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what is days payable outstanding dpo | days payable outstanding dpo is a financial ratio that indicates the average time in days that a company takes to pay its bills and invoices to its trade creditors which may include suppliers vendors or financiers the ratio is typically calculated on a quarterly or annual basis and it indicates how well the company s cash outflows are being managed a company with a higher value of dpo takes longer to pay its bills which means that it can retain available funds for a longer duration allowing the company an opportunity to use those funds in a better way to maximize the benefits a high dpo however may also be a red flag indicating an inability to pay its bills on time investopedia joules garciaformula for days payable outstanding dpo dpo accounts payable number of dayscogswhere cogs cost of goods sold beginning inventory p ending inventoryp purchases begin aligned text dpo frac text accounts payable times text number of days text cogs textbf where text cogs text cost of goods sold qquad text beginning inventory text p text ending inventory text p text purchases end aligned dpo cogsaccounts payable number of days where cogs cost of goods sold beginning inventory p ending inventoryp purchases | |
how to calculate dpo | to manufacture a salable product a company needs raw material utilities and other resources in terms of accounting practices the accounts payable represents how much money the company owes to its supplier s for purchases made on credit additionally there is a cost associated with manufacturing the salable product and it includes payment for utilities like electricity and employee wages this is represented by cost of goods sold cogs which is defined as the cost of acquiring or manufacturing the products that a company sells during a period both of these figures represent cash outflows and are used in calculating dpo over a period of time the number of days in the corresponding period is usually taken as 365 for a year and 90 for a quarter the formula takes account of the average per day cost being borne by the company for manufacturing a salable product the numerator figure represents payments outstanding the net factor gives the average number of days taken by the company to pay off its obligations after receiving the bills two different versions of the dpo formula are used depending upon the accounting practices in one of the versions the accounts payable amount is taken as the figure reported at the end of the accounting period like at the end of fiscal year quarter ending sept 30 this version represents the dpo value as of the mentioned date in another version the average value of beginning ap and ending ap is taken and the resulting figure represents the dpo value during that particular period cogs remains the same in both versions dpo is a form of turnover ratio that measures the efficiency of a company | |
what does dpo tell you | generally a company acquires inventory utilities and other necessary services on credit it results in accounts payable ap a key accounting entry that represents a company s obligation to pay off the short term liabilities to its creditors or suppliers beyond the actual dollar amount to be paid the timing of the payments from the date of receiving the bill till the cash actually going out of the company s account also becomes an important aspect of the business dpo attempts to measure this average time cycle for outward payments and is calculated by taking the standard accounting figures into consideration over a specified period of time additionally a company may need to balance its outflow tenure with that of the inflow imagine if a company allows a 90 day period for its customers to pay for the goods they purchase but has only a 30 day window to pay its suppliers and vendors this mismatch will result in the company being prone to cash crunch frequently companies must strike a delicate balance with dpo companies having high dpo can use the available cash for short term investments and to increase their working capital and free cash flow fcf however higher values of dpo may not always be a positive for the business if the company takes too long to pay its creditors it risks jeopardizing its relations with the suppliers and creditors who may refuse to offer the trade credit in the future or may offer it on terms that may be less favorable to the company the company may also be losing out on any discounts on timely payments if available and it may be paying more than necessary on the other hand a low dpo indicates that a company is paying its bills to suppliers quickly which may suggest that the company is managing its cash flow effectively a low dpo is considered to be a positive sign for a company s financial health as it shows that the company is able to pay its bills in a timely manner this also helps maintain good relationship with suppliers however a low dpo may also indicate that the company is not taking advantage of discounts offered by suppliers for early payment for example a company may be extended a payment period of 30 days if it usually pays invoices after 10 days the company could have been earning interest on the funds for an additional 20 days before remitting payment a high dpo can indicate a company that is using capital resourcefully but it can also show that the company is struggling to pay its creditors special considerationstypical dpo values vary widely across different industry sectors and it is not worthwhile comparing these values across different sector companies a firm s management will instead compare its dpo to the average within its industry to see if it is paying its vendors too quickly or too slowly depending upon the various global and local factors like the overall performance of the economy region and sector plus any applicable seasonal impacts the dpo value of a particular company can vary significantly from year to year company to company and industry to industry dpo value also forms an integral part of the formula used for calculating the cash conversion cycle ccc another key metric that expresses the length of time that a company takes to convert the resource inputs into realized cash flows from sales while dpo focuses on the current outstanding payable by the business the superset ccc follows the entire cash time cycle as the cash is first converted into inventory expenses and accounts payable through to sales and accounts receivable and then back into cash in hand when received | |
how to improve dpo | most often companies want a high dpo as long as this doesn t indicate it s inability to make payment a company can negotiate with its suppliers to extend payment terms if a company really prioritizes maximizing its dpo it can decline to take advantage of early payment discounts by using electronic payment systems a company can streamline its payment processes and make payments more quickly and efficiently this means that instead of issuing slower means of payment such as a check that may have to be processed and mailed early in order for it to be received in time instead a company can issue electronic payments the instant something is due if a company wants to decrease its dpo a company can also regularly monitor its accounts payable to identify and resolve any issues that may be delaying payment to suppliers a company can also more quickly resolve supplier payment problems if it has accurate and up to date records dpo may be most valuable when compared over time for example a company can see whether its dpo is improving or worsening over time and make the appropriate course of action accordingly advantages and disadvantages of dpoa company can use dpo to understand its financial flexibility by evaluating its dpo it can project its creditworthiness liquidity and financial health when a company s dpo is high this may either mean the company is struggling to pay bills on time or is effectively using credit terms only by measuring dpo can a company further evaluate | |
when a company knows its dpo it can better assess whether it is paying its bills quickly which helps maintain good relationships with suppliers a company usually wants to balance the benefit of paying a vendor early against the purchasing power lost by spending capital early in many cases a company may want to be on the good graces of a supplier to potentially receive goods earlier | while dpo is useful in comparing relative strength among companies there is no clear cut figure for what constitutes a healthy days payable outstanding as the dpo varies significantly by industry competitive positioning of the company and its bargaining power large companies with a strong power of negotiation are able to contract for better terms with suppliers and creditors effectively producing lower dpo figures than they would have otherwise in addition a higher dpo may mean several things and usually must be further investigated as the figure by itself doesn t mean much for example a company may be thinking that its dpo means it is efficiently using capital on the contrary the company may actually be paying vendors late and racking up late fees therefore dpo by itself doesn t amount to much unless management knows the drivers behind it can be used to gauge the financial health of a company | |
is useful in measuring the relationship with suppliers | no clear cut figure for what is good or badoften varies across industriesusually changes based on the size of company and purchasing poweroften requires further research to understandreal world example of dpothe snippet below is taken from amazon s consolidated statement of operations for the fiscal year ended dec 31 2023 1 the figures represent the amount of expenses related to the cost of sales note that in the calculation below other operating expenses such as sales marketing technology general or administrative costs have been omitted in addition amazon reports its accounts payable balance on its balance sheet 2using this information you can calculate amazon s dpo for the accounts payable portion we can assume that the beginning balance of one period is the ending balance of the prior period therefore using this method the average balance of accounts payable for 2023 was 82 291 million alternatively amazon s average daily accounts payable balance was 225 5 million for the cogs the company directly reports that as cost of sales for 2023 amazon s cost of goods sold was 272 3 billion therefore dpo can be calculated as 82 3 billion 272 3 billion 365 days therefore amazon s dpo is approximately 110 days this dpo calculation demonstrates amazon s ability to leverage its size to enter into contracts in which it has long open periods where it is not expected to pay an invoice | |
what does days payable outstanding mean in accounting | as a financial ratio days of payable outstanding dpo shows the amount of time that companies take to pay financiers creditors vendors or suppliers the dpo may indicate a few things namely how a company is managing its cash or the means for a company to utilize this cash towards short term investments that in turn may amplify their cash flow the dpo is measured on a quarterly or annual term | |
how do you calculate days payable outstanding | to calculate days of payable outstanding dpo the following formula is applied dpo accounts payable x number of days cost of goods sold cogs here cogs refers to beginning inventory plus purchases subtracting the ending inventory accounts payable on the other hand refers to company purchases that were made on credit that are due to its suppliers | |
what is the difference between dpo and dso | days payable outstanding dpo is the average time for a company to pay its bills by contrast days sales outstanding dso is the average length of time for sales to be paid back to the company when a dso is high it indicates that the company is waiting extended periods to collect money for products that it sold on credit by contrast a high dpo could be interpreted multiple ways either indicating that the company is utilizing its cash on hand to create more working capital or indicating poor management of free cash flow the bottom linedays payable outstanding or dpo is one of several metrics used to gauge the financial health of a company in short it measures about how many days it takes the company to pay its obligations there s no single standard for a good dpo value a high dpo can be a can be a positive sign that a company is using its capital resourcefully but if it s too high it may be struggling to make payments conversely a low dpo could mean that a company pays its bills quickly but it may also be missing out on potential interest by holding cash longer | |
what is days sales of inventory dsi | the days sales of inventory dsi is a financial ratio that indicates the average time in days that a company takes to turn its inventory including goods that are a work in progress into sales dsi is also known as the average age of inventory days inventory outstanding dio days in inventory dii days sales in inventory or days inventory and is interpreted in multiple ways indicating the liquidity of the inventory the figure represents how many days a company s current stock of inventory will last generally a lower dsi is preferred as it indicates a shorter duration to clear off the inventory though the average dsi varies from one industry to another investopedia zoe hansendays sales of inventory dsi formula and calculationd s i average inventory c o g s 365 days where d s i days sales of inventory c o g s cost of goods sold begin aligned dsi frac text average inventory cogs times 365 text days textbf where dsi text days sales of inventory cogs text cost of goods sold end aligned dsi cogsaverage inventory 365 dayswhere dsi days sales of inventorycogs cost of goods sold to manufacture a salable product a company needs raw material and other resources which form the inventory and come at a cost additionally there is a cost linked to the manufacturing of the salable product using the inventory such costs include labor costs and payments towards utilities like electricity which is represented by the cost of goods sold cogs and is defined as the cost of acquiring or manufacturing the products that a company sells during a period dsi is calculated based on the average value of the inventory and cost of goods sold during a given period or as of a particular date mathematically the number of days in the corresponding period is calculated using 365 for a year and 90 for a quarter in some cases 360 days is used instead the numerator figure represents the valuation of the inventory the denominator cost of sales number of days represents the average per day cost being spent by the company for manufacturing a salable product the net factor gives the average number of days taken by the company to clear the inventory it possesses two different versions of the dsi formula can be used depending upon the accounting practices in the first version the average inventory amount is taken as the figure reported at the end of the accounting period such as at the end of the fiscal year ending june 30 this version represents dsi value as of the mentioned date in another version the average value of start date inventory and end date inventory is taken and the resulting figure represents dsi value during that particular period therefore average inventory ending inventory text average inventory text ending inventory average inventory ending inventoryoraverage inventory beginning inventory ending inventory 2 text average inventory frac text beginning inventory text ending inventory 2 average inventory 2 beginning inventory ending inventory cogs value remains the same in both the versions | |
what dsi tells you | since dsi indicates the duration of time a company s cash is tied up in its inventory a smaller value of dsi is preferred a smaller number indicates that a company is more efficiently and frequently selling off its inventory which means rapid turnover leading to the potential for higher profits assuming that sales are being made in profit on the other hand a large dsi value indicates that the company may be struggling with obsolete high volume inventory and may have invested too much into the same it is also possible that the company may be retaining high inventory levels in order to achieve high order fulfillment rates such as in anticipation of bumper sales during an upcoming holiday season dsi is a measure of the effectiveness of inventory management by a company inventory forms a significant chunk of the operational capital requirements for a business by calculating the number of days that a company holds onto the inventory before it is able to sell it this efficiency ratio measures the average length of time that a company s cash is locked up in the inventory however this number should be looked upon cautiously as it often lacks context dsi tends to vary greatly among industries depending on various factors like product type and business model therefore it is important to compare the value among the same sector peer companies companies in the technology automobile and furniture sectors can afford to hold on to their inventories for long but those in the business of perishable or fast moving consumer goods fmcg cannot therefore sector specific comparisons should be made for dsi values special considerationsone must also note that a high dsi value may be preferred at times depending on the market dynamics if a short supply is expected for a particular product in the next quarter a business may be better off holding on to its inventory and then selling it later for a much higher price thus leading to improved profits in the long run for example a drought situation in a particular soft water region may mean that authorities will be forced to supply water from another area where water quality is hard it may lead to a surge in demand for water purifiers after a certain period which may benefit the companies if they hold onto inventories irrespective of the single value figure indicated by dsi the company management should find a mutually beneficial balance between optimal inventory levels and market demand dsi vs inventory turnovera similar ratio related to dsi is inventory turnover which refers to the number of times a company is able to sell or use its inventory over the course of a particular time period such as quarterly or annually inventory turnover is calculated as the cost of goods sold divided by average inventory it is linked to dsi via the following relationship d s i 1 inventory turnover 365 days dsi frac 1 text inventory turnover times 365 text days dsi inventory turnover1 365 daysbasically dsi is an inverse of inventory turnover over a given period higher dsi means lower turnover and vice versa in general the higher the inventory turnover ratio the better it is for the company as it indicates a greater generation of sales a smaller inventory and the same amount of sales will also result in high inventory turnover in some cases if the demand for a product outweighs the inventory on hand a company will see a loss in sales despite the high turnover ratio thus confirming the importance of contextualizing these figures by comparing them against those of industry competitors dsi is the first part of the three part cash conversion cycle ccc which represents the overall process of turning raw materials into realizable cash from sales the other two stages are days sales outstanding dso and days payable outstanding dpo while the dso ratio measures how long it takes a company to receive payment on accounts receivable the dpo value measures how long it takes a company to pay off its accounts payable overall the ccc value attempts to measure the average duration of time for which each net input dollar cash is tied up in the production and sales process before it gets converted into cash received through sales made to customers | |
why the dsi matters | managing inventory levels is vital for most businesses and it is especially important for retail companies or those selling physical goods while the inventory turnover ratio is one of the best indicators of a company s level of efficiency at turning over its inventory and generating sales from that inventory the days sales of inventory ratio goes a step further by putting that figure into a daily context and providing a more accurate picture of the company s inventory management and overall efficiency dsi and inventory turnover ratio can help investors to know whether a company can effectively manage its inventory when compared to competitors a 2014 paper in management science does inventory productivity predict future stock returns a retailing industry perspective suggests that stocks in companies with high inventory ratios tend to outperform industry averages 1 a stock that brings in a higher gross margin than predicted can give investors an edge over competitors due to the potential surprise factor conversely a low inventory ratio may suggest overstocking market or product deficiencies or otherwise poorly managed inventory signs that generally do not bode well for a company s overall productivity and performance example of dsithe leading retail corporation walmart wmt had inventory worth 54 9 billion and cost of goods sold worth 490 billion for the fiscal year 2023 23 dsi is therefore while inventory value is available on the balance sheet of the company the cogs value can be sourced from the annual financial statement care should be taken to include the sum total of all the categories of inventory which includes finished goods work in progress raw materials and progress payments since walmart is a retailer it does not have any raw material works in progress and progress payments its entire inventory is comprised of finished goods | |
what does a low days sales of inventory indicate | a low dsi suggests that a firm is able to efficiently convert its inventories into sales this is considered to be beneficial to a company s margins and bottom line and so a lower dsi is preferred to a higher one a very low dsi however can indicate that a company does not have enough inventory stock to meet demand which could be viewed as suboptimal | |
how do you interpret days sales of inventory | dsi estimates how many days it takes on average to completely sell a company s current inventories | |
what is a good days sale of inventory number | in order to efficiently manage inventories and balance idle stock with being understocked many experts agree that a good dsi is somewhere between 30 and 60 days this of course will vary by industry company size and other factors | |
what is days sales outstanding dso | days sales outstanding dso is a measure of the average number of days that it takes a company to collect payment for a sale dso is often determined on a monthly quarterly or annual basis to compute dso divide the average accounts receivable during a given period by the total value of credit sales during the same period and then multiply the result by the number of days in the period being measured days sales outstanding is an element of the cash conversion cycle and may also be referred to as days receivables or average collection period investopedia tara anandunderstanding days sales outstanding dso given the vital importance of cash flow in running a business it is in a company s best interest to collect its outstanding accounts receivables as quickly as possible companies can expect with relative certainty that they will be paid their outstanding receivables but because of the time value of money principle time spent waiting to be paid is money lost that said the definition of quickly depends on the business in the financial industry relatively long payment terms are common in the agriculture and fuel industries fast payment can be crucial in general small businesses rely more heavily on steady cash flow than large diversified companies 1dso accounts receivable total credit sales number of days begin aligned text dso frac text accounts receivable text total credit sales times text number of days end aligned dso total credit salesaccounts receivable number of days by quickly turning sales into cash a company has a chance to put the cash to use again more quickly | |
what the numbers tell you | a high dso number shows that a company is selling its product to customers on credit and waiting a long time to collect the money this can lead to cash flow problems a low dso value means that it takes a company fewer days to collect its accounts receivable that company is promptly getting the money it needs to create new business in effect determining the average length of time that a company s outstanding balances are carried in receivables can reveal a great deal about the nature of the company s cash flow it is important to remember that the formula for calculating dso only accounts for credit sales while cash sales may be considered to have a dso of 0 they are not factored into dso calculations if they were factored into the calculation they would decrease the dso and companies with a high proportion of cash sales would have lower dsos than those with a high proportion of credit sales applications of days sales outstandingdays sales outstanding can be analyzed in a wide variety of ways it suggests how efficient the company s collections department is and the degree to which the company is maintaining customer satisfaction it also helps identify customers who are not creditworthy looking at a dso value for a company for a single period can provide a good benchmark for quickly assessing a company s cash flow however trends in dso over time are much more useful they can act as an early warning sign of trouble good and bad dso numbersif a company s dso is increasing it s a warning sign that something is wrong customer satisfaction might be declining or the salespeople may be offering longer terms of payment to drive increased sales perhaps the company may be allowing customers with poor credit to make purchases on credit a sharp increase in dso can cause a company serious cash flow problems if a company s ability to make its own payments in a timely fashion is disrupted it may be forced to make drastic changes average dso for companies across various industries in the third quarter of 2022 2generally when looking at a given company s cash flow it is helpful to track that company s dso over time to determine if its dso is trending up or down or if there are patterns in the company s cash flow history dso may vary consistently on a monthly basis particularly if the company s product is seasonal if a company has a volatile dso this may be cause for concern but if its dso regularly dips during a particular season each year it could be no reason to worry limitations of days sales outstandingas a metric attempting to gauge the efficiency of a business days sales outstanding comes with a limitation that is important for any investor to consider | |
when using dso to compare the cash flows of a number of companies you should compare companies within the same industry with similar business models and revenue numbers if you try to compare companies in different industries and of different sizes the results you ll get will be misleading because they often have very different dso benchmarks and targets | dso is not particularly useful in comparing companies with significant differences in the proportion of sales that are made on credit the dso of a company with a low proportion of credit sales does not indicate much about that company s cash flow comparing such companies with those that have a high proportion of credit sales also says little in addition dso is not a perfect indicator of a company s accounts receivable efficiency fluctuating sales volumes can affect dso with any increase in sales lowering the dso value delinquent days sales outstanding ddso is a good alternative for credit collection assessment or for use alongside dso like any metric measuring a company s performance dso should not be considered alone but rather should be used with other metrics | |
how do you calculate dso | divide the total number of accounts receivable during a given period by the total dollar value of credit sales during the same period then multiply the result by the number of days in the period being measured | |
what is a good dso ratio | a good or bad dso ratio may vary according to the type of business and industry that the company operates in that said a number under 45 is considered to be good for most businesses 3 it suggests that the company s cash is flowing in at a reasonably efficient rate ready to be used to generate new business | |
how do you calculate dso for 3 months | during the last three months of the year company a made a total of 1 500 000 in credit sales and had 1 050 000 in accounts receivable the time period covers 92 days company a s dso for that period is calculated as follows the dso for this business in this period is 64 4 | |
why is dso important | a high dso number can indicate that the cash flow of the business is not ideal it varies by business but a number below 45 is considered good it s best to track the number over time if the number is climbing there may be something wrong in the collections department or the company may be selling to customers with less than optimal credit in any case the company s cash flow is at risk the debt collections experts at atradius suggest that tracking dso over time also creates an incentive for the payments department to stay on top of unpaid invoices 1 needless to say a small business can use its days sales outstanding number to identify and flag customers that are weighing it down by not paying promptly the bottom linein many businesses the days sales outstanding number can be a valuable indicator of the efficiency of the business and the quality of its cash flow if the number gets too high it could even disrupt the normal operations of the business causing its own outstanding payments to be delayed in any case cash delayed is cash lost to your business | |
what is days working capital | days working capital describes how many days it takes for a company to convert its working capital into revenue the more days a company has of working capital the more time it takes to convert that working capital into sales the higher the days working capital number the less efficient a company is sydney saporito investopediaunderstanding days working capitalworking capital also known as net working capital is the difference between a company s current assets like cash accounts receivable and inventories of raw materials and finished goods and its current liabilities like accounts payable and the current portion of debt due within one year the difference between current assets and current liabilities represents the company s short term cash surplus or shortfall a positive working capital balance means that current assets cover current liabilities conversely a negative working capital balance means that current liabilities exceed current assets working capital is a measure of both a company s operational efficiency and its short term financial health although working capital is important days working capital demonstrates how many days it takes to convert working capital into revenue the more days a company has of working capital the more time it takes to convert that working capital into sales in other words a high value of days working capital number is indicative of an inefficient company while negative and positive working capital calculations provide a general overview of working capital days working capital provides analysts with a numeric measure for comparison a low value for days working capital could mean a company is quickly using its working capital and converting it into sales if the days working capital number is decreasing it might be due to an increase in sales conversely if the days working capital number is high or increasing it could mean that sales are decreasing or that perhaps the company is taking longer to collect payment for its payables days working capital formula and calculationdwc average working capital 365 sales revenue where average working capital working capital averaged for a period of time sales revenue income from sales begin aligned text dwc frac text average working capital times text 365 text sales revenue textbf where text average working capital text working capital averaged text for a period of time text sales revenue text income from sales end aligned dwc sales revenueaverage working capital 365 where average working capital working capital averagedfor a period of timesales revenue income from sales working capital is a measure of liquidity working capital is calculated by the following working capital current assets current liabilities where current assets assets converted to cash value within a normal operating cycle current liabilities debts or obligations due within a normal operating cycle begin aligned text working capital text current assets text current liabilities textbf where text current assets text assets converted to cash value text within a normal operating cycle text current liabilities text debts or obligations due within text a normal operating cycle end aligned working capital current assets current liabilitieswhere current assets assets converted to cash valuewithin a normal operating cyclecurrent liabilities debts or obligations due withina normal operating cycle | |
the de minimis tax rule an overview | the de minimis tax rule sets the threshold at which a discount bond should be taxed as a capital gain rather than as ordinary income the rule states that a discount that is less than a quarter point per full year between its time of acquisition and its maturity is too small to be considered a market discount for tax purposes instead the accretion from the purchase price to the par value should be treated as a capital gain if it is held for more than one year de minimis is latin for about minimal things de minimis tax rule explainedunder the de minimis tax rule if a municipal bond is purchased for a minimal discount it is subject to capital gains tax rather than the usually higher ordinary income tax rate according to the internal revenue service irs a minimal discount defined as an amount less than a quarter of a percent of the par value multiplied by the number of complete years between the purchase date of the bond and its maturity date is too small to be considered a market discount for income tax purposes to determine whether a municipal bond is subject to the capital gains tax or ordinary income tax using the de minimis tax rule multiply the face value by 0 25 and multiply the result by the number of full years between the discounted bond s purchase date and the maturity date subtract the derived de minimis amount from the bond s par value if this amount is higher than the purchase price of the discount bond the purchased bond is subject to the ordinary income tax rate if the purchase price is above the de minimis threshold capital gains tax is due de minimis means about minimal things an insignificant discount is not treated as a capital gain in other words if the market discount is less than the de minimis amount the discount on the bond is generally treated as a capital gain upon its sale or redemption rather than as ordinary income say you are looking at a 10 year municipal bond with a par value of 100 and five years left until maturity the de minimis discount is 100 par value x 0 0025 x 5 years 1 25 you then subtract the 1 25 from the par value to get the de minimis cut off amount which in this example is 98 75 100 1 25 this is the lowest price at which the bond can be purchased for the irs to treat the discount as a capital gain in this example if the price of the discount bond you purchased is below 98 75 per 100 of par value you will be subject to ordinary income tax under the de minimis tax rule so if you purchased this bond for 95 ordinary income tax will apply when the bond is redeemed at par since 95 is less than 98 75 another way to look at it is the market discount of 100 95 5 is higher than the de minimis amount of 1 25 therefore the profit on the sale of the bond is income not capital gains a basic bond pricing principle is that when interest rates rise bond prices fall and vice versa the de minimis tax rule typically applies in an environment of rising interest rates during such periods the price of bonds falls and they are offered at discounts or deep discounts to par | |
what is a dead cat bounce | a dead cat bounce is a temporary short lived recovery of asset prices from a prolonged decline or a bear market that is followed by the continuation of the downtrend frequently downtrends are interrupted by brief periods of recovery or small rallies during which prices temporarily rise the name dead cat bounce is based on the notion that even a dead cat will bounce if it falls far enough and fast enough it is an example of a sucker s rally investopedia laura porter | |
what does a dead cat bounce tell you | a dead cat bounce is a price pattern used by technical analysts it is considered a continuation pattern where at first the bounce may appear to be a reversal of the prevailing trend but it is quickly followed by a continuation of the downward price move it becomes a dead cat bounce and not a reversal after the price drops below its prior low frequently downtrends are interrupted by brief periods of recovery or small rallies when prices temporarily rise this can be a result of traders or investors closing out short positions or buying on the assumption that the security has reached a bottom a dead cat bounce is a price pattern that is usually recognized in hindsight analysts may attempt to predict that the recovery will be only temporary by using certain technical and fundamental analysis tools a dead cat bounce can be seen in the broader economy such as during the depths of a recession or it can be seen in the price of an individual stock or group of stocks short term traders may attempt to profit from the small rally and traders and investors might try to use the temporary reversal as a good opportunity to initiate a short position similar to identifying a market peak or trough recognizing a dead cat bounce ahead of time is fraught with difficulty even for skilled investors in march 2009 for example economist nouriel roubini of new york university referred to the incipient stock market recovery as a dead cat bounce predicting that the market would reverse course in short order and plummet to new lows instead march 2009 marked the beginning of a protracted bull market eventually surpassing its pre recession high examples of a dead cat bouncelet s consider a historical example stock prices for cisco systems peaked at 82 per share in march 2000 before falling to 15 81 in march 2001 amid the dot com collapse cisco saw many dead cat bounces in the ensuing years the stock recovered to 20 44 by november 2001 only to fall to 10 48 by september 2002 fast forward to june 2016 and cisco traded at 28 47 per share barely one third of its peak price during the tech bubble in 2000 a more recent example is the price action in the market following the onset of the global covid 19 pandemic in the spring of 2020 between the week of feb 21 and feb 28 2020 u s markets lost around 12 as headlines began to hit and panic set in the next week the market rose 2 giving some people the impression that the worst was over but this was a classic dead cat bounce as the market subsequently fell an additional 25 over the next two weeks only later during the summer of 2020 did markets recover limitations in identifying a dead cat bounceas mentioned above most of the time a dead cat bounce can only be identified after the fact this means that traders that notice a rally after a steep decline may think it is a dead cat bounce when in reality it is a trend reversal signaling a prolonged upswing | |
how long can a dead cat bounce last | a dead cat bounce typically lasts only a few days although it can sometimes extend over a period of a few months | |
what causes a dead cat bounce | reasons for a dead cat bounce include a clearing of short positions investors incorrectly believing the bottom has been reached or from investors trying to find oversold assets ultimately the dead cat bounce is not founded on fundamentals and so the market continues to decline soon after | |
what is the opposite of a dead cat bounce | an inverted dead cat bounce is a temporary and often severe sell off during an otherwise secular bull market it has many of the characteristics of a dead cat bounce but in reverse the bottom line | |
what is a deadweight loss of taxation | deadweight loss of taxation refers to the measurement of loss caused by the imposition of a new tax this results from a new tax that is more than what is normally paid to the government s taxing authority this theory suggests that imposing a new tax or raising an old one can backfire resulting in insufficient or no gains in government revenues due to the decline in demand for the goods or services being taxed understanding deadweight loss of taxationgovernments impose taxes to collect revenues these funds are used to support public programs and projects such as infrastructure economic aid and social services federal state and local governments frequently decide to raise taxes in order to raise revenues to cover shortfalls although this action may seem like a good idea it often has the opposite effect this is called a deadweight loss of taxation or simply a deadweight loss let s look at a hypothetical example when the government raises taxes on certain goods and services it collects that tax as additional revenue taxes can result in a higher cost of production and a higher purchase price for the consumer though this may eventually cause production volumes and consumer supply to both drop leading to an increase in price and a drop in demand for these goods and services this gap between the taxed and tax free production volumes is the deadweight loss this theory was developed by alfred marshall an economist who specialized in microeconomics 1 according to marshall supply and demand are directly related to production and cost these points intersect in the middle when one changes it throws off the balance 2although there isn t a consensus among experts about whether deadweight loss can be accurately measured many economists agree that taxation can often be counter productive this makes a deadweight loss of taxation a lost opportunity cost deadweight loss of taxation may be viewed as the overall reduction in demand and the subsequent decline in production levels that follow the imposition of a tax which is usually represented graphically factors that contribute to deadweight loss of taxationthere s usually a combination of several factors that make a deadweight loss of taxation occur not all of the factors below may apply to every situation but a deadweight loss is more likely to occur when the following are present | |
how consumers and producers respond to changes in price significantly influences the deadweight loss of taxation when demand or supply is inelastic deadweight loss tends to be higher in these cases consumers and producers may find it challenging to adjust their behavior in response to tax induced price changes | tax elasticity or the degree to which the tax base responds to changes in tax code also plays a factor if individuals or businesses can easily adjust their behavior to minimize tax liabilities deadweight loss may be more pronounced this is because the more flexible a consumer can be to avoid a tax the more opportunities there are for the deadweight loss to occur imagine a situation with very high tax rates this was the case during the prohibition era which is discussed towards the end of this article when rates are very high consumer behavior may be discouraged or materially altered to avoid these rates this may have a greater likelihood of resulting in unintended consequences or lost revenue different taxes can influence economic behavior and deadweight losses in different ways taxes on consumption may affect spending patterns as consumer may no longer want to consume a good if it is more expensive alternatively consumers may seek illegal methods of consuming the good to avoid the tax altogether in perfectly competitive markets deadweight loss may be more evident consider a situation where there are a bunch of different small companies competing in the same industry deadweight loss may be more likely to occur as consumers can hop from one company to another to avoid a single implication from a single firm in a market structure like a monopoly it may be harder for a consumer or producer to avoid an unfavorable outcome due to the large number of small firms while monopolies may exhibit different patterns the degree of competition and market power shapes how taxes affect economic agents and market outcomes last the availability of substitute goods can matter if consumers can easily switch to alternative goods or services in response to a tax the impact on the original product may be more significant think about if the government imposed a specific tax to a certain geographical region consumers could in theory move to a different area this area could have less or no tax than what was assessed before because the consumer was able to move or substitute where they lived they could pose harm to the fiscal plan special considerationstaxation reduces the returns from investments wages rents and entrepreneurship this in turn reduces the incentive to invest work deploy property and take risks but it also encourages taxpayers to spend time and money trying to avoid their tax burden diverting valuable resources from other productive uses most governments levy taxes disproportionately on different people goods services and activities this distorts the natural market distribution of resources the limited resources will move from their otherwise optimal use away from heavily taxed activities and into lightly taxed activities which may not be advantageous to all the economics of taxation also apply to other forms of government financing if a government finances activities through bonds rather than taxation deadweight loss is only delayed higher future taxes must be levied to pay off the bond debt the deadweight loss of inflation is nuanced inflation reduces the economy s production volume in three ways deficit spending means borrowing which only delays deadweight loss of taxation to some future date when the debt must be repaid hypothetical example of deadweight loss of taxationhere s a hypothetical example to show how the deadweight loss of taxation works let s say the mythical city state of braavos imposes a flat 40 income tax on all of its citizens the government stands to collect an additional 1 2 trillion a year through this new tax that big chunk of money which is now going to the government of braavos is no longer available for spending on consumer goods and services or for consumer savings and investment suppose consumer spending and investments decline at least 1 2 trillion and total economic output declines by 2 trillion in this case the deadweight loss is 800 billion the 2 trillion total output less 1 2 trillion consumer spending or investing equals a deadweight loss of 800 billion real world example of deadweight loss of taxationduring the prohibition era in the united states the government looked to slow alcohol consumption by imposing heavy taxes on alcoholic beverages the demand for alcohol exhibited both elastic and inelastic components with some consumers still willing to pay higher prices despite the taxes this inelastic demand led to the emergence of a black market as consumers and producers sought alternatives to buying alcohol legally 3heavy taxes and legal restrictions reduced consumer surplus similarly producer surplus diminished as legal producers encountered restrictions and illegal producers faced legal consequences the combination of these two meant both legal and illegal markets coexisted an unintended consequence of the tax as this meant the government potentially lost out on taxes it would have otherwise collected it s estimated that the federal government lost 11 billion in tax revenue from this course of action 4there are a lot of intricacies around the economics of the prohibition era at its core the government enacted a tax that resulted in it losing income as businesses departed legal markets though you can claim the government may have steered some away from alcohol arguably its primary goal there were financial implications it may not have planned for | |
how is elasticity related to deadweight loss of tax | the more elastic a good is the greater the potential for deadweight loss because consumers and producers can more easily adjust their behavior in response to tax induced price changes if something is elastic consumers may choose a substitute or avoid the good altogether can tax deadweight loss be completely avoided or is it inherent in taxation achieving a tax system entirely free from deadweight loss is challenging if not impossible taxes always introduce some level of distortion to market activities people are naturally inclined to try and minimize their tax liability when possible so consumer behavior in response to almost any tax may be reasonable to expect even to a small degree | |
how can policymakers design tax policies to minimize deadweight loss | policymakers can minimize deadweight loss by designing tax policies that consider the elasticity of demand and supply setting tax rates at optimal levels broadening tax bases and minimizing administrative and compliance costs government officials who draft tax legislation updates often keep this all in mind when proposing changes as all implications must be considered before decisions can be made | |
how does tax deadweight loss relate to economic efficiency | tax deadweight loss is a measure of the efficiency loss in a market due to taxes when taxes are introduced they somewhat mess up the natural order of markets this is because they change the way consumers interact with goods and make decisions all else being equal the most inefficient taxes will have the largest deadweight losses as they will prove to drive the most consumers away from favorable economic activity the bottom linedeadweight loss of taxation refers to the economic inefficiency resulting from taxes that distort market transactions leading to a reduction in overall economic welfare the magnitude of deadweight loss is influenced by a number of things like the elasticity of supply and demand tax rates and market conditions | |
what is deadweight loss | a deadweight loss is a cost to society created by market inefficiency which occurs when supply and demand are out of equilibrium mainly used in economics deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources price ceilings such as price controls and rent controls price floors such as minimum wage and living wage laws and taxation can all potentially create deadweight losses with a reduced level of trade the allocation of resources in a society may also become inefficient investopedia eliana rodgersunderstanding deadweight lossa deadweight loss occurs when supply and demand are not in equilibrium which leads to market inefficiency market inefficiency occurs when goods within the market are either overvalued or undervalued while certain members of society may benefit from the imbalance others will be negatively impacted by a shift from equilibrium the market can regain stable footing when demand and supply fall into better alignment through interventions or consumer actions | |
when consumers do not feel the price of a good or service is justified when compared to the perceived utility they are less likely to purchase the item | for example overvalued prices may lead to higher profit margins for a company but it negatively affects consumers of the product for inelastic goods meaning demand does not change for that particular good or service when the price goes up or down the increased cost may prevent consumers from making purchases in other market sectors in addition some consumers may purchase a lower quantity of the item when possible for elastic goods meaning sellers and buyers quickly adjust their demand for that good or service if the price changes consumers may reduce spending in that market sector to compensate or be priced out of the market entirely undervalued products may be desirable for consumers but may prevent a producer from recuperating their production costs if the product remains undervalued for a substantial period producers will either choose to no longer sell that product up the price to equilibrium or may be forced out of the market entirely land has a near static supply therefore the margin between natural monopoly pricing and rent caps creating deadweight loss is minimal or often non existent in well developed property markets in the case of rent consumers bear most of the deadweight loss from natural monopolies in cities introducing rent caps and a goal for economists is to calculate caps that aren t set too low and lead to minimum consumer producer losses so producers are still willing to invest | |
how deadweight loss is created | minimum wage and living wage laws can create a deadweight loss by causing employers to overpay for employees and preventing low skilled workers from securing jobs price ceilings and rent controls can also create deadweight loss by discouraging production and decreasing the supply of goods services or housing below what consumers truly demand consumers experience shortages and producers earn less than they would otherwise taxes also create a deadweight loss because they prevent people from engaging in purchases they would otherwise make because the final price of the product is above the equilibrium market price if taxes on an item rise the burden is often split between the producer and the consumer leading to the producer receiving less profit from the item and the customer paying a higher price this results in lower consumption of the item than previously which reduces the overall benefits the consumer market could have received while simultaneously reducing the benefit the company may see in regard to profits monopolies and oligopolies also lead to deadweight loss as they remove the aspects of a perfect market in which fair competition accurately sets a price monopolies and oligopolies can control supply for a specific good or service thereby falsely increasing its price this would eventually lead to a lower amount of goods and services sold example of deadweight lossa new sandwich shop opens in your neighborhood selling a sandwich for 10 you perceive the value of this sandwich to be 12 and therefore are happy to pay 10 for it now assume the government imposes a new sales tax on food items which raises the cost of the sandwich to 15 at 15 you feel that the sandwich is overvalued and believe that the new cost is not a fair price and therefore are not willing to buy the sandwich at 15 many consumers but not all feel this way about the sandwich and the sandwich shop sees a decrease in demand for its sandwich and a decline in revenues the deadweight loss in this example is the unsold sandwiches as a result of the new 15 cost if the decrease in demand is severe enough the sandwich shop could go out of business further increasing the negative economic effects of the new tax on society at large | |
what is a dealer | dealers are people or firms who buy and sell securities for their own account whether through a broker or otherwise a dealer acts as a principal in trading for its own account as opposed to a broker who acts as an agent who executes orders on behalf of its clients dealers are important figures in the market they make markets in securities underwrite securities and provide investment services to investors that means dealers are the market makers who provide the bid and ask quotes you see when you look up the price of a security in the over the counter market they also help create liquidity in the markets and boost long term growth while dealers are in a separate registration category in the u s the term is used in canada as the shortened version of investment dealer the equivalent of a broker dealer in the u s understanding dealersa dealer in the securities market is an individual or firm who stands ready and willing to buy a security for its own account at its bid price or sell from its own account at its ask price a dealer seeks to profit from the spread between the bid and ask prices while also adding liquidity to the market it neither does business on behalf of a client nor facilitates transactions between parties entities that arrange trades between security buyers and sellers but do not purchase and hold securities in their own account are not classified as dealers a dealer is different from a trader while a dealer buys and sells securities as part of its regular business a trader buys and sells securities for their own account not on a business basis in recent years the profitability of dealers has been challenged by a number of factors including increased technology requirements to keep up with rapidly changing markets industry consolidation and the heightened regulatory environment which has increased compliance costs regulating dealersdealers are regulated by the securities and exchange commission sec as part of the regulation all dealers and brokers must register with the sec and must be members of the financial industry regulatory authority finra 1anyone engaged in the following activities generally needs to register as a dealer under sec guidelines dealers are required to perform certain duties when they deal with clients these duties include prompt order execution disclosure of material information and conflicts of interest to investors and charging reasonable prices in the prevailing market dealers are not allowed to begin conducting business until the sec has granted registration they must also join a self regulatory organization sro become a member of the securities investor protection corporation sipc and comply with all state requirements 3dealers vs brokersthese are two roles that are generally associated with the buying and selling of securities although they may function in a similar capacity they do have distinctions between them contrary to a dealer a broker does not trade for its portfolio but instead facilitates transactions by bringing buyers and sellers together in practice most dealers also act as brokers and are known as broker dealers broker dealers range in size from small independent houses to subsidiaries of some of the largest banks firms operating as broker dealers perform both services depending on the market conditions and on the size type and security involved in a particular transaction another key difference between the two is how they charge for their services a dealer will charge a markup when selling from their own inventory because the dealer is principal in the account while a broker charges clients a commission for executing trades on their behalf dealers are also different from registered investment advisors rias who are required to put their clients interests above their own this standard is referred to as the fiduciary standard dealer marketsthe environment in which multiple dealers come together to buy and sell securities for their own accounts is called a dealer market in this market dealers can deal with each other and use their own funds to close the transaction as opposed to a broker s market wherein they work as agents of buyers and sellers brokers are not permitted to trade in a dealer market dealers provide all the terms of the transaction including price other dealers in the marketwhile the term dealer is used predominantly in the securities market there are others who use this distinction dealers can also refer to a business or person who trades in or executes the purchase or sale of a specific product or service for example someone who sells automobiles is called a car dealer while a person who deals in the sale of antiquities is called an antique dealer dealer faqsafter buying securities such as stock and bonds dealers sell those securities to other investors at a price higher than the buying price the difference between their buying price bid price and their selling price ask price is known as the dealer s spread the dealer s spread equals the profit that the dealer makes on the transactions | |
when you open an account with a broker dealer will be required to provide certain types of information | before opening an account with anyone you should check the broker s background and disciplinary history the sec s website provides guidance for finding a broker s background or disciplinary history broker s will generally ask for this personal information from their customers you will also need to decide what type of brokerage account you want to open broker dealers usually offer two types of accounts a cash account and a margin account finally you will need to make some investment decisions for your account you also have the option of granting discretionary authority to someone else to make decisions for you on your account 4there are over 3 400 securities firms according to finra some of the largest broker dealers include fidelity investments charles schwab and edward jones 5broker dealers can be either individual or a firm a general partnership a limited partnership limited liability company corporation or other entity there are more than 3 400 broker dealers from which to choose according to the most recent data from the financial industry regulatory authority finra 6the bottom linedealers are people or firms who buy and sell securities for their own account whether through a broker or otherwise dealers are regulated by the securities and exchange commission sec dealers are important because they make markets in securities underwrite securities and provide investment services to investors | |
what is a dealer market | a dealer market is a financial market mechanism wherein multiple dealers post prices at which they will buy or sell a specific security or instrument in a dealer market a dealer who is designated as a market maker provides liquidity and transparency by electronically displaying the prices at which it is willing to make a market in a security indicating both the price at which it will buy the security the bid price and the price at which it will sell the security the offer price bonds and foreign exchanges trade primarily in dealer markets and stock trading on the nasdaq is a prime example of an equity dealer market | |
how dealer markets work | a market maker mm in a dealer market stakes his or her own capital to provide liquidity to investors the primary mode of risk control for the market maker is therefore the use of the bid ask spread which represents a tangible cost to investors but which is also a source of profit to dealers 1a dealer market differs from an auction market primarily in this multiple market maker aspect in an auction market a single specialist in a centralized location think of the trading floor on the new york stock exchange for instance facilitates trading and liquidity by matching buyers and sellers for a specific security dealer markets vs broker marketsin a broker market there must be a defined buyer and seller for a trade to happen in a dealer market buyers and sellers execute buy sell orders separately and independently through dealers who act as market makers the differences between broker and dealer markets also include example of a dealer marketfor example if dealer a has ample inventory of wisewidget co stock which is quoted on the nasdaq market along with other market makers at a national best bid and offer nbbo of 10 10 05 say that dealer a wishes to offload some of its holdings so it posts its own bid ask quote as 9 95 10 03 skewing it lower since they have an axe to sell investors looking to buy wisewidget co would then take dealer a s offer price of 10 03 since it is two cents cheaper than the 10 05 price at which it is offered by other market makers at the same time investors looking to sell wisewidget co stock would have little incentive to hit the bid of 9 95 posted by dealer a since it is 2 cents less than the 10 price that other dealers are willing to pay for the stock | |
what is the difference between a trader and a dealer | a dealer is a specialized type of trader who commits to continuously make two sided markets in the securities that they deal in this means that they will always be posting both a bid and an offer the goal is to trade frequently enough with both buyers and sellers in the market to generate profit from the bid ask spread traders on the other hand need not make two sided markets and can buy or sell as they please in this respect non dealer traders are considered to be price takers instead of market makers traders do not profit from the bid ask spread but instead hope for the market to move in their favor in order to exit the trade at a favorable price later on | |
what are the types of securities dealers | in today s financial markets broker dealers bds are regulated entities that can engage in securities trading for both their own accounts and on behalf of clients some broker dealers act as agent pure broker facilitating trades only on behalf of customers and taking a commission others act as both principal and agent trading against customers from their own accounts there are thousands of broker dealers falling into one of two broad categories a wirehouse which sells its own products or an independent broker dealer which sells products from outside sources | |
is robinhood a dealer market | no robinhood like other online trading platforms is a broker as a broker it is registered as a broker dealer with finra but it executes trades only on behalf of customers and does not take the other side of those trades nor does not constitute its own marketplace or exchange | |
what is a death benefit | a death benefit is a payment made to a beneficiary of a contract such as a life insurance policy after the insured person dies it may also be paid as a result of an annuity or pension with life insurance the amount of the death benefit is set in the terms of the contract and is chosen by the policyholder who makes regular premium payments the amount of the premium payments will increase as the amount of the death benefit increases generally the younger and healthier you are the lower your premiums buying a life insurance policy with a death benefit can provide peace of mind that your loved ones will receive financial support after your death types of death benefitstypes of death benefits with insurance policies include all cause death benefits accidental death benefits adb and accidental death and dismemberment benefits addb let s look at each type of death benefit in more detail | |
how death benefits work | under the contract with the insurance company or other company a death is guaranteed to be paid to the listed beneficiary or beneficiaries as long as premiums are paid while the insured or annuitant is alive death benefits of life insurance policies are commonly issued as a lump sum payment in the full amount of the benefit another option that beneficiaries may have is to accept the death benefit in installments such as quarterly or monthly in a fixed amount until the proceeds are depleted or for a set period of time beneficiaries may also have the option of receiving an annuity that makes payments in installments for life in an amount determined by the insurer or they may opt to take only interest payments and then eventually pass on the proceeds to another beneficiary some insurers offer a retained asset account in which the insurance company acts as a bank holding the proceeds and the beneficiary can make withdrawals for an insurer to issue a death benefit it will likely require a completed claim form along with copies of the contract and a death certificate proceeds paid through life insurance or annuity death benefits avoid probate which can provide the benefit faster probate is a legal process in which a will is reviewed to determine if it s valid however for most policies and accounts if the policyholder does not name a beneficiary the insurer pays the proceeds to the estate of the insured which may be probated death benefits from life insurance policies are generally not subject to ordinary income tax while annuity beneficiaries may pay income tax on death benefits death benefits from pensions are treated differently from benefits from life insurance policies and they may be subject to taxation 12while life insurance death benefits paid in a lump sum are not subject to ordinary income tax if the beneficiary receives the death benefit in installments that include interest then the interest will be taxable and if the death benefit goes to your estate it may be subject to federal or state estate tax if the estate exceeds the estate tax exemption amount 13requirements for payout of death benefitsthe process of receiving a death benefit from a life insurance policy pension or annuity is straightforward first beneficiaries need to know which life insurance company holds the deceased s policy or annuity the policyholder has a responsibility to share policy or annuity information with beneficiaries when they name them as beneficiaries once the insurance company is identified beneficiaries must complete a death claim form providing the insured s policy number name social security number date of death and payment preferences for the death benefit proceeds beneficiaries must submit death claim forms to each insurance company with which the insured or annuitant carried a policy along with a copy of the death certificate most insurers require a certified death certificate listing the cause of death if multiple beneficiaries or survivors are listed on a policy or annuity each one must complete a death claim form | |
what are the tax implications of death benefits | death benefits under a life insurance policy are not subject to ordinary income tax but they may be subject to federal or state estate tax if the death benefit is paid to the estate and exceeds the estate tax exemption limit beneficiaries of an annuity with a death benefit may pay income tax on the payments 312 | |
what if you think you re a beneficiary of a death benefit | try to find out from the policyholder whether or not you re named as a beneficiary don t rely on the insurance company to tell you you can request information from the national association of insurance commissioners life insurance policy locator service about whether you are a beneficiary on a life insurance policy to claim a benefit beneficiaries must submit death claim forms with a copy of a death certificate to insurers | |
how does the death benefit work on an annuity | some annuity contracts allow you to name a beneficiary to inherit remaining annuity payments typically a beneficiary reports annuity income as the plan participant would have included it as gross income but they may exclude an amount equal to the deceased employee s payments toward the contract 2the bottom linedeath benefits are designed to provide funds to beneficiaries so they can receive financial support following the death of the insured a death benefit can help offset the expenses of funeral services or provide money for necessary life expenses among other purposes if you are naming beneficiaries in a contract or inheriting a death benefit consider consulting a financial professional to guide you through your options for your specific situation | |
what is a death cross | the death cross is a market chart pattern reflecting recent price weakness it refers to the drop of a short term moving average meaning the average of recent closing prices for a stock stock index commodity or cryptocurrency over a set period of time below a longer term moving average the most closely watched stock market moving averages are the 50 day and the 200 day despite its ominous name the death cross is not a market milestone worth dreading market history suggests it tends to precede a near term rebound with above average returns investopedia jessica olahunderstanding a death crossthe death cross only tells you that price action has deteriorated over a period a little longer than two months if the crossing is done by the 50 day moving average moving averages exclude weekends and holidays when the market is closed those convinced of the pattern s predictive power note the death cross preceded all the severe bear markets of the past century including 1929 1938 1974 and 2008 that s an example of sample selection bias expressed by using only the select data points helpful to the argued point cherry picking those bear market years ignores the many more numerous occasions when the death cross signaled nothing worse than a market correction according to fundstrat research cited in barron s the s p 500 index was higher a year after the death cross about two thirds of the time averaging a gain of 6 3 over that span that s well off the annualized gain of over 10 for the s p 500 since 1926 but hardly a disaster in most instances the track record of the death cross as a precursor of market gains is even more appealing over shorter time frames from 1971 to 2022 the 22 instances in which the 50 day moving average of the nasdaq composite index fell below its 200 day moving average were followed by average returns of about 2 6 over the next month 7 2 in three months and 12 4 six months after the death cross roughly double the typical nasdaq return over those time frames according to nautilus research intuitively the death cross has tended to provide a more useful bearish market timing signal when occurring after market losses of 20 or more because downward momentum in weak markets can indicate deteriorating fundamentals but its historical track record makes clear the death cross is a coincident indicator of market weakness rather than a leading one example of a death crosshere is an example of a death cross on the s p 500 in december 2018 image by sabrina jiang investopedia 2021it led to headlines describing a stock market in tatters the index proceeded to lose another 11 over the next two weeks and a day the s p then rallied 19 from that low in two months and was 11 above its level at the time of the death cross less than six months later another s p 500 death cross took place in march 2020 during the initial covid 19 panic and the s p 500 went on to gain just over 50 in the next year these examples don t represent the full range of possible outcomes after a death cross of course but they are at the very least more representative of current market conditions than earlier death cross occurrences death cross vs golden crossthe opposite of the death cross is the so called golden cross when the short term moving average of a stock or index moves above its longer term moving average many investors view this pattern as a bullish indicator even though the death cross has been followed by gains in several occurrences since 1992 the golden cross can indicate a prolonged downtrend has run out of momentum limitations of using the death crossif market signals as simple as the interaction between the 50 day and the 200 day moving averages had predictive value you would expect them to lose it quickly as market participants tried to take advantage the death cross makes for snappy headlines but it has been a better signal of a short term bottom in sentiment than of an onset of a bear market or recession | |
what happens after a death cross | a death cross is a bearish signal so after a death cross occurs a downward trend is likely to continue where the asset s price will further decline it can also signal a reversal an end of an upward trend where the price will start to decline or remain fairly flat | |
what is the difference between a death cross and a golden cross | a death cross and a golden cross are the opposite of one another a death cross is a bearish indicator and signals a decrease in the price of an asset a golden cross is a bullish indicator that signals an increase in the price of an asset | |
how do you check a death cross | technical traders use both a 50 day and 200 day moving average to determine if a death cross has occurred a death cross occurs when the 50 day moving average is above the 200 day moving average and then crosses below the 200 day moving average the bottom linethe death cross is used in technical analysis by traders to understand a stock s price movement whereby it notifies a trader that the short term moving average has fallen below a longer term moving average which signals a bearish trend | |
what are death taxes | death taxes are taxes imposed by the federal and some state governments on someone s estate upon their death these taxes are levied on the beneficiary who receives the property in the deceased s will or the estate that pays the tax before transferring the inherited property death taxes are also called death duties estate taxes or inheritance taxes understanding death taxesa death tax can be any tax imposed on property transfer after someone s death the term death tax gained popularity in the 1990s and was used to describe estate and inheritance taxes by those who wanted the taxes repealed in estate taxes the deceased s estate pays the tax before the assets are transferred to a beneficiary with the inheritance tax the person who inherits the assets pays the estate tax charged by the federal government and some state governments is based on the value of property and assets at the time of the owner s death the federal estate tax ranges from 18 to 40 of the inheritance amount 1twelve states impose a state estate tax separate from the federal government these states are connecticut hawaii illinois maine maryland massachusetts minnesota new york oregon rhode island vermont washington and the district of columbia the federal government does not impose an inheritance tax but several states do iowa kentucky maryland nebraska new jersey and pennsylvania however in all of these states property passing to a surviving spouse is exempt from inheritance taxes nebraska and pennsylvania impose taxes on property passing to a child or grandchild in some instances death tax thresholdsmost people end up not paying the death tax because it applies to only a few people this is because the 2017 tax cuts and jobs act applied the estate tax to the basic exclusion amount which in 2023 is 12 92 million and in 2024 is 13 61 million 23the tax cuts and jobs act expires after 2025 the basic exclusion amount is set to drop back down to pre tcja levels if congress doesn t renew the act 3for example assume an individual leaves an estate valued at 13 million accounted for inflation in non exempt assets to the children and has never left any gifts that exceeded the exclusion amount the amount above the federal level in 2023 13 million 12 92 million 80 000 will be subject to estate tax according to the unified rate schedule the taxable amount is subject to a 28 tax plus a base tax of 18 200 therefore the estate will have a death tax liability of 28 x 80 000 18 200 40 600 1so if a decedent s estate is valued at less than the applicable exemption amount for the year of death the estate won t owe any federal estate taxes the unified tax credit has a set amount that an individual can gift during their lifetime before any death taxes or gift taxes apply the tax credit unifies both the gift and estate taxes into one tax system decreasing the tax bill of the individual or estate dollar to dollar 4since some people prefer to use the unified tax credits to save on estate taxes after their deaths the unified tax credit may not be used for reducing gift taxes while still alive it may instead be used on the inheritance amount bequeathed to beneficiaries after death another provision available to reduce death tax is the unlimited marital deduction which allows an individual to transfer an unrestricted amount of assets to their spouse at any time including at the death of the transferor free from tax 5the provision eliminates both the federal estate and gift tax on property transfers between spouses in effect treating them as one economic unit the transfer to surviving spouses is made possible through an unlimited deduction from estate and gift tax that postpones the transfer taxes on the property inherited from each other until the second spouse s death 6the unlimited marital deduction allows married couples to delay the payment of estate taxes upon the death of the first spouse because after the surviving spouse dies all assets in the estate over the applicable exclusion amount will be included in the survivor s taxable estate unless the assets are used up or gifted during the surviving spouse s lifetime 6advantages and disadvantages of death taxeshigh thresholdhigh tax revenuedouble taxesloopholes | |
how to reduce or avoid death taxes | most people will not need to worry about death taxes because not many have more than 12 92 million in assets this number may drop after 2025 if congress doesn t renew the tax cuts and jobs act but the figure could still be 5 million or more more than most people have if you do happen or expect to have enough assets to trigger death taxes there are some things you can do to reduce or avoid them | |
how do you avoid death taxes | most people will not incur estate taxes commonly called the death tax but if you have 12 92 million or more in assets in 2023 or 13 61 million in 2024 you can avoid paying taxes by donating to charity giving enough of your estate away to reduce its value or placing it in special trust funds 2 | |
what states have death taxes | twelve states and one district have estate taxes connecticut hawaii illinois maine maryland massachusetts minnesota new york oregon rhode island vermont washington and the district of columbia | |
what is the difference between an estate tax and an inheritance tax | the estate of the deceased is responsible for estate taxes while the heirs of the deceased are responsible for inheritance taxes the bottom linethe death tax is a tax on a person s estate after they have passed also known as estate taxes to be triggered the estate must have significant assets more than 12 92 million in 2023 or 13 61 million in 2024 most people will not need to worry about a death tax but for those who do there are some tactics you can use to reduce or avoid the tax 2 | |
what is a debenture | a debenture is a type of bond or other debt instrument that is unsecured by collateral since debentures have no collateral backing they must rely on the creditworthiness and reputation of the issuer for support both corporations and governments frequently issue debentures to raise capital or funds investopedia candra huffunderstanding debenturessimilar to most bonds debentures may pay periodic interest payments called coupon payments like other types of bonds debentures are documented in an indenture an indenture is a legal and binding contract between bond issuers and bondholders the contract specifies features of a debt offering such as the maturity date the timing of interest or coupon payments the method of interest calculation and other features corporations and governments can issue debentures governments typically issue long term bonds those with maturities of longer than 10 years considered low risk investments these government bonds have the backing of the government issuer corporations also use debentures as long term loans however the debentures of corporations are unsecured 1 instead they have the backing of only the financial viability and creditworthiness of the underlying company these debt instruments pay an interest rate and are redeemable or repayable on a fixed date a company typically makes these scheduled debt interest payments before they pay stock dividends to shareholders debentures are advantageous for companies since they carry lower interest rates and longer repayment dates as compared to other types of loans and debt instruments types of debentures | |
when debts are issued as debentures they may be registered to the issuer in this case the transfer or trading in these securities must be organized through a clearing facility that alerts the issuer to changes in ownership so that they can pay interest to the correct bondholder a bearer debenture in contrast is not registered with the issuer the owner bearer of the debenture is entitled to interest simply by holding the bond | redeemable debentures clearly spell out the exact terms and date by which the issuer of the bond must repay their debt in full irredeemable non redeemable debentures on the other hand do not hold the issuer liable to repay in full by a certain date because of this irredeemable debentures are also known as perpetual debentures convertible debentures are bonds that can convert into equity shares of the issuing corporation after a specific period convertible debentures are hybrid financial products with the benefits of both debt and equity companies use debentures as fixed rate loans and pay fixed interest payments however the holders of the debenture have the option of holding the loan until maturity and receiving the interest payments or converting the loan into equity shares convertible debentures are attractive to investors that want to convert to equity if they believe the company s stock will rise in the long term however the ability to convert to equity comes at a price since convertible debentures pay a lower interest rate compared to other fixed rate investments nonconvertible debentures are traditional debentures that cannot be converted into equity of the issuing corporation to compensate for the lack of convertibility investors are rewarded with a higher interest rate when compared to convertible debentures features of a debenture | |
when issuing a debenture first a trust indenture must be drafted the first trust is an agreement between the issuing corporation and the trustee that manages the interest of the investors | the coupon rate is determined which is the rate of interest that the company will pay the debenture holder or investor this coupon rate can be either fixed or floating a floating rate might be tied to a benchmark such as the yield of the 10 year treasury bond and will change as the benchmark changes the company s credit rating and ultimately the debenture s credit rating impacts the interest rate that investors will receive credit rating agencies measure the creditworthiness of corporate and government issues 2 these entities provide investors with an overview of the risks involved in investing in debt credit rating agencies such as standard and poor s typically assign letter grades indicating the underlying creditworthiness the standard poor s system uses a scale that ranges from aaa for excellent rating to the lowest rating of c and d any debt instrument receiving a rating lower than a bb is said to be of speculative grade 3 you may also hear these called junk bonds it boils down to the underlying issuer being more likely to default on the debt for nonconvertible debentures mentioned above the date of maturity is also an important feature this date dictates when the company must pay back the debenture holders the company has options on the form the repayment will take most often it is as redemption from the capital where the issuer pays a lump sum amount on the maturity of the debt alternatively the payment may use a redemption reserve where the company pays specific amounts each year until full repayment at the date of maturity pros and cons of debenturesdebentures are the most common form of long term debt instruments issued by corporations a company will issue these to raise capital for its growth and operations and investors can enjoy regular interest payments that are relatively safer investments than a company s equity shares of stock debentures are unsecured bonds issued by corporations to raise debt capital because they are not backed by any form of collateral they are inherently more risky than an otherwise identical note that is secured because of the increased risk debentures will carry a comparatively higher interest rate in order to compensate bondholders this also means that bond investors should pay careful attention to the creditworthiness of debenture issuers the relative lack of security does not necessarily mean that a debenture is riskier than any other bond strictly speaking a u s treasury bond and a u s treasury bill are both debentures they are not secured by collateral yet they are considered risk free a debenture pays a regular interest rate or coupon rate return to investors convertible debentures can be converted to equity shares after a specified period making them more appealing to investors in the event of a corporation s bankruptcy the debenture is paid before common stock shareholders fixed rate debentures may have interest rate risk exposure in environments where the market interest rate is rising creditworthiness is important when considering the chance of default risk from the underlying issuer s financial viability debentures may have inflationary risk if the coupon paid does not keep up with the rate of inflation debenture risks to investorsdebenture holders may face inflationary risk 4 here the risk is that the debt s interest rate paid may not keep up with the rate of inflation inflation measures economy based price increases as an example say inflation causes prices to increase by 3 should the debenture coupon pay at 2 the holders may see a net loss in real terms debentures also carry interest rate risk 4 in this risk scenario investors hold fixed rate debts during times of rising market interest rates these investors may find their debt returning less than what is available from other investments paying the current higher market rate if this happens the debenture holder earns a lower yield in comparison further debentures may carry credit risk and default risk 5 as stated earlier debentures are only as secure as the underlying issuer s financial strength if the company struggles financially due to internal or macroeconomic factors investors are at risk of default on the debenture as some consolation a debenture holder would be repaid before common stock shareholders in the event of bankruptcy the three main features of a debenture are the interest rate the credit rating and the maturity date example of a debenturean example of a government debenture would be the u s treasury bond t bond t bonds help finance projects and fund day to day governmental operations the u s treasury department issues these bonds during auctions held throughout the year some treasury bonds trade in the secondary market in the secondary market through a financial institution or broker investors can buy and sell previously issued bonds t bonds are nearly risk free since they re backed by the full faith and credit of the u s government however they also face the risk of inflation and interest rates increase 6 | |
how is a debenture different from a bond | a debenture is a type of bond in particular it is an unsecured or non collateralized debt issued by a firm or other entity and usually refers to such bonds with longer maturities secured bonds are backed by some sort of collateral in the form of property securities or other assets that can be seized to repay creditors in the event of a default unsecured debentures have no such collateralization making them relatively riskier | |
are debentures risky investments | because debentures are debt securities they tend to be less risky than investing in the same company s common stock or preferred shares debenture holders would also be considered more senior and take priority over those other types of investments in the case of bankruptcy because these debts are not backed by any collateral however they are inherently riskier than secured debts therefore these may carry relatively higher interest rates than otherwise similar bonds from the same issuer that are backed by collateral in fact strictly speaking a u s treasury bond and a u s treasury bill are both debentures they are not secured by collateral yet they are considered risk free securities | |
how are debentures structured | all debentures follow a standard structuring process and have common features first a trust indenture is drafted which is an agreement between the issuing entity and the entity that manages the interests of the bondholders next the coupon rate is decided which is the rate of interest that the company will pay the debenture holder or investor this rate can be either fixed or floating and depends on the company s credit rating or the bond s credit rating debentures may also be either convertible or non convertible into common stock | |
is a debenture an asset or a liability | this depends on whose perspective is considered as a debt instrument a debenture is a liability for the issuer who is essentially borrowing money via issuing these securities for an investor bondholder owning a debenture is an asset the bottom linedebentures are a common form of unsecured bonds issued by corporations and governments in contrast to secured bonds which are backed by collateral unsecured bonds are relatively riskier since they do not offer any sort of backstop of assets if the issuer defaults they rely solely on the creditworthiness of the issuer strictly speaking a u s treasury bonds are in this way debentures | |
a debit is an accounting entry that results in either an increase in assets or a decrease in liabilities on a company s balance sheet in fundamental accounting debits are balanced by credits which operate in the exact opposite direction | for instance if a firm takes out a loan to purchase equipment it would simultaneously debit fixed assets and credit a liabilities account depending on the nature of the loan the abbreviation for debit is sometimes dr which is short for debtor investopedia madelyn goodnight | |
what is the difference between a debit and a credit | a debit is a feature found in all double entry accounting systems debits are the opposite of credits in a standard journal entry all debits are placed as the top lines while all credits are listed on the line below debits when using t accounts a debit is on the left side of the chart while a credit is on the right side debits and credits are utilized in the trial balance and adjusted trial balance to ensure that all entries balance the total dollar amount of all debits must equal the total dollar amount of all credits in other words finances must balance a dangling debit is a debit balance with no offsetting credit balance that would allow it to be written off it occurs in financial accounting and reflects discrepancies in a company s balance sheet as well as when a company purchases goodwill or services to create a debit for example if barnes noble sold 20 000 worth of books it would debit its cash account 20 000 and credit its books or inventory account 20 000 this double entry system shows that the company now has 20 000 more in cash and a corresponding 20 000 less in books normal accounting balancescertain types of accounts have natural balances in financial accounting systems assets and expenses have natural debit balances this means that positive values for assets and expenses are debited and negative balances are credited for example upon the receipt of 1 000 cash a journal entry would include a debit of 1 000 to the cash account in the balance sheet because cash is increasing if another transaction involves payment of 500 in cash the journal entry would have a credit to the cash account of 500 because cash is being reduced in effect a debit increases an expense account in the income statement and a credit decreases it liabilities revenues and equity accounts have natural credit balances if a debit is applied to any of these accounts the account balance has decreased for example a debit to the accounts payable account in the balance sheet indicates a reduction of a liability the offsetting credit is most likely a credit to cash because the reduction of a liability means that the debt is being paid and cash is an outflow for the revenue accounts in the income statement debit entries decrease the account while a credit points to an increase in the account the concept of debits and offsetting credits are the cornerstone of double entry accounting debit notesdebit notes are a form of proof that one business has created a legitimate debit entry in the course of dealing with another business b2b this might occur when a purchaser returns materials to a supplier and needs to validate the reimbursed amount in this case the purchaser issues a debit note reflecting the accounting transaction a business might issue a debit note in response to a received credit note mistakes often interest charges and fees in a sales purchase or loan invoice might prompt a firm to issue a debit note to help correct the error a debit note or debit receipt is very similar to an invoice the main difference is that invoices always show a sale whereas debit notes and debit receipts reflect adjustments or returns on transactions that have already taken place margin debit | |
when buying on margin investors borrow funds from their brokerage and then combine those funds with their own to purchase a greater number of shares than they would have been able to purchase with their own funds the debit amount recorded by the brokerage in an investor s account represents the cash cost of the transaction to the investor | the debit balance in a margin account is the amount of money owed by the customer to the broker or another lender for funds advanced to purchase securities the debit balance is the amount of funds that the customer must put into their margin account following the successful execution of a security purchase order to properly settle the transaction the debit balance can be contrasted with the credit balance while a long margin position has a debit balance a margin account with only short positions will show a credit balance the credit balance is the sum of the proceeds from a short sale and the required margin amount under regulation t sometimes a trader s margin account has both long and short margin positions adjusted debit balance is the amount in a margin account that is owed to the brokerage firm minus profits on short sales and balances in a special miscellaneous account sma contra accountscertain accounts are used for valuation purposes and are displayed on the financial statements opposite the normal balances these accounts are called contra accounts the debit entry to a contra account has the opposite effect as it would to a normal account for example an allowance for uncollectable accounts offsets the asset accounts receivable because the allowance is a negative asset a debit actually decreases the allowance a contra asset s debit is the opposite of a normal account s debit which increases the asset | |
what is a debit | a debit is an accounting entry that results in either an increase in assets or a decrease in liabilities on a company s balance sheet | |
what s the difference between a debit and a credit | debits are the opposite of credits in an accounting system assets and expenses have natural debit balances while liabilities and revenues have natural credit balances | |
does debit always mean an increase | it means an increase in assets all accounts that normally contain a debit balance will increase in amount when a debit left column is added to them and reduced when a credit right column is added to them the types of accounts to which this rule applies are expenses assets and dividends the bottom linea debit is an accounting entry that creates a decrease in liabilities or an increase in assets in double entry bookkeeping all debits are made on the left side of the ledger and must be offset with corresponding credits on the right side of the ledger on a balance sheet positive values for assets and expenses are debited and negative balances are credited | |
what is a debit balance | the debit balance in a margin account is the amount of money a brokerage customer owes their broker for funds they ve borrowed from the broker to purchase securities on margin | |
when buying on margin investors borrow funds from a broker and then combine those funds with their own in order to purchase a greater number of shares and if all goes well earn a greater profit this is known as leveraging their position | the two primary types of brokerage accounts used to buy and sell financial assets are a cash account and a margin account in a cash account the investor can only spend the cash balance they have on deposit and no more for example if a person has 2 000 in their cash account they can only buy securities worth a total value of 2 000 unless they add more money to the account a margin account allows the investor to borrow money from the broker to purchase additional shares or in the case of a short sale to borrow shares to sell in the market in order to borrow money the investor pledges cash or securities already in their margin account as collateral for example an investor with a 2 000 cash balance might want to purchase shares worth 3 000 their broker could lend them the other 1 000 through a margin account with the investor putting up 2 000 in cash in this case the debit balance would be 1 000 | |
what is an adjusted debit balance | an adjusted debit balance is the amount of money in a margin account that is owed to the brokerage firm minus profits on short sales and balances in a special memorandum account sma 1the adjusted debit balance tells the investor how much they would owe the broker in the event of a margin call which requires the repayment of borrowed funds to the brokerage firm if the balance in the account drops below a certain level that can happen when a security purchased on margin falls in value financial industry regulations permit an investor to borrow up to 50 of the purchase price of securities on margin which is stipulated in the federal reserve board s regulation t that is referred to as the initial margin 2in addition investors must meet a maintenance margin requirement set by their brokerage firm that s the amount of equity they need to have in their margin account at all times and it is calculated by subtracting the money they owe their broker from value of the cash and securities in their account industry rules require the maintenance margin to be at least 25 of the market value of the margin securities but some brokerage firms set a higher minimum 2 | |
do brokers charge interest on your debit balance | yes brokers charge interest on the money they lend you it s worth asking about the interest rate and whether it s fixed or variable before you start buying on margin the interest you ll have to pay will reduce any profits you hope to make from your trades 3 | |
what is a special memorandum account | a special memorandum account sma is a brokerage account that is set up in conjunction with a margin account to hold excess margin that is more than is needed to meet maintenance requirements from the margin account the sma preserves the investor s gains and provides a line of credit for future purchases on margin it can also be used to help make up for declines in value of securities in the margin account in the event of a margin call 4 | |
what happens in a margin call | a margin call can occur when the customer s account falls below the brokerage firm s minimum maintenance requirement when they receive a margin call the customer must deposit additional cash or securities into the account to bring it up to a level where it satisfies the requirement if they fail to do so within a prescribed period often two to five days the broker will sell enough of the securities already in the account to make up the difference 5however as the u s securities and exchange commission notes brokers are not required to issue a margin call and may be able to sell your securities at any time without consulting you first under most margin agreements even if your firm offers to give you time to increase the equity in your account it can sell your securities without waiting for you to meet the margin call 2 | |
what are marginable securities | marginable securities are stocks bonds and other securities that can be purchased on margin or used as collateral in a margin account each brokerage firm can decide whether a particular security is marginable or non marginable for its purposes if a security is non marginable the investor can still buy it but they will have to pay for it entirely with their own cash | |
how can you avoid a margin call | the best way to avoid a margin call is to keep a significant cash cushion in the margin account and also to monitor the account regularly to see how close you are to slipping below your brokerage firm s maintenance margin percentage you can also avoid a margin call of course if you simply maintain a cash account and don t buy on margin the bottom linea debit balance is the amount of money a brokerage customer owes their broker for securities purchases they have made on margin if the debit balance gets too high relative to the equity in the account the investor may be subject to a margin call for that reason investors with margin accounts should regularly check how much equity they have in their accounts and be prepared to come up with additional cash if they need to | |
what is a debit card | a debit card is a payment card that deducts money directly from your checking account also called check cards or bank cards debit cards can be used to buy goods or services or to get cash from an atm debit cards can help you reduce the need to carry cash although using these cards can sometimes entail fees 1 | |
how a debit card works | a debit card is a card linked to your checking account it looks like a credit card but it works differently the amount of money you can spend on a debit card is determined by the amount of funds in your account not by a credit limit such as credit cards carry your debit card may be connected electronically to your account or it can be an offline card offline cards take longer to process transactions unlike with a credit card you do not go into debt when you use a debit card because you are using it to access funds you already have you do not have to make monthly minimum payments on a debit card because there is no debt to repay 1you can use a debit card to get cash from an atm or you can make purchases with it like you make purchases with credit cards with debit cards you may need to enter your pin personal identification number although many debit cards can be used to make purchases without a pin debit cards draw the funds immediately from the affiliated account so your spending is limited to what s available in your checking account and the exact amount of money you have to spend will fluctuate along with your account balance debit cards usually have daily purchase limits meaning you can t spend more than a certain amount in one 24 hour period 2investopedia joules garciadebit card feesgenerally debit cards do not have annual membership fees or cash advance charges but there are other potential fees to consider 34a prepaid debit card which has a set amount of money stored on it may have similar fees a prepaid debit card is like a gift card in that it allows you to spend a sum that s been loaded onto the card fees for prepaid debit cards can include monthly maintenance fees transaction fees atm fees reloading fees balance inquiry fees inactivity fees paper statement fees and foreign transaction fees 6debit card vs credit cardmany bank debit cards are issued by credit card companies so it may seem like there is little distinction between credit and debit cards for example a mastercard debit card can look like a mastercard credit card however they differ in many ways from the way they finance a purchase to the amount of consumer protections they provide here is a comparison of some of their main features in more detail credit cards and debit cards work in fundamentally different ways in terms of how they use your money using a debit card to make a purchase is like writing a check or paying with cash you re paying for the item with funds in your bank account not with revolving credit | |
when you use a credit card you re essentially using a revolving loan the credit card company pays the merchant then bills you for the amount you repay it when you get your monthly statement if you don t repay the full amount you pay interest on the remaining portion the following month 7 | some debit cards offer reward programs similar to credit card rewards programs such as 1 cashback on all purchases 8however rewards programs are more common with credit cards which can offer better terms with an introductory offer cash back rewards travel points and other perks by law you cannot be held responsible for more than 50 of fraudulent purchases made on a debit or credit card as long as you report the fraud in a timely manner however credit card companies often extend their protections to provide zero liability to cardholders 9you can get cash with both debit and credit cards but when you get cash using a credit card you re borrowing money with a cash advance if you use your credit card for cash you may pay interest on the funds starting right when you withdraw them you may also pay a transaction fee and pay a higher interest rate than you would on purchases 10you don t carry a balance on a debit card because each time you use it you re paying with money that already belongs to you so there are no interest charges pros and cons debit cardssafer than cash | |
doesn t incur debt | easier qualifications than credit cardslimits expenditures to cash in bank and or a daily amount | |
could incur fees | fewer perks than credit cardsfewer protections than credit cards | |
what are the features of a debit card | debit cards come with personal identification numbers pins that let you withdraw cash from atms you can also make purchases with these cards if they come from a credit card issuer they might offer cashback programs and other perks | |
do debit cards have purchase protection | purchase protections on debit cards vary depending on the issuer generally debit cards do not offer as much purchase protection as credit cards you can be responsible for up to 50 of fraudulent purchases made with a debit card or credit card but many credit card companies extend this protection to zero liability 911can i get a debit card online you can usually get a debit card online from any financial institution that lets you open a checking account online and provides a debit card this applies to online banks and traditional brick and mortar banks that sign people up digitally can you be 12 and have a debit card the age requirements for financial products like debit cards depends on the bank legally u s financial institutions cannot provide financial products to minors but minors still may be able to get a debit card with the inclusion of a parent or legal guardian on the account to have a debit card in their own name minors often have to be at least 13 years old still some banks offer cards to children under 13 in the adult s name the bottom linea debit card is a card issued by a bank or credit union to checking account holders that is used to access funds in the account you can use a debit card to access cash from an atm or to buy goods or services unlike with credit cards you can t go into debt using debit cards except perhaps for small negative balances that might be incurred if you have overdraft protection if you are considering getting a debit card compare the fees and potential perks of accounts from different banks | |
what is a debit note | a debit note is a document used by a vendor to inform the buyer of current debt obligations the debit note can provide information regarding an upcoming invoice or serve as a reminder for funds currently due debit notes can also be created by buyers when returning goods received on credit for returned items notes will include the total anticipated credit an inventory of the returned items and the reason for their return dennis madamba investopedia | |
how a debit note works | a debit note is generally used in business to business b2b transactions these transactions often involve an extension of credit which means that a vendor sends a shipment of goods to a company before the buyer s cost is paid debit notes tell the buyer that the seller has debited their account although real goods change hands real money is not transferred until an actual invoice is issued debits and credits are instead logged in an accounting system to track shipped inventories and payments owed debit notes are separate from invoices because they are generally formatted as letters and they may not require immediate payment this is true when the debit note is used to inform the buyer of upcoming debt obligations based on amounts that have yet to be officially invoiced special considerationssome companies use debit notes to bill for items that are not their primary business for example if a company sublets some of its warehouse space it might issue a debit note for the rent debit notes might also be used to correct mistakes in invoices if a client is underbilled on an invoice for example a debit note might be issued for the missing amount that should have been billed in addition to the letter format debit notes may also be provided as shipping receipts with received goods while the amount due may be noted payment is not expected until an official invoice is sent to the buyer this can allow a buyer the opportunity to return goods if necessary without first having to provide payment some debit notes may be sent as informational postcards that only serve as a reminder of the debt that the buyer has accrued this can be helpful in cases where the seller is not certain if an original invoice was received or reviewed the postcard can also contain information on how the debt can be settled such as relevant contact information not all companies choose to send debit notes to buyers with outstanding or pending debt obligations a seller generally either considers it a standard business practice and uses it according to internal procedures or does not use it at all in some cases a buyer can request a document with the information contained in a debit note to meet internal recordkeeping requirements debit note featuresdebit notes may look different based on the issuer however there are a few distinct components that every vendor includes on these documents the following is a list of some of the features of a debit note debit notes are also known as debit memos debit note vs credit notea credit note is different from a debit note a credit note is issued by a supplier or seller to their customer this document advises the customer that there is a credit applied to their account vendors may issue credit notes if credit notes may be used to cover all or part of the value of the bill however the credit note is not a refund it indicates that the customer s account has a credit on file this credit can be used to offset the cost of future purchases | |
why are debit notes issued | debit notes can be issued for a few reasons a vendor may create and send their customer a debit note to remind them that there is a payment due for goods and services delivered in other cases a customer may issue a debit note to their supplier about an adjustment to their order including the total amount of goods returned and their value who sends a debit note a debit note is sent by the vendor or supplier to the buyer the document is intended to inform the customer of their debt obligations relating to a purchase order debit notes may also be issued by buyers as a way to let the vendor know that goods received are being returned | |
is a debit note the same as an invoice | debit notes and invoices are similar documents but they are not necessarily the same invoices are bills this means that they indicate information about a sale including the goods and services sold the price per unit and the total cost other information may be included such as the name and details of the seller and or information about the buyer a debit note on the other hand is a document prepared by the seller it is usually used as a way to remind customers about payments that need to be made or about adjustments made to an order the bottom linevendors and buyers commonly create and submit documents relating to the exchange of goods and services a debit note is one document that both parties can send to one another debit notes indicate that a buyer has a payment pending on an order or they can alert a vendor that the buyer is making an adjustment on something they ordered however don t confuse this with an invoice which is a bill of sale that has information about the nature of the goods sold their price and the total amount of the order | |
what is debt | debt is something usually money owed by one party to another debt is used by many individuals and companies to make large purchases that they could not afford under other circumstances unless a debt is forgiven by the lender it must be paid back typically with added interest | |
how debt works | the most common forms of debt are loans including mortgages auto loans and personal loans as well as credit cards under the terms of a most loans the borrower receives a set amount of money which they must repay in full by a certain date which may be months or years in the future the terms of the loan will also stipulate the amount of interest that the borrower is required to pay expressed as a percentage of the loan amount interest compensates the lender for taking on the risk of the loan credit cards and lines of credit operate a little differently they provide what s known as revolving or open end credit with no fixed end date the borrower is assigned a credit limit and they can use their credit card or credit line repeatedly as long as they don t exceed that limit | |
when students take out federal student loans to pay for college they will receive a certain sum of money that they agree to pay back in the future with interest students now have the option of several different repayment plans if they choose what s known as the standard repayment plan they will be required to make fixed monthly payments for 10 years at which point their debt will be completely paid off 1 | each of those monthly payments will represent a portion of the principal they owe plus interest on their debt the interest rate on federal student loans for undergraduates is currently 5 50 2types of consumer debtdebt can come in a variety of forms each with their own uses and requirements most types of debt fall into one or more of the following categories secured debt is also known as collateralized debt that means the borrower has pledged something of value to back up the debt with a car loan for example the vehicle usually serves as collateral if the borrower fails to repay the money they borrowed to buy the car the lender can seize and sell it similarly when someone takes out a mortgage to buy a home the home itself typically serves as collateral if the borrower fails to make payments the lender can foreclose and take the home a company that wants to borrow money might pledge a piece of machinery real estate or cash in the bank as collateral unsecured debt does not require any collateral as security instead the lender decides whether to grant a loan based on the borrower s creditworthiness as indicated by their credit score credit history and other factors most credit cards and most personal loans are examples of unsecured debt because unsecured debt can be riskier to the lender it generally commands a higher interest rate than secured debt revolving debt provides the borrower with a line of credit that they are able to borrow from as they wish the borrower can take up to a certain amount pay the debt back and borrow up to that amount again the most common form of revolving debt is credit card debt as long as the borrower fulfills their obligations typically by making monthly payments of at least a certain minimum amount the line of credit remains available for as long as the account is active over time with a favorable repayment history the amount of revolving debt that s available to the borrower may increase a mortgage is a type of secured debt used to purchase real estate such as a house or condo mortgages are usually paid back over long periods such as 15 or 30 years mortgages are often the largest debt apart from student loans that consumers will ever take on and they come in many different varieties two broad categories are fixed rate mortgages and adjustable rate mortgages or arms in the case of arms the interest rate can change periodically usually based on the performance of a particular index types of corporate debtcompanies that want to borrow money have some options that aren t available to individual consumers in addition to loans from a bank or other lender they are often able to issue bonds and commercial paper bonds are a debt instrument that allow a company to borrow funds from investors by promising to repay the money with interest both individuals and investment firms can purchase bonds which typically carry a fixed interest or coupon rate if a company needs to raise 1 million to fund the purchase of new equipment for example it could issue 1 000 bonds with a face value of 1 000 each bonds commonly become due at a certain date in the future called the maturity date at which time the investor will receive the bond s full face value in addition the investor will have received regular interest payments throughout the intervening years commercial paper is short term corporate debt with a maturity of 270 days or less 3advantages and disadvantages of debtproperly used debt can be advantageous to individuals and companies alike few people could buy a home without a mortgage and many people couldn t afford a new car without an auto loan credit cards can be a great convenience and even a lifesaver in emergency situations for companies access to debt can make all the difference in their ability to expand and compete but debt can be risky for borrower and lender alike with enough credit cards in their wallets consumers can easily accumulate an unmanageable amount of debt especially if they lose their jobs or face another serious setback companies that take on a large amount of debt may not be able to make their interest payments if sales drop putting the business in danger of bankruptcy even if it doesn t reach that point having too much debt can impose a crippling burden on a company requiring it to devote much of its income to debt repayment rather than more productive purposes | |
how to pay off debt | the best way to stay out of debt trouble is to have a plan for paying it off that starts with not taking on too much debt in the first place for example consumers should pay attention to their credit utilization ratio also known as a debt to limit ratio that s the amount of debt they currently owe as a percentage of the total amount of credit they have available to them for example if someone has two credit cards with a combined credit limit of 10 000 and they currently owe 5 000 on those cards their credit utilization ratio is 50 lenders typically prefer that consumers keep their credit utilization ratios below 30 and credit scores penalize individuals for exceeding that level 4the fastest way to pay off debt is to devote a greater portion of your income to monthly debt payments ideally paying off credit card debts in full each month before any interest charges kick in if you need to prioritize experts generally recommend paying off your highest interest debts first and working your way down from there you can also consolidate several debts into one which may make sense if the new loan carries a lower interest rate similarly you may be able to transfer your credit card balances to another card with a lower interest rate or ideally a 0 interest rate for a period of time | |
what are examples of debt | debt is anything owed by one party to another examples of debt include amounts owed on credit cards car loans and mortgages | |
what is the legal definition of debt | in terms of consumer debt 15 u s code section 1692a defines it as any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money property insurance or services which are the subject of the transaction are primarily for personal family or household purposes whether or not such obligation has been reduced to judgment 5 | |
what is the difference between debt and a loan | debt and loan are often used synonymously but there are slight differences debt is anything owed by one person to another debt can involve real property money services or other consideration in corporate finance debt is more narrowly defined as money raised through the issuance of bonds a loan is a form of debt but more specifically an agreement in which one party lends money to another the lender sets repayment terms including how much is to be repaid and when as well as the interest rate on the debt | |
what is the difference between debt and credit | debt is amount of money you owe while credit is the amount of money you have available to you to borrow for example unless you have maxed out your credit cards your debt is less than your credit the bottom linedebt is an important if not essential tool in today s economy businesses take on debt in order to fund needed projects while consumers may use it to buy a home or finance a college education at the same time debt can be risky especially for companies or individuals that accumulate too much of it | |
what is a debt collector | a debt collector is a person or organization that recovers money owed on delinquent accounts creditors hire debt collectors when they are owed money by individuals collectors are paid a flat fee or a certain percentage of the amount they collect some debt collectors are debt buyers such that they purchase debt at a fraction of its face value and then attempt to recover the full amount of the debt or as much of it as they can a debt collector may also be known as a collection agency cecilie arcurs gettyimagesunderstanding debt collectors | |
when a borrower defaults on a debt the lender or creditor may turn their account over to a debt collector or collections agency the debt is said to have gone to collections at this point this typically happens within three to six months of default depending on the creditor overdue payments on credit cards phone bills auto loans utility bills and back taxes are examples of debts for which collectors may be responsible | debt collectors may contact the debtor in writing by mail or over the phone they can call the person s personal and work phones in some cases they may even show up on a debtor s doorstep collectors may also contact a debtor s family friends and neighbors to confirm the individuals contact information on file 1if the person agrees to pay the debt the creditor will usually pay the debt collector a percentage of the money it gets back unless they have a flat fee arrangement some debt collection agencies and other companies will purchase delinquent debt from creditors typically for pennies on the dollar then attempt to collect the debt for their benefit these collectors keep all of the money they collect if they re successful there are different types of debt collectors in house debt collectors are employees of the creditor third party debt collectors work for outside agencies that are specifically in the business of collecting other parties debts debt collector regulationsdebt collectors are regulated under the fair debt collection practices act fdcpa which is administered by the federal trade commission ftc the law which went into effect in 1978 is designed to protect consumers against unscrupulous collection practices 2 it prohibits the use of abusive unfair or deceptive practices during the collection process this includes the following the law also gives debtors certain rights for example if you send a letter to a debt collector telling them to stop contacting you the collector is required to comply this means they must stop contacting you in any way including over the phone or in writing 6the consumer financial protection bureau cfpb issued a new debt collection rule in 2021 that further clarifies what debt collectors can and can t do for example when a debt collector first contacts the debtor in any way it must provide certain information such as the debt collector s name and address the creditor s name the associated account number and the amount and itemized accounting of the debt they must also provide information on the debtor s rights and how they can dispute the debt if they believe it is inaccurate 5people who think a debt collector has broken the law can report them to the ftc the cfpb and their state attorney general s office debt collectors are not allowed to disclose information about your debt to another individual such as a family member friend neighbor coworker or employer without your express consent you can file a complaint with the ftc cfpb or your state attorney general s office if you have trouble with a collector you also have the right to sue the debt collector in state or federal court 4example of a debt collectorhere s a hypothetical example to show how debt collectors work let s assume that jesse owes abc bank 15 000 on a credit card they ve missed six months worth of payments because they re overwhelmed by debt the credit card issuer makes several attempts to try to collect on the arrears through its in house collection department after the last attempt the bank closes the card and sends jesse s account to a third party collection agency to assume collection activity once the account arrives the collection agency sends a letter to jesse advising them that it is now responsible for collecting on the account the agency may send letters and attempt to collect the debt by contacting jesse over the phone if the activity is successful the agency may get a fee or a percentage of the outstanding balance the rest is sent to the original creditor and the account is considered paid in full |
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