spot price the prices of different futures contracts can also vary depending on their projected delivery dates forecasting oil priceseconomists and experts are hard pressed to predict the path of crude oil prices which are volatile and depend on many variables they use a range of forecasting tools and depend on time to confirm or disprove their predictions the five models used most often are each mathematical model is time dependent and some models work better at one time than another because no one model alone offers a reliably accurate prediction economists often use a weighted combination of them all to get the most accurate answer in 2014 for instance the european central bank ecb used a four model combination to predict the course of oil prices to generate a more accurate forecast 16 there have been times however when the ecb has used fewer or more models to capture the best results 17 even so unforeseen factors like natural disasters political events or social upheavals can derail the most careful of calculations oil industry informationbecause crude oil prices constantly change and are typically more volatile than stock or currency prices it is crucial for successful investors and traders to have good information sources that report on the many factors that can influence oil prices many websites report crude oil news but only a few broadcast the breaking news and current prices the following three offer current information | |
how do you invest in crude oil | to an investor crude oil can be a speculative asset a portfolio diversifier or a hedge against related positions there are two ways to invest in crude oil futures contracts and spot contracts the price of the spot contract reflects the current market price for oil whereas the futures price reflects the price that buyers are willing to pay for oil on a delivery date set at some point in the future 21 | |
what can spot and futures crude oil prices tell an investor | the basis or differences between oil futures contracts and the spot cash market can be indicative of the near term expectations of oil supply and demand when futures prices are trading higher than the spot known as contango it suggests that traders are willing to pay a premium for oil to be delivered at a future date and that expectations are bullish when futures are trading below the spot known as backwardation it can be a bearish signal | |
how can i follow the crude oil industry | crude oil prices and related market news are available online often for free for example marketwatch provides up to date price quotes headlines and commentary the site has an active link on its landing page showing the price of crude 22 the reuters news service is another free site with a commodity specific portion that shows current prices 23 cnbc com too has a page dedicated to oil specific news and recent developments 24 | |
what countries are members of opec | according to its statutes opec membership is open to any country that is a substantial exporter of oil and shares the ideals of the organization after the five founding members opec grew by 11 additional member countries as of 2019 they are in order of joining as follows 25ecuador withdrew from the organization on jan 1 2020 qatar terminated its membership on jan 1 2019 and indonesia suspended its membership on nov 30 2016 thus as of 2022 the organization consists of 13 states the bottom linethe importance of crude oil cannot be overstated it is a major source of energy generating heat and powering various types of vehicles and machinery it is also used as a component in many of the products that we use every day including plastics paints and cosmetics concerns about the damage it does to the environment mean crude oil isn t favorable to everyone however most agree that we currently cannot live without it and that no longer extracting and refining crude oil would lead the global economy to grind to a halt | |
what are crypto tokens | a crypto token is a representation of an asset or interest that has been tokenized on an existing cryptocurrency s blockchain crypto tokens and cryptocurrencies share many similarities but cryptocurrencies are the native asset of a blockchain crypto tokens are often used to raise funds for projects and are usually created distributed sold and circulated through an initial coin offering ico process which involves a crowdfunding round history of crypto tokensalthough there were cryptocurrencies that forked from bitcoin and ethereum previous to the 2017 ico boom the first recognized ico and token was mastercoin mastercoin was created by j r willet and announced on january 2012 via bitcoin forum he titled his whitepaper the second bitcoin whitepaper mastercoin was one of the first projects to describe using layers to enhance a cryptocurrency s functionality the project linked the value of mastercoin to bitcoin s value and explained how the project would use the funds to pay developers to create a way for users to make new coins from their mastercoins 1between 2012 and 2016 crypto token creation and ico increased until 2017 token offerings skyrocketed as investors seemed to become aware of them and the possible increase in value they promised 2 developers businesses and scammers began creating tokens rapidly in attempts to take advantage of the fund raising boom so much so that regulatory agencies began issuing alerts to investors warning them about the risks of icos 34not all crypto tokens and icos are scams many are legitimate efforts to raise funds for projects or startups the ico bubble burst in 2018 shortly after initial exchange offerings ieo emerged where exchanges began facilitating token offerings 5 exchanges claimed to have vetted the token offerings reducing the risks to investors however scammers used the exchanges to promote their scams regulatory agencies issued alerts to investors about the risks involved in participating in an ieo they also alerted exchanges that they were required to register with the authorities if they were facilitating these fund raising efforts the logic was that the exchanges might be acting as alternative trading systems or broker dealers which by law are required to register 6crypto tokens are still being created and used to raise funds for projects through icos whitepapers read like pitchbooks outlining the token s purpose how it will be sold how the funds will be used and how investors will benefit concerns about crypto tokensthe single most important concern about crypto tokens is that because they are used to raise funds they can be and have been used by scammers to steal money from investors however it can be difficult to distinguish between a scam token and one representing an actual business endeavor here are some factors to look for when you re looking at a crypto token | |
how crypto tokens work | crypto or cryptography refers to the various encryption algorithms and cryptographic techniques that safeguard crypto tokens and currencies such as elliptical curve encryption public private key pairs and hashing functions cryptocurrencies on the other hand are virtual currencies on a blockchain these systems that allow for secure online payments and the storing of value crypto tokens are transactional units created on top of existing blockchains by blockchain companies or projects they are created using standard templates like that of the ethereum network such blockchains work on the concept of smart contracts or decentralized applications wherein the programmable self executing code is used to process and manage the various transactions that occur a smart contract is a self executing program that automates transactions two parties agree on terms then code is written to execute the transaction once the agreed upon terms are met for example you might receive a crypto token representing a certain number of customer loyalty points on a blockchain that manages such details for a retail chain another crypto token might give the token holder the entitlement to view 10 hours of streaming content on a video sharing blockchain a token can even represent other cryptocurrencies such as a crypto token equalling 15 bitcoins on a particular blockchain such crypto tokens are tradable and transferrable among the various participants of the blockchaininvestors can use crypto tokens for any number of reasons they can hold onto them to represent a stake in the cryptocurrency company or for an economic reason to trade or make purchases of goods and services as a practical example decentralized storage provider bluzelle allows you to stake your tokens to help secure its network while earning transaction fees and rewards the financial industry regulatory authority finra continues to issue alerts about cryptocurrency and token fraud so be sure you research before investing in any cryptocurrency the same way you would with any stock 9crypto tokens vs cryptocurrenciesthe term crypto token is often erroneously used interchangeably with cryptocurrency however these terms are distinct from one another a cryptocurrency is used for making or receiving payments using a blockchain with the most popular cryptocurrency being bitcoin btcusd altcoins are alternative cryptocurrencies that were launched after the massive success achieved by bitcoin the term means alternative coins that is cryptocurrency other than bitcoin they were launched as enhanced bitcoin substitutes that have claimed to overcome some of bitcoin s pain points litecoin ltcusd bitcoin cash bchusd namecoin and dogecoin dogeusd are typical examples of altcoins though each has tasted varying levels of success none have managed to gain popularity akin to bitcoin s while cryptocurrencies have their own blockchain and are its native asset crypto tokens are built on an existing blockchain which acts as a medium for the creation and execution of decentralized apps and smart contracts the tokens are used to facilitate transactions on the blockchain in many cases tokens go through an ico and then transistion to this stage after the ico completes | |
what is the purpose of tokens | crypto tokens generally facilitate transactions on a blockchain but can represent an investor s stake in a company or serve an economic purpose similar to legal tender however tokens are not legal tender this means token holders can use them to make purchases or trades just like other securities to make a profit | |
is bitcoin a token or a coin | bitcoin is a coin also known as a cryptocurrency it can be used to trade store value or make purchases | |
what is the difference between a crypto coin and a crypto token | the main difference is that crypto coins have their own independent blockchain whereas tokens are built on an existing blockchain crypto coins are designed to be used as currency while crypto tokens are intended to represent an interest in an asset and facilitate transactions on a blockchain | |
what are some of the different types of tokens that reside on blockchains | blockchain tokens include reward utility security governance and asset tokens the bottom linecrypto tokens are digital representations of interest in an asset or used to facilitate transactions on a blockchain they are often confused with cryptocurrency because they are also tradeable and exchangeable crypto tokens are often used as a way to raise funds for projects in initial coin offerings icos have been abused by many parties to fool investors into contributing funds only to disappear but many are valid fundraising attempts by legitimate businesses if you re considering crypto tokens as an investment be sure to do your research on the team or company offering them investing in cryptocurrencies and other initial coin offerings icos is highly risky and speculative and this article is not a recommendation by investopedia or the writer to invest in cryptocurrencies or other icos since each individual s situation is unique a qualified professional should always be consulted before making any financial decisions investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein as of the date this article was written the author does not own cryptocurrency | |
what is cryptocurrency | a cryptocurrency is a digital or virtual currency secured by cryptography which makes it nearly impossible to counterfeit or double spend most cryptocurrencies exist on decentralized networks using blockchain technology a distributed ledger enforced by a disparate network of computers a defining feature of cryptocurrencies is that they are generally not issued by any central authority rendering them theoretically immune to government interference or manipulation investopedia tara anandunderstanding cryptocurrencycryptocurrencies are digital or virtual currencies underpinned by cryptographic systems they enable secure online payments without the use of third party intermediaries crypto refers to the various encryption algorithms and cryptographic techniques that safeguard these entries such as elliptical curve encryption public private key pairs and hashing functions central to the appeal and functionality of bitcoin and other cryptocurrencies is blockchain technology as its name indicates a blockchain is essentially a set of connected blocks of information on an online ledger each block contains a set of transactions that have been independently verified by each validator on a network every new block generated must be verified before being confirmed making it almost impossible to forge transaction histories the contents of the online ledger must be agreed upon by a network of individual nodes or computers that maintain the ledger experts say that blockchain technology can serve multiple industries supply chains and processes such as online voting and crowdfunding financial institutions such as jpmorgan chase co jpm are using blockchain technology to lower transaction costs by streamlining payment processing types of cryptocurrencymany cryptocurrencies were created to facilitate work done on the blockchain they are built on for example ethereum s ether was designed to be used as payment for validating transactions and opening blocks when the blockchain transitioned to proof of stake in september 2022 ether eth inherited an additional duty as the blockchain s staking mechanism the xrp ledger foundation s xrp is designed for financial institutions to facilitate transfers between different geographies because there are so many cryptocurrencies on the market it s important to understand the types knowing whether the coin you re looking at has a purpose can help you decide whether it is worth investing in a cryptocurrency with a purpose is likely to be less risky than one that doesn t have a use most of the time when you hear about cryptocurrency types you hear the coin s name however coin names differ from coin types here are some of the types you ll find with some of the names of tokens in that category if you find a cryptocurrency that doesn t fall into one of these categories you ve found a new category or something that needs to be investigated to be sure it s legitimate | |
how to buy cryptocurrency | if you want to use cryptocurrency to buy products and services you will need to visit a cryptocurrency exchange these are businesses that allow you to buy or sell cryptocurrencies from other users at the current market price similar to a stock after buying the coins you will need to transfer them to a digital wallet or use a third party service like coinbase to store your coins if you only want to buy cryptocurrency as an investment you may be able to do so through your brokerage for example robinhood allows users to invest in bitcoin and other cryptocurrencies although you cannot withdraw them from the platform for purchases in addition there are several crypto etfs that provide exposure to the crypto asset class without requiring the investors to maintain their own wallets for instance as of may 2024 investors may choose to hold bitcoin futures etf shares the sec has also approved the listing and trading of ether spot shares | |
is cryptocurrency legal | fiat currencies derive their authority from the government or monetary authorities for example the u s dollar is recognized and issued by the government as the official currency of the united states and is legal tender but cryptocurrencies are not issued by any public or private entities therefore it has been difficult to make a case for their legal status in different financial jurisdictions throughout the world it doesn t help matters that cryptocurrencies have primarily functioned outside most existing financial infrastructure the legal status of cryptocurrencies creates implications for their use in daily transactions and trading in june 2019 the financial action task force fatf recommended that wire transfers of cryptocurrencies should be subject to the requirements of its travel rule which requires aml compliance although cryptocurrencies are considered a form of money the internal revenue service irs treats them as financial assets or property for tax purposes and as with most other investments if you reap capital gains selling or trading cryptocurrencies the government wants a piece of the profits how exactly the irs taxes digital assets either as capital gains or ordinary income depends on how long the taxpayer held the cryptocurrency and how they used it in the united states in july 2023 courts ruled that cryptocurrencies are considered securities when purchased by institutional buyers but not by retail investors purchased on exchanges enthusiasts called it a victory for crypto however crypto exchanges are regulated by the sec as are coin offerings or sales to institutional investors so crypto is legal in the u s but regulatory agencies are slowly gaining ground in the industry as of june 2024 el salvador is the only country to accept bitcoin as legal tender for monetary transactions in the rest of the world cryptocurrency regulation varies by jurisdiction japan s payment services act defines bitcoin as legal property cryptocurrency exchanges operating in the country are required to collect information about the customer and details relating to the wire transfer china has banned cryptocurrency exchanges transactions and mining within its borders but has a central bank digital currency cbdc india was reported to be formulating a framework for cryptocurrencies but until it is enacted crypto is not yet illegal exchanges are free to offer cryptocurrencies cryptocurrencies are legal in the european union derivatives and other products that use cryptocurrencies must qualify as financial instruments in june 2023 the european commission s markets in crypto assets mica regulation went into effect this law sets safeguards and establishes rules for companies or vendors providing financial services using cryptocurrencies | |
is cryptocurrency a safe investment | cryptocurrencies have attracted a reputation as unstable investments due to high investor losses from scams hacks bugs and volatility although the underlying cryptography and blockchain are generally secure the technical complexity of using and storing crypto assets can be a significant hazard to new users in addition to the market risks associated with speculative assets cryptocurrency investors should be aware of the following risks despite these risks cryptocurrencies have seen a significant price leap with the total market capitalization rising to about 2 4 trillion despite the asset s speculative nature some have created substantial fortunes by taking on the risk of investing in early stage cryptocurrencies advantages and disadvantages of cryptocurrencycryptocurrencies were introduced with the intent to revolutionize financial infrastructure as with every revolution however there are tradeoffs involved at the current stage of development for cryptocurrencies there are many differences between the theoretical ideal of a decentralized system with cryptocurrencies and its practical implementation removes single points of failureeasier to transfer funds between partiesremoves third partiescan be used to generate returnsremittances are streamlinedtransactions are pseudonymouspseudonymity allows for criminal uses | |
have become highly centralized | expensive to participate in a network and earnoff chain security issuesprices are very volatilecryptocurrencies represent a new decentralized paradigm for money in this system centralized intermediaries such as banks and monetary institutions are not necessary to enforce trust and police transactions between two parties thus a system with cryptocurrencies eliminates the possibility of a single point of failure such as a large financial institution setting off a cascade of global crises such as the one triggered in 2008 by the failure of large investment banks in the u s cryptocurrencies promise to make transferring funds directly between two parties easier without needing a trusted third party like a bank or a credit card company such decentralized transfers are secured by the use of public keys and private keys and different forms of incentive systems such as proof of work or proof of stake because they do not use third party intermediaries cryptocurrency transfers between two transacting parties can be faster than standard money transfers flash loans in decentralized finance are an excellent example of such decentralized transfers these loans which are processed without requiring collateral can be executed within seconds and are mostly used in trading the remittance economy is testing one of cryptocurrency s most prominent use cases cryptocurrencies such as bitcoin serve as intermediate currencies to streamline money transfers across borders thus a fiat currency is converted to bitcoin or another cryptocurrency transferred across borders and subsequently converted to the destination fiat currency without third party involvement though they claim to be an anonymous form of transaction cryptocurrencies are pseudonymous they leave a digital trail that agencies like the federal bureau of investigation fbi can follow this opens up the possibility for governments authorities and others to track financial transactions cryptocurrencies have become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases the case of dread pirate roberts who ran a marketplace to sell drugs on the dark web is already well known cryptocurrencies have also become a favorite of hackers who use them for ransomware activities in theory cryptocurrencies are meant to be decentralized their wealth distributed between many parties on a blockchain ownership is becoming more concentrated as witnessed by companies purchasing and holding them for price appreciation and investment fund managers buying them to hold in their funds one of the conceits of cryptocurrencies is that anyone can mine them using a computer with an internet connection however mining popular cryptocurrencies requires considerable energy sometimes as much energy as entire countries consume the expensive energy costs and the unpredictability of mining have concentrated mining among large firms whose revenues run into billions of dollars only 61 1 of the 4 568 bitcoin blocks opened from may 15 2024 to june 15 2024 were opened by unknown addresses the other 99 were opened by mining pools though cryptocurrency blockchains are highly secure off chain crypto related key storage repositories such as exchanges and wallets can be hacked many cryptocurrency exchanges and wallets have been hacked over the years sometimes resulting in the theft of millions of dollars in coins cryptocurrencies traded in public markets suffer from price volatility so investments require accurate price monitoring for example bitcoin has experienced rapid surges and crashes in its value climbing to nearly 65 000 in november 2021 before dropping to just over 20 000 a year and a half later bitcoin prices had roared back by mid 2024 as a result of this vast range of volatility many people consider cryptocurrencies a speculative bubble | |
is crypto actually a good investment | crypto can be a good investment for someone who enjoys speculating and can financially tolerate losing everything invested however it is not a wise investment for someone seeking to grow their retirement portfolio or for placing savings into it for growth | |
is crypto real money | one definition of money is something that is generally accepted as a medium of exchange a measure or store of value and a unit of account by this definition cryptocurrency is real money | |
how does crypto make you money | there are several ways cryptocurrency can make money for you decentralized finance applications let you loan your crypto with interest you can stake a compatible one on a blockchain or at certain exchanges for rewards or you can hold on to it and hope its market value increases none of these methods are guaranteed to make money but many people have benefitted from them the bottom linecryptocurrencies are digital assets that are secured by cryptography as a relatively new technology they are highly speculative and it is important to understand the risks involved before investing the comments opinions and analyses expressed on investopedia are for informational purposes online read our warranty and liability disclaimer for more info | |
what is cum dividend | a stock is cum dividend which means with dividend when a company has declared that there will be a dividend in the future but has not yet paid it out a stock will trade cum dividend until the ex dividend date after that the stock trades without its dividend rights when the buyer receives the next dividend scheduled for distribution the share is cum dividend | |
how cum dividend works | before the announcement of year end results for companies dates are set out for closing the register for dividend payments and scrips these dates will determine the qualification for dividends and scrips a scrip is a document acknowledging a debt companies short on cash often pay scrip dividends instead of cash dividends cum dividend is the status of a security when a company is preparing to pay out a dividend at a later date the seller of a stock cum dividend is selling the right to the share and the right to the next dividend distribution this situation often results from the timing of the sale rather than the preference of the seller stock price movements based on the expected future of the company usually influence investment returns more than dividends in order to buy a share cum dividend the buyer must complete the purchase before a certain point in the dividend period called the record date often companies will require the sale to be completed two business days before the end of the period however some corporations will push the deadline to the last day of the period if the buyer completes the recording of the transaction in time they will receive the eventual distribution if the buyer misses the deadline then the share is sold ex dividend or without the right to the next distribution the dates are set based on the declaration date and recording date chosen by the company that issues the stock there is no specific schedule for the release of dividends and the payment dates can vary from company to company some companies offer quarterly dividends while others may pay dividends only once or twice a year while it is not typical some companies pay dividends monthly special considerationscum dividend rights include those associated with the next declared dividend a declared dividend is the amount the board of directors has agreed upon through a motion authorizing the payments once they are declared dividends effectively function as liabilities for the company as dividends are a portion of a firm s profits these amounts can fluctuate a company declares the dividend on the declaration date next it sets a recording date that the buyer must meet for it to transfer the dividend often a buyer must purchase a share at least two business days before the recording date to get the dividend this cutoff date is the ex dividend date or ex date if a buyer purchases a share after the ex date the seller sells it ex dividend instead of cum dividend in this case the buyer would get the stock but would not be entitled to the distribution the price of the stock will adjust depending on if it is cum dividend or ex dividend since information on dividends is publicly available it is incorporated into the share price under the efficient market hypothesis a strategy of buying at the last possible date collecting the dividend and then selling the stock is far too naive to succeed example of cum dividendlet s say an investor owns 100 shares of ecommerce firm pricedtosell and the company s board of directors has declared a quarterly dividend of 0 10 per share the ex dividend date is ten days away the investor is considering selling their shares to finance another purchase if they sell cum dividend the buyer would receive the 100 shares at the current price and would be entitled to the 10 in dividend payouts suppose the seller holds off on selling during the cum dividend period waiting to see if other investments pan out those investments don t end up panning out and the seller is forced to sell the 100 shares of pricedtosell however the cum dividend date has passed and the shares are ex dividend to reflect the loss of the dividend the market price of the shares will be 10 lower all other things being equal while the buyer won t receive that quarter s distribution they will be entitled to future distributions if they continue to hold the shares | |
what is cum laude | cum laude is a latin term that means with distinction with praise or with honor it represents an academic level of achievement educational institutions use the term to signify an academic degree awarded to someone with honorable excellence in academic coursework it is a mark of distinction that some students and others use on their resumes as a hallmark of their success in their higher education cum laude is one of three academic excellence designations recognized in the united states the other two are summa cum laude which indicates the greatest distinction and magna cum laude which indicates great distinction because the terms come from latin they are often called latin honors they are common in the u s but very few countries around the world use them cum laude is awarded when a student achieves academic success and strong grades understanding cum laudecum laude signifies a distinguished level of academic achievement an even greater distinction is magna cum laude which means with high honor or with high praise summa cum laude bestows the greatest honor or praise on its recipient the guidelines by which each level of academic honor is achieved differ at academic institutions each university or college typically outlines its expectations for each award students who receive latin honors are typically recognized during graduation ceremonies and the designation appears on the student s diploma students graduating with honors may also be allowed to wear some special symbol like a specific sash or tassel on their mortarboard in 1869 harvard university became the first academic institution in the u s to award cum laude and other latin honors criteria for cum laudethe criteria for earning latin honors may include a high grade point average gpa class ranking a particular number of credit hours completed and other academic achievements some universities bestow latin honors at certain gpa levels typically a gpa of 3 5 or higher is required to receive the cum laude designation with higher gpas necessary for magna cum laude and summa cum laude the designation is based only on an individual student s final gpa other universities reserve latin honors for a stated percentage of each graduating class that means only a top percentage of a class may receive any honors even smaller percentages of the student body may be awarded the magna cum laude and summa cum laude honors designations an outstanding gpa alone may not be enough to earn these honors at ivy league universities and other highly competitive schools faculty committees also consider students academic records and other academic achievements such as outstanding papers published articles and well researched assignments the professors will usually recommend honors for exceptional students | |
what is the difference between cum laude magna cum laude and summa cum laude | while cum laude represents a distinguished level of achievement magna cum laude is one level above meaning with great praise in latin magna cum laude differs from summa cum laude which in turn means highest praise or highest honor summa cum laude represents the highest level of academic distinction these designations may be awarded due to different factors such as gpa class ranking or additional academic achievements | |
what is an example of cum laude | consider the ivy league school the university of pennsylvania where students must have a gpa of 3 4 to graduate cum laude by contrast new york university awards students cum laude if students gpas fall within the next 15 of the previous year s graduating class and some colleges within the university have their own ranking system ultimately how and when these designations are awarded can vary widely across academic institutions 12 | |
is it hard to earn a cum laude | most students need to have an above average to high grade point to earn the cum laude honor it requires a lot of dedication effort and time to outperform many peers in an academic class to achieve such a distinction the bottom linecum laude is a latin term used at educational institutions as a mark of distinction representing honorable excellence in coursework the cum laude designation is often included in resumes by potential job candidates to demonstrate their success in academics and to put themselves above the competition cum laude is determined by gpa or other academic achievements it is awarded more by u s educational institutions than by those in other countries | |
what is a cup and handle pattern | a cup and handle price pattern on a security s price chart is a technical indicator that resembles a cup with a handle where the cup is in the shape of a u and the handle has a slight downward drift the cup and handle is considered a bullish signal with the right hand side of the pattern typically experiencing lower trading volume the pattern s formation may be as short as seven weeks or as long as 65 weeks investopedia michela buttignol | |
what does a cup and handle pattern tell you | american technician william j o neil defined the cup and handle c h pattern in his 1988 classic how to make money in stocks adding technical requirements through a series of articles published in investor s business daily which he founded in 1984 o neil included time frame measurements for each component as well as a detailed description of the rounded lows that give the pattern its unique teacup appearance 12as a stock forming this pattern tests old highs it is likely to incur selling pressure from investors who previously bought at those levels selling pressure is likely to make price consolidate with a tendency toward a downtrend trend for a period of four days to four weeks before advancing higher a cup and handle is considered a bullish continuation pattern and is used to identify buying opportunities 3it is worth considering the following when detecting cup and handle patterns a retest of previous resistance is not required to touch or come within several ticks of the old high however the further the top of the handle is away from the highs the more significant the breakout needs to be | |
how to trade the cup and handle | there are several ways to approach trading the cup and handle but the most basic is to look for entering a long position the image below depicts a classic cup and handle formation place a stop buy order slightly above the upper trend line of the handle order execution should only occur if the price breaks the pattern s resistance traders may experience excess slippage and enter a false breakout using an aggressive entry alternatively wait for the price to close above the upper trend line of the handle subsequently place a limit order slightly below the pattern s breakout level attempting to get an execution if the price retraces there is a risk of missing the trade if the price continues to advance and does not pull back image by julie bang investopedia 2020a profit target is determined by measuring the distance between the bottom of the cup and the pattern s breakout level and extending that distance upward from the breakout for example if the distance between the bottom of the cup and handle breakout level is 20 points a profit target is placed 20 points above the pattern s handle stop loss orders may be placed either below the handle or below the cup depending on the trader s risk tolerance and market volatility example trading the cup and handlenow let s consider a real world historical example using wynn resorts limited wynn which went public on the nasdaq exchange near 13 in october 2002 and rose to 154 five years later 45 the subsequent decline ended within two points of the initial public offering ipo price far exceeding o neil s requirement for a shallow cup high in the prior trend the subsequent recovery wave reached the prior high in 2011 nearly 10 years after the first print the handle follows the classic pullback expectation finding support at the 50 retracement in a rounded shape and returns to the high for a second time 14 months later the stock broke out in october 2013 and added 90 points in the following five months 6image by julie bang investopedia 2020limitations of the cup and handle patternlike all technical indicators the cup and handle should be used in concert with other signals and indicators before making a trading decision specifically with the cup and handle certain limitations have been identified by practitioners the first is that it can take some time for the pattern to fully form which can lead to late decisions while one month to one year is the typical timeframe for a cup and handle to form it can also happen quite quickly or take several years to establish itself making it ambiguous in some cases another issue has to do with the depth of the cup part of the formation sometimes a shallower cup can be a signal while other times a deep cup can produce a false signal sometimes the cup forms without the characteristic handle finally one limitation shared across many technical patterns is that it can be unreliable in illiquid stocks | |
what does a cup and handle pattern indicate | a cup and handle is a technical indicator where the price movement of a security resembles a cup followed by a downward trending price pattern this drop or handle is meant to signal a buying opportunity to go long on a security when this part of the price formation is over the security may reverse course and reach new highs typically cup and handle patterns fall between seven weeks to over a year | |
how do you find a cup and handle pattern | consider a scenario where a stock has recently reached a high after significant momentum but has since corrected falling almost 50 at this point an investor may purchase the stock anticipating that it will bounce back to previous levels the stock then rebounds testing the previous high resistance levels after which it falls into a sideways trend in the final leg of the pattern the stock exceeds these resistance levels soaring 50 above the previous high | |
what happens after a cup and handle pattern forms | if a cup and handle forms and it is confirmed the price should see a sharp increase in the short to medium term if the pattern fails this bull run would not be observed | |
what is the target for cup and handle pattern | the target with the cup and handle pattern is the height of the cup added to the breakout point of the handle generally these patterns are bullish signals extending an uptrend 3 | |
is a cup and handle pattern bullish | as a general rule cup and handle patterns are bullish price formations the founder of the term william o neil identified four primary stages of this technical trading pattern first approximately one to three months before the cup pattern begins a security will reach a new high in an uptrend second the security will retrace dropping no more than 50 of the previous high creating a rounding bottom third the security will rebound to its previous high but subsequently decline forming the handle part of the formation finally the security breaks out again surpassing its highs that are equal to the depth of the cup s low point | |
what is currency | currency is a medium of exchange for goods and services in short it s money in the form of paper and coins usually issued by a government and generally accepted at its face value as a method of payment currency is the primary medium of exchange in the modern world having long ago replaced bartering as a means of trading goods and services in the 21st century a new form of currency has entered the vocabulary and realm of exchange the virtual currency also known as cryptocurrency virtual currencies such as bitcoin and ethereum have no physical form or government backing in the united states they are traded and stored electronically understanding currencycurrency in some form has been in use for at least 3 000 years at one time only in the form of coins currency proved to be crucial to facilitating trade across continents 1a key characteristic of modern currency is that it is worthless in itself that is bills are pieces of paper rather than coins made of gold silver or bronze the concept of using paper as a currency may have been developed in china as early as 1000 bc but the acceptance of a piece of paper in return for something of real value took a long time to catch on 2 modern currencies are issued on paper in various denominations with fractional issues in the form of coins money vs currencythe terms money and currency are often thought to mean the same thing however while related they have different meanings money is a broader term that refers to an intangible system of value that makes the exchange of goods and services possible now and in the future currency is simply one tangible form of money money is used in a variety of ways all related to its future use in some kind of transaction for example money is a store of value this means that it has and maintains a certain value that supports ongoing exchanges people know that the money they received today essentially will have the same value next week when they need to make a purchase or pay a bill money is also referred to as a unit of account that means it can be used to account for changes in the value of items over time businesses use money as a unit of account when they prepare a budget or give assets a value profits and losses are established and relied upon using money as a unit of account money also has certain properties that allow for the smooth exchange of goods understanding what money is clarifies the meaning of currency it s a form of money used every day by people all over the world checks are another form of money known as money substitutes cigarettes have even been a form of money as they were for soldiers during the second world war 3the bureau of engraving and printing is responsible for printing america s paper currency its parent agency is the u s dept of the treasury 4 the u s mint founded in 1792 is the nation s sole manufacturer of legal tender coinage and is responsible for producing circulating coinage for the nation to conduct its trade and commerce 5types of currencythe united states mint defines currency as money in the form of paper and coins that s used as a medium of exchange 6 currencies are created and distributed by individual countries around the world u s currency in paper form is issued by the bureau of engraving and printing as 1 2 5 10 20 50 and 100 bills the 500 1 000 5 000 and 10 000 bills are no longer issued but those still in circulation are redeemable at full face value currency issued in 1861 or earlier is no longer valid and would not be redeemable at full face value 7u s currency in the form of coins is issued by the mint in denominations of 1 5 10 25 50 and 1 7there are over 200 national currencies currently in circulation 8 including the u s 42 countries either use the u s dollar or peg their currencies directly to the dollar 9 according to the international monetary fund imf the dollar makes up 58 8 of the foreign exchange reserves 10most countries issue their own currencies for example switzerland s official currency is the swiss franc and japan s is the yen 1112 an exception is the euro which has been adopted by most countries that are members of the european union 13some countries accept the u s dollar as legal tender in addition to their own currencies like the bahamas zimbabwe and panama 8 for some time after the founding of the u s mint in 1792 americans continued to use spanish coins because they were heavier and presumably felt more valuable 9there are also branded currencies like airline and credit card points and disney dollars these are issued by companies and are used only to pay for the products and services to which they are tied currency tradingthe exchange rate is the current value of any currency relative to another currency as a result rates are quoted for currency pairs such as the eur usd euro to u s dollar exchange rates fluctuate constantly in response to economic and political events 14these fluctuations create the market for currency trading the foreign exchange market where these trades are conducted is one of the world s largest markets based on sheer volume all trades are in large volumes with a standard minimum lot of 100 000 15 most currency traders are professionals investing for themselves or for institutional clients that include banks and large corporations the foreign exchange market has no physical address trading is entirely electronic and goes on 24 hours a day to accommodate traders in every time zone 16for the rest of us currency exchange typically is done at an airport kiosk or a bank before we go on a trip or while traveling consumer advocates say that travelers get the best value by exchanging cash at a bank or at an in network atm other options may have higher fees and unattractive exchange rates | |
what does currency mean | the term currency refers to the tangible form of money that is paper bills and coins it s used as a medium of exchange that s accepted at face value for products and services as well as for savings and the payment of debt | |
what s an example of currency | one example of currency is any of the u s paper bills you may have on hand it is any of the coins the u s issues such as the penny nickel and quarter currency can also be the paper bills and coins issued by the governments of other countries across the globe | |
what s the difference between money and currency | money is an intangible system of value that provides the means for the ongoing exchange of goods and services in a society money has taken many forms since it overtook the system of bartering currency is a tangible form of it so instead of say bartering agricultural produce for the clothing you may need you can use currency paper notes and coins to obtain it | |
what is a currency carry trade | a currency carry trade is a strategy whereby a high yielding currency funds the trade with a low yielding currency a trader using this strategy attempts to capture the difference between the rates which can often be substantial depending on the amount of leverage used the carry trade is one of the most popular trading strategies in the forex market the most popular carry trades have involved buying currency pairs like the australian dollar japanese yen and new zealand dollar japanese yen because the interest rate spreads of these currency pairs have been quite high the first step in putting together a carry trade is to find out which currency offers a high yield and which one offers a low yield the basics of a currency carry tradethe currency carry trade is one of the most popular trading strategies in the currency market consider it akin to the motto buy low sell high the best way to first implement a carry trade is to determine which currency offers a high yield and which offers a lower one the most popular carry trades involve buying currency pairs like the aud jpy and the nzd jpy since these have interest rate spreads that are very high as for the mechanics a trader stands to make a profit of the difference in the interest rates of the two countries as long as the exchange rate between the currencies does not change many professional traders use this trade because the gains can become very large when leverage is taken into consideration if the trader in our example uses a common leverage factor of 10 1 he can stand to make a profit of 10 times the interest rate difference the funding currency is the currency that is exchanged in a currency carry trade transaction a funding currency typically has a low interest rate investors borrow the funding currency and go short while taking long positions in the asset currency which has a higher interest rate the central banks of funding currency countries such as the bank of japan boj and the u s federal reserve often engaged in aggressive monetary stimulus which results in low interest rates these banks will use monetary policy to lower interest rates to kick start growth during a time of recession as the rates drop speculators borrow the money and hope to unwind their short positions before the rates increase the best time to get into a carry trade is when central banks are raising or thinking about interest rates many people are jumping onto the carry trade bandwagon and pushing up the value of the currency pair similarly these trades work well during times of low volatility since traders are willing to take on more risk as long as the currency s value doesn t fall even if it doesn t move much or at all traders will still be able to get paid but a period of interest rate reduction won t offer big rewards in carry trades for traders that shift in monetary policy also means a shift in currency values when rates are dropping demand for the currency also tends to dwindle and selling off the currency becomes difficult basically in order for the carry trade to result in a profit there needs to be no movement or some degree of appreciation currency carry trade exampleas an example of a currency carry trade assume that a trader notices that rates in japan are 0 5 percent while they are 4 percent in the united states this means the trader expects to profit 3 5 percent which is the difference between the two rates the first step is to borrow yen and convert them into dollars the second step is to invest those dollars into a security paying the u s rate assume the current exchange rate is 115 yen per dollar and the trader borrows 50 million yen once converted the amount that he would have is u s dollars 50 million yen 115 434 782 61after a year invested at the 4 percent u s rate the trader has ending balance 434 782 61 x 1 04 452 173 91now the trader owes the 50 million yen principal plus 0 5 percent interest for a total of amount owed 50 million yen x 1 005 50 25 million yenif the exchange rate stays the same over the course of the year and ends at 115 the amount owed in u s dollars is amount owed 50 25 million yen 115 436 956 52the trader profits on the difference between the ending u s dollar balance and the amount owed which is profit 452 173 91 436 956 52 15 217 39notice that this profit is exactly the expected amount 15 217 39 434 782 62 3 5 if the exchange rate moves against the yen the trader would profit more if the yen gets stronger the trader will earn less than 3 5 percent or may even experience a loss risks and limitations of carry tradesthe big risk in a carry trade is the uncertainty of exchange rates using the example above if the u s dollar were to fall in value relative to the japanese yen the trader runs the risk of losing money also these transactions are generally done with a lot of leverage so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately an effective carry trade strategy does not simply involve going long a currency with the highest yield and shorting a currency with the lowest yield while the current level of the interest rate is important what is even more important is the future direction of interest rates for example the u s dollar could appreciate against the australian dollar if the u s central bank raises interest rates at a time when the australian central bank is finished tightening its rates also carry trades only work when the markets are complacent or optimistic uncertainty concern and fear can cause investors to unwind their carry trades the 45 sell off in currency pairs such as the aud jpy and nzd jpy in 2008 was triggered by the subprime turned global financial crisis since carry trades are often leveraged investments the actual losses were probably much greater correction march 22 2024 this article has been corrected to state that in a currency carry trade transaction investors borrow the funding currency and go short while taking long positions in the asset currency | |
what is a currency exchange | a currency exchange is a licensed business that allows customers to exchange one currency for another currency exchange of physical money coins and paper bills is usually done over the counter at a teller station which can be found in various places such as airports banks hotels and resorts currency exchanges make money by charging a nominal fee and through the bid ask spread in a currency also known as a bureau de change or casa de cambio a currency exchange should not be confused with the foreign exchange forex market where traders and financial institutions transact in currencies | |
how a currency exchange works | currency exchange businesses physical online and peer to peer allow you to exchange one country s currency for another by executing buy and sell transactions for example if you have u s dollars and you want to exchange them for australian dollars you would bring your u s dollars or bank card to the currency exchange store and buy australian dollars with them the amount you would be able to purchase would be dependent on the international spot rate which is basically a daily changing value set by a network of banks that trade currencies the currency exchange store will modify the rate by a certain percentage to ensure that it makes a profit on the transaction for example suppose the spot rate for exchanging u s dollars into australian dollars is listed as 1 2500 for the day this means that for each u s dollar spent you can buy 1 25 australian dollars if traded at the spot rate but the currency exchange store may modify this rate to 1 20 meaning you can buy 1 20 australian dollars for 1 u s dollar with this hypothetical rate change their fee would effectively be 5 cents on the dollar because the transaction is not conducted at the spot rate and depends on the profit that the exchange wants to make consumers may find that it is less expensive to incur atm or credit card fees at the foreign destination rather than use exchange services ahead of time travelers are advised to estimate how much money they will spend on a trip and compare the amounts saved through typical transactions currency convertibility is essential in a global economy and critical for international commerce and finance a currency that is inconvertible poses big barriers to trade foreign investment and tourism | |
where to find a currency exchange | currency exchange businesses can be found in a variety of forms and venues it may be a stand alone small business operating out of a single office a larger chain of small exchange service booths at airports or a large international bank offering currency exchange services at its teller stations airports are commonplace for currency exchanges for business and tourist travel they enable travelers to purchase currency of their travel destination immediately before their departure or exchange any excess money back to their local currency upon their return because airports are seen as the last port of call the rates at airport exchanges will in general be more expensive than those at a bank in the city of departure going cashless is becoming more common as some banks offer cards that can load multiple currencies on them with little or no fees in addition offshore atms are a viable option for those banking with a global bank for example hsbc atms are prevalent in europe north and latin america asia the middle east and north africa currency exchange services can also be found through businesses that offer these services online this may be offered as part of the services provided by a bank forex broker or other financial institution | |
when traveling outside of your own country watch for country specific fees for example prior to july 2020 cuba charged a 10 tax on tourists buying cuban convertible peso cuc with u s dollars 1 | bid ask spreads in the retail forex marketcurrency exchanges earn their money by charging customers a fee for their services but also by taking advantage of the bid ask spread in the currency the bid price is what the dealer is willing to pay for a currency while the ask price is the rate at which a dealer will sell the same currency for example ellen is an american traveler visiting europe the cost of purchasing euros at the airport may be quoted as follows the higher price usd 1 40 is the cost to buy each euro ellen wants to buy eur 5 000 so she would have to pay the dealer usd 7 000 suppose also that the next traveler in line has just returned from her european vacation and wants to sell the euros that she has left over katelyn has eur 5 000 to sell she can sell the euros at the bid price of usd 1 30 the lower price and would receive usd 6 500 in exchange for her euros because of the bid ask spread the kiosk dealer is able to make a profit of usd 500 from this transaction the difference between usd 7 000 and usd 6 500 | |
what is a currency peg | a currency peg is a policy in which a national government or central bank sets a fixed exchange rate for its currency with a foreign currency or a basket of currencies and stabilizes the exchange rate between countries the currency exchange rate is the value of a currency compared to another while some currencies are free floating and rates fluctuate based on supply and demand in the market others are fixed and pegged to another currency pegging provides long term predictability of exchange rates for business planning and helps to promote economic stability investopedia jessica olahunderstanding currency peggingthe primary motivation for a currency peg is to encourage trade between countries by reducing foreign exchange risk countries commonly establish a currency peg with a stronger or more developed economy so that domestic companies can access broader markets with less risk the u s dollar the euro and gold have historically been popular choices currency pegs create stability between trading partners and can remain in place for decades for example the hong kong dollar has been pegged to the u s dollar since 1983 2only realistic currency pegs aimed at reducing volatility can produce economic benefits setting a currency peg artificially high or low creates imbalances that ultimately harm all countries involved advantages of a currency pegpegged currencies can expand trade and boost real incomes particularly when currency fluctuations are relatively low and foresee no long term changes without exchange rate risk and tariffs individuals businesses and nations are free to benefit fully from specialization and exchange with fixed exchange rates and within a mutually beneficial economic framework farmers may be able to effectively produce technology firms may be able to expand research and development and retailers will be able to source from efficient producers pegging allows for long term investments in other countries as fluctuating exchange rates are not disrupting supply chains and altering the value of investments disadvantages of a currency pegthe central bank of a country with a currency peg must monitor and manage cash flow and avoid spikes in a currency s supply and demand these spikes can require a central bank to hold large foreign exchange reserves to counter excessive buying or selling of its currency currency pegs affect forex trading by artificially stemming volatility | |
when a currency is pegged at an excessively low exchange rate domestic consumers will be deprived of the purchasing power to buy foreign goods if the chinese yuan is pegged too low against the u s dollar chinese consumers will have to pay more for imported food and oil lowering their consumption and affecting their standard of living the sellers u s farmers and middle east oil producers see a decrease in demand and business loss and trade tensions may escalate among the countries | if a currency is pegged at an overly high rate a country may be unable to defend the peg over time domestic consumers may buy too many imports and drive up demand chronic trade deficits create downward pressure on the home currency forcing the government to spend foreign exchange reserves to defend the peg if government reserves are exhausted the peg will collapse as a currency peg collapses the country that set the peg high will find imports more expensive inflation will rise and the nation may have difficulty paying its debts the other country will find its exporters losing markets and its investors losing money on foreign assets that are no longer worth as much in domestic currency major currency peg breakdowns include the argentine peso to the u s dollar in 2002 the british pound to the german mark in 1992 and arguably the u s dollar to gold in 1971 345expands trade and boosts real incomesmakes long term investments realisticreduces disruptions to supply chainsminimizes changes to the value of investmentsaffects forex trading by artificially stemming volatilityerodes purchasing power when pegged too lowcreates trade deficits when pegged too highincreases inflation when pegged too highexample of a currency pegsince 1986 the saudi riyal has been pegged at a fixed rate of 3 75 to the usd 6 the arab oil embargo of 1973 saudi arabia s response to the united state s involvement in the arab israeli war precipitated events that led to the currency peg the effects of the short lived embargo devalued the u s dollar and led to economic turmoil the nixon administration drafted a deal with the saudi government to restore the usd to the super currency it once was from this arrangement the saudi government enjoyed the use of u s military resources an abundance of u s treasury savings and a booming economy saturated with the usd during the embargo the riyal was supported by special drawing rights sdr an international reserve asset created by the international monetary fund to supplement the official reserves of its member countries with freely usable currencies of imf members to provide a country with liquidity 7due to high inflation and the 1979 energy crisis the riyal suffered a devaluation leading the saudi government to peg the riyal to the us dollar the currency peg restored stability and lowered inflation the saudi arabian monetary authority sama credits the peg for supporting economic growth in its country and for stabilizing the cost of foreign trade 8 | |
why would a country peg their currency | the most common reasons include encouraging trade between nations reducing the risks associated with expanding into broader markets and stabilizing the economy | |
which countries have currencies that are pegged to the usd | fourteen countries have currencies pegged to the usd and include bahrain belize cuba djibouti hong kong sar china jordan lebanon oman panama qatar saudi arabia united arab emirates and eritrea 1 | |
how many currencies are pegged to the euro | eleven currencies are pegged to the euro eur including the croatian kuna and the moroccan dirham 9 | |
what is a soft peg | a soft peg is an exchange rate policy where a government allows the exchange rate to be set by the market but in some cases especially if the exchange rate appears to move rapidly in one direction the central bank will intervene in the market the bottom linea currency peg is a nation s governmental policy whereby its exchange rate with another country is fixed most nations peg their currencies to promote trade and foreign investment and encourage stability | |
what is a currency swap | a currency swap sometimes referred to as a cross currency swap involves the exchange of interest and sometimes of principal in one currency for the same in another currency interest payments are exchanged at fixed dates through the life of the contract it is considered to be a foreign exchange transaction and is not required by law to be shown on a company s balance sheet the basics of currency swapscurrency swaps were originally done to get around exchange controls governmental limitations on the purchase and or sale of currencies although nations with weak and or developing economies generally use foreign exchange controls to limit speculation against their currencies most developed economies have eliminated controls nowadays so swaps are now done most commonly to hedge long term investments and to change the interest rate exposure of the two parties companies doing business abroad often use currency swaps to get more favorable loan rates in the local currency than they could if they borrowed money from a bank in that country currency swaps are important financial instruments used by banks investors and multinational corporations | |
how a currency swap works | in a currency swap the parties agree in advance whether or not they will exchange the principal amounts of the two currencies at the beginning of the transaction the two principal amounts create an implied exchange rate for example if a swap involves exchanging 10 million versus 12 5 million that creates an implied eur usd exchange rate of 1 25 at maturity the same two principal amounts must be exchanged which creates exchange rate risk as the market may have moved far from 1 25 in the intervening years pricing is usually expressed as london interbank offered rate libor plus or minus a certain number of points based on interest rate curves at inception and the credit risk of the two parties due to recent scandals and questions around its validity as a benchmark rate libor is being phased out according to the federal reserve and regulators in the uk libor will be phased out by june 30 2023 and will be replaced by the secured overnight financing rate sofr as part of this phase out libor one week and two month usd libor rates will no longer be published after december 31 2021 1 a currency swap can be done in several ways many swaps use simply notional principal amounts which means that the principal amounts are used to calculate the interest due and payable each period but is not exchanged if there is a full exchange of principal when the deal is initiated the exchange is reversed at the maturity date currency swap maturities are negotiable for at least 10 years making them a very flexible method of foreign exchange interest rates can be fixed or floating india and japan signed a bilateral currency swap agreement worth 75 billion in october 2018 to bring stability to forex and capital markets in india exchange of interest rates in currency swapsthere are three variations on the exchange of interest rates fixed rate to fixed rate floating rate to floating rate or fixed rate to floating rate this means that in a swap between euros and dollars a party that has an initial obligation to pay a fixed interest rate on a euro loan can exchange that for a fixed interest rate in dollars or for a floating rate in dollars alternatively a party whose euro loan is at a floating interest rate can exchange that for either a floating or a fixed rate in dollars a swap of two floating rates is sometimes called a basis swap interest rate payments are usually calculated quarterly and exchanged semi annually although swaps can be structured as needed interest payments are generally not netted because they are in different currencies | |
what is the current account | the current account records a nation s transactions with the rest of the world specifically its net trade in goods and services its net earnings on cross border investments and its net transfer payments over a defined period such as a year or a quarter the current account deficit of the united states in q2 of 2023 was negative 212 1 billion 1investopedia matthew collinsunderstanding the current accountthe current account is one half of the balance of payments the other half being the capital account while the capital account measures cross border investments in financial instruments and changes in central bank reserves the current account measures a country s current account balance may be positive a surplus or negative a deficit in either case the country s capital account balance will register an equal and opposite amount exports are recorded as credits in the balance of payments while imports are recorded as debits a positive current account balance indicates that the nation is a net lender to the rest of the world while a negative current account balance indicates that it is a net borrower a current account surplus increases a nation s net foreign assets by the amount of the surplus while a current account deficit decreases it by the amount of the deficit in keeping with double entry bookkeeping any credit in the current account such as an export will have a corresponding debit recorded in the capital account the item received by the nation is recorded as a debit while the item given up in the transaction is recorded as a credit special considerationssince the trade balance exports minus imports is generally the biggest determinant of the current account surplus or deficit the current account balance often displays a cyclical trend during a strong economic expansion import volumes typically surge if exports are unable to grow at the same rate the current account deficit will widen conversely during a recession the current account deficit will shrink if imports decline and exports increase to stronger economies the exchange rate exerts a significant influence on the trade balance and by extension on the current account an overvalued currency makes imports cheaper and exports less competitive thereby widening the current account deficit or narrowing the surplus an undervalued currency on the other hand boosts exports and makes imports more expensive thus increasing the current account surplus or narrowing the deficit nations with chronic current account deficits often come under increased investor scrutiny during periods of heightened uncertainty the currencies of such nations often come under speculative attack during such times this creates a vicious circle in which foreign exchange reserves are depleted to support the domestic currency and this foreign exchange reserve depletion combined with a deteriorating trade balance puts further pressure on the currency embattled nations are often forced to take stringent measures to support the currency such as raising interest rates and curbing currency outflows current account vs capital accountsome countries will split the capital account into two top level divisions i e the financial account and the capital account in this context the financial account measures an increase or decrease in international ownership of assets while the capital account measures financial transactions that do not affect income production or savings | |
what are some factors that impact the current account | a country s trade balance exports minus imports is generally the biggest determinant of whether the current account is a surplus or a deficit during an economic expansion import volumes typically increase creating a current account deficit however during a recession the current account will be a surplus if imports decline and exports increase exchange rates are another variable that can impact the current account | |
what is a capital account | the capital account is one part of a country s balance of payments it provides a summary of the country s capital expenditure and income sometimes the capital account is called the financial account with a separate usually very small capital account listed separately the summary of transactions consists of imports and exports of goods services capital and transfer payments such as foreign aid and remittances the capital account measures the changes in national ownership of assets whereas the current account measures the country s net income | |
what is a balance of payments | a country s balance of payments bop is a statement of all transactions made between entities in that country and the rest of the world over a defined period such as a quarter or a year it includes both the current account and the capital account in theory the sum of all transactions recorded in the balance of payments should be zero however exchange rate fluctuations and differences in accounting practices may prevent this in practice the bottom linea country s current account represents its imports and exports of goods and services payments made to foreign investors and transfers such as foreign aid it can be thought of as the country s net income if it is positive a surplus that indicates it exports more it important a negative deficit current account indicates that the country imports more than it exports the current account balance should be equal but opposite to the country s capital account balance which measures changes in the country s net asset ownership both measures when taken together give a picture of a country s global economic activity | |
what is a current account deficit | the current account deficit is a measurement of a country s trade where the value of the goods and services it imports exceeds the value of the products it exports the current account includes net income such as interest and dividends and transfers such as foreign aid although these components make up only a small percentage of the total current account the current account represents a country s foreign transactions and like the capital account is a component of a country s balance of payments bop 1investopedia michela buttignolunderstanding a current account deficita country can reduce its existing debt by increasing the value of its exports relative to the value of imports it can place restrictions on imports such as tariffs or quotas or it can emphasize policies that promote export such as import substitution industrialization or policies that improve domestic companies global competitiveness the country can also use monetary policy to improve the domestic currency s valuation relative to other currencies through devaluation which reduces the country s export costs while an existing deficit can imply that a country is spending beyond its means having a current account deficit is not inherently disadvantageous if a country uses external debt to finance investments that have higher returns than the interest rate on the debt the country can remain solvent while running a current account deficit if a country is unlikely to cover current debt levels with future revenue streams however it may become insolvent deficits in developed and emerging economiesa current account deficit represents negative net sales abroad developed countries such as the united states often run deficits while emerging economies often run current account surpluses impoverished countries tend to run current account debt real world example of current account deficitsfluctuations in a country s current account are largely dependent on market forces even countries that purposefully run deficits have volatility in the deficit the united kingdom for example saw a decrease in its existing deficit after the brexit vote results in 2016 2the united kingdom has traditionally run a deficit because it is a country that uses high levels of debt to finance excessive imports a large portion of the country s exports are commodities and declining commodity prices have resulted in lower earnings for domestic companies this reduction translates to less income flowing back into the united kingdom increasing its current account deficit 3however after the british pound declined in value as a result of the brexit vote that was held on june 23 2016 the weaker pound decreased the nation s existing debt this decrease occurred because overseas dollar earnings were higher for domestic commodity companies resulting in more cash inflows to the country 2 | |
what are current assets | the current assets account is a balance sheet line item listed under the assets section which accounts for all company owned assets that can be converted to cash within one year assets whose value is recorded in the current assets account are considered current assets current assets include cash cash equivalents accounts receivable stock inventory marketable securities pre paid liabilities and other liquid assets current assets may also be called current accounts investopedia matthew collinsunderstanding current assetspublicly owned companies must adhere to generally accepted accounting principles and reporting procedures following these principles and practices financial statements must be generated with specific line items that create transparency for interested parties one of these statements is the balance sheet which lists a company s assets liabilities and shareholders equity current assets is always the first account listed in a company s balance sheet under the assets section it is comprised of sub accounts that make up the current assets account 1 for example apple inc lists several sub accounts under current assets that combine to make up total current assets which is the value of all current assets sub accounts this section is important for investors because it shows the company s short term liquidity according to apple s balance sheet for fiscal year 2023 it had 143 million in the current assets account it could convert to cash within one year 2 this short term liquidity is vital if apple were to experience issues paying its short term obligations it could liquidate these assets to help cover these debts depending on the nature of the business and the products it markets current assets can range from barrels of crude oil fabricated goods inventory for works in progress raw materials or foreign currency types of current assetsmany assets can be considered current by different businesses throughout all industries in general most industries group their current assets into these sub accounts however you might see others 3on the balance sheet the current asset sub accounts are normally displayed in order of current asset liquidity the assets most easily converted into cash are ranked higher by the finance division or accounting firm that prepared the report the order in which these accounts appear might differ because each business can account for the included assets differently by definition assets in the current assets account are cash or can be quickly converted to cash cash equivalents are certificates of deposit money market funds short term government bonds and treasury bills 4to qualify as current assets these items must not have any restrictions that inhibit their short term liquidity marketable securities is the account where the total value of liquid investments that can be quickly converted to cash without reducing their market value is entered 5 for example if shares of a company trade in very low volumes it may not be possible to convert them to cash without impacting their market value these shares would not be considered liquid and therefore would not have their value entered into the current assets account accounts receivable the value of all money due to a company for goods or services delivered or used but not yet paid for by customers is entered in current assets as long as the accounts can be expected to be paid within a year 6 if a business makes sales by offering longer credit terms to its customers some of its receivables may not be included in the current assets account if an account is never collected it is entered as a bad debt expense and not included in the current assets account it is also possible that some receivables are not expected to be collected on this consideration is reflected in the allowance for doubtful accounts a sub account whose value is subtracted from the accounts receivable account inventory which represents raw materials components and finished products is included in the current assets account 7 however different accounting methods can adjust inventory at times it may not be as liquid as other qualified current assets depending on the product and the industry sector for example there is little or no guarantee that a dozen units of high cost heavy earth moving equipment may be sold over the next year but there is a relatively high chance of a successful sale of a thousand umbrellas in the coming rainy season for these reasons you should view inventory with a skeptical eye read through the company reports or browse the internet to determine what is going on with a company s inventory it might also just be standard practice or a trend in the industry for inventory to be at specific levels inventory also blocks working capital if demand shifts unexpectedly which is more common in some industries than others inventory can become backlogged prepaid expenses which represent advance payments made by a company for goods and services to be received in the future are considered current assets although they cannot be converted into cash they are payments already made these payments free up capital for other uses prepaid expenses might include payments to insurance companies or contractors 8many companies categorize liquid investments into the marketable securities account but some can be accounted for in the other short term investments account an example would be excess funds invested in a short term security putting the funds to work but keeping the option of accessing them if needed current assets vs non current assetsif current assets are those which can be converted to cash within one year non current assets are those which cannot be converted within one year on a balance sheet you might find some of the same asset accounts under current assets and non current assets this is because those same types of assets might be tied up for a longer period such as a marketable security that cannot be sold in one year s time or which would be sold for much less than their purchase price property plants buildings facilities equipment and other illiquid investments are all examples of non current assets because they can take a significant amount of time to sell non current assets are also valued at their purchase price because they are held for longer times and depreciate 9 current assets are valued at fair market value and don t depreciate formula for current assetsthe total current assets formulation is a simple summation of all the assets that can be converted to cash within one year if a current asset subcategory is not listed in this formula you can add it to other liquid assets you gather the current asset information from a balance sheet and add it typically it is already totaled up for you on the balance sheet under total current assets current assets c ce i ar ms pe olawhere c cashce cash equivalentsi inventoryar accounts receivablems marketable securitiespe prepaid expensesola other liquid assets begin aligned text current assets c ce i ar ms pe ola textbf where text c cash text ce cash equivalents text i inventory text ar accounts receivable text ms marketable securities text pe prepaid expenses text ola other liquid assets end aligned current assets c ce i ar ms pe olawhere c cashce cash equivalentsi inventoryar accounts receivablems marketable securitiespe prepaid expensesola other liquid assets real world exampleleading retailer walmart inc s wmt total current assets for the 2024 fiscal year was 76 9 billion 10in comparison for fy 2023 microsoft corp s msft total current assets was 184 3 billion 11 | |
how do investors use current assets | the total current assets figure is of prime importance to company management regarding the daily operations of a business as payments toward bills and loans become due management must have the necessary cash the dollar value represented by the total current assets figure reflects the company s cash and liquidity position it allows management to reallocate and liquidate assets if necessary to continue business operations creditors and investors keep a close eye on the current assets account to assess whether a business is capable of paying its obligations many use a variety of liquidity ratios representing a class of financial metrics used to determine a debtor s ability to pay off current debt obligations without raising additional funds financial ratios that use current assetsthe following ratios are commonly used to measure a company s liquidity position each ratio uses different current assets sub accounts compared against the value of a company s current liabilities account 12the cash ratio is the most conservative as it considers only cash and cash equivalents the current ratio is the most accommodating and includes various assets from the current assets account these multiple measures assess the company s ability to pay outstanding debts and cover liabilities and expenses without liquidating its fixed assets | |
what are current and non current assets | current assets is an account where assets that can be converted into cash within one fiscal year or operating cycle are entered non current assets is an account where assets that cannot be quickly converted into cash often selling for less than the purchase price are entered | |
what are some examples of current assets | the current assets account can be found on a firm s balance sheet common examples of current assets accounts include | |
what are current liabilities | current liabilities are a company s short term financial obligations that are due within one year or within a normal operating cycle an operating cycle also referred to as the cash conversion cycle is the time it takes a company to purchase inventory and convert it to cash from sales an example of a current liability is money owed to suppliers in the form of accounts payable sydney saporito investopediaunderstanding current liabilitiescurrent liabilities are typically settled using current assets which are assets that are used up within one year current assets include cash or accounts receivable which is money owed by customers for sales the ratio of current assets to current liabilities is important in determining a company s ongoing ability to pay its debts as they are due accounts payable is typically one of the largest current liability accounts on a company s financial statements and it represents unpaid supplier invoices companies try to match payment dates so that their accounts receivable are collected before the accounts payable are due to suppliers for example a company might have 60 day terms for money owed to their supplier which results in requiring their customers to pay within a 30 day term current liabilities can also be settled by creating a new current liability such as a new short term debt obligation companies will include liabilities on their balance sheet some businesses will use a common size balance sheet that shows numeric values and the relative percentage of the liability below is a list of the most common current liabilities that are found on the balance sheet sometimes companies use an account called other current liabilities as a catch all line item on their balance sheets to include all other liabilities due within a year that are not classified elsewhere current liability accounts can vary by industry or according to various government regulations analysts and creditors often use the current ratio the current ratio measures a company s ability to pay its short term financial debts or obligations the ratio which is calculated by dividing current assets by current liabilities shows how well a company manages its balance sheet to pay off its short term debts and payables it shows investors and analysts whether a company has enough current assets on its balance sheet to satisfy or pay off its current debt and other payables the quick ratio is the same formula as the current ratio except that it subtracts the value of total inventories beforehand the quick ratio is a more conservative measure for liquidity since it only includes the current assets that can quickly be converted to cash to pay off current liabilities a number higher than one is ideal for both the current and quick ratios since it demonstrates that there are more current assets to pay current short term debts however if the number is too high it could mean the company is not leveraging its assets as well as it otherwise could be although the current and quick ratios show how well a company converts its current assets to pay current liabilities it s critical to compare the ratios to companies within the same industry the analysis of current liabilities is important to investors and creditors banks for example want to know before extending credit whether a company is collecting or getting paid for its accounts receivable in a timely manner on the other hand on time payment of the company s payables is important as well both the current and quick ratios help with the analysis of a company s financial solvency and management of its current liabilities accounting for current liabilities | |
when a company determines that it received an economic benefit that must be paid within a year it must immediately record a credit entry for a current liability depending on the nature of the received benefit the company s accountants classify it as either an asset or expense which will receive the debit entry | for example a large car manufacturer receives a shipment of exhaust systems from its vendors to whom it must pay 10 million within the next 90 days because these materials are not immediately placed into production the company s accountants record a credit entry to accounts payable and a debit entry to inventory an asset account for 10 million when the company pays its balance due to suppliers it debits accounts payable and credits cash for 10 million suppose a company receives tax preparation services from its external auditor to whom it must pay 1 million within the next 60 days the company s accountants record a 1 million debit entry to the audit expense account and a 1 million credit entry to the other current liabilities account when a payment of 1 million is made the company s accountant makes a 1 million debit entry to the other current liabilities account and a 1 million credit to the cash account example of current liabilitiesbelow is a current liabilities example using the consolidated balance sheet of macy s inc m from the company s 10 q report reported on aug 3 2019 image by sabrina jiang investopedia 2020 | |
why do investors care about current liabilities | the analysis of current liabilities is important to investors and creditors for example banks want to know before extending credit whether a company is collecting or getting paid for its accounts receivable in a timely manner on the other hand on time payment of the company s payables is important as well both the current and quick ratios help with the analysis of a company s financial solvency and management of its current liabilities | |
what are some current liabilities listed on a balance sheet | the most common current liabilities found on the balance sheet include accounts payable short term debt such as bank loans or commercial paper issued to fund operations dividends payable notes payable the principal portion of outstanding debt the current portion of deferred revenue such as prepayments by customers for work not yet completed or earned current maturities of long term debt interest payable on outstanding debts including long term obligations and income taxes owed within the next year sometimes companies use an account called other current liabilities as a catch all line item on their balance sheets to include all other liabilities due within a year that are not classified elsewhere |
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