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what is depreciated cost
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depreciated cost is the value of a fixed asset minus all of the accumulated depreciation that has been recorded against it in a broader economic sense the depreciated cost is the aggregate amount of capital that is used up in a given period such as a fiscal year the depreciated cost can be examined for trends in a company s capital spending and how aggressive their accounting methods are seen through how accurately they calculate depreciation depreciated cost is also known as the salvage value net book value or adjusted cost basis
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how depreciated cost works
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the depreciated cost method of asset valuation is an accounting method used by businesses and individuals to determine the useful value of an asset it s important to note that the depreciated cost is not the same as the market value the market value is the price of an asset based on supply and demand in the market the depreciated cost is the value of an asset after its useful life is complete reduced over time through depreciation the depreciated cost method always allows for accounting records to show an asset at its current value as the value of the asset is constantly reduced by calculating the depreciation cost this also allows for measuring cash flows generated from the asset in relation to the value of the asset itself the formula for depreciated costdepreciated cost purchase price or cost basis cdwhere cd cumulative depreciation begin aligned text depreciated cost text purchase price or cost basis text cd textbf where text cd text cumulative depreciation end aligned depreciated cost purchase price or cost basis cdwhere cd cumulative depreciation example of depreciated costif a construction company can sell an inoperable crane for parts at a price of 5 000 that is the crane s depreciated cost or salvage value if the same crane initially cost the company 50 000 then the total amount depreciated over its useful life is 45 000 suppose the crane has a useful life of 15 years at this point the company has all the information it needs to calculate each year s depreciation the simplest method is the straight line depreciation this means that there is no curve to the amount of appreciation whether that is an immediate 30 depreciation seen when driving new cars off the lot or an increased depreciation when an item is close to needing major repairs using this method depreciation is the same every year it equals total depreciation 45 000 divided by the useful life 15 years or 3 000 per year
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what is depreciation
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depreciation is an accounting practice used to spread the cost of a tangible or physical asset over its useful life depreciation represents how much of the asset s value has been used up in any given time period companies depreciate assets for both tax and accounting purposes and have several different methods to choose from investopedia jessica olahdepreciation overviewassets like machinery and equipment are expensive instead of realizing the entire cost of an asset in year one companies can use depreciation to spread out the cost and match depreciation expenses to related revenues in the same reporting period this allows the company to write off an asset s value over a period of time notably its useful life companies take depreciation regularly so they can move their assets costs from their balance sheets to their income statements when a company buys an asset it records the transaction as a debit to increase an asset account on the balance sheet and a credit to reduce cash or increase accounts payable which is also on the balance sheet neither journal entry affects the income statement where revenues and expenses are reported 1at the end of an accounting period an accountant books depreciation for all capitalized assets that are not yet fully depreciated the journal entry consists of a depreciation and taxesas noted above businesses use depreciation for both tax and accounting purposes under u s tax law they can take a deduction for the cost of the asset reducing their taxable income but the internal revenue servicc irs states that when depreciating assets companies must generally spread the cost out over time in some instances they can take it all in the first year under section 179 of the tax code 2 the irs also has requirements for the types of assets that qualify 3buildings and structures can be depreciated but land is not eligible for depreciation depreciation in accountingin accounting terms depreciation is considered a non cash charge because it doesn t represent an actual cash outflow the entire cash outlay might be paid initially when an asset is purchased but the expense is recorded incrementally for financial reporting purposes that s because assets provide a benefit to the company over an extended period of time but the depreciation charges still reduce a company s earnings which is helpful for tax purposes 4the matching principle under generally accepted accounting principles gaap is an accrual accounting concept that dictates that expenses must be matched to the same period in which the related revenue is generated depreciation helps to tie the cost of an asset with the benefit of its use over time in other words the incremental expense associated with using up the asset is also recorded for the asset that is put to use each year and generates revenue the total amount depreciated each year which is represented as a percentage is called the depreciation rate for example if a company had 100 000 in total depreciation over the asset s expected life and the annual depreciation was 15 000 the rate would be 15 per year different companies may set their own threshold amounts to determine when to depreciate a fixed asset or property plant and equipment pp e and when to simply expense it in its first year of service for example a small company might set a 500 threshold over which it will depreciate an asset on the other hand a larger company might set a 10 000 threshold under which all purchases are expensed immediately accumulated depreciation is a contra asset account meaning its natural balance is a credit that reduces its overall asset value accumulated depreciation on any given asset is its cumulative depreciation up to a single point in its life carrying value is the net of the asset account and the accumulated depreciation while salvage value is the carrying value that remains on the balance sheet after which all depreciation is accounted for until the asset is disposed of or sold salvage value is based on what a company expects to receive in exchange for the asset at the end of its useful life the irs publishes depreciation schedules indicating the number of years over which assets can be depreciated for tax purposes depending on the type of asset 4types of depreciation with calculation examplesthere are a number of methods that accountants can use to depreciate capital assets they include straight line declining balance double declining balance sum of the years digits and unit of production we ve highlighted some of the basic principles of each method below along with examples to show how they re calculated the straight line method is the most basic way to record depreciation it reports an equal depreciation expense each year throughout the entire useful life of the asset until the asset is depreciated down to its salvage value image by theresa chiechi the balance 2019let s assume that a company buys a machine at a cost of 5 000 the company decides that the machine has a useful life of five years and a salvage value of 1 000 based on these assumptions the depreciable amount is 4 000 5 000 cost 1 000 salvage value the annual depreciation using the straight line method is calculated by dividing the depreciable amount by the total number of years in this case it comes to 800 per year 4 000 5 years this results in an annual depreciation rate of 20 800 4 000 the declining balance method is an accelerated depreciation method that begins with the asset s book rather than salvage value because an asset s carrying value is higher in earlier years before it has begun to be depreciated the same percentage causes a larger depreciation expense amount in earlier years then declines each year thereafter this is the formula using the straight line example above the machine costs 5 000 and has a useful life of five years in year one depreciation would be 1 000 5 000 x 1 5 1 000 in year two it would be 5 000 1 000 x 1 5 or 800 in year three 5 000 1 000 800 x 1 5 or 640 and so forth the double declining balance ddb method is an even more accelerated depreciation method it doubles the 1 useful life multiplier making it essentially twice as fast as the declining balance method continuing to use our example of a 5 000 machine depreciation in year one would be 5 000 x 2 5 or 2 000 in year two it would be 5 000 2 000 x 2 5 or 1 200 and so on note that while salvage value is not used in declining balance calculations once an asset has been depreciated down to its salvage value it cannot be further depreciated the sum of the years digits syd method also allows for accelerated depreciation you start by combining all the digits of the expected life of the asset for example an asset with a five year life would have a base of the sum of the digits one through five or 1 2 3 4 5 15 in the first year 5 15 of the depreciable base would be depreciated in the second year 4 15 of the depreciable base would be depreciated this continues until year five when the remaining 1 15 of the base is depreciated the depreciable base in all of these cases is the purchase price minus the salvage value or 4 000 in the example we ve been using for example year one depreciation would be 1 333 4 000 x 5 15 1 333 in year two it would be 1 067 4 000 x 4 15 1 067 this method which is often used in manufacturing requires an estimate of the total units an asset will produce over its useful life depreciation expense is then calculated per year based on the number of units produced that year this method also calculates depreciation expenses using the depreciable base purchase price minus salvage value
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why are assets depreciated over time
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new assets are typically more valuable than older ones for a number of reasons depreciation measures the value an asset loses over time directly from ongoing use through wear and tear and indirectly from the introduction of new product models and factors like inflation writing off only a portion of the cost each year rather than all at once also allows businesses to report higher net income in the year of purchase than they would otherwise
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how do businesses determine salvage value
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salvage value can be based on past history of similar assets a professional appraisal or a percentage estimate of the value of the asset at the end of its useful life
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what is depreciation recapture
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depreciation recapture is a provision of the tax law that requires businesses or individuals that make a profit in selling an asset that they have previously depreciated to report it as income in effect the amount of money they claimed in depreciation is subtracted from the cost basis they use to determine their gain in the transaction recapture can be common in real estate transactions where a property that has been depreciated for tax purposes such as an apartment building has gained in value over time
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how does depreciation differ from amortization
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depreciation refers only to physical assets or property amortization essentially depreciates intangible assets such as intellectual property like trademarks or patents over time the bottom linedepreciation allows businesses to spread the cost of physical assets over a period of time which can have advantages from both an accounting and tax perspective businesses also have a variety of depreciation methods to choose from allowing them to pick the one that works best for their purposes
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what is depreciation depletion and amortization dd a
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depreciation depletion and amortization dd a is an accounting technique that enables companies to gradually expense various different resources of economic value over time in order to match costs to revenues depreciation spreads out the cost of a tangible asset over its useful life depletion allocates the cost of extracting natural resources such as timber minerals and oil from the earth and amortization is the deduction of intangible assets over a specified time period typically the life of an asset depreciation and amortization are common to almost every industry while depletion is usually used only by energy and natural resource firms the use of all three therefore is often associated with the acquisition exploration and development of new oil and natural gas reserves understanding depreciation depletion and amortization dd a accrual accounting permits companies to recognize capital expenses in periods that reflect the use of the related capital asset in other words it lets firms match expenses to the revenues they helped produce for example if a large piece of machinery or property requires a large cash outlay it can be expensed over its usable life rather than in the individual period during which the cash outlay occurred this accounting technique is designed to provide a more accurate depiction of the profitability of the business dd a is a common operating expense item for energy companies analysts and investors in the energy sector should be aware of this expense and how it relates to cash flow and capital expenditure depreciation applies to expenses incurred for the purchase of assets with useful lives greater than one year a percentage of the purchase price is deducted over the course of the asset s useful life depletion also lowers the cost value of an asset incrementally through scheduled charges to income where it differs is that it refers to the gradual exhaustion of natural resource reserves as opposed to the wearing out of depreciable assets or the aging life of intangibles depletion expense is commonly used by miners loggers oil and gas drillers and other companies engaged in natural resource extraction enterprises with an economic interest in mineral property or standing timber may recognize depletion expenses against those assets as they are used depletion can be calculated on a cost or percentage basis and businesses generally must use whichever provides the larger deduction for tax purposes amortization is very similar to depreciation in theory but applies to intangible assets such as patents trademarks and licenses rather than physical property and equipment capital leases are also amortized recording depreciation depletion and amortization dd a if a company uses all three of the above expensing methods they will be recorded in its financial statement as depreciation depletion and amortization dd a a single line providing the dollar amount of charges for the accounting period appears on the income statement explanations may also be supplied in the footnotes particularly if there is a large swing in the depreciation depletion and amortization dd a charge from one period to the next an entry is made on the balance sheet too the dollar amount represents the cumulative total amount of depreciation depletion and amortization dd a from the time the assets were acquired assets deteriorate in value over time and this is reflected in the balance sheet real world examplechevron corp cvx reported 19 4 billion in dd a expense in 2018 more or less in line with the 19 3 billion it recorded in the prior year in its footnotes the energy giant revealed that the slight dd a expense increase was due to higher production levels for certain oil and gas producing fields
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what is depreciation recapture
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depreciation recapture is the gain realized by the sale of depreciable capital property that must be reported as ordinary income for tax purposes depreciation recapture is assessed when the sale price of an asset exceeds the tax basis or adjusted cost basis the difference between these figures is thus recaptured by reporting it as ordinary income depreciation recapture is reported on internal revenue service irs form 4797 understanding depreciation recapturecompanies account for wear and tear on property plant and equipment through depreciation depreciation divides the cost associated with the use of an asset over a number of years the irs publishes specific depreciation schedules for different classes of assets the schedules tell a taxpayer what percentage of an asset s value may be deducted each year and the number of years for which the deductions may be taken for tax purposes annual depreciation expense lowers the ordinary income that a company or individual pays each year and reduces the adjusted cost basis of the asset if the depreciated asset is disposed of or sold for a gain the ordinary income tax rate will be applied to the amount of the depreciation expense previously taken on the asset depreciation recapture is a tax provision that allows the irs to collect taxes on any profitable sale of an asset that the taxpayer had used to previously offset their taxable income since depreciation of an asset can be used to deduct ordinary income any gain from the disposal of the asset must be reported and taxed as ordinary income rather than the more favorable capital gains tax rate depreciable capital assets held by a business for over a year are considered to be section 1231 property as defined in section 1231 of the irs code section 1231 is an umbrella for both section 1245 property and section 1250 property section 1245 refers to capital property that is not a building or structural component section 1250 refers to real estate property such as buildings and land the tax rate for the depreciation recapture will depend on whether an asset is a section 1245 or 1250 asset examples of depreciation recapturethe first step in evaluating depreciation recapture is to determine the cost basis of the asset the original cost basis is the price that was paid to acquire the asset the adjusted cost basis is the original cost basis minus any allowed or allowable depreciation expense incurred for example if business equipment was purchased for 10 000 and had a depreciation expense of 2 000 per year its adjusted cost basis after four years would be 10 000 2 000 x 4 2 000 for income tax purposes the depreciation would be recaptured if the equipment is sold for a gain if the equipment is sold for 3 000 the business would have a taxable gain of 3 000 2 000 1 000 it is easy to think that a loss occurred from the sale since the asset was purchased for 10 000 and sold for only 3 000 however gains and losses are realized from the adjusted cost basis not the original cost basis the reasoning for this method is that the taxpayer has benefited from lower ordinary income over the previous years due to annual depreciation expenses gains and losses are realized from the adjusted cost basis not the original cost basis the realized gain from an asset sale must be compared with the accumulated depreciation the smaller of the two figures is considered to be the depreciation recapture in our example above since the realized gain on the sale of the equipment is 1 000 and accumulated depreciation taken through year four is 8 000 the depreciation recapture is thus 1 000 this recaptured amount will be treated as ordinary income when taxes are filed for the year instead assume the equipment in the example above was sold for 12 000 in that case the entire accumulated depreciation of 8 000 is treated as ordinary income for depreciation recapture purposes the additional 2 000 is treated as a capital gain and it is taxed at the favorable capital gains rate there is no depreciation to recapture if a loss was realized on the sale of a depreciated asset unrecaptured section 1250 gaindepreciation recapture on real estate property is not taxed at the ordinary income rate as long as straight line depreciation was used over the life of the property any accelerated depreciation previously taken is still taxed at the ordinary income tax rate during recapture however this is a rare occurrence because the irs has mandated all post 1986 real estate be depreciated using the straight line method part of the gain beyond the original cost basis is taxed as a capital gain and qualifies for the favorable tax rate on long term gains but the part that is related to depreciation is taxed at the unrecaptured gains section 1250 tax rate specific only to gains on real estate property the unrecaptured section 1250 tax rate is currently capped at 25 for example consider a rental property that was purchased for 275 000 and has an annual depreciation of 10 000 275 000 27 5 years allowed by irs for rental property after 11 years the owner decides to sell the property for 430 000 the adjusted cost basis then is 275 000 10 000 x 11 165 000 the realized gain on the sale will be 430 000 165 000 265 000 the unrecaptured section 1250 gain can be calculated as 10 000 x 11 110 000 and the capital gain on the property is 265 000 10 000 x 11 155 000 let s assume a 15 capital gains tax and that the owner falls in the 32 income tax bracket unrecaptured section 1250 gains are limited to 25 the total amount of tax that the taxpayer will owe on the sale of this rental property is 0 15 x 155 000 0 25 x 110 000 23 250 27 500 50 750 the depreciation recapture amount is thus 27 500
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how do you calculate depreciation recapture
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depreciation recapture is calculated by subtracting the adjusted cost basis from the sale price of the asset the adjusted cost basis is the original price paid to acquire the asset minus any allowed or allowable depreciation expense incurred if for example the adjusted cost basis is 2 000 and the asset is sold for 3 000 there is a gain of 1 000 to be taxed the rate it will be taxed depends on the taxpayer s income tax rate and whether the asset is real estate
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how is depreciation recapture treated
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depreciation recapture is treated as ordinary income and taxed as such with real estate it s a little more complicated the gain beyond the original cost basis is taxed as a capital gain whereas the part that is related to depreciation is taxed at the unrecaptured gains section 1250 tax rate which is capped at 25
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how can i avoid depreciation recapture
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depreciation recapture can be quite costly when selling something like real estate other than selling the property for less which isn t a favorable option ways around it could include using the irs section 121 exclusion or passing the property to your heirs if you find yourself in this position speak to an expert before acting the bottom linedepreciation recapture offers the irs a way to collect taxes on the profitable sale of an asset that a taxpayer used to offset taxable income while owning the asset the taxpayer is permitted each year to expense its declining value to reduce the amount of income tax owed however if that asset is later sold the irs may be able to claw some of that money back depreciation recapture is calculated by subtracting the adjusted cost basis which is the price paid for the asset minus any allowed or allowable depreciation expense incurred from the sale price it only applies when an asset is sold for more than its adjusted cost basis and is taxed differently depending on the type of asset depreciation recapture on non real estate property is taxed at the taxpayer s ordinary income tax rate depreciation recapture on gains specific to real estate property on the other hand is capped at a maximum of 25
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what is a depression
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a depression is a severe and prolonged downturn in economic activity a depression may be defined as an extreme recession that lasts three or more years or that leads to a decline in real gross domestic product gdp of at least 10 in a given year 1 depressions are far less common than milder recessions both tend to be accompanied by relatively high unemployment and relatively low inflation the u s has experienced at least 34 recessions since 1850 this includes the great recession of 2008 2009 and the covid 19 recession of 2020 2 but it has had only one depression which lasted from 1929 until 1941 and is known as the great depression 3the number of recessions that the u s experienced between 1850 and 2007 according to the national bureau of economic research 2 those were followed by the great recession of 2008 2009 and the covid 19 recession of 2020 for a total of 34 recessions since 1850 4understanding depressionstwo major factors characterize a depression consumer confidence falls dramatically as people begin to worry about their job security and pull back on spending and investments decrease as businesses and individuals stop investing whether that means building a new factory developing a new product or buying stocks economic factors that characterize a depression include economists disagree on the duration of a depression some argue that a depression encompasses only the period that is plagued by declining economic activity other economists argue that the depression continues up until the point that most economic activity has returned to normal depression vs recessiona recession is considered a normal part of the boom and bust business cycle it is generally defined as a decline in gdp for at least two consecutive quarters given the lag in collecting data on economic activity a brief recession may be over before it is confirmed to have happened a depression lasts for years and its consequences are far graver almost 25 of the u s population was unemployed during the depths of the great depression and that figure does not include the farmers who lost their homes and their land due to cratering prices for their produce 5recessions are much more common there were 32 recessions in the u s between 1850 and 2007 and just one depression 2 since then the u s experienced the great recession of 2008 2009 and the briefer and less disruptive covid 19 related recession of 2020 as noted a recession is defined as at least two consecutive quarters of negative gdp growth even if that decline is slight 1 a depression is defined by a drop in annual gdp of 10 or more the great depression lasted for a decade 3a recession is defined as two or more consecutive quarters of decline in gdp growth no matter how slight the decline is 1 a depression is defined by a drop in annual gdp of 10 or more example of a depressionthe great depression is to this day the worst economic downturn in modern world history lasting roughly a decade many historians trace its origins to october 24 1929 when the stock market crashed in an event afterward known as black thursday 5 after years of reckless investing and speculation the stock market bubble burst and a huge sell off began with a then record 12 9 million shares traded on that day the united states was already in a recession the following tuesday oct 29 1929 the dow jones industrial average fell 12 more in another mass sell off triggering the start of the great depression 6the great depression began in the united states but soon took hold throughout the industrialized world its economic impact was felt for more than a decade the era was characterized by catastrophic levels of unemployment poverty hunger and political unrest consumer spending and business investment dried up u s unemployment reached a level of just under 25 in 1933 and remained in the double digits until 1941 when it finally fell to 9 66 78during the great depression wages dropped 42 real estate prices declined 25 total u s economic output fell by 30 and many investors portfolios became worthless as stock prices cratered 9shortly after franklin d roosevelt was elected president in 1932 the federal deposit insurance corporation fdic was created to protect depositors bank accounts in the event of bank failure 10 in addition the securities and exchange commission sec was formed to regulate the u s stock markets 11
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why a repeat of the great depression is unlikely
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government policymakers appear to have learned their lesson from the great depression new laws and regulations were introduced to protect consumers and investors central banks developed tools designed to keep the economy steady nowadays central banks are quick to react to inflation before it gets out of control they are equally willing to use expansionary monetary policy to lift the economy during difficult times these tools are widely credited for helping to stop the great recession of 2008 2009 from becoming a full blown depression a series of factors can cause an economy and production to contract severely in the case of the great depression questionable monetary policy took the blame
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what causes a depression
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an economic depression is a rolling disaster that begins with a decline in consumer confidence there is of course a triggering event or events behind this loss of confidence the subprime mortgage crisis of 2006 is seen as the first major event leading to the great recession of 2007 2009 1213 as home prices fell many americans watched their personal wealth and that of their neighbors evaporate they grew cautious about spending money
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when consumers spend less businesses produce less and rethink investments in new enterprises they need fewer workers to produce fewer goods so they begin laying off people with more people unemployed wages for the few remaining jobs fall with fewer people spending money the prices of many goods fall
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the wheel keeps turning as the economy sinks farther into negative territory
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what signals an upcoming depression
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if it all starts with the consumer the number to keep an eye on is the consumer confidence index published by the confidence board one of the numbers considered to be a key economic indicator of the health of the u s economy the latest updates to the index are published on the last tuesday of every month 14the survey used to compile the index delves into the reasons behind consumer confidence or lack of it its present situation index which assesses views on current business and labor market conditions increased slightly its expectations index based on consumers short term outlook fell a bit for instance it s important to note that this shows the potential for a recession not a depression the number would have to indicate a catastrophic loss in consumer confidence to cause anyone to use the d word and even then monetary policymakers and fiscal policymakers would be scrambling to use the tools at their disposal to prop up those numbers so where does confidence stand after january 2023 the index dropped to 100 4 in june 2024 the present situation index stood at 141 5 while the expectations index still sits below the threshold of 80 with a value of 73 0 16
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how to prevent a depression
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in modern times a deep recession or an outright depression is most often fended off by the use of two weapons wielded by separate branches of government expansionary fiscal policy and expansionary monetary policy there is another course fiscal austerity that has been controversial to say the least fiscal policy is the job of the u s congress and the president 17 in warding off an economic downturn fiscal policymakers spend taxpayer money they may approve massive public works projects such as the works progress administration wpa which was created in 1935 to create jobs to replace those lost 18 they may put money directly into the hands of the public through such measures as the expanded child tax credit that increased the spending power of families during the covid related recession monetary policy is the job of the central bank in the u s that s the federal reserve the fed can goose the economy simply by lowering the interest rates it charges banks for the short term loans that keep the banking system running 17these rates influence all other rates that are charged for consumer and business loans cheap money encourages more borrowing and more business investment leading to the creation of more jobs when it works the rolling disaster of a looming depression comes to a halt and begins to reverse course if still more firepower is needed the fed may adopt a policy of quantitative easing the fed uses its own reserves to buy massive amounts of the government s debts such as bonds this has the effect of adding more cash to the economy that cash becomes available for new investments fiscal austerity stands in direct opposition to expansionary policy as a strategy for fending off an economic downturn in times of recession government revenues decline fewer people are working fewer projects are getting off the ground and consumer spending is reduced all of the taxable events that keep a government humming are in decline a commitment to a balanced budget could logically be met with cuts in government spending that course was followed during the great recession by some nations in the european union as well as by some u s states which were hamstrung by balanced budget rules or had a pronounced aversion to increasing government debt whether this strategy cures a recession or feeds it continues to be a matter of debate most recently u k prime minister liz truss was ousted from her job after a record short tenure for recommending fiscal austerity in response to the nation s economic problems
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how to protect your money in a depression
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if history is any guide you shouldn t spend your time worrying about a depression but you should prepare for the next recession it s really about maintaining your awareness that the economy moves in a boom and bust cycle and if it s boom time get ready for the bust as an investor that means keeping your portfolio diversified to include safe haven picks that do well even in a downturn as a responsible adult it means saving regularly paying your debt down and maintaining an emergency fund and as a participant in the modern american economy it can mean looking around you and considering alternative sources of income that you can exploit when things turn dicey
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what is a depression vs a recession
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you might view a depression as a recession that is extreme in its effects and its duration a recession is a relatively brief downturn in economic activity it is seen as an intrinsic stage of the economic cycle these are the generally accepted definitions of the two can a great depression happen again the united states dodged another great depression in 2008 2009 there s a good chance that it could do so again using some of the same costly but powerful fiscal and monetary measures that it deployed at that time these included huge loans to the banks and the auto industry tax cuts for the public increased government infrastructure spending and lower interest rates keep in mind too that the covid pandemic caused only a brief recession in 2020 that too was met with a targeted array of fiscal and monetary actions that might have prevented a far more severe downturn
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how long can a recession last
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a recession is defined as at least two consecutive quarters of negative economic growth a chart from the federal reserve of recessions since 1970 suggests how long a recession can last probably the worst was the double dip recession that began in the second quarter of 1979 and ended in the third quarter of 1980 only to reemerge in the second quarter of 1981 and continue through the third quarter of 1982 19the bottom linerecessions are common enough events to be considered a normal part of the economic cycle a period of expansion is followed by a period of contraction they are unpredictable although plenty of people try to predict them economists couldn t anticipate for example that a worldwide pandemic would cause a near shutdown of the global pipeline of goods and services leading to a recession that began in the first quarter of 2020 they also could not predict that the recession would be over by the third quarter of 2020 after a huge infusion of government cash not only propped up the economy but kept it going until more normal economic activity could resume a depression is a recession of catastrophic proportions the u s economy has not been in an economic depression since 1939 that may in part be because the nation s policymakers have developed tools to alleviate the effects of a recession before it morphs into something worse
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what is depth of market dom
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depth of market dom is a measure of the supply and demand for liquid tradeable assets it is based on the number of open buy and sell orders for a given asset such as a stock or futures contract the greater the quantity of those orders the deeper or more liquid the market is considered to be depth of market data is also known as the order book since it consists of a list of pending orders for a security or currency the data in the book is used to determine which transactions can be processed dom data is available from most online brokers for free or for a small fee understanding domby measuring real time supply and demand market depth is used by traders to assess the likely direction of an asset s price it is also used to gauge the number of shares of the asset that can be bought without causing its price to appreciate if a stock is extremely liquid it has a large number of both buyers and sellers a buyer can purchase a large block of shares without causing a substantial stock price movement however if a stock is not particularly liquid it doesn t trade as constantly purchasing a block of shares may have a noticeable impact on the stock s price depth of market is typically displayed as an electronic list of outstanding buy and sell orders organized by price level and updated in real time to reflect current activity a matching engine pairs up compatible trades for completion most online brokers offer some form of dom display this allows users to see a full list of buy and sell orders pending execution along with the size of the trade rather than just the best options available depth of market data helps traders see where the price of a security may be heading in the near future as orders are filled updated or canceled a trader might use market depth data to understand the bid ask spread for a stock along with its current volume stocks with a strong depth of market tend to be popular large cap companies like apple aapl they usually have strong volumes and are quite liquid allowing traders to place large orders without significantly affecting their market prices securities with poor depth of market tend to be more obscure companies with smaller market capitalizations the prices of their stocks are likely to move if a single trader places a large buy or sell order the most popular stocks tend to have a greater depth of market than the stocks of lesser known companies being able to view the depth of market information for a particular security in real time allows traders to profit from short term price volatility for example when a company launches its initial public offering ipo traders can watch its dom in real time waiting for the opportunity to buy or sell shares when the price reaches the right level of demand example of domsay a trader is tracking the dom of stock a the shares might currently be trading at 1 00 but there are 250 offers at 1 05 250 at 1 08 125 at 1 10 and 100 at 1 12 meanwhile there are 50 offers at 0 98 40 offers at 0 95 and 10 each at 0 93 and 0 92 seeing this trend the trader might determine that stock a is going higher armed with that knowledge the trader can decide whether this is the right time to jump in and buy or sell the stock
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what is deregulation
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the term deregulation refers to the reduction or elimination of government power in a particular industry deregulation is usually enacted by government bodies to create more competition within an industry the struggle between proponents of regulation and those of government nonintervention has shifted market conditions some of the industries that have been deregulated in the united states include trucking railroad airline and finance understanding deregulationderegulation involves removing regulations and restrictions within an industry it reduces a lot of the bureaucracy involved which makes it cumbersome and overbearing for companies to do business this is normally done at the executive level which means legislation must be passed and signed into law by a country s leader proponents of deregulation say it but there is plenty of criticism those against deregulation say it may help create monopolies and lead to a lack of transparency on how businesses operate eliminating regulations can also have detrimental impacts on consumers without any regulatory framework in place companies are free to exploit consumers interests for instance the deregulation of the financial sector gave financial institutions the power to decide how they would use their capital and how they would charge consumers fees deregulation proponents argue that overbearing legislation reduces investment opportunity and stymies economic growth causing more harm than it helps the history of deregulation in the financial industrythe financial sector in the u s wasn t heavily regulated until the stock market crash of 1929 and the great depression that resulted franklin d roosevelt s administration responded to the financial crisis by enacting financial regulation this includes the securities exchange acts of 1933 and 1934 and the u s banking act of 1933 otherwise known as the glass steagall act 12the securities exchange acts required all public companies to disclose relevant financial information and established the securities and exchange commission sec to oversee securities markets the glass steagall act prohibited a financial institution from engaging in both commercial and investment banking this reform legislation was based on the belief that the pursuit of profit by large national banks must have spikes in place to avoid reckless and manipulative behavior that would lead financial markets in unfavorable directions in 1986 the federal reserve reinterpreted the glass steagall act and decided that 5 of a commercial bank s revenue could be from investment banking activity in 1996 that level was pushed up to 25 the following year the fed ruled that commercial banks could engage in underwriting 3 in 1994 the riegle neal interstate banking and branching efficiency act was passed amending the bank holding company act of 1956 and the federal deposit insurance act to allow interstate banking and branching 4in 1999 the financial services modernization act or gramm leach bliley act was passed under the watch of the clinton administration and overturned the glass steagall act completely 5 in 2000 the commodity futures modernization act prohibited the commodity futures trading commission from regulating credit default swaps and other over the counter otc derivative contracts 6 in 2004 the sec made changes that reduced the proportion of capital that investment banks have to hold in reserves 7this spree of deregulation came to a grinding halt following the subprime mortgage crisis of 2007 and the financial crash of 2007 2008 most notably with the passage of the dodd frank wall street reform and consumer protection act of 2010 which restricted subprime mortgage lending and derivatives trading 8however with the 2016 u s election bringing both a republican president and congress to power then president donald trump and his party set their sights on undoing dodd frank in may 2018 trump signed a bill that exempted small and regional banks from dodd frank s most stringent regulations and loosened rules put in place to prevent the sudden collapse of big banks it passed both houses of congress with bipartisan support after successful negotiations with democrats trump said that he wanted to do a big number on dodd frank possibly even repealing it completely however the bill s co sponsor and former rep barney frank d mass said of the new legislation this is not a big number on the bill it s a small number the legislation left major pieces of dodd frank s rules in place and failed to make any changes to the consumer financial protection bureau cfpb which was created by dodd frank to police its rules 9effects of deregulationthe hoped for effects of deregulation are to increase investment opportunities by eliminating restrictions for new businesses to enter markets and increase competition increasing competition encourages innovation and as companies enter markets and compete with each other consumers can enjoy lower prices lessening the need to use resources and capital to comply with regulations allows corporations to invest in research and development r d without needing to comply with mandated restrictions businesses will develop new products set competitive prices employ more labor enter foreign countries buy new assets and interact with consumers without the need to obey regulations example of deregulationwe highlighted some of the key measures taken to deregulate the financial industry above other industries experienced the removal of regulations in 1978 congress passed the airline deregulation act which gave more control to airline companies and changed the landscape of the industry by removing certain restrictions the law allowed new airlines to enter the market including smaller ones it also allowed airlines more freedom to fly to new locations increase the number of planes in the air and boost the number of passengers per flight 10
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what are the most regulated industries in the united states
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the most regulated industries in the united states are
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what is a derivative
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the term derivative refers to a type of financial contract whose value is dependent on an underlying asset group of assets or benchmark a derivative is set between two or more parties that can trade on an exchange or over the counter otc these contracts can be used to trade any number of assets and carry their own risks prices for derivatives derive from fluctuations in the underlying asset these financial securities are commonly used to access certain markets and may be traded to hedge against risk derivatives can be used to either mitigate risk hedging or assume risk with the expectation of commensurate reward speculation derivatives can move risk and the accompanying rewards from the risk averse to the risk seekers investopedia katie kerpelunderstanding derivativesa derivative is a complex type of financial security that is set between two or more parties derivatives can take many forms from stock and bond derivatives to economic indicator derivatives traders use derivatives to access specific markets and trade different assets typically derivatives are considered a form of advanced investing the most common underlying assets for derivatives are stocks bonds commodities currencies interest rates and market indexes contract values depend on changes in the prices of the underlying asset the primary instrument derivatives can be used to hedge a position speculate on the directional movement of an underlying asset or give leverage to holdings these assets are commonly traded on exchanges or otc and are purchased through brokerages the chicago mercantile exchange cme is among the world s largest derivatives exchanges 1it s important to remember that when companies hedge they re not speculating on the price of the commodity instead the hedge is merely a way for each party to manage risk each party has its profit or margin built into the price and the hedge helps to protect those profits from being eliminated by market moves in the price of the commodity otc traded derivatives generally have a greater possibility of counterparty risk which is the danger that one of the parties involved in the transaction might default these contracts trade between two private parties and are unregulated to hedge this risk the investor could purchase a currency derivative to lock in a specific exchange rate derivatives that could be used to hedge this kind of risk include currency futures and currency swaps exchange traded derivatives are standardized and more heavily regulated than those that are traded over the counter special considerationsderivatives were originally used to ensure balanced exchange rates for internationally traded goods international traders needed a system to account for the differing values of national currencies assume a european investor has investment accounts that are all denominated in euros eur let s say they purchase shares of a u s company through a u s exchange using u s dollars usd this means they are now exposed to exchange rate risk while holding that stock exchange rate risk is the threat that the value of the euro will increase in relation to the usd if this happens any profits the investor realizes upon selling the stock become less valuable when they are converted into euros a speculator who expects the euro to appreciate versus the dollar could profit by using a derivative that rises in value with the euro when using derivatives to speculate on the price movement of an underlying asset the investor does not need to have a holding or portfolio presence in the underlying asset many derivative instruments are leveraged which means a small amount of capital is required to have an interest in a large amount of value in the underlying asset types of derivativesderivatives today are based on a wide variety of transactions and have many more uses there are even derivatives based on weather data such as the amount of rain or the number of sunny days in a region there are many different types of derivatives that can be used for risk management speculation and leveraging a position the derivatives market is one that continues to grow offering products to fit nearly any need or risk tolerance there are two classes of derivative products lock and option lock products e g futures forwards or swaps bind the respective parties from the outset to the agreed upon terms over the life of the contract option products e g stock options on the other hand offer the holder the right but not the obligation to buy or sell the underlying asset or security at a specific price on or before the option s expiration date the most common derivative types are futures forwards swaps and options a futures contract or simply futures is an agreement between two parties for the purchase and delivery of an asset at an agreed upon price at a future date futures are standardized contracts that trade on an exchange traders use a futures contract to hedge their risk or speculate on the price of an underlying asset the parties involved are obligated to fulfill a commitment to buy or sell the underlying asset for example say that on nov 6 2021 company a buys a futures contract for oil at a price of 62 22 per barrel that expires dec 19 2021 the company does this because it needs oil in december and is concerned that the price will rise before the company needs to buy buying an oil futures contract hedges the company s risk because the seller is obligated to deliver oil to company a for 62 22 per barrel once the contract expires assume oil prices rise to 80 per barrel by dec 19 2021 company a can accept delivery of the oil from the seller of the futures contract but if it no longer needs the oil it can also sell the contract before expiration and keep the profits in this example both the futures buyer and seller hedge their risk company a needed oil in the future and wanted to offset the risk that the price may rise in december with a long position in an oil futures contract the seller could be an oil company concerned about falling oil prices that wanted to eliminate that risk by selling or shorting a futures contract that fixed the price it would get in december it is also possible that one or both of the parties are speculators with the opposite opinion about the direction of december oil in that case one might benefit from the contract and one might not take for example the futures contract for west texas intermediate wti oil that trades on the cme and represents 1 000 barrels of oil if the price of oil rose from 62 22 to 80 per barrel the trader with the long position the buyer in the futures contract would have profited 17 780 80 62 22 x 1 000 17 780 2 the trader with the short position the seller in the contract would have a loss of 17 780 not all futures contracts are settled at expiration by delivering the underlying asset if both parties in a futures contract are speculating investors or traders it is unlikely that either of them would want to make arrangements for the delivery of a large number of barrels of crude oil speculators can end their obligation to purchase or deliver the underlying commodity by closing unwinding their contract before expiration with an offsetting contract many derivatives are in fact cash settled which means that the gain or loss in the trade is simply an accounting cash flow to the trader s brokerage account futures contracts that are cash settled include many interest rate futures stock index futures and more unusual instruments such as volatility futures or weather futures forward contracts or forwards are similar to futures but they do not trade on an exchange these contracts only trade over the counter when a forward contract is created the buyer and seller may customize the terms size and settlement process as otc products forward contracts carry a greater degree of counterparty risk for both parties counterparty risks are a type of credit risk in that the parties may not be able to live up to the obligations outlined in the contract if one party becomes insolvent the other party may have no recourse and could lose the value of its position once created the parties in a forward contract can offset their position with other counterparties which can increase the potential for counterparty risks as more traders become involved in the same contract swaps are another common type of derivative often used to exchange one kind of cash flow with another for example a trader might use an interest rate swap to switch from a variable interest rate loan to a fixed interest rate loan or vice versa imagine that company xyz borrows 1 000 000 and pays a variable interest rate on the loan that is currently 6 xyz may be concerned about rising interest rates that will increase the costs of this loan or encounter a lender that is reluctant to extend more credit while the company has this variable rate risk assume xyz creates a swap with company qrs which is willing to exchange the payments owed on the variable rate loan for the payments owed on a fixed rate loan of 7 that means that xyz will pay 7 to qrs on its 1 000 000 principal and qrs will pay xyz 6 interest on the same principal at the beginning of the swap xyz will just pay qrs the 1 percentage point difference between the two swap rates if interest rates fall so that the variable rate on the original loan is now 5 company xyz will have to pay company qrs the 2 percentage point difference on the loan if interest rates rise to 8 then qrs would have to pay xyz the 1 percentage point difference between the two swap rates regardless of how interest rates change the swap has achieved xyz s original objective of turning a variable rate loan into a fixed rate loan swaps can also be constructed to exchange currency exchange rate risk or the risk of default on a loan or cash flows from other business activities swaps related to the cash flows and potential defaults of mortgage bonds are an extremely popular kind of derivative in fact they ve been a bit too popular in the past it was the counterparty risk of swaps like this that eventually spiraled into the credit crisis of 2008 an options contract is similar to a futures contract in that it is an agreement between two parties to buy or sell an asset at a predetermined future date for a specific price the key difference between options and futures is that with an option the buyer is not obliged to exercise their agreement to buy or sell it is an opportunity only not an obligation as futures are as with futures options may be used to hedge or speculate on the price of the underlying asset in terms of timing your right to buy or sell it depends on the style of the option an american option allows holders to exercise the option rights at any time before and including the day of expiration a european option can be executed only on the day of expiration most stocks and exchange traded funds have american style options while equity indexes including the s p 500 have european style options
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what is derived demand
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derived demand in economics is the demand for a good or service that results from the demand for a different or related good or service it is a demand for some physical or intangible thing where a market exists for both related goods and services in question derived demand can have a significant impact on the derived product s market price understanding derived demandderived demand is related solely to the demand placed on a good or service for its ability to acquire or produce another good or service derived demand can be spurred by what is required to complete the production of a particular good including capital land labor and necessary raw materials in these instances the demand for raw materials is directly tied to the demand for products that require the raw material for their production the demand that is derived from the demand for another product can be an excellent investing strategy when used to anticipate the potential market for goods outside of the desired original product in addition if activity in one sector increases then any sector responsible for the first sector s success may also see gains the principles of derived demand work in both directions if the demand for a product decreases then the demand for the goods required to produce that product will also decrease examples of derived demandthe pick and shovel investment strategy employs the principles of derived demand because it invests in the underlying technology needed to produce a good or service instead of investing in the final product itself it is a way to invest in a specific industry without being exposed to the market risks of the end product this strategy is named after the tools used to mine for gold during the california gold rush of the 1840s and 1850s prospectors needed to buy picks and shovels to mine for gold so though there was no guarantee that a prospector would find gold the companies that sold picks and shovels were earning revenue and thus were considered good investments during that era the demand for picks and shovels was derived largely from the demand for gold as more businesses become dependent on computer technology and people expand their home computing capabilities the demand for computers rises consequently we may see derived demand in the related products of computer peripherals such as computer mice monitors external drives and so on we also could see derived demand for the internal components of computers like motherboards and video cards and the materials required to produce them a pick and shovel investment strategy is not without risks as the subject investment could experience a loss even when demand for the derived product is high special considerationscertain production materials may not experience large scale changes based on increases or decreases in demand for a specific product based on how widely the production materials are used for example cotton is widely used to manufacture fabric but if a particular print or color of cotton fabric is popular during a specific season and its popularity diminishes over the course of a few seasons then this may not have a large impact on the demand for cotton in general
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how is derived demand determined
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derived demand occurs when the demand for a good or service produces a corresponding demand for a related good or service for example when demand for a good or service increases demand for the related good or service increases and vice versa
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why is derived demand significant
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demand for a good or service affects demand for a related good or service and the raw materials labor technology and processed materials used to produce the related product or service in addition with an increased demand for raw materials international trade may be created or boosted and indirectly as production increases demand for energy increases companies can anticipate and plan for demand shifts when demand for a related or complimentary product or service changes
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what is derived vs direct demand
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direct demand is the demand for a final product or service and is not affected by the demand for other products or services on the other hand derived demand is the demand for a product or service based on the demand for another product or service
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what are the main components of derived demand
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derived demand consists of three main components labor raw materials and processed materials labor is the work employed to produce final goods and services raw materials are the resources used to manufacture a product or service and processed materials are the products created from raw materials and labor when derived demand increases or decreases the demand for these components follow the bottom linederived demand occurs when demand for a good or service affects demand for a related good or service comprised of raw materials processed goods and labor derived demand can influence the demand for its associated components the technology needed for production and the derived product s market price however demand shifts may not significantly affect the demand for raw and processed materials that produce many other products for investors the demand for a final product or service helps predict demand for related goods or services making for a sound investment strategy
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what is a descending triangle
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a descending triangle is a chart pattern used in technical analysis created by drawing one trend line connecting a series of lower highs and a second horizontal trend line connecting a series of lows a regular descending triangle pattern is commonly considered a bearish chart pattern or a continuation pattern with an established downtrend however a descending triangle pattern can also be bullish with a breakout in the opposite direction and is known as a reversal pattern
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what does a descending triangle tell you
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a popular chart pattern used by traders descending triangles clearly show that demand for an asset derivative or commodity is weakening when the price breaks below the lower support it indicates that downward momentum is likely to continue technical traders have the opportunity to make substantial profits over a brief period they often watch for a move below the lower support trend line suggesting that downward momentum is building and a breakdown is imminent traders often enter into short positions to further lower the asset s price
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how to identify a descending triangle
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the descending triangle is one of three triangle patterns used in technical analysis image by julie bang investopedia 2019a descending triangle pattern has the following features
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how to trade a descending triangle
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traders often initiate a short position following a high volume breakdown from lower trend line support in a descending triangle chart pattern in general the price target for the chart pattern is equal to the entry price minus the vertical height between the two trend lines at the time of the breakdown the upper trend line resistance also serves as a stop loss level for traders to limit their potential losses traders often choose the simplest way to use the descending triangle pattern and buy the breakout of the triangle and it is one of several common strategies to take profits using this pattern 1this strategy anticipates a breakout from the descending triangle pattern and uses a combination of trading volumes and asserting the trend to capture short term profits when a stock is in a downtrend or a consolidation phase traders watch for lower highs and lower lows being formed heikin ashi charts can apply to any market and are a trading tool used in conjunction with technical analysis to assist in identifying trends the heikin ashi candlesticks turn bullish before the breakout in this strategy traders watch for the descending triangle pattern to form and wait for the bullish trend to begin using the heikin ashi charts traders can combine price techniques like the moving average and chart patterns with technical indicators in this strategy traders use the descending triangle pattern to anticipate potential breakouts and the moving average indicators trigger the signal to initiate a trade this pattern emerges when volume declines and new stock price highs are limited the pattern indicates that the bullish phase is ending the trading period begins when the descending triangle reversal pattern is revealed ahead of the breakout the descending triangle reversal pattern at the bottom end of a downtrend is where the price action stalls and a horizontal support level mark a bottom if the price action breaks to the upside from the descending triangle reversal pattern at the bottom a trader can choose long positions descending triangles vs ascending trianglesboth the ascending and descending triangle are continuation patterns the descending triangle has a horizontal lower trend line and a descending upper trend line the ascending triangle has a horizontal trend line on the highs and a rising trend line on the lows triangles reveal an opportunity to short and suggest a profit target so both triangles are just different takes on a potential breakdown ascending triangles can also form at the reversal of a downtrend but are more commonly viewed as a bullish continuation pattern the limitations of a descending trianglesince no chart pattern is perfect and analysis is often subjective using descending triangles has limitations a false breakdown may occur or trend lines may need to be redrawn if the price action breaks out in the opposite direction if a breakdown doesn t occur the stock could rebound to re test the upper trend line resistance before making another move lower to re test lower trend line support levels the more often that the price touches the support and resistance levels the more reliable the chart pattern
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what is descending triangle breakout
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descending triangles are a bearish pattern that anticipates a downward trend breakout a breakout occurs when the price of an asset moves above a resistance area or below a support area
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what is the difference between breakdown and breakout in technical analysis
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a breakout refers to price movement above a resistance area or below a support area breakouts indicate the potential for the price to start trending in the breakout direction a breakdown is a downward move in a security s price usually through an identified level of support that predicts further declines
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what is the difference between descending triangle and falling wedge
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the falling wedge appears in a downtrend and indicates a bullish reversal a descending triangle appears after a bearish trend with a probable breakdown continuation the falling wedge appears in a downtrend but indicates a bullish reversal the bottom linethe descending triangle is a chart pattern used in technical analysis the pattern usually forms at the end of a downtrend but can also occur as a consolidation in an uptrend a regular descending triangle pattern is commonly considered a bearish chart pattern with an established downtrend a descending triangle pattern however may be bullish with a breakout in the opposite direction known as a reversal pattern
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what are descriptive statistics
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descriptive statistics are brief informational coefficients that summarize a given data set which can be either a representation of the entire population or a sample of a population descriptive statistics are broken down into measures of central tendency and measures of variability spread measures of central tendency include the mean median and mode while measures of variability include standard deviation variance minimum and maximum variables kurtosis and skewness jessica olahunderstanding descriptive statisticsdescriptive statistics help describe and explain the features of a specific data set by giving short summaries about the sample and measures of the data the most recognized types of descriptive statistics are measures of center for example the mean median and mode which are used at almost all levels of math and statistics are used to define and describe a data set the mean or the average is calculated by adding all the figures within the data set and then dividing by the number of figures within the set for example the sum of the following data set is 20 2 3 4 5 6 the mean is 4 20 5 the mode of a data set is the value appearing most often and the median is the figure situated in the middle of the data set it is the figure separating the higher figures from the lower figures within a data set however there are less common types of descriptive statistics that are still very important 1people use descriptive statistics to repurpose hard to understand quantitative insights across a large data set into bite sized descriptions a student s grade point average gpa for example provides a good understanding of descriptive statistics the idea of a gpa is that it takes data points from a range of individual course grades and averages them together to provide a general understanding of a student s overall academic performance a student s personal gpa reflects their mean academic performance descriptive statistics especially in fields such as medicine often visually depict data using scatter plots histograms line graphs or stem and leaf displays 2 we ll talk more about visuals later in this article types of descriptive statisticsall descriptive statistics are either measures of central tendency or measures of variability also known as measures of dispersion measures of central tendency focus on the average or middle values of data sets whereas measures of variability focus on the dispersion of data these two measures use graphs tables and general discussions to help people understand the meaning of the analyzed data measures of central tendency describe the center position of a distribution for a data set a person analyzes the frequency of each data point in the distribution and describes it using the mean median or mode which measures the most common patterns of the analyzed data set measures of variability or measures of spread aid in analyzing how dispersed the distribution is for a set of data for example while the measures of central tendency may give a person the average of a data set it does not describe how the data is distributed within the set so while the average of the data might be 65 out of 100 there can still be data points at both 1 and 100 measures of variability help communicate this by describing the shape and spread of the data set range quartiles absolute deviation and variance are all examples of measures of variability 3consider the following data set 5 19 24 62 91 100 the range of that data set is 95 which is calculated by subtracting the lowest number 5 in the data set from the highest 100 distribution or frequency distribution refers to the number of times a data point occurs alternatively it can be how many times a data point fails to occur consider this data set male male female female female other the distribution of this data can be classified as univariate vs bivariatein descriptive statistics univariate data analyzes only one variable it is used to identify characteristics of a single trait and is not used to analyze any relationships or causations for example imagine a room full of high school students say you wanted to gather the average age of the individuals in the room this univariate data is only dependent on one factor each person s age by gathering this one piece of information from each person and dividing by the total number of people you can determine the average age bivariate data on the other hand attempts to link two variables by searching for correlation two types of data are collected and the relationship between the two pieces of information is analyzed together 4 because multiple variables are analyzed this approach may also be referred to as multivariate let s say each high school student in the example above takes a college assessment test and we want to see whether older students are testing better than younger students in addition to gathering the ages of the students we need to find out each student s test score then using data analytics we mathematically or graphically depict whether there is a relationship between student age and test scores the preparation and reporting of financial statements is an example of descriptive statistics analyzing that financial information to make decisions on the future is inferential statistics descriptive statistics and visualizationsone essential aspect of descriptive statistics is graphical representation visualizing data distributions effectively can be incredibly powerful and this is done in several ways histograms are tools for displaying the distribution of numerical data they divide the data into bins or intervals and represent the frequency or count of data points falling into each bin through bars of varying heights histograms help identify the shape of the distribution central tendency and variability of the data another visualization is boxplots boxplots also known as box and whisker plots provide a concise summary of a data distribution by highlighting key summary statistics including the median middle line inside the box quartiles edges of the box and potential outliers points outside or the whiskers boxplots visually depict the spread and skewness of the data and are particularly useful for comparing distributions across different groups or variables descriptive statistics and outlierswhenever descriptive statistics are being discussed it s important to note outliers outliers are data points that significantly differ from other observations in a dataset these could be errors anomalies or rare events within the data detecting and managing outliers is a step in descriptive statistics to ensure accurate and reliable data analysis to identify outliers you can use graphical techniques such as boxplots or scatter plots or statistical methods such as z score or iqr method these approaches help pinpoint observations that deviate substantially from the overall pattern of the data the presence of outliers can have a notable impact on descriptive statistics skewing results and affecting the interpretation of data outliers can disproportionately influence measures of central tendency such as the mean pulling it towards their extreme values for example the dataset of 1 1 1 997 is 250 even though that is hardly representative of the dataset this distortion can lead to misleading conclusions about the typical behavior of the dataset depending on the context outliers can often be treated by removing them if they are genuinely erroneous or irrelevant alternatively outliers may hold important information and should be kept for the value they may be able to demonstrate as you analyze your data consider the relevance of what outliers can contribute and whether it makes more sense to just strike those data points from your descriptive statistic calculations descriptive statistics vs inferential statisticsdescriptive statistics have a different function from inferential statistics which are data sets that are used to make decisions or apply characteristics from one data set to another imagine another example where a company sells hot sauce the company gathers data such as the count of sales average quantity purchased per transaction and average sale per day of the week all of this information is descriptive as it tells a story of what actually happened in the past in this case it is not being used beyond being informational now let s say that the company wants to roll out a new hot sauce it gathers the same sales data above but it uses the information to make predictions about what the sales of the new hot sauce will be the act of using descriptive statistics and applying characteristics to a different data set makes the data set inferential statistics we are no longer simply summarizing data we are using it to predict what will happen regarding an entirely different body of data in this case the new hot sauce product
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what is descriptive statistics
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descriptive statistics is a means of describing features of a data set by generating summaries about data samples for example a population census may include descriptive statistics regarding the ratio of men and women in a specific city
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what are examples of descriptive statistics
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in recapping a major league baseball season for example descriptive statistics might include team batting averages the number of runs allowed per team and the average wins per division
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what is the main purpose of descriptive statistics
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the main purpose of descriptive statistics is to provide information about a data set in the example above there are dozens of baseball teams hundreds of players and thousands of games descriptive statistics summarizes large amounts of data into useful bits of information
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what are the types of descriptive statistics
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the three main types of descriptive statistics are frequency distribution central tendency and variability of a data set the frequency distribution records how often data occurs central tendency records the data s center point of distribution and variability of a data set records its degree of dispersion can descriptive statistics be used to make inferences or predictions technically speaking descriptive statistics only serves to help understand historical data attributes inferential statistics a separate branch of statistics is used to understand how variables interact with one another in a data set and possibly predict what might happen in the future 5the bottom linedescriptive statistics refers to the analysis summary and communication of findings that describe a data set often not useful for decision making descriptive statistics still hold value in explaining high level summaries of a set of information such as the mean median mode variance range and count of information
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what is devaluation
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devaluation is the deliberate downward adjustment of the value of a country s money relative to another currency or standard it is a monetary policy tool used by countries with a fixed exchange rate or semi fixed exchange rate investopedia lara antaldevaluation strategyby devaluing its currency a country makes its money cheaper and boosts exports rendering them more competitive in the global market conversely foreign products become more expensive so the demand for imports falls governments use devaluation to combat a trade imbalance and have exports exceed imports as exports increase and imports decrease there is typically a better balance of payments as the trade deficit shrinks a country that devalues its currency can reduce its deficit because of the greater demand for its less expensive exports devaluation is the opposite of revaluation which refers to the readjustment of a currency s exchange rate consequences of devaluationwhile devaluing a currency may be an option it can have negative consequences currency warsthere has been historical conflict between countries such as china and the united states over the valuation of their currencies a monetary policy that stresses devaluation allows a country to remain competitive in the global trading marketplace devaluation also encourages investment drawing in foreign investors to cheaper assets in august 2023 fitch ratings downgraded the united states long term foreign currency issuer default rating idr to aa from aaa the downgrade reflects the expected fiscal deterioration over the next three years a high and growing general government debt burden and the erosion of governance relative to aa and aaa peers over the last two decades resulting in repeated debt limit standoffs and untimely resolutions 1the omnibus trade and competitiveness act of 1988 requires the u s secretary of the treasury to analyze the exchange rate policies of other countries and determine if they are manipulating the exchange rate between their currency and the united states dollar in 2019 secretary mnuchin found that china devalued its currency to gain an unfair competitive advantage in international trade 2however in 2023 following several years of trade woes caused by the covid 19 pandemic china s central bank hopes to keep the chinese yuan from weakening too quickly against the u s dollar as imports are becoming more expensive relative to its exports 3 the offshore yuan traded around 7 15 per dollar in may 2023 and chinese exports fell more than expected reflecting the country s slow recovery path 4
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how does devaluation affect international trade
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devaluation causes a shift in international trade changing the balance of trade in favor of the devaluing country revising how much one currency is worth relative to another means the relative cost of goods from each country also changes
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what is the difference between devaluation and depreciation
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devaluation occurs when a government changes the fixed exchange rate of its currency most currencies traded on foreign exchange markets are not pegged to another currency and the market determines their value with floating exchange rates if the demand for one currency changes relative to another due to market forces and loses value it is called depreciation the bottom linedevaluation occurs when a country creates a downward adjustment of its currency value to balance trade devaluing a currency reduces the cost of a country s exports and makes imports less attractive as exports increase and imports decrease there is typically a better balance of payments as the trade deficit shrinks
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what is a developed economy
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a developed economy is typically characteristic of a developed country with a relatively high level of economic growth and security standard criteria for evaluating a country s level of development are income per capita or per capita gross domestic product the level of industrialization the general standard of living and the amount of technological infrastructure noneconomic factors such as the human development index hdi which quantifies a country s levels of education literacy and health into a single figure can also be used to evaluate an economy or the degree of development understanding a developed economythe most common metric used to determine if an economy is developed or developing is per capita gross domestic product gdp although no strict level exists for an economy to be considered either developing or developed some economists consider 12 000 to 15 000 per capita gdp to be sufficient for developed status while others do not consider a country developed unless its per capita gdp is above 25 000 or 30 000 the u s per capita gdp in 2019 was 65 111 for countries that are difficult to categorize economists turn to other factors to determine development status standard of living measures such as the infant mortality rate and life expectancy are useful although there are no set boundaries for these measures either however most developed economies suffer fewer than 10 infant deaths per 1 000 live births and their citizens live to be 75 or older on average a high per capita gdp alone does not confer developed economy status without other factors for example the united nations still considers qatar with one of the world s highest per capita gdp in 2021 at around 62 000 a developing economy because the nation has extreme income inequality a lack of infrastructure and limited educational opportunities for non affluent citizens 1examples of countries with developed economies include the united states canada and most of western europe including the united kingdom and france the human development indexthe un s human development index hdi looks at three standards of living criteria literacy rates access to education and access to health care and quantifies this data into a standardized figure between zero and one most developed countries have hdi figures above 0 8 the united nations in its annual hdi rankings reports that in 2020 norway had the world s highest hdi at 0 957 the united states ranked 17th at 0 926 the top 10 countries in the hdi index were norway ireland switzerland hong kong iceland germany sweden australia netherlands and denmark niger had the lowest human development index score at 0 394 out of 189 countries 2developing economiesterms such as emerging countries least developed countries and developing countries are commonly used to refer to countries that do not enjoy the same level of economic security industrialization and growth as developed countries the term third world country to describe a state is today considered archaic and offensive the united nations conference on trade and development notes that the world s least developed countries are deemed highly disadvantaged in their development process many of them for geographical reasons and face more than other countries the risk of failing to come out of poverty it is often claimed by proponents of globalization that globalization is helping to lift developing economies out of poverty and onto a path of improved standards of living higher wages and use of modern technology these benefits have primarily been witnessed in the asia pacific region though globalization has not taken root in all developing economies it has shown to improve the economies in the ones that it has that being said globalization does come with drawbacks as well that need to be assessed when foreign investments flow into a developing economy
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what is development economics
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development economics is a branch of economics that focuses on improving fiscal economic and social conditions in developing countries development economics considers factors such as health education working conditions domestic and international policies and market conditions with a focus on improving conditions in the world s poorest countries the field also examines both macroeconomic and microeconomic factors relating to the structure of developing economies and domestic and international economic growth understanding development economicsdevelopment economics studies the transformation of emerging nations into more prosperous nations strategies for transforming a developing economy tend to be unique because the social and political backgrounds of countries can vary dramatically not only that but the cultural and economic frameworks of every nation is different also such as women s rights and child labor laws students of economics and professional economists create theories and methods that guide practitioners in determining practices and policies that can be used and implemented at the domestic and international policy level some aspects of development economics include determining to what extent rapid population growth helps or hinders development the structural transformation of economies and the role of education and healthcare in development they also include international trade globalization sustainable development the effects of epidemics such as hiv and the impact of catastrophes on economic and human development prominent development economists include jeffrey sachs hernando de soto polar and nobel laureates simon kuznets amartya sen and joseph stiglitz types of development economicsmercantilism is thought to be one of the earliest forms of development economics that created practices to promote the success of a nation it was a dominant economic theory practiced in europe from the 16th to the 18th centuries the theory promoted augmenting state power by lowering exposure to rival national powers like political absolutism and absolute monarchies mercantilism promoted government regulation by prohibiting colonies from transacting with other nations mercantilism monopolized markets with staple ports and banned gold and silver exports it believed the higher the supply of gold and silver the more wealthy it would be in general it sought a trade surplus exports greater than imports did not allow the use of foreign ships for trade and it optimized the use of domestic resources economic nationalism reflects policies that focus on domestic control of capital formation the economy and labor using tariffs or other barriers it restricts the movement of capital goods and labor economic nationalists do not generally agree with the benefits of globalization and unlimited free trade they focus on a policy that is isolationist so that the industries within a nation are able to grow without the threat of competition from established companies in other countries the economy of the early united states is a prime example of economic nationalism as a new nation it sought to develop itself without relying so much on outside influences it enacted measures such as high tariffs so its own industries would grow unimpeded the linear stages of growth model was used to revitalize the european economy after world war ii this model states that economic growth can only stem from industrialization the model also agrees that local institutions and social attitudes can restrict growth if these factors influence people s savings rates and investments the linear stages of growth model portrays an appropriately designed addition of capital partnered with public intervention this injection of capital and restrictions from the public sector leads to economic development and industrialization the structural change theory focuses on changing the overall economic structure of a nation which aims to shift society from being a primarily agrarian one to a primarily industrial one for example russia before the communist revolution was an agrarian society when the communists overthrew the royal family and took power they rapidly industrialized the nation allowing it to eventually become a superpower
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what is development economics used for
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development economics is the study of how emerging nations become more financially stable it can be used as a tool for students and economists working to develop policies that can be used in creating domestic and international policy
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what is the goal of development economics
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ultimately the study of development economics is meant to help better the financial economic and social circumstances in developing countries through the enactment of certain structures and policies
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what are the 4 main topics in development economics
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the topics or types of development economics include mercantilism economic nationalism linear stages of growth model and structural change theory the bottom linedevelopment economics examines things like the structure of domestic and international economies in order to improve conditions in developing countries there are many theories of development economics while mercantilism nationalism linear stages of growth and structural change theory are four of the most common this field of study continues to develop and change
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what is the diamonds etf
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diamonds is an informal term for an index based exchange traded fund etf known as the spdr dow jones industrial average etf the diamonds etf trades on the nyse arca exchange under the ticker symbol dia the etf s objective is to provide returns that mirror the price and yield performance of the dow jones industrial average djia 1understanding diamondslaunched in 1998 the spdr dow jones industrial average etf also known as the diamonds etf is managed by state street global advisors since its launch it has become popular among investors as a way of achieving approximately the same returns as owning the individual stocks in the underlying dow jones industrial average investors can buy and sell shares of the etf just like with common stocks the fund s holdings consist of the 30 blue chip stocks in the djia in the same price weighted proportion as they appear in the djia as well as some cash holdings at the end of 2023 the etf was heaviest weighted in unitedhealth group microsoft goldman sachs home depot and mcdonalds 1as of the beginning of december 2023 9 93 of the spdr dow jones industrial average etf trust was comprised of unitedhealth group 1the popularity of the diamonds etfdiamonds are a popular and generally well regarded fund owning shares of diamonds allows investors to attain the diversity of the djia with relatively low transaction fees the fund is highly regarded for its relatively low gross expense ratio of 0 16 diamonds like other etfs may offer some investors tax advantages over owning mutual funds the fund s large size provides ample share liquidity and investors can buy or sell shares any time the exchange is open the etf s high market capitalization and liquidity have spawned a variety of options chains from which traders can choose the nyse allows investors to trade diamond shares using margin as well as to short sell diamond shares 21on any given day the stock s exchange volume may swell or shrink as of dec 4 2023 the etf reported that 865 652 shares had been traded in the prior open market day 1 note that this figure is updated every day and the liquidity of an etf may dramatically change at any given time diamonds etf statisticsas of dec 5 2023 the fund had total net assets of over 31 billion with over 86 million shares outstanding the fund s weighted average market cap was about 515 5 million at a price earnings ratio of about 18 71 the fund has a 10 year net asset value of 10 62 it s important to remember that etfs are not insured and may incur the loss of capital for example as of september 30 2023 the etf had a one month nav of 3 43 and quarter to date nav of 2 14 since the fund s inception in 1998 the etf had returned greater than 8 1investing in diamond gemstonesdiamonds as gemstones not the etf are generally considered a poor investment vehicle mainly due to the illiquidity of the market a lack of price transparency high transaction fees and high risk related to quality assurance at one point investors who wanted exposure to diamonds or other gemstones could have invested in gems an etf called purefunds ise diamond gemstone etf that invested in the diamond and gemstone industry the etf has since been liquidated and no longer exists 3 since then other indexes or funds have been created for example the idex diamond index was formulated and tracks diamond prices every hour 4
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what are the benefits of investing in diamonds etf
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investing in the dia etf offers several benefits including diversification across a range of industries liquidity and the ability to access the broader u s stock market dia provides investors with a well rounded exposure to some of the most established and influential u s companies the composition of dia includes a bunch of blue chip stocks but it also diversifies across a few industries
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what are the risks associated with investing in the diamonds etf
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the risks of the diamonds etf are essentially the same as those of the broader stock market investments can lose their capital and stocks may be susceptible to swings in economics conditions it also faces all of the associated risks the 30 constituent companies of the etf race such as geopolitical risk or market risk can i hold diamonds etf in a tax advantaged account yes you can hold dia etf in tax advantaged accounts such as individual retirement accounts iras and 401 k s the bottom linethe spdr dow jones industrial average etf dia is an exchange traded fund that aims to replicate the performance of the dow jones industrial average djia it s a widely recognized index representing 30 major u s companies across various sectors some investors may know it by its nickname of diamonds etf and diamonds etf aims to bring some diversification to investors while protecting investor funds with blue chip stocks
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what is a digital currency
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the term digital currency refers to a form of currency that is available only in digital or electronic form it is also called digital money electronic money electronic currency or cybercash this means that there is no physical form as such it cannot be handled stored or manipulated consumers and businesses can use digital currencies to execute transactions and trades these currencies may not be used by all countries or communities understanding digital currenciesdigital currencies do not have physical attributes and are available only in digital form transactions involving digital currencies are made using computers or electronic or digital wallets connected to the internet or designated networks in contrast physical currencies such as banknotes and minted coins are tangible meaning they have definite physical attributes and characteristics transactions involving such currencies are made possible only when their holders have physical possession of these currencies digital currencies have utility similar to physical currencies they can be used to purchase goods and pay for services they can also find restricted use among certain online communities such as gaming sites gambling portals or social media networks digital currencies also enable instant transactions that can be seamlessly executed across borders for instance someone in the united states may make payments to a counterparty in singapore using digital currency provided they are both connected to the same network characteristics of digital currenciesas mentioned earlier digital currencies only exist in digital form they do not have a physical equivalent digital currencies can be centralized or decentralized fiat currency which exists in physical form is a centralized system of production and distribution by a central bank and government agencies prominent cryptocurrencies such as bitcoin and ethereum are examples of decentralized digital currency systems digital currencies can transfer value using digital currencies requires a mental shift in the existing framework for currencies where they are associated with sale and purchase transactions for goods and services digital currencies however extend the concept for example a gaming network token can extend the life of a player or provide them with extra superpowers this is not a purchase or sale transaction but instead represents a transfer of value types of digital currenciesdigital currency is an overarching term that can be used to describe different types of currencies that exist in the electronic realm broadly there are three different types of currencies cryptocurrencies are digital currencies that use cryptography to secure and verify transactions in a network 1 cryptography is also used to manage and control the creation of such currencies bitcoin and ethereum are examples of cryptocurrencies depending on the jurisdiction cryptocurrencies may or may not be regulated cryptocurrencies are considered virtual currencies because they are unregulated and exist only in digital form virtual currencies are unregulated digital currencies controlled by developers or a founding organization consisting of various stakeholders involved in the process 2 virtual currencies can also be algorithmically controlled by a defined network protocol an example of a virtual currency is a gaming network token whose economics is defined and controlled by developers central bank digital currencies cbdcs are regulated digital currencies issued by the central bank of a country a cbdc can be a supplement or a replacement for a traditional fiat currency unlike fiat currency which exists in both physical and digital form a cbdc exists purely in digital form england sweden and uruguay are a few of the nations that are considering plans to launch a digital version of their native fiat currencies 3the use of cbdcs has been suggested as a means of enhancing the speed and security of centralized payment systems lowering the costs and dangers of handling cash and promoting greater financial inclusion for people and companies without access to conventional banking services they may also make cross border payments easier and lessen the need for foreign exchange the introduction of a u s cbdc presents certain difficulties for instance for congress to authorize the issuance of a cbdc there must be robust privacy and security infrastructures put in place the government must also weigh the possible impacts on monetary policy and the operational management of the switch from conventional money to a cbdc advantages and disadvantages of digital currenciesfaster transaction timesno physical manufacturing requiredlower transaction costsmake it easier to implement monetary and fiscal policygreater privacy than other forms of currencycan be difficult to store and useprone to hackingvolatile prices that result in lost valuemay not allow for irrevocability of transactionslimited acceptabilityfuture of digital currenciescryptocurrencies like bitcoin have exploded in value but they are largely used for speculation or to buy other speculative assets although there have been some signs of merchant adoption in countries like el salvador the high volatility and complexity of these currencies make them impractical for most daily applications many companies have tried to reduce volatility by introducing stablecoins whose value is fixed to the price of fiat currency this is usually done by depositing an equivalent amount of fiat which can be used to redeem the tokens however stablecoin issuers such as tether have used these deposits on more speculative investments raising concerns that they are vulnerable to a market crash another possible application is in central bank digital currencies which could be issued by a country s bank or monetary authority these would be used and stored in online wallets similar to cryptocurrencies but allowing the central bank to issue and freeze tokens at will several countries such as china have proposed digital versions of their currencies examples of digital currenciessome major central banks around the world have looked into issuing their digital currencies some of the larger more notable examples include the countries below can you invest in central bank digital currencies cbdcs are unlikely to be useful for speculative investments since they will likely be pegged to the value of an underlying currency however it will still be possible to invest in those currencies through the forex markets
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how do you buy china s digital yuan
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the digital yuan or e cny is only available to chinese citizens living in 23 major cities users can buy digital yuan by downloading an app and connecting it to their bank accounts
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how do you make a digital currency
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most digital currencies are created by issuing them on ethereum or another blockchain capable of running smart contracts the issuer must first decide how many tokens to issue and any special rules that limit transactions or ownership once these choices are coded into the smart contract the issuer pays a small amount of cryptocurrency to pay for the computational cost of issuing the tokens the bottom linedigital currencies are assets that are only used for electronic transactions they do not have any physical form although they can be exchanged for regular money or other assets although the most popular digital currencies are cryptocurrencies like bitcoin many national governments are considering issuing their own centralized digital currencies
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what is a digital currency
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the term digital currency refers to a form of currency that is available only in digital or electronic form it is also called digital money electronic money electronic currency or cybercash this means that there is no physical form as such it cannot be handled stored or manipulated consumers and businesses can use digital currencies to execute transactions and trades these currencies may not be used by all countries or communities understanding digital currenciesdigital currencies do not have physical attributes and are available only in digital form transactions involving digital currencies are made using computers or electronic or digital wallets connected to the internet or designated networks in contrast physical currencies such as banknotes and minted coins are tangible meaning they have definite physical attributes and characteristics transactions involving such currencies are made possible only when their holders have physical possession of these currencies digital currencies have utility similar to physical currencies they can be used to purchase goods and pay for services they can also find restricted use among certain online communities such as gaming sites gambling portals or social media networks digital currencies also enable instant transactions that can be seamlessly executed across borders for instance someone in the united states may make payments to a counterparty in singapore using digital currency provided they are both connected to the same network characteristics of digital currenciesas mentioned earlier digital currencies only exist in digital form they do not have a physical equivalent digital currencies can be centralized or decentralized fiat currency which exists in physical form is a centralized system of production and distribution by a central bank and government agencies prominent cryptocurrencies such as bitcoin and ethereum are examples of decentralized digital currency systems digital currencies can transfer value using digital currencies requires a mental shift in the existing framework for currencies where they are associated with sale and purchase transactions for goods and services digital currencies however extend the concept for example a gaming network token can extend the life of a player or provide them with extra superpowers this is not a purchase or sale transaction but instead represents a transfer of value types of digital currenciesdigital currency is an overarching term that can be used to describe different types of currencies that exist in the electronic realm broadly there are three different types of currencies cryptocurrencies are digital currencies that use cryptography to secure and verify transactions in a network 1 cryptography is also used to manage and control the creation of such currencies bitcoin and ethereum are examples of cryptocurrencies depending on the jurisdiction cryptocurrencies may or may not be regulated cryptocurrencies are considered virtual currencies because they are unregulated and exist only in digital form virtual currencies are unregulated digital currencies controlled by developers or a founding organization consisting of various stakeholders involved in the process 2 virtual currencies can also be algorithmically controlled by a defined network protocol an example of a virtual currency is a gaming network token whose economics is defined and controlled by developers central bank digital currencies cbdcs are regulated digital currencies issued by the central bank of a country a cbdc can be a supplement or a replacement for a traditional fiat currency unlike fiat currency which exists in both physical and digital form a cbdc exists purely in digital form england sweden and uruguay are a few of the nations that are considering plans to launch a digital version of their native fiat currencies 3the use of cbdcs has been suggested as a means of enhancing the speed and security of centralized payment systems lowering the costs and dangers of handling cash and promoting greater financial inclusion for people and companies without access to conventional banking services they may also make cross border payments easier and lessen the need for foreign exchange the introduction of a u s cbdc presents certain difficulties for instance for congress to authorize the issuance of a cbdc there must be robust privacy and security infrastructures put in place the government must also weigh the possible impacts on monetary policy and the operational management of the switch from conventional money to a cbdc advantages and disadvantages of digital currenciesfaster transaction timesno physical manufacturing requiredlower transaction costsmake it easier to implement monetary and fiscal policygreater privacy than other forms of currencycan be difficult to store and useprone to hackingvolatile prices that result in lost valuemay not allow for irrevocability of transactionslimited acceptabilityfuture of digital currenciescryptocurrencies like bitcoin have exploded in value but they are largely used for speculation or to buy other speculative assets although there have been some signs of merchant adoption in countries like el salvador the high volatility and complexity of these currencies make them impractical for most daily applications many companies have tried to reduce volatility by introducing stablecoins whose value is fixed to the price of fiat currency this is usually done by depositing an equivalent amount of fiat which can be used to redeem the tokens however stablecoin issuers such as tether have used these deposits on more speculative investments raising concerns that they are vulnerable to a market crash another possible application is in central bank digital currencies which could be issued by a country s bank or monetary authority these would be used and stored in online wallets similar to cryptocurrencies but allowing the central bank to issue and freeze tokens at will several countries such as china have proposed digital versions of their currencies examples of digital currenciessome major central banks around the world have looked into issuing their digital currencies some of the larger more notable examples include the countries below can you invest in central bank digital currencies cbdcs are unlikely to be useful for speculative investments since they will likely be pegged to the value of an underlying currency however it will still be possible to invest in those currencies through the forex markets
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how do you buy china s digital yuan
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the digital yuan or e cny is only available to chinese citizens living in 23 major cities users can buy digital yuan by downloading an app and connecting it to their bank accounts
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how do you make a digital currency
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most digital currencies are created by issuing them on ethereum or another blockchain capable of running smart contracts the issuer must first decide how many tokens to issue and any special rules that limit transactions or ownership once these choices are coded into the smart contract the issuer pays a small amount of cryptocurrency to pay for the computational cost of issuing the tokens the bottom linedigital currencies are assets that are only used for electronic transactions they do not have any physical form although they can be exchanged for regular money or other assets although the most popular digital currencies are cryptocurrencies like bitcoin many national governments are considering issuing their own centralized digital currencies
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what is digital money
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digital money is any means of payment that exists in a purely electronic form digital money is not physically tangible like a dollar bill or a coin it is accounted for and transferred using online systems digital money generally represents fiat currencies such as dollars or euros it is exchanged using computers smartphones cards and online cryptocurrency exchanges in some cases it can be converted into physical cash using an atm understanding digital moneydigital money is similar in concept and use to its cash counterpart in that it can be a unit of account and a medium for daily transactions it is treated the same as cash for example the dollars in your bank account are digital banks no longer store physical cash for clients when you make a cash deposit to a bank it adds numbers to your account and reissues those bills to other customers if you make a cash withdrawal the bank converts your digital dollars to cash subtracts the amount from your account and gives you physical bills this makes financial transactions much faster and cheaper especially concerning cross border payments and remittances given these advantages digital money has become a priority for several governments around the world for example the central bank of sweden a country that has been researching a cashless society has released several exploratory papers since 2017 that explore the benefits and drawbacks of introducing digital money into its economy 1 china released the digital renminbi e cny the digital equivalent of its national currency and began using it to pay government employees the bahamian sand dollar was introduced in 2020 23digital money makes it easier for central banks to implement monetary policy because they don t need to collect and store physical money or assets to influence inflation or create financial system stability
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what problems does digital money solve
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several systems already perform transactions with digital versions of money for example credit card systems let you purchase goods and services on credit wire transfer systems enable the movement of cash across borders such transactions are expensive and time consuming because they involve disparate processing systems the swift system a payments systems network consisting of various banks and financial institutions across the globe is an example each transfer conducted through the swift network has an associated charge swift member institutions also function in a patchwork of regulations each specific to a different financial jurisdiction moreover these systems are built on the promise of future payments ensuring a time lag for each transaction for example reconciliation for credit cards occurs at a later date and users can file chargebacks for transactions one of the aims of digital money is to do away with the time lag and operating costs inherent in current systems by using distributed ledger technology dlt in a distributed ledger system shared ledgers are connected via a common network to record transactions entities across jurisdictions can connect which minimizes processing times it also provides transparency to authorities and stakeholders because the ledger is stored on multiple machines it is difficult to alter them especially if they are secured through cryptographic techniques advancements in digital moneyone of the key advancements in dlt systems is historically linked encryption methods that chain blocks together called a blockchain blockchains improve the resiliency of a financial network because they make it very difficult to change records or access them a blockchain with a decentralized and distributed validation mechanism also solves the double spending problem where a digital asset can be spent more than once because there is no physical transfer when there is an extensive network of automated validators checking encrypted transactions linked by historical information double spending is not possible a large and powerful network is orders of magnitude faster than individual computers or small groups which cannot keep up with the processing rates of the bigger networks this speed makes a network uneconomical and exceedingly hard to hack third parties can be eliminated in transactions using blockchains and distributed ledgers blind signatures hide transacting parties identities zero knowledge proofs encrypt transaction details and encryption adds extra security examples of this type of digital money are cryptocurrencies like bitcoin and ethereum types of digital moneythanks to its technological underpinning digital money can be adapted to suit multiple purposes and can take on various forms besides the digital representation of cash currently used there are a few more and it is likely more will emerge central bank digital currencies cbdcs are currencies issued by a country s central bank they are separate from fiat currencies backed by the authority and credit of a central bank and are another obligation of the institution cbdcs are newborns when it comes to digital money some countries have implemented them but many remain vigilantly observant waiting to see how the idea works out in the countries experimenting with them there are even suggestions for different types of cbdcs for instance a type called a wholesale cbdc could be used in transactions between banks and financial institutions for wholesale payments large or high value payments between institutions retail cbdcs could be designed for daily transactions by consumers and businesses much like fiat currencies 4cryptocurrencies are a digital currency designed using cryptography they are more commonly becoming known as virtual currencies a subclass of digital currencies in an effort to distinguish them from officially recognized money 5the crypto wrapper around a digital currency provides enhanced security and makes transactions tamper resistant since 2017 the popularity of cryptocurrencies as an investment class has skyrocketed the market capitalization of crypto markets by november 2021 the market cap of cryptocurrencies had surpassed 2 7 trillion the crypto winter of 2022 saw the total crypto market cap drop under 1 trillion but it began recovering in 2023 climbing to more than 2 5 trillion in march 2024 6stablecoins are a variation of cryptocurrencies and were developed to counter the price volatility of regular cryptocurrencies stablecoins can be likened to a form of private money whose price is tied to that of a fiat currency or a basket of goods to ensure that they remain stable they can be a proxy for fiat currencies except they are not backed by governmental authority the market for stablecoins has exploded in recent times as of january 2024 168 stablecoins were listed on coinmarketcap the popular cryptocurrency data aggregator some of which were not showing activity 7advantages of digital moneythe current financial infrastructure is a complex system of many entities conducting transactions between financial institutions takes time and money because they work in different technological systems and regulation regimes the main advantage of digital money is that it speeds up transaction speeds and cuts back on costs other advantages of digital money are as follows disadvantages of digital moneythe disadvantages of digital money are as follows digital money and digital walletsdigital wallets serve as the cornerstone of the digital money ecosystem digital wallets are the primary interface where users interact with and manage their digital currencies they provide a secure environment for storing and managing digital money a fundamental aspect of digital wallets is their role in facilitating transactions obviously involving digital money users send and receive payments via their digital wallets by interacting with software interfaces consider how you ve sent money to a friend via popular banking or personal finance applications these applications may have digital wallets or similar technologies that facilitate transmitting funds one of the key advantages of digital wallets is their accessibility and mobility users have instant access to their digital money anytime anywhere as long as they have an internet connection this mobility empowers users to make transactions on the go using their smartphones or other internet enabled devices this concept is one of the primary benefits of cryptocurrency anyone around the world can have access to banking services which otherwise have been restricted in many areas of the world last security is paramount in the realm of digital money if it s really easy to move money it s easy for others to move your money if they get access to your account digital wallets may include encryption techniques multi factor authentication and biometric authentication methods to safeguard digital assets
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what is digital money
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digital money or digital currency refers to any means of payment that exists purely in electronic form digital money does not have a physical and tangible form such as a dollar bill or a coin and is accounted for and transferred using online systems
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what are the different types of digital money
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its technological underpinnings mean digital money can be adapted for various purposes apart from being a digital representation of fiat currency there are other forms of digital money such as central bank digital currencies and stablecoins
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what is the difference between digital money and cryptocurrency
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cryptocurrency is a form of digital money that is built on blockchain networks that rely on cryptography there are other forms of digital money aside from cryptocurrency
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is the digital dollar going to happen
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central bank digital currencies cbdcs are digital currencies backed by a government and regulated by its agencies there has been discussion about a digital dollar for several years but it seems unlikely to happen in the u s soon the bottom linedigital money is a major innovation in financial technology it overcomes the issues created by cash and makes payment systems faster and cheaper but it has the attendant dilemmas technology introduces as digital money can be hacked and erode privacy while digital money is still in its early days it will play an important part in the future of finance the comments opinions and analyses expressed on investopedia are for informational purposes online read our warranty and liability disclaimer for more info
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what is a digital wallet
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a digital wallet or electronic wallet is a software based system or an application that runs on any connected device it stores your payment information and passwords of numerous payment methods and websites digital wallets run primarily on mobile devices but may be accessible from a computer mobile wallets which are a subset are primarily used on mobile devices digital wallets allow you to pay when you re shopping using your device so that you don t need to carry your cards around you enter and store your credit card debit card or bank account information and can then use your device to pay for purchases digital wallets can also store learn more about digital wallets how they work and how you can use them
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how a digital wallet works
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digital wallets are applications designed to take advantage of the abilities of mobile devices to improve access to financial products and services digital wallets essentially eliminate the need to carry a physical wallet by storing all of a consumer s payment information securely and compactly digital wallets use a mobile device s wireless capabilities like bluetooth wifi and magnetic signals to transmit payment data securely from your device to a point of sale designed to read the data and connect via these signals currently the technologies used by mobile devices and digital wallets are the card information you ve stored in your wallet and choose to use for a transaction is transmitted from your device to the point of sale terminal which is connected to payment processors then through the processors gateways acquirers or any other third parties involved in credit and debit card transactions the payment is routed through the credit card networks and banks to make a payment
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when you hold your phone over a point of sale to make a purchase you re using your digital wallet to conduct the transaction
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because cryptocurrency has become a part of the financial system companies like coinbase offer cards that let you pay with cryptocurrency coinbase s card is issued by visa digital wallets like apple pay allow you to add a crypto debit card the card converts cryptocurrency to dollars at the current market value which your wallet then uses to pay for your purchase 3types of digital walletsthere are several digital wallets available here are some of the most well known most wallets attempt to distinguish themselves from their competitors with different methods for example google s digital wallet service allows you to add funds to the wallet on your phone or device apple on the other hand entered into a strategic partnership with goldman sachs to issue apple credit cards and expand its apple pay services 4most makers of digital wallets place age restrictions on young users for example if you re not yet 18 you can t open your own apple pay account however apple does offer apple cash family where children or teens as part of a family can send or receive money with messages and wallet and make purchases with apple pay parents would need to create and authorize this from their own accounts 56cash app segregates the types of services available to those 18 and younger for example if you are below 18 you can pay someone else or receive funds up to 1 000 every 30 days in peer to peer transactions borrowing check deposits cross border payments and phone support are available only to those 18 and older 7pros and cons of digital walletslimits exposure of financial and personal informationends carrying a physical wallet and cardscan improve access to financial services in underserved areaspayment method may not be accepted everywheremay not work if bluetooth or wifi isn t available or your device isn t chargedcan be vulnerable to identity theft or fraud if your mobile device is stolen while unprotected or hackeddigital wallets don t require a bank account at a bank with a physical branch instead you can place your funds in an online only bank which gives unbanked and underbanked communities access to financial services enabling broader financial inclusion security might become an issue if you use a digital wallet from a provider that hasn t been vetted or doesn t have an established reputation if your phone isn t password protected you risk giving someone else access to your finances if you lose your phone additionally there might be local businesses you prefer to shop at that don t yet have a point of sale that accepts this technology
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what is a digital wallet example
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apple pay is an example of one of the more well known digital wallets it allows you to access your financial products through your devices and to make purchases
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is paypal a digital wallet
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paypal is a peer to peer payment and money exchange platform but it has a digital wallet included in its app
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do i need a digital wallet
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you don t necessarily need a digital wallet however they offer a convenient way to pay for your purchases because you don t have to carry credit and debit cards around that information is instead stored in the cloud this also increases card security you can t lose your cards if you don t carry them the bottom linea digital wallet is a type of financial transaction app that runs on any connected device it securely stores your payment information and passwords mobile wallets are a form of digital wallet most often used on mobile devices one of the biggest advantages of digital wallets is that they let you pay for things without credit or debit cards once you enter and store your card and banking information in the mobile payment platform
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what is diluted eps
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diluted eps is a measurement used to gauge the quality of a company s earnings per share eps if all convertible securities were exercised the diluted eps is commonly lower than the simple or basic eps convertible securities are outstanding convertible preferred shares convertible debentures stock options and warrants investopedia michela buttignolunderstanding diluted epsearnings per share or eps is a financial metric used to measure a company s profitability it compares the company s net earnings against its current number of shares calculating diluted eps includes shares that a company may be obligated to issue in the future convertible preferred stock stock options and convertible bonds are common types of dilutive securities all of these securities if exercised would increase the number of shares outstanding and decrease eps convertible preferred stock is a preferred share that can be converted to a common share at any time stock options grant the buyer the right to purchase common stock at a set price at a set time convertible bonds are similar to convertible preferred stock as they are converted to common shares at the prices and times specified in their contracts shareholders typically resist dilution as it devalues their existing equity stake and reduces a firm s earnings per share
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what is dilution
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dilution occurs when a company issues new shares that result in a decrease in existing stockholders ownership percentage of that company stock dilution can also occur when holders of stock options such as company employees or holders of other optionable securities exercise their options when the number of shares outstanding increases each existing stockholder owns a smaller or diluted percentage of the company making each share less valuable a share of stock represents equity ownership in that company when a firm s board of directors decides to take their company public usually through an initial public offering ipo they authorize the number of shares that will be initially offered this amount of outstanding stock is commonly referred to as the float if that company later issues additional stock often called secondary offerings they have increased the float and therefore diluted their stock the shareholders who bought the original ipo now have a smaller ownership stake in the company than they did prior to the new shares being issued understanding dilutiondilution is simply a case of cutting the equity cake into more pieces there will be more pieces but each will be smaller so you will still get your piece of the cake only that it will be a smaller proportion of the total than you had been expecting which is often not desired while it primarily affects equity ownership positions dilution also reduces the company s earnings per share eps or net income divided by the float which often depresses stock prices in the market for this reason many public companies publish estimates of both non diluted and diluted eps which is essentially a what if scenario for investors in the case new shares are issued diluted eps assumes that potentially dilutive securities have already been converted to outstanding shares share dilution may happen any time a company raises additional equity capital as newly created shares are issued to new investors the potential upside of raising capital in this way is that the funds the company receives from selling additional shares can improve the company s profitability and growth prospects and by extension the value of its stock understandably share dilution is not often viewed favorably by existing shareholders and companies sometimes initiate share repurchase programs to help curb the effects of dilution note that stock splits do not create dilution in situations where a company splits its stock current investors receive additional shares while the price of the shares is adjusted accordingly keeping their percentage ownership in the company static general example of dilutionsuppose a company has issued 100 shares to 100 individual shareholders each shareholder owns 1 of the company if the company then has a secondary offering and issues 100 new shares to 100 more shareholders each shareholder only owns 0 5 of the company the smaller ownership percentage also diminishes each investor s voting power real world example of dilutionoften times a public company disseminates its intention to issue new shares thereby diluting its current pool of equity long before it actually does this allows investors both new and old to plan accordingly for example mgt capital filed a proxy statement on july 8 2016 that outlined a stock option plan for the newly appointed ceo john mcafee additionally the statement disseminated the structure of recent company acquisitions purchased with a combination of cash and stock both the executive stock option plan as well as the acquisitions are expected to dilute the current pool of outstanding shares further the proxy statement had a proposal for the issuance of newly authorized shares which suggests the company expects more dilution in the near term dilution protectionshareholders typically resist dilution as it devalues their existing equity dilution protection refers to contractual provisions that limit or outright prevent an investor s stake in a company from being reduced in later funding rounds the dilution protection feature kicks in if the actions of the company will decrease the investor s percentage claim on assets of the company for example if an investor s stake is 20 and the company is going to hold an additional funding round the company must offer discounted shares to the investor to at least partially make up for the dilution of the overall ownership stake dilution protection provisions are generally found in venture capital funding agreements dilution protection is sometimes referred to as anti dilution protection similarly an anti dilution provision is a provision in an option or convertible security and it is also known as an anti dilution clause it protects an investor from equity dilution resulting from later issues of stock at a lower price than the investor originally paid these are common with convertible preferred stock which is a favored form of venture capital investment
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what is a dim sum bond
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dim sum bond is a slang term for bonds denominated in chinese renminbi and issued in hong kong dim sum bonds are attractive to foreign investors who desire exposure to renminbi denominated assets but are restricted by china s capital controls from investing in domestic chinese debt the term is derived from dim sum a popular style of cuisine in hong kong which involves serving a variety of small delicacies dim sum bonds explainedinternational investors who are looking to participate in the chinese renminbi denominated rmb market may look to the dim sum bond market dim sum bonds are issued in hong kong sar by chinese and foreign companies that prefer to avoid the stringent securities laws set by regulators in the people s republic of china prc in other words dim sum bonds are attractive to investors interested in holding debt issued in yuan but are unable to do so due to chinese domestic debt regulations multinational companies even those without a presence in china can issue dim sum bonds to professional investors without seeking approval from either prc or hong kong authorities after issuing such bonds multinational issuers may use their proceeds freely in hong kong without prc regulatory approval the proceeds may also be used to settle cross border trades since prc approval is not required the dim sum bond market is appealing to investors seeking to diversify their holdings in addition investors who bet on rmb appreciation can also use the dim sum bond market this bond market also allows china to regulate the amount of offshore yuan that flow back into the mainland dim sum bonds vs panda bondsthe dim sum bond is frequently compared to panda bonds panda bonds instead are onshore renminbi denominated debt issued in china by overseas companies the panda bond market is used as a capital raising platform for foreign firms targeting domestic investors and hence domestic investors are the main purchasers of these bonds conversely the offshore dim sum bond market is dominated by international investors the dim sum bond indexthe dim sum bond index is a market capitalization weighted index that measures the performance of rmb denominated dim sum bonds issued and settled outside mainland china its top 10 issuers by market weight were prc bank of china ltd lenovo group ltd china development bank corp asian development bank beijing enterprises group beijing enterprises water group export import bank of china china construction bank corp and international finance corp this index is managed by citigroup and rebalanced once a month
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what is a direct cost
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a direct cost is a price that can be directly tied to the production of specific goods or services a direct cost can be traced to the cost object which can be a service product or department direct and indirect costs are the two major types of expenses or costs that companies can incur direct costs are often variable costs meaning they fluctuate with production levels such as inventory however some costs such as indirect costs are more difficult to assign to a specific product examples of indirect costs include depreciation and administrative expenses investopedia paige mclaughlinunderstanding direct costsalthough direct costs are typically variable costs they can also include fixed costs rent for a factory for example could be tied directly to the production facility typically rent would be considered overhead however companies can sometimes tie fixed costs to the units produced in a particular facility any cost that s involved in producing a good even if it s only a portion of the cost that s allocated to the production facility are included as direct costs some examples of direct costs are listed below because direct costs can be specifically traced to a product direct costs do not need to be allocated to a product department or other cost objects direct costs usually benefit only one cost object items that are not direct costs are pooled and allocated based on cost drivers direct and indirect costs are the major costs involved in the production of a good or service while direct costs are easily traced to a product indirect costs are not direct vs indirect costsdirect costs are fairly straightforward in determining their cost object for example ford motor company f manufactures automobiles and trucks the steel and bolts needed for the production of a car or truck would be classified as direct costs however an indirect cost would be the electricity for the manufacturing plant although the electricity expense can be tied to the facility it can t be directly tied to a specific unit and is therefore classified as indirect fixed vs variabledirect costs do not need to be fixed in nature as their unit cost may change over time or depending on the quantity being utilized an example is the salary of a supervisor that worked on a single project this cost may be directly attributed to the project and relates to a fixed dollar amount materials that were used to build the product such as wood or gasoline might be directly traced but do not contain a fixed dollar amount this is because the quantity of the supervisor s salary is known while the unit production levels are variable based upon sales inventory valuation measurementusing direct costs requires strict management of inventory valuation when inventory is purchased at different dollar amounts for example the cost of an essential component of an item being manufactured may change over time as the item is being manufactured the component piece s price must be directly traced to the item for example in the construction of a building a company may have purchased a window for 500 and another window for 600 if only one window is to be installed on the building and the other is to remain in inventory consistent application of accounting valuation must occur companies typically trace these costs using two methods first in first out fifo or last in first out lifo fifo involves the assigning of costs such as the purchase of inventory based on what items arrived first as inventory is used up in the production of goods the first ones or the oldest inventory items are used first when measuring the cost of the item conversely lifo assigns the value of a cost item based on the last item purchased or added to inventory
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what is direct deposit
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the term direct deposit refers to the deposit of funds electronically into a bank account rather than through a physical paper check direct deposit requires the use of an electronic network that allows deposits to take place between banks this network is called the automated clearing house ach because the funds are transferred electronically recipients accounts are credited automatically so there is no need to wait for the money to clear common uses for direct deposit include paychecks tax refunds and other benefits
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how direct deposit works
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direct deposit is a safe and convenient way to receive payment funds are deposited into a recipient s account directly through an electronic network in order for the funds to be transferred from the payer the recipient must provide the name of their bank their account number and the bank s routing number to the person or business making the deposit alternatively they may provide a voided check which has the same information printed on it it can take a few days for direct deposit to be set up once the depositor has the information they enter it into their banking system funds are transferred electronically and are deposited into the recipient s account at midnight on the payment date since the funds clear automatically through the ach they are available immediately so there s no need for the bank to put a hold on them this method is commonly used to transfer an employee s salary tax refunds investment redemptions payments from retirement accounts and government benefits like social security bill payments are also made using direct deposits from debtors to creditors for instance taxpayers have the option to receive their refunds in the form of a personal check or through a direct deposit most refunds are issued within a few weeks of the date the taxpayer initially filed their annual income tax direct deposit allows the government to make the refund immediately available to the citizen the same applies to government benefits like social security while most direct deposits are done using bank accounts and automated clearing houses these payments can also be done using online banking and by transfers through smartphones if for instance someone wants to send money directly to a family member all they need is the person s email or mobile phone number the recipient gives the transfer company their banking information once the money is sent it deposits the money into the payee s account as with other direct deposit cases the money is available for immediate use
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how long does direct deposit take
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it normally takes 1 3 days for direct deposits to clear the actual transfer of funds is almost instantaneous but it can take a few days for your bank to verify the funds and make them available to you weekends and public holidays can slow this process down as can a range of other factors in some cases employers will factor this time frame into their payroll system so you ll receive your deposit on the day you are meant to get paid rather than three days later you can typically withdraw the money the same day it hits your account but in some cases you may not be able to access it until the following business day keep track of what direct deposits you have hitting certain accounts should you need to close that bank account it would help to have a list of transactions that are directly deposited uses of direct depositdirect deposit can be used for various types of payments and transactions examples of uses of direct deposit include but aren t limited to special considerations for direct depositdirect deposit is a popular and convenient way for people to send and receive payment for payers it cuts down any expenses related to check writing postage and administration for payees or recipients it eliminates the risk of losing a physical check along with the need to visit a bank in person to make a deposit as mentioned above direct deposit recipients are not subject to a check clearing wait period salaries paid via check can often take a week or more to clear within their account not everyone has a bank account if the payer is required to provide a form of electronic payment like direct deposit they may be able to provide funds in another way such as a prepaid debit card this often occurs in cases where the government sends cards to benefit recipients who don t bank with traditional financial institutions payers who are required to make electronic payments may provide recipients with prepaid debit cards advantages and disadvantages of direct depositdirect deposit offers numerous benefits including convenience security and fast access to funds direct deposit may cost less than other payment methods that rely on more manual repetitive time intensive processing methods direct deposit may also be seen as more environmentally friendly as it does not rely heavily on paper or one time items direct deposit eliminates the need for physical checks and allows for automatic credited payments to the recipient s account saving time and effort in terms of having money hit one s account direct deposit also reduces the risk of lost or stolen checks and the need to carry large amounts of cash direct deposit also allows individuals to allocate funds to different accounts based on their preferences and financial goals for example someone may choose to have their paycheck direct deposited into three of their bank accounts one for bills one for their emergency fund and one for long term savings direct deposit and other forms of electronic banking come with greater efficiency along with a greater risk of online security hacks the rise of certain cybersecurity measures to help protect forms of banking such as direct deposits has been critical types of cybersecurity attacks on sensitive financial information include measures to increase security can include using a password protector or choosing more complicated passwords with a combination of letters numbers capitals and special signs to encrypt personal financial data direct deposits and sustainabilityone of the primary important benefits of direct deposits is sustainability direct deposits offer a more ecological approach to financial transactions by reducing paper usage carbon footprint and energy consumption this reduces the reliance on fossil fuels necessary to power paper recycling plants direct deposits do not necessitate mailing or physically distributing payments therefore it is more sustainable as it reduces waste such as envelopes and deposit slips they also reduce water consumption by minimizing paper usage proponents of direct deposits can argue that this method of payment also reduces emissions from transportation in theory direct deposits eliminate the need for physical checks to be transported via mail or courier services though checks may be able to be deposited electronically direct deposits require no trip to the bank for the funds to hit an individual s account
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how do i set up direct deposit
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if your employer offers direct deposit you should ask them how to set it up there are generally a number of steps involved
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how long does direct deposit take
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it normally takes one to three days for a direct deposit to process sometimes the payment will show up right away with a pending designation until it s finalized can i recieve a direct deposit without a bank account yes the easiest way to get a direct deposit without a bank account is through a prepaid card you can buy a prepaid card even if you re not an account holder at any bank you buy the card load some money on it and use it most of these cards include the possibility of receiving direct deposits the bottom linedirect deposit is the deposit of funds electronically into a bank account rather than through a physical paper check salaries tax refunds investment redemptions and government benefits are commonly paid in this way payees must provide the payer with their banking information in order to receive direct deposit payments payments normally take one to three days to process
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what is direct investment
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direct investment is more commonly referred to as foreign direct investment fdi fdi refers to an investment in a foreign business enterprise designed to acquire a controlling interest in the enterprise the direct investment provides capital funding in exchange for an equity interest without the purchase of regular shares of a company s stock understanding direct investmentthe purpose of fdi is to gain an equity interest sufficient to control a company in some instances it involves a company in one country opening its own business operations in another country in other cases direct investment involves acquiring control of existing assets of a business already operating in the foreign country a direct investment can involve gaining a majority interest in a company or a minority interest but the interest acquired gives the investing party effective control direct investment is primarily distinguished from portfolio investment the purchase of common or preferred stock shares of a foreign company and by the element of control that is sought control can come from sources other than an investment of capital however control of assets such as technology is considered only a critical input in fact fdi is frequently not a simple monetary transfer of ownership or controlling interest but can include complementary factors such as organizational and management systems or technology foreign direct investments can be made by individuals but are more commonly made by companies wishing to establish a business presence in a foreign country examples of foreign direct investmentforeign direct investment takes many forms in practice but is generally classified as either a vertical horizontal or conglomerate investment for a vertical direct investment the investor adds foreign activities to an existing business an example is an american auto manufacturer that establishes dealerships or acquires a parts supply business in a foreign country horizontal direct investment is perhaps the most common form of direct investment for horizontal investments a business already existing in one country establishes the same business operations in a foreign country a fast food franchise based in the united states might open restaurant locations in china horizontal direct investment is also referred to as green field entry into a foreign market for a conglomerate type direct investment an existing company in one country adds an unrelated business operation in a foreign country this is a particularly challenging form of direct investment since it requires simultaneously establishing a new business and establishing it in a foreign country an example of conglomerate direct investment might be an insurance firm opening a resort park in a foreign country
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what is direct market access dma
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direct market access dma refers to access to the electronic facilities and order books of financial market exchanges that facilitate daily securities transactions direct market access requires a sophisticated technology infrastructure and is often owned by sell side firms rather than relying on market making firms and broker dealers to execute trades some buy side firms use direct market access to place trades themselves understanding direct market access dma direct market access is the direct connection to financial market exchanges that makes the completion of a financial market transaction final exchanges are organized marketplaces where stocks commodities derivatives and other financial instruments are traded some of the most well known exchanges are the new york stock exchange nyse the nasdaq and the london stock exchange lse individual investors typically do not have direct market access to the exchanges while trade execution is usually immediately enacted the transaction is fulfilled by an intermediary brokerage firm while brokerage firms can work on a market making quote basis it has become more common since the 1990s for brokerage platforms to use direct market access for completing the trade with direct market access the trade is executed at the final market transaction phase by the brokerage firm the order is accepted by the exchange for which the security trades and the transaction is recorded on the exchange s order book intermediary brokerage firms are known to have direct market access for completing trade orders in the broad market various entities can own and operate direct market access platforms broker dealers and market making firms have direct market access sell side investment banks are also known for having direct market access sell side investment banks have trading groups that execute trades with direct market access direct market access technologyin the financial markets sell side firms offer their direct market access trading platforms and technology to buy side firms who wish to control the direct market access trading activities for their investment portfolios examples of buy side entities include hedge funds pension funds mutual funds life insurance companies and private equity funds this form of control over trading activities is considered sponsored access the technology and infrastructure required to develop a direct market access trading platform can be expensive to build and maintain companies that offer direct market access sometimes combine this service with access to advanced trading strategies such as algorithmic trading thus there are agreements between direct market access platform owners and sponsored firms that outline the services offered and the stipulations of the agreement benefits of direct market accesswith direct market access a trader has full transparency of an exchange s order book and all of its trade orders direct market access platforms can be integrated with sophisticated algorithmic trading strategies that can streamline the trading process for greater efficiency and cost savings direct market access allows buy side firms to often execute trades with lower costs order execution is extremely fast so traders are better able to take advantage of very short lived trading opportunities special considerationsmarket regulators such as the financial industry regulatory authority finra oversee all of the market s trading activities and have raised some concerns over the sharing or sponsored access agreements offered by sell side firms 1if a buy side firm does not have direct market access then it must partner with a sell side firm brokerage or bank with direct market access to determine a trading price and execute the final transaction 1finra s concern stems from the potential market disruption that could occur if poorly regulated direct market access results in trading errors caused by computers or humans the damage from these trading errors could be compounded by high speed trading automation and high volume trading 1to address these trading risks the securities and exchange commission sec requires firms that provide direct market access to maintain a system of risk management controls over the trading actions allowed through sponsored access 2
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what is a direct market access order
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a direct market access order is a trade placed by a trader directly with an exchange on its order books without having to go through a brokerage as an intermediary this allows transparency efficiency and better pricing for the trader
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what is the direct market access rule
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the market access rule is rule 15c3 5 which requires institutions with market access or that provide market access to clients to appropriately control the risks associated with market access so as not to jeopardize their own financial condition that of other market participants the integrity of trading on the securities markets and the stability of the financial system 3
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what is the difference between dma and otc
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direct market access dma differs from over the counter otc in that dma places trades directly with an exchange while otc happens outside of exchanges and directly between parties dma offers more transparency liquidity regulation and better pricing the bottom linebanks and other financial institutions provide clients with direct market access to electronic facilities and order books of exchanges to facilitate and complete trade orders with the advent of electronic trading direct market access has made the process of executing trades much more efficient for traders as they can gain access directly without having to rely on an intermediary
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what is direct marketing
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direct marketing consists of any marketing that relies on direct communication or distribution to individual consumers rather than through a third party such as mass media mail email social media and texting campaigns are among the delivery systems used it is called direct marketing because it generally eliminates the middleman such as advertising media
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how direct marketing works
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unlike traditional public relations campaigns pushed out through a third party such as media publications or mass media direct marketing campaigns operate independently to directly communicate with target audiences in direct marketing companies deliver their messaging and sales pitches by social media email mail or phone sms campaigns although the number of communications sent can be massive direct marketing often attempts to personalize the message by inserting the recipient s name or city in a prominent place to increase engagement the call to action is an essential part of direct marketing the recipient of the message is urged to immediately respond by calling a toll free phone number sending in a reply card or clicking on a link in a social media or email promotion any response is a positive indicator of a prospective purchaser this variety of direct marketing is often called direct response marketing a direct marketing pitch that is delivered to the widest possible audience is probably the least effective that is the company may gain a few customers while merely annoying all of the other recipients junk mail spam email and texting all are forms of direct marketing that many people can t get rid of fast enough the most effective direct marketing campaigns use lists of targeted prospects in order to send their messages only to the likeliest prospects for example the lists might target families who have recently had a baby new homeowners or recent retirees with products or services that they are most likely to need catalogs are the oldest form of direct marketing with a history that dates back to the latter half of the 19th century 12 in modern times catalogs are usually sent only to consumers who have indicated an interest in a previous purchase of a similar product while social media has emerged as the most modern form of direct marketing targeting strategies can also be used on social media when putting out ads platforms like facebook allow brands to choose the age gender demographics and even interests of potential new audiences that an ad could reach many companies engage in opt in or permission marketing which limits their mailing or emailing to people who have indicated a willingness to receive it lists of opt in subscribers are particularly valuable as they indicate a real interest in the products or services being advertised investopedia daniel fishelthe advantages and disadvantages of direct marketingdirect marketing is one of the most popular and effective marketing tools in order to establish a direct connection with a target audience direct marketing has its appeal particularly to companies on a shoestring budget who can t afford to pay for television or internet advertising campaigns especially as the world becomes increasingly connected through digital platforms social media becomes an effective way to market to customers the main drawback with direct marketing however is the profile raising and image building that comes with a third party accrediting your brand for example although a company may pay for a sponsored article in the new york times this can greatly enhance a brand s image and can help seal the deal with customers who are willing to trust a supposedly unbiased source or external opinion by its nature the effectiveness of a direct marketing campaign is easier to measure than other types of advertising since brands can analyze their own analytics track unique source codes and tweak strategies effectively without going through a middleman the company can measure its success by how many consumers make the call return the card use the coupon or click on the link
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what is the direct method
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the direct method is one of two accounting treatments used to generate a cash flow statement the statement of cash flows direct method uses actual cash inflows and outflows from the company s operations instead of modifying the operating section from accrual accounting to a cash basis accrual accounting recognizes revenue when it is earned versus when the payment is received from a customer conversely the cash flow direct method measures only the cash that s been received which is typically from customers and the cash payments or outflows such as to suppliers the inflows and outflows are netted to arrive at the cash flow the direct method is also known as the income statement method understanding the direct methodthe three main financial statements are the balance sheet income statement and cash flow statement the cash flow statement is divided into three categories cash flow from operating activities cash flow from financing activities and cash flow from investing activities the cash flow statement can be prepared using either the direct or indirect method the cash flow from the financing and investing activities sections will be identical under both the indirect and direct methods the indirect method for calculating cash flow from operations uses accrual accounting information and it always begins with the net income from the income statement the net income is then adjusted for changes in the asset and liability accounts on the balance sheet by adding to or subtracting from net income to derive the cash flow from operations under the direct method the only section of the statement of cash flows that will differ in the presentation is the cash flow from the operations section the direct method lists the cash receipts and cash payments made during the accounting period the cash outflows are subtracted from the cash inflows to calculate the net cash flow from operating activities before the net cash from investing and financing activities are included to get the net cash increase or decrease in the company for that period of time the cash flow statement s direct method takes the actual cash inflows and outflows to determine the changes in cash over the period complexities of the direct methodthe difficulty and time required to list all the cash disbursements and receipts required for the direct method makes the indirect method a preferred and more commonly used practice since most companies use the accrual method of accounting business activities are recorded on the balance sheet and income statement consistent with this method for example a company using accrual accounting will report sales revenue on the income statement in the current period even if the sale was made on credit and cash has not yet been received from the customer this same amount would also appear on the balance sheet in accounts receivable companies that use accrual accounting do not also collect and store transactional information per customer or supplier on a cash basis another complexity of the direct method is that the fasb requires a business using the direct method to disclose the reconciliation of net income to the cash flow from operating activities that would have been reported if the indirect method had been used to prepare the statement the reconciliation report is used to check the accuracy of the operating activities and it is similar to the indirect report the reconciliation report begins by listing the net income and adjusting it for non cash transactions and changes in the balance sheet accounts this added task makes the direct method unpopular among companies example of the direct methodexamples of the direct method for the statement of cash flows included in the operations section include the following a straightforward presentation of cash flow from operations using the direct method looks somewhat like this listing out information this way provides the financial statement user with a more detailed view of where a company s cash came from and how it was disbursed for this reason the financial accounting standards board fasb recommends companies use the direct method 1although it has its disadvantages the statement of cash flows direct method reports the direct sources of cash receipts and payments which can be helpful to investors and creditors
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what is the difference between the direct method and the accrual method
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the direct method of accounting for cash flows uses real cash inflows and outflows from a business s operations this process records cash as it comes in or is paid out conversely the accrual accounting method records revenues and expenses as they occur rather than when money comes in or out
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is the direct method allowed under gaap
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yes the direct method of accounting for cash flow is allowed under the generally accepted accounting principles gaap and under the international financial reporting standards ifrs the indirect method is also allowed however the guidelines tend to promote the direct method
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what are the 3 methods of accounting
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the three methods of accounting are 1 the cash basis accounting method 2 the accrual accounting method and 3 the modified cash basis accounting method the cash basis accounting method records transactions as money comes in and out the accrual accounting method records transactions as they are incurred whether or not money has come in or gone out the modified cash basis method is a blend of the two the bottom linewhile the direct method of cash flow accounting is more time consuming it provides more detail about the operating cash flow account which helps analysts and business managers get a more holistic understanding of the cash cycle and profitability
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what is a direct participation program dpp
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a direct participation program dpp is a pooled entity that offers investors access to a business venture s cash flow and tax benefits also known as a direct participation plan dpps are non traded pooled investments in real estate or energy related ventures over an extended time frame understanding a direct participation program dpp in most direct participation programs limited partners put up money their stake is quantified in units which is then invested by a general partner most dpps are managed passively and have a lifespan of five to 10 years during that time all tax deductions as well as the dpp s income are passed to partners because of the income they generate and their pooled nature dpps have become a popular way for average investors to access investments that have normally been reserved for wealthy investors though with some restrictions a direct participation program is usually organized as a limited partnership a subchapter s corporation or a general partnership such structures allow the dpp s income losses gains tax credits and deductions to transfer though to the underlying partner taxpayer on a pre tax basis accordingly the dpp itself pays no corporate tax dpps are not traded which means that they lack liquidity and a reliable pricing mechanism especially compared to equities that trade on a stock market as such dpps tend to require that clients meet asset and income thresholds to invest these requirements can vary by state types of direct participation programsthe most common dpps are non traded reits about two thirds of the dpp market non listed business development companies bdc which act as debt instruments for small businesses energy exploration and development partnerships and equipment leasing corporations a dpp may have the legal structure of a corporation such as a reit a limited partnership or a limited liability corporation llc but in practice all behave as a limited partnership a dpp gives an investor partial ownership of a physical asset such as the underlying property in a reit the machinery in an equipment leasing venture or wells and income from oil sales in an energy partnership special consideration direct participation program structurein dpps limited partners are the investors should the dpp lose money their downside is limited to what they invested the general partner manages the investment limited partners have no say in the management and receive no benefit from the dpp s operations limited partners can however vote to change or fire a general partner or sue one for not acting in the best interest of the partnership direct participation programs have their origin in the securities act of 1933 and the financial industry regulatory authority finra rule 2310 1 2 series 7 candidates can expect to see several questions on dpps on their exam
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what is a direct public offering dpo
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a direct public offering dpo also known as a direct listing is a type of offering in which a company offers its securities directly to the public to raise capital an issuing company using a dpo eliminates the intermediaries investment banks broker dealers and underwriters that are typical in initial public offerings ipo and self underwrites its securities 1cutting out the intermediaries from a public offering substantially lowers the cost of capital of a dpo therefore a dpo is attractive to small companies and companies with an established and loyal client base 1 a dpo is also known as direct placement
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when a firm issues securities through a direct public offering dpo it raises money independently without the restrictions associated with bank and venture capital financing the terms of the offering are solely up to the issuer who guides and tailors the process according to the company s best interests the issuer sets the offering price the minimum investment per investor the limit on the number of securities that any one investor can buy the settlement date and the offering period within which investors can purchase the securities and after which the offering will be closed
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on dec 22 2020 the u s securities and exchange commission announced that it will allow companies to raise capital through direct listings paving the way for circumvention of the traditional initial public offering ipo process in a direct listing a company floats its shares on an exchange without hiring investment banks to underwrite the transaction as an initial public offering in addition to saving on fees companies that follow the direct listing process may avoid the usual ipo restrictions including lockup periods that prevent insiders from selling their shares for a defined period of time 2in some cases where there are a large number of shares to be issued or time is of the essence the issuing company may employ the services of a commission broker to sell a portion of the shares to the broker s clients or prospects on a best efforts basis issuing companies can raise capital from the public without the stringent security measures and costs required by the sec since most of them qualify for key federal securities exemptions 3timeline of a dpothe amount of time necessary to prepare a dpo is variable it can take a few days or a few months during the preparation stage the company initiates an offering memorandum which describes the issuer and the type of security that will be sold 4 securities that can be sold through a dpo include common shares preferred shares reits and debt securities and more than one type of investment can be offered through the dpo 56 the company also decides which medium will be used to market the securities potential options include newspaper and magazine ads social media platforms public meetings with prospective shareholders and telemarketing campaigns among others before finally offering its securities to the public the issuing company has to prepare and file compliance documents to the securities regulators under the blue sky laws of each state where it intends on conducting a dpo 7 these documents would normally include the offering memorandum articles of incorporation and up to date financial statements that show the health of the company receiving regulatory approval on a dpo application could take three weeks or several months depending on the state 4most dpos do not require the issuers to register with the securities exchange commission sec because they qualify for certain federal securities exemptions for example the intrastate exemption or rule 147 excludes registration with the sec as long as the company is incorporated in the state where it is offering securities and only selling the securities to residents of that state 8
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how a dpo is formally announced
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after receiving regulatory approval the issuing company running a dpo uses a tombstone ad to formally announce its new offering to the public the issuer opens up the securities for sale to accredited and non accredited investors or investors that the issuer already knows subject to any limitations by the regulators these investors may include acquaintances clients suppliers distributors and employees of the firm the offering closes when all securities offered have been sold or when the closing date for the offering period has been clocked a dpo that has an intended minimum and maximum number of securities to be sold will be canceled if the interest or number of orders received for the securities falls below the minimum required in this case all funds received will be refunded to the investors if the number of orders exceeds the maximum number of shares offered the investors would be served on a first come basis or have their shares prorated among all investors the united states treasury has the most popular dpo system for its debt securities treasurydirect is a 24 hour online system for individual investors buying and selling treasury securities such as notes bonds bills savings bonds and treasury inflation protected securities tips 9
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how a dpo is traded
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although an issuing company can raise funds from the company through a dpo a trading exchange platform for its securities will still not be available unlike an ipo that usually trades on the nyse or nasdaq after its offering a dpo will not have such a trading platform but can opt to trade in the over the counter markets otc like otc securities dpo securities may face illiquidity and risk if they are not registered and do not conform to the requirements of the sarbanes oxley act the number of major companies since 2018 to opt for a direct listing rather than an ipo they are spotify in april 2018 slack in june 2019 and coinbase in january 2021 101112 however slack was purchased by salesforce in july 2021 and is no longer listed on the exchange 13prominent examples of dposone of the earliest notable dpos was in 1984 by ben cohen and jerry greenfield two entrepreneurs who needed approximately 750 000 for their ice cream business they advertised their ownership stakes through local newspapers for 10 50 per share with 73 500 available offering 17 5 of the company their loyal fan base in vermont took advantage of the offer and the company ben jerry s ice cream raised the needed funds in a few months 14popular music streaming service spotify spot launched a direct public offering on april 3 2018 spotify opted to underwrite its own shares via a direct listing meaning that there is no supporting bank to buttress share prices by purchasing any additional stock if necessary at the same time spotify s dpo was unique among offerings of this type spot is also listed on the new york stock exchange in previous cases in which companies have listed on exchanges as part of a dpo there have typically been other special circumstances such as previous bankruptcy filings a shift from one exchange to another and so on spotify was not subject to any of these conditions as a company which already enjoyed massive popularity and cash flow positivity prior to its public offering spotify was able to bypass the typical publicity and fundraising efforts involved in an ipo 12on june 20 2019 enterprise software company slack debuted on the new york stock exchange via a direct listing the stock opened at a share price of 38 50 more than 48 above the 26 per share reference price set by the nyse 1516 slack was purchased by salesforce in july 2021 and is no longer listed on the exchange 13
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what is a direct quote
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a direct quote is a foreign exchange rate quoted in fixed units of foreign currency in variable amounts of the domestic currency in other words a direct currency quote asks what amount of domestic currency is needed to buy one unit of the foreign currency most commonly the u s dollar usd in forex markets in a direct quote the foreign currency is the base currency while the domestic currency is the counter currency or quote currency this can be contrasted with an indirect quote in which the price of the domestic currency is expressed in terms of a foreign currency or what is the amount of domestic currency received when one unit of the foreign currency is sold note that a quote involving two foreign currencies or one not involving usd is called a cross currency quote understanding direct quotesthe use of direct quotes versus indirect quotes depends on the location of the trader asking for the quote as that determines which currency in the pair is domestic and which is foreign non business publications and other media usually quote foreign exchange rates in direct terms for the ease of consumers however the foreign exchange market has quoting conventions that transcend local borders a direct quote can be compared to an indirect quote as its inverse or by the following expression
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where
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in a direct quote a higher exchange rate implies that the domestic currency is depreciating or becoming weaker since the price of the foreign currency is effectively rising and vice versa thus if the usd jpy direct quotation changes from 100 to 105 it indicates the yen is weakening against the dollar because it would take 5 more yen the local currency to buy 1 usd the foreign currency the u s dollar usd is the most actively traded currency in the world in the context of trading rooms and professional publications most currencies are quoted as the number of foreign currency units per dollar this means that the dollar serves as the base currency whether the speaker is in the united states or elsewhere an example of a direct quote using u s dollars might be stating 1 17 canadian per u s dollar rather than 85 5 u s cents per canadian dollar which would be the indirect quote a major exception to the dollar base quote rule is when the british pound gbp is quoted against other currencies including the dollar but with the exception of the euro this reflects the fact that the pound was the world s dominant currency in the years leading up to world war ii and before the ascendancy of the u s economy the exchange rate for the pound would thus be quoted as 1 45 per 1 regardless of whether this is considered direct in the united states or indirect in the united kingdom the euro eur came into existence on jan 1 1999 as the unit of account for participating european union eu member nations notes and coins were first issued on jan 1 2002 the euro replaced many major traded european currencies including the german mark the french franc and the dutch guilder the european central bank ecb which oversaw the conversion intended the currency to be the financial market s dominant currency it specified that the euro should always be the base currency whenever it is traded including against both the u s dollar and the british pound for this reason quotes are always the number of dollars pounds swiss francs or japanese yen needed to buy 1
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what is a direct stock purchase plan dspp
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a direct stock purchase plan dspp is a program that enables individual investors to purchase a company s stock directly from that company without the intervention of a broker some companies that offer dspps make the plans directly available to retail investors while others use transfer agents or other third party administrators to handle these transactions such plans offer low fees and sometimes the ability to purchase shares at a discount not all companies offer dspps and such plans may come with certain restrictions about when an individual may purchase shares dspps have lost some of their appeal over the last two decades as investing through online brokers has become less expensive and more convenient though dspps still offer an advantage for the long term investor who doesn t have much money to get started
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how a direct stock purchase plan dspp works
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a dspp allows individual investors to establish an account in which to make deposits for the purpose of purchasing shares directly from a given company the investor makes a monthly deposit usually by ach and the company applies that amount toward purchasing shares each month the plan purchases new shares of company stock or fractions of shares based on the money available from deposits or dividend payouts if any this mechanism makes it easy and automatic to slowly accumulate shares from a given company because these plans often have very low fees and sometimes no fees it makes dspps an inexpensive way for first time investors to enter the financial markets the minimum deposits for participating can range from as little as 100 to 500 perhaps the most common means of direct investment is dividend reinvestment which is the act of using one s dividends to buy more shares in the same company for companies that pay dividends you can set up a dspp to purchase the shares automatically and then reinvest any income payments through an optional dividend reinvestment plan drip drips allow investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date one drawback of a dspp is that the shares are rather illiquid it is difficult to re sell one s shares without using a broker as a result these plans generally function best for investors with a long term investment strategy direct stock purchase plans dspps and the issueras much as dspps can benefit investors they also can be worthwhile to the company that offers them dspps may bring in new investors who otherwise might not have been able to invest in the company moreover a dspp can provide a company with the ability to raise additional funds at a reduced cost companies that offer dspps usually cite information about the plans on their websites under the investor relations shareholder services or frequently asked questions faq sections here you will find details about account minimums investment minimums any fees applicable to their offerings trading details and the like the securities and exchange commission sec regulates a dspp s activity just as it does a brokerage s activities so although the mechanism for investing in dspps is slightly different from going through a broker the risks of buying stock are equally present regardless of how the stock is purchased limitations of direct stock purchase plans dspps dspps were seen as a pretty sweet deal in the early days of internet investing because you still had to pay significant trading or management fees to full service brokers if you wanted to buy stock however as online investing has become cheaper over time some of the original positive factors of dspps have faded for example an often cited advantage of dspps is that shareholders do not need to maintain physical certificates as proof of purchase an agent registers dspp transactions directly onto the company s books today however this benefit is practically moot because most stocks are kept in electronic form in a broker s computer system which is known as in street name in other words paper certificates have well nigh disappeared anyway thus while the concept of dspps may remain appealing they are no longer quite as functional in today s reality
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