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when volcker assumed his position in mid 1979 he aggressively lifted the federal funds rate to tackle rampant inflation which sat at 9 in the following years the economy cooled substantially experiencing two recessions from 1980 to 1983 with unemployment climbing to 10 8 by the end of 1982 4 current chairman jerome powell has lifted interest rates over the past 12 months at the fastest rate since volcker to tame inflation indicating a possible economic downturn if history repeats after a period of hawkish monetary policy | the federal funds rate increased from 0 25 in march 2022 to 4 5 in december 2022 the fastest interest rate increase since the volcker era 5 | |
how is disinflation different from deflation | the key difference between disinflation and deflation is that the former is always positive but decreasing while the latter is always negative | |
what causes disinflation | disinflation is usually caused by contractionary monetary policy e g rising interest rates it can also arise from increases in productivity and technology | |
what happens to the economy during periods of disinflation | past periods of disinflation have caused recessions economic slowdowns that resulted in higher unemployment and lower corporate earnings | |
what happened to the economy during the last period of disinflation | academic research shows that the economy suffered two recessions and higher unemployment during the last sustained period of disinflation in the early 1980s the bottom linedisinflation refers to a slowing in the rate of inflation typically when it eases over the short term proponents of disinflation argue that it s necessary to prevent the economy from overheating while opponents say that it can lead to a downturn or cause deflation as it represents economic contraction disinflation typically arises from a reduction in the money supply that results from rising interest rates but it can also come about by productivity advancements or companies raising prices at a slower pace during a contracting business cycle a period of disinflation in the early 1980s indicates the economy may contract over the next few years if history repeats | |
what is disintermediation | the term disintermediation refers to the process of cutting out the financial intermediary in a transaction it may allow a consumer to buy directly from a wholesaler rather than through an intermediary such as a retailer or enable a business to order directly from a manufacturer rather than from a distributor in the financial industry it is seen when an investor is able to buy stock directly rather than through a broker or a financial institution the purpose of disintermediation is usually to cut costs speed up delivery or both understanding disintermediationdisintermediation is used across various industries and is able to lower the overall cost of completing a transaction removing the intermediary may also allow a transaction to be completed more quickly it is now a pillar of the internet model where it is often called the business to consumer b2c model it can occur when a wholesale purchase allows an interested buyer to purchase goods sometimes in large quantities directly from the producer this can result in lower prices for the buyer because the intermediary such as a traditional retail store is removed from the purchasing process this saves the buyer the cost of the markup that is associated with the transition of a product from a wholesaler to a retailer before it reaches a buyer the concept originated in the financial industry allowing investors to buy financial products directly without an intermediary such as a broker or a bank the government placed a limit on bank interest rates for federally insured accounts in 1967 so consumers began taking their money out of savings accounts in order to find better returns by directly investing in bonds or stocks 1not all companies offer wholesale options directly to customers as it requires a substantial investment in resources to fulfill and ship these orders special considerationsintermediaries often play a valuable part in the process of getting a product from the production line to the consumer a producer has a network of wholesalers who preorder their products and ship them for distribution they employ sales representatives to score orders for products from retailers a retail store is needed to showcase the products properly get the customers through the doors and make the sales all of these roles must be duplicated by the producer who wants to cut out the middlemen disintermediation is inevitably associated with an increased burden on the company using the strategy the company must dedicate more internal resources to cover the services that were previously handled by an intermediary shipping costs in particular can be more expensive for a company that deals directly with the buyer specialized shipping companies have economies of scale that can substantially reduce their customers shipping and handling costs disintermediation and the internetthe internet can be a powerful tool for disintermediation consumers and small businesses can theoretically place orders directly with the producers of products in practice new intermediaries such as amazon etsy and ebay have emerged as electronic middlemen even apps are sold through a third party such as google play or apple s app store the rise of online intermediaries may have been inevitable few producers can devote the resources to developing a retail platform and interface that could rival those of amazon ebay or etsy and fewer still have the means to develop a professional marketing plan to promote their products still some products have been able to skip at least one intermediary the retailer electronics manufacturers such as apple google and hp are prime examples cosmetics brands once sold only in department stores now sell directly to consumers via their websites many small local businesses thrive by promoting their wares on their own websites and on social media many of these products are also available on retailers sites other internet giants took on disintermediation in specific niches google s adsense platform transformed the marketing and advertising industry allowing businesses to directly control their own messaging meta formerly facebook gives local businesses a social media platform to communicate directly with customers and promote their products this potential was realized to some extent particularly by small independent businesses and website operators but online marketing specialists soon emerged to manage the message for businesses eager to outsource the work this process is sometimes called reintermediation cryptocurrencies and disintermediationthe strategy of disintermediation is key to the development of decentralized cryptocurrencies that rely on blockchain technology such as bitcoin one feature of these systems is that users transact on a peer to peer p2p basis directly with one another without having a bank or a monetary authority facilitate or validate the transactions instead of relying on a trusted third party blockchain systems employ a distributed consensus mechanism such as proof of work pow or proof of stake pos these mechanisms rely on cryptographic functions and algorithmic processing to maintain security and fidelity disintermediation is a critical component of the cryptocurrency business banks and governments are cut out transactions are peer to peer example of disintermediationthe travel industry has been transformed by disintermediation mostly through the internet the process began when american airlines introduced direct flight bookings on its sabre global distribution system now travelocity and made the service available on early online sites including prodigy and compuserve the travel agent now has to struggle to compete for consumers who can book hotel rooms cruises rental cars and flights directly from the providers or through a travel site that allows them to compare an exhaustive list of options online travel booking is not however a perfect example of disintermediation a site such as expedia is essentially an intermediary it buys hotel bookings in bulk at a discount and resells them to consumers earning revenues on the markup | |
how do consumers benefit from disintermediation | in theory consumers get a better price for a product when a step in its supply chain is eliminated in practice steps in the supply chain that are necessary still have to be done by someone businesses and their customers benefit from disintermediation if the necessary tasks can be done as efficiently and more cheaply without the services of an intermediary | |
when does disintermediation occur | disintermediation occurs whenever a step in the supply chain is eliminated a consumer calls a hotel directly to make a reservation rather than booking through a website or a travel agent a retailer orders directly from a manufacturer rather than a sales representative for a distributor or on a vastly larger scale amazon builds up its shipping network in order to deliver directly to consumers rather than relying on fedex or ups | |
what is disintermediation in ecommerce | from its beginnings the internet has been seen as an ideal platform for disintermediation it has the potential to remove the intermediary and allow consumers and businesses to deal directly with producers and wholesalers but it hasn t quite worked out that way most consumers most of the time go to new intermediaries such as amazon in order to get a broad array of choices customer service and fast delivery all in one place | |
what is disinvestment | disinvestment is the action of an organization or government selling or liquidating an asset or subsidiary absent the sale of an asset disinvestment also refers to capital expenditure capex reductions which can facilitate the reallocation of resources to more productive areas within an organization or government funded project whether disinvestment results in the divestiture or the reduction of funding the primary objective is to maximize the return on investment roi related to capital goods labor and infrastructure understanding disinvestmentdisinvestments in most cases are primarily motivated by the optimization of resources to deliver maximum returns to achieve this objective disinvestment may take the form of selling spinning off or reducing capital expenditures capex disinvestments may also be undertaken for political or legal reasons types of disinvestmentwithin the target market for commoditized goods a company may identify product segments delivering higher profitability than others while expenditures resources and infrastructure required for manufacturing remain the same for both products for example a company may determine that its industrial tool division is growing faster and generating higher profit margins than its consumer tool division if the difference in the profitability of the two divisions is large enough then the company may consider disinvesting e g selling the consumer division after the disinvestment the company could allocate both the sales proceeds and recurring capital expenditures to the industrial division to maximize its roi a company may opt for the disinvestment of certain assets of a company it has acquired particularly if those assets do not fit with its overall strategy for example a company focused on domestic operations may sell the international division of a company it has purchased due to the complexities and costs of integration as well as operating it on an ongoing basis as a result of the disinvestment the acquiring company can reduce the total cost of the purchase and determine the optimal use of the proceeds which may include reducing debt keeping the cash on the balance sheet or making capital investments organizations may decide on the disinvestment of holdings that no longer fit with their social environmental or philosophical positions for example the rockefeller family foundation which derived its wealth from oil divested its energy holdings in 2016 due to false statements from oil companies regarding global warming companies considered to be monopolies may be legally required to disinvest holdings to ensure fair competition for example after being found to be a monopoly after eight years in court at t t divested its seven regional operating companies in 1984 after disinvestment at t retained its long distance services while the operating companies referred to as the baby bells provided regional services example of disinvestmentdisinvestment in fossil fuels is the most prominent and recent example of political and environment related disinvestment in 2011 students on college campuses began demanding that their endowment foundations which are some of the richest institutional investors in the world begin divesting their stakes in fossil fuel companies because they were major carbon polluters the movement spans 37 countries and has resulted in the divestiture of 6 2 trillion worth of assets according to a report from arabella advisors one thousand institutional investors including insurance companies sovereign wealth funds and pension funds have committed to divest assets related to fossil fuels the report attributes the surge in fossil fuel related divestments to moral pressure that gave way to financial and fiduciary imperatives as the movement grew and stocks for major oil companies fell 1meanwhile weyerhaeuser co wy is an example of strategic disinvestment the washington based company was a manufacturer of paper and paper products until 2004 since that year it has divested operations by selling its pulp and paper manufacturing businesses to focus on real estate and timber | |
why does disinvestment occur | disinvestments are most often motivated by optimizing resources to deliver maximum returns disinvestments may also occur for environmental legal political or strategic reasons | |
how does disinvestment occur | disinvestment may occur by selling spinning off or reducing capital expenditures capex | |
what are types of disinvestment | disinvestment types include the bottom line | |
what is dispersion | the field of statistics is used across every sector and industry to help people better understand and predict potential outcomes in finance investors often turn to statistics to gain a sense of how returns on certain assets or groups of assets could be distributed this range of possible investment returns is called dispersion in other words dispersion refers to the range of potential outcomes of investments based on historical volatility or returns there are two important ways to measure dispersion alpha and beta which calculate risk adjusted returns and returns relative to a benchmark respectively by considering the dispersion of possible investment returns and values such as alpha and beta investors can gain a sense of the risk inherent in a particular security or investment portfolio understanding dispersiondispersion is often interpreted as a measure of the degree of uncertainty and thus risk associated with a particular security or investment portfolio investors have thousands of potential securities to invest in and many factors to consider in choosing where to invest one factor high on their list of considerations is the risk profile of the investment dispersion is one of many statistical measures to give perspective most funds will address their risk profile in their fact sheets or prospectuses which can be readily found on the internet information on individual stocks meanwhile can be found via morningstar and similar stock rating companies | |
when it comes to statistics in finance investors often turn to metrics such as correlation when discussing diversification and the variation of portfolios over time however according to s p dow jones indices the measure known as asset dispersion has strong qualifications as a complementary tool 1 understandably since the dispersion of possible returns on an asset provides insight about the volatility and risk associated with holding that asset the more variable the return on an asset the more risky or volatile it is | for example an asset whose historical return in any given year ranges from 10 to 10 can be considered more volatile than an asset whose historical return ranges from 3 to 3 because its returns are more widely dispersed measuring dispersionthe primary risk measurement statistic beta measures the dispersion of a security s return relative to a particular benchmark or market index most frequently the u s s p 500 index a beta measure of 1 0 indicates the investment moves in unison with the benchmark a beta greater than 1 0 indicates the security is likely to experience moves greater than the market as a whole a stock with a beta of 1 3 could be expected to experience moves that are 1 3x the market meaning if the market is up 10 the beta stock of 1 3 climbs 13 the flip side is that if the market goes down that security will likely go down more than the market although there are no guarantees of the magnitude of the moves a beta of less than 1 0 signifies a less dispersed return relative to the overall market for example a security with a beta of 0 87 will likely trail the overall market if the market is up 10 then the investment with the lower beta would be expected to rise only 8 7 alpha is a statistic that measures a portfolio s risk adjusted returns that is how much more or less the investment returned relative to the index or beta a return higher than the beta indicates a positive alpha usually attributed to the success of the portfolio manager or model a negative alpha on the other hand indicates the lack of success of the portfolio manager in beating the beta or more broadly the market | |
what is descriptive stats | descriptive statistics is a means of using summaries of a data sample to describe features of a larger data set for example a population census may include descriptive statistics regarding the ratio of men and women in a specific city | |
what is covariance | covariance is a statistical measure of the directional relationship between two asset returns finding that two stocks that have a high or low covariance might not be a useful metric on its own some investors may choose to supplement their analysis by looking at the dispersion of returns or correlation before deciding to invest | |
what is beta | in finance beta is a measure of volatility of a security or portfolio compared to the market as a whole tracking beta over time can provide investors with a useful risk profile for the asset compared to a major index the bottom linedispersion refers to a statistical measure of the range of potential outcomes for an investment based on its historical volatility or returns two important ways to represent dispersion are alpha which calculates risk adjusted returns and beta which describes returns relative to a benchmark analyzing the dispersion of possible returns can help you understand the level of risk represented by a particular investment although it s important to keep in mind that a security s future returns may diverge from its past performance | |
what is disposable income | disposable income is the amount of money that an individual or household has to spend or save after federal state and local taxes and other mandatory charges are deducted economists closely monitor disposable personal income as a key indicator of the strength of the economy also known as disposable personal income or net income it includes both necessary spending on essentials like food and rent and discretionary spending on leisure and luxury items investopedia paige mclaughlinformula and calculation of disposable incomethere are several ways to calculate disposable income but the main formula used is total income is the entirety of gross wages that an individual earns this is sometimes adjusted to reflect factors that alter that total for example products returned by a customer would reduce a sole proprietor s total income taxes are eliminated from disposable income because they are mandatory an individual may down size to save money or splurge on a fancier car but there s no wiggle room in taxes understanding disposable incomedisposable income is the amount of money that a person or family has left after paying their taxes it is the portion of income that can be spent on necessities such as food and rent people can also use disposable income to pay for discretionary items leisure activities and investments this type of income plays a critical factor in the economy it drives how much consumers spend how much companies earn and how much people save and invest by extension it drives consumer demand for goods manufacturing levels distribution and the overall well being of the economy different statistical measures and economic indicators are derived from the number for disposable income it is the starting point for calculating measurements such as discretionary income personal savings rates marginal propensity to consume mpc and marginal propensity to save mps special considerationsthe federal government uses a slightly different method to calculate disposable income for wage garnishment purposes this is the seizure of a portion of a wage earner s paycheck before it is paid every payday until the amount due for back taxes or overdue child support is paid for this purpose the government uses disposable income as a starting point to determine how much of each paycheck to seize the amount garnished may not exceed 25 of a person s disposable income or the amount by which a person s weekly income exceeds 30 times the federal minimum wage whichever is less the amount paid into a gross income retirement plan also is deducted from disposable income in this calculation 1 | |
how to use disposable income | unlike taxes disposable income is relatively flexible and highly individualized it includes both essential and non essential spending we ve listed some of the key spending categories that people can and often do use with their disposable income discretionary income is equal to disposable income minus all payments for necessities including a mortgage or rent payment health insurance food and transportation this portion of disposable income can be spent at will discretionary income is the first to shrink after a job loss or pay reduction businesses that sell discretionary goods like jewelry or vacation packages tend to suffer the most during recessions their sales are watched closely by economists for signs of both recession and recovery the personal savings rate is the percentage of disposable income that goes into savings for retirement or other goals for several months in 2005 and 2006 the average personal savings rate dipped into negative territory for the first time since 1933 2 this means that americans spent all of their disposable income every month and still had to tap into savings or debt to make ends meet marginal propensity to consume is the percentage of each additional dollar of disposable income that is spent immediately while marginal propensity to save is the percentage that is saved both the marginal propensity to consume and the marginal propensity to save are positively correlated to income as people make more money they re more likely to buy things and save for the future this is usually shown graphically as an upward sloping curve importance of disposable incomedisposable income is not only important to individuals but holds massive value to society as a whole its essential qualities include interpreting disposable incomethe bureau of economic analysis bea tracks the month to month changes in disposable personal income the agency reported that disposable income increased by 40 2 billion or 0 2 in april 2024 compared to the previous month 3 a decrease in this month over month measurement would mean that households have less residual income compared to the prior month the federal reserve is also interested in disposable income as household savings and spending influence monetary and fiscal policy the federal reserve bank of st louis reported aggregate real disposable personal income of over 16 94 trillion as of april 2024 it was substantially higher about 20 42 trillion in march 2021 when the federal reserve raised interest rates to cool inflation 4certain industries like agriculture have good reasons to watch the numbers on disposable income the u s department of agriculture measures the percent of disposable income an average individual spends on food that helps farmers plan future harvests 5 | |
how do you calculate disposable income | to calculate your disposable income you will first need to know what your gross income is for an individual gross income is your total pay which is the amount of money you ve earned before taxes and other items are deducted from your gross income subtract the income taxes you owe the amount left represents your disposable income | |
is disposable income net or gross | disposable income is a net amount it is the amount of money an individual or family has left to spend or save after all taxes are deducted from gross income | |
is disposable income taxable | disposable income is by definition after tax income | |
what is the average disposable income in the u s | the disposable income per capita in the united states was 60 276 in 2023 6 the average number notably does not reflect the gap between the richest and the rest the organisation for economic co operation and development oecd reports that the top 20 of the u s population earns almost seven times as much as the bottom 20 7 | |
what is the proportion of saved disposable income called | the proportion of saved disposable income is known as the average propensity to save aps it is also called the savings ratio this refers to the proportion of a population s overall income that is saved rather than spent to calculate the aps ratio divide total savings by disposable after tax income the bottom linedisposable income is money that remains to be used after all taxes are paid all products and services including rent or mortgage payments food and utilities come out of disposable income what is left over for wants as opposed to needs is known as discretionary income in a society as a whole when disposable income increases people spend or save more leading to a growth in overall consumption consumer spending is one of the most important measures of demand in turn driving business expansion and the creation of jobs | |
what is a disposition | a disposition is the act of selling or otherwise disposing of an asset or security the most common form of a disposition would be selling a stock investment on the open market such as a stock exchange other types of dispositions include donations to charities or trusts the sale of real estate either land or a building or any other financial asset still other forms of dispositions involve transfers and assignments the bottom line is that the investor has given up possession of an asset understanding a dispositiona disposition of shares is perhaps the most commonly used phrase regarding a disposition let s say an investor has been a long time shareholder of a particular company but lately the company may not be doing so well if they decide to exit the investment it would amount to a disposition of that investment a disposition of shares most likely they would sell their shares through a broker on a stock exchange ultimately they have decided to get rid of or dispose of that investment if the sale results in any sort of capital gain then the investor will have to pay capital gains tax on the profits of the sale if they meet the requirements set by the internal revenue service irs other types of dispositions include transfers and assignments where someone legally assigns or transfers particular assets to their family a charity or another type of organization mostly this is done for tax and accounting purposes where the transfer or assignment relieves the disposer of tax or other liabilities for example if an investor purchased stock for 5 000 and the investment grew to 15 000 the investor can avoid the capital gains tax on their profit by donating it to a charity the investor is then able to include the entire 15 000 as a tax deduction business dispositionbusinesses also dispose of assets and very often of entire business segments or units this is commonly known as divestiture and can be done through a spinoff split up or split off the securities and exchange commission sec has very specific guidelines on how these dispositions must be reported and handled if the disposition is not reported in the financial statements of a company then pro forma financial statements are required if the disposition meets the requirements of a significance test significance is determined by either an income test or an investment test an investment test measures the investment value in the unit being disposed of compared to total assets if the amount is more than 10 as of the most recent fiscal year end then it is considered significant 1 the income test measures if the equity in the income from continuing operations before taxes extraordinary items and cumulative effects of changes in accounting principles is 10 or more of such income of the most recent fiscal year end 1 in certain situations the threshold level can be increased to 20 the disposition effectbehavioral economics also has something to say about one s propensity to sell a winning vs losing position based on the concept of loss aversion the disposition effect is a term that describes investor behavior in which they have a tendency to sell winning investments too early before realizing all potential gains while holding on to losing investments for longer than they should hoping that the investments will turn around and generate a profit this effect was first introduced by hersh shefrin and meir statman in 1985 in their paper the disposition to sell winners too early and ride losers too long theory and evidence studies show that investors should do the exact opposite of what the disposition effect states they tend to do | |
what is disruptive innovation | disruptive innovation refers to the innovation that transforms expensive or highly sophisticated products or services previously accessible to a high end or more skilled segment of consumers to those that are more affordable and accessible to a broader population this transformation disrupts the market by displacing long standing established competitors investopedia candra huffunderstanding disruptive innovationdisruptive innovation involves technologies used to make products easier to use or access and available to a larger non targeted market note that it does not involve the process of improving or enhancing products for the same target market an example of disruptive innovation is the introduction of digital music downloads which have by far replaced compact discs clayton christensen popularized the idea of disruptive innovation in the book the innovator s solution which was a follow up to the innovators dilemma published in 1997 1christensen posited that there are two types of technologies businesses deal with sustainable technologies allow a business to incrementally improve its operations in a predictable timeframe these technologies and the way they are incorporated into a business are primarily designed to allow companies to remain competitive or at least maintain a status quo disruptive technologies and the way they are integrated the disruptive innovations are more difficult to plan for and potentially more devastating to companies that do not pay enough attention to them 2investing in a disruptive innovation can be complicated it requires an investor to focus on how companies will adapt to disruptive technology instead of focusing on the development of the technology itself companies such as amazon amzn google googl and meta meta formerly facebook are examples of companies that have heavily focused on the internet as a disruptive technology the internet has become so ingrained in the modern world that the companies that failed to integrate disruptive innovation into their business models have been pushed aside artificial intelligence ai and its potential to learn from employees and perform their jobs may be a disruptive innovation for the job market as a whole soon 3the internet was disruptive because it was not an iteration of previous technology it was something new that created unique models for making money that never existed before of course that created losses for other business models people using smartphones instead of laptops and desktops for their computing needs including web browsing and streaming is another example of disruptive innovation technological enhancements have enabled cell phones to be equipped with small processors chips and software applications that support these functions requirements for disruptive innovationdisruptive innovation requires access to ignored or overlooked markets and technology that can transform a product into a more accessible and affordable one to be disruptive the network of partners suppliers contractors and distributors also must benefit from the new disruptive business model certain core requirements include disruptive innovation vs sustaining innovationdisruptive innovation is an innovation that simplifies and makes more affordable products and services to undesirable or ignored markets established companies typically strive to improve their products and services for their profitable customer base largely ignoring the needs and desires of untapped segments this lack of attention gives smaller companies or new entrants ground to target this ignored population with simpler more affordable options sustaining innovation on the other hand is the process of innovating to make existing products and services better for the existing customer base either based on customer or market demands sustaining innovation does not target untapped or ignored markets rather it s innovating to remain relevant and competitive cd makers making cds with the capacity to hold large volumes of music that are scratch resistant is sustaining innovation a company introducing digital downloads via the internet making cds obsolete is disruptive innovation 2examples of disruptive innovationdisruptive innovation is differentiated from disruptive technology in that it focuses on the use of the technology rather than the technology itself 4 two well known examples of this are amazon and netflix a classic example of the disruptive innovation of the internet being unleashed was the restructuring of the bookselling industry the big bookselling chains lost out to amazon amzn because it could display its inventory without owning a physical store in every town and then ship the book to the buyer s home before online shopping became popular books were sold in traditional bookstores such as barnes noble and the now defunct borders 5amazon s popularity grew along with its profits and market share moving many bookstores to the back of the shelf or out of business since its launch amazon has successfully used the internet to create an online shopping platform whereby most of what s offered in a physical store including groceries can be ordered from amazon s website and it all began with a small garage born company using the power of the internet to attend to the needs of a niche market of online shopping book enthusiasts the model t car is an example of something not considered to be disruptive innovation because it was an improvement on existing technology and it wasn t widely adopted upon its release the auto industry didn t take off until mass production reduced prices moving the entire transportation system from hooves to wheels in that sense the system of mass production does meet the criteria for disruptive innovation netflix nflx is another disruptive innovator during a time when vhs tapes and dvds were rented in abundance from thousands of video stores new entrant netflix saw an opening to cater to an overlooked market of online shoppers utilizing the growing power of the internet it offered consumers the ability to peruse their catalog of dvds rent unencumbered by someone else s choice to rent the same selection and have their selections sent directly to their home 6after netflix disrupted the media industry blockbuster went from having more than 9 000 blockbuster brick and mortar stores to one 7not long after offering mail delivered dvd rentals it revised its business model finding an avenue to disrupt itself in the market by providing online streamed entertainment 6 however competitors have successfully duplicated this business model taking away from netflix s market share time will tell how long netflix can remain dominant but there is no doubt about the disruption it brought about | |
what is the meaning of disruptive innovation | disruptive innovation refers to the process of transforming an expensive or highly sophisticated product offering or service into one that is simpler more affordable and accessible to a broader population it explains the process of how innovation and technology can change markets by presenting affordable simple and accessible solutions and after doing so disrupts the market from which its predecessors were born | |
what are examples of disruptive innovation | amazon provides a clear example of disruptive innovation jeff bezos in 1995 subscribing to the notion that the internet could significantly boost commerce launched amazon to sell books to a growing but largely ignored online shopping community in doing so he forced many bookstores to go out of business netflix is another prime example after it disrupted the media industry the dominant player blockbuster went from having 9 000 brick and mortar stores to one | |
what are the key requirements for disruptive innovation | to be a successful disruptor the network of partners suppliers contractors and distributors must also benefit from the new business model certain core requirements include having enabling technology an innovative business model and a coherent value network where upstream and downstream business partners benefit from a successful disruption the bottom linedisruptive innovation involves the innovative processes used to transform products and services into simple and affordable options for bottom tier or traditionally unmarketable consumers unlike sustaining innovation it does not involve improving existing products for current customers disruptive innovation requires technology that can transform the product or service into something more affordable and easy to use a business model that supports the disruptive innovation and a network of upstream and downstream partners who support and will benefit from the success of the disruption amazon and netflix are examples of market disruptors that began as new entrants in industries dominated by well known established companies | |
what is disruptive technology | disruptive technology is an innovation that significantly alters the way that consumers industries or businesses operate a disruptive technology sweeps away the systems or habits it replaces because it has attributes that are recognizably superior recent disruptive technology examples include e commerce online news sites ride sharing apps and gps systems in their own times the automobile electricity service and television were disruptive technologies investopedia nono floresdisruptive technology explainedclayton christensen introduced the idea of disruptive technologies in a 1995 harvard business review article 1 christensen later expanded on the topic in the innovator s dilemma published in 1997 2 it has since become a buzzword in startup businesses that seek to create a product with mass appeal even a startup with limited resources can aim at technology disruption by inventing an entirely new way of getting something done established companies tend to focus on what they do best and pursue incremental improvements rather than revolutionary changes they cater to their largest and most demanding customers this provides an opening for disruptive businesses to target overlooked customer segments and gain an industry presence established companies often lack the flexibility to adapt quickly to new threats that allows disruptors to move upstream over time and cannibalize more customer segments disruptive technologies are difficult to prepare for because they can appear suddenly risk taking companies may recognize the potential of disruptive technology in their own operations and target new markets that can incorporate it into their business processes these are the innovators of the technology adoption lifecycle other companies may take a more risk averse position and adopt an innovation only after seeing how it performs for others companies that fail to account for the effects of disruptive technology may find themselves losing market share to competitors that have discovered ways to integrate the technology blockchain the technology behind bitcoin is a decentralized distributed ledger that records transactions between two parties it moves transactions from a centralized server based system to a transparent cryptographic network the technology uses peer to peer consensus to record and verify transactions removing the need for manual verification the automobile electricity service and television all were disruptive technologies in their own times blockchain technology has enormous implications for financial institutions such as banks and stock brokerages for example a brokerage firm could execute peer to peer trade confirmations on the blockchain removing the need for custodians and clearinghouses which will reduce financial intermediary costs and dramatically expedite transaction times investing in companies that create or adopt disruptive technologies carries significant risk many products considered disruptive take years to be adopted by consumers or businesses or are not adopted at all the segway electric vehicle was once touted as a disruptive technology until it wasn t investors can gain exposure to disruptive technology by investing in exchange traded funds etfs such as the alps disruptive technologies etf dtec this fund invests in a variety of innovative areas such as the internet of things cloud computing fintech robotics and artificial intelligence 3 | |
what are dissenters rights | under various forms of state legislation dissenting shareholders of a corporation are entitled to receive a cash payment for the fair value of their shares in the event of a share for share merger or acquisition m a to which the shareholders do not consent dissenters rights allow dissenting shareholders an easy way out of the company if they do not want to be a part of the merger understanding dissenters rightsprior to the legislation creating dissenters rights mergers and acquisitions required a unanimous vote in favor of the deal from the shareholders of the company this allowed for just one dissenting shareholder to veto the merger or acquisition even though it may have been in the best interest of the company state legislation took away this right but in turn gave the shareholders the right to receive the cash payment for their shares instead although dissenting rights have made it easier to move ahead with a number of corporate transactions certain business decisions are still not without issues for instance while the day to day operations of a corporation and even the policies governing its ongoing operations are generally left to the corporation s officers and directors any extraordinary matter such as a merger must be approved by the corporation s shareholders exercising dissenters rightsif the necessary majority of the corporation s shareholders approve a merger or consolidation it will advance and the shareholders will receive compensation however no shareholder who votes against the transaction is required to accept shares in the surviving or successor corporation instead they may exercise appraisal rights under appraisal rights a dissenting shareholder who objects to an extraordinary transaction may have their shares of the pre merger corporation appraised and be compensated for the fair market value of their shares by the pre merger company the financial world has seen an increase in appraisals in relation to dissenters rights in many states oftentimes due to the fact that the appraisal valuations have been higher than the price of the merged company this provides added incentive for a shareholder to cash in before the merger though there can be benefits to exercising dissenters rights they do come with many risks the valuation can be much lower than the merged price resulting in a possible loss furthermore the appraisal process can be lengthy and complex requiring high litigation costs that the shareholder will have to incur themselves up until the court ruling | |
what is a distress sale | a distress sale also called a distressed sale occurs when a property stock or other asset must be sold quickly distress sales often result in a financial loss for the seller who for reasons of economic duress must accept a lower price the proceeds from these assets are most often used to pay debts or medical expenses or for other emergencies | |
how distress sales work | mortgage borrowers who can no longer meet the payments for their mortgaged property may opt to sell their property to pay off the mortgage examples of situations where distress sales occur include divorce foreclosures and relocations a short sale by a homeowner can be considered a distressed sale here the homeowner is attempting to sell their property even though its current market value is below the amount owed to their lender this can occur if the homeowner is forced to move from the home and cannot wait for the property s market value to recover the homeowner may have a new job that requires immediate relocation for example a divorce could force a home to be sold in order to liquidate assets that must be divided between the parties a lender typically must agree to a short sale before it can proceed because such a transaction would remove the collateral that secured the mortgage if a distress sale is conducted for a piece of property such as an antique or collectible art the seller might choose to take offers that are lower than the value of the item the seller might request offers by advertising the item or instead might offer the item to a pawnbroker | |
when the seller of an item deals with a pawnbroker they will likely receive offers below the value of the item the pawnbroker bids low because they intend to resell the item for a higher price and turn a profit even if an item is appraised at a higher value a pawnbroker will still look for a way to make a profit | the tradeoff a seller gets from accepting an offer that is below market value is the immediate cash the sale provides there are times when potential buyers may take advantage of the circumstances that forced a seller into conducting a distress sale the buyer may be aware of the seller s immediate need to complete a transaction and receive payment this could lead to bids that are substantially lower than the value of the property special considerationsif an asset is sold through a distress sale the valuation of the asset is considered artificial because it was not sold under true competitive market conditions in the case of real estate for example the sales price cannot be used as a comparator to establish the asset s true value buying a distressed property means that you stand a good chance of buying it at a price that is below market value however there are drawbacks if the seller was in a hurry to sell it is unlikely that they will have performed any repairs on the house to boost the sales price the new owners may have to spend a substantial amount to bring the property up to the desired state | |
what are distressed securities | distressed securities are financial instruments issued by a company that is near to or currently going through bankruptcy distressed securities can include common and preferred shares bank debt trade claims and corporate bonds a particular security can also be considered distressed if it fails to maintain certain covenants obligations incorporated into the debt or security such as the ability to maintain a certain asset to liability ratio or a particular credit rating as a result of the issuing company s inability to meet its financial obligations their financial instruments suffer a substantial reduction in value however because of the implicit riskiness of distressed securities they can offer high risk investors the potential for high returns understanding distressed securitiesdistressed securities often appeal to investors who are looking for a bargain and are willing to accept risk in some cases these investors believe the company s situation is not as bad as it looks and as a result they anticipate their investments will increase in value over time in other cases investors may foresee the company going into bankruptcy however they feel confident that there might be enough money upon liquidation to cover the securities they have purchased in many cases the companies that issue distressed securities end up filing for chapter 11 or chapter 7 bankruptcy as a result individuals interested in investing in these securities need to consider what happens in the case of bankruptcy in most bankruptcies equity such as common shares is rendered worthless this makes investing in distressed stocks extremely risky however senior debt instruments such as bank debt trade claims and bonds may yield some payout in particular if a business files chapter 7 bankruptcy it will stop operations and go into liquidation at this point its funds are dispensed to its creditors including bondholders conversely under chapter 11 bankruptcy a business restructures and continues operations if reorganization is successful its distressed securities including both stocks and bonds may yield surprising amounts of profits example of a distressed securitysecurities are labeled as distressed when the company issuing them is unable to meet many of its financial obligations in most cases these securities carry a ccc or below credit rating from debt rating agencies such as standard and poor s or moody s investor services distressed securities can be contrasted with junk bonds which traditionally have a credit rating of bbb or lower typically the anticipated rate of return on a distressed security is more than 1 000 basis points above the rate of return of a so called risk free asset such as a u s treasury bill or treasury bond for example if the yield on a five year treasury bond is 1 a distressed corporate bond has a rate of return of 11 or higher based on the fact that one basis point equates to 0 01 | |
what is distributable net income | the term distributable net income dni refers to income allocated from a trust to its beneficiaries distributable net income is the maximum amount received by a unitholder or a beneficiary that is taxable this figure is capped to ensure there is no instance of double taxation any amount above the dni is therefore tax free understanding distributable net income dni the internal revenue service irs considers distributable net income to be an estimate of the economic value that stems from a distribution to a beneficiary a distribution is a payment made from a fund an estate or an income trust to a beneficiary dni gives beneficiaries a reliable income source while minimizing the amount of income taxes paid by the trust just like individuals estates and non grantor trusts must file income tax returns non grantor trusts are still funded by the grantor the person or entity that creates the trust but this kind of trust functions entirely on its own from the grantor who gives up control of the assets to the trust the income these trusts report is taxed at either the entity or beneficiary level which level is taxed depends on whether it is allocated to the principal amount or to the distributable income and whether the amount is distributed to the beneficiaries according to u s tax code estates and trusts are allowed to deduct the sum of the trust income required to be distributed and other amounts properly paid or credited or required to be distributed or the distributable net income whichever is less to beneficiaries to prevent double taxation on income 1 an income trust recognizes distributable net income as an amount transferred to unitholders with an estate trust it s the amount to be distributed to a beneficiary estates and trusts are allowed to deduct the distributable net income or the sum of the trust income required to be distributed whichever is less 1special considerationsas noted above when a trust calculates the distributable net income it essentially prevents any instance of double taxation of the funds issued by a trust the formula to calculate the figure is as follows in instances where there are capital losses that figure replaces the capital gains and is added to the formula instead of subtracted the personal exemption repealed for individuals through 2025 as part of the tax cuts and jobs act tcja was not repealed for trusts and estates trusts are allowed 100 or 300 exemptions while estates are allowed a 600 exemption 2in order to calculate the taxable income you need to add the interest income dividends and capital gains then subtract any fees and tax exemptions unlike the dni calculation capital gains are added in the taxable income formula while capital losses are subtracted distributable net income dni vs net incomedistributable net income shouldn t be confused with net income as they are two different things while dni is the income distributed from a trust to its beneficiary or beneficiaries net income is used by a business to calculate its earnings per share eps the total profit of a company divided by the number of outstanding shares of its common stock and is also referred to as net earnings net income appears on a company s balance sheet and helps indicate how profitable the company is in order to calculate its net income corporations subtract any general and administrative expenses operating expenses interest taxes other expenses and the cost of goods sold cogs from the total amount of sales net income can also be used to refer to an individual s take home pay this is the amount of money a person receives after any deductions are taken from their paychecks such as taxes healthcare disability insurance and any other expenses a person s net income can be contrasted with their gross income the amount they receive before any deductions example of distributable net income dni here s an example of how dni is calculated using a fictional trust we ll call abc trust let s say abc trust reported total income of 40 000 interest income was 10 000 of this while the remaining 30 000 was derived from dividends fees charged by the trust amounted to 3 000 and the trust realized a capital gain of 15 000 an exemption of 300 applied to the trust if we use the formula above the trust s taxable income is 51 700 we can then use this taxable income figure to calculate the dni which would be 37 000 | |
what is the difference between taxable income and distributable net income | a trust s taxable income includes interest income dividends and capital gains and it subtracts any fees tax exemptions and capital losses for the dni calculation capital gains are subtracted back out while tax exemptions and capital losses are added back in | |
does distributable net income include capital gains | distributable net income excludes capital gains and losses it is removed from the taxable income figure for the purposes of calculating dni | |
what are the 2022 trust and estate exemption amounts | in 2022 a decedent s estate is allowed a 600 exemption a trust required to distribute all income is allowed a 300 exemption and a qualified disability trust is allowed a 4 400 exemption all other trusts are allowed a 100 exemption 3the bottom linedistributable net income is the income that is allocated to beneficiaries of a trust specifically the maximum amount that is taxable the formula used to calculate dni takes the taxable income subtracts capital gains and adds an exemption which was not eliminated for trusts and estates by the tax cuts and jobs act in 2018 | |
what is distributed ledger technology dlt | distributed ledger technology dlt is the technological infrastructure and protocols that allow simultaneous access validation and record updating across a networked database dlt is the technology blockchains are created from and the infrastructure allows users to view any changes and who made them reduces the need to audit data ensures data is reliable and only provides access to those that need it history of distributed ledgersdistributed computing is not new businesses and governments have been using the concept for several decades in the 1990s it became possible for multiple computers and users in different locations to solve problems and return the solutions to a central location 1advances in data science computing software hardware and other technologies have made ledgers much more capable improved connectivity through intranet and internet protocols allowed for much more data to be collected analyzed and used however because there can now be many users with access to data it is necessary to have someone verify the changes computer and data scientists developed programs that reduced the need for auditing data these programs used automation and data encryption techniques to verify database transactions or changes in a database s state this is called consensus the act of automated majority agreement on transaction validity where a transaction is simply a change made to a database s state distributed ledgers evolved into scalable and programmable platforms as seen in ethereum and hyperledger where solutions can be created to use a database or ledger for everything from tokenizing physical assets to streamlining manufacturing and other business processes | |
how distributed ledger technology dlt works | dlts allow information to be stored securely and accurately using cryptography the data can be accessed using keys and cryptographic signatures once the information is stored it can become an immutable database the rules of the network written into the coding of the database programming govern the ledger if something is immutable it is unable to be changed distributed ledgers are only immutable if they are programmed to be that way blockchains are immutable because they are decentralized and cryptographically enhanced public ledgers because they are decentralized private and encrypted distributed ledgers are less prone to cybercrime as all the copies stored across the network need to be attacked simultaneously for the attack to be successful additionally the peer to peer sharing and updating of records make the whole process much faster more effective and cheaper every device on a distributed ledger network stores a copy of the ledger these devices are called nodes a network can have any number of nodes any changes to the ledger such as moving data from one block to another are recorded across all nodes because each node has a copy of the ledger each one publishes its version with the latest transactions if the network reaches a consensus about the validity of the latest ledger the transactions are finalized encrypted and used as a basis for the following transactions this is how blockchains develop each block contains encrypted information about the proceeding block which makes them impossible to change industries using distributed ledger technologydistributed ledgers are created for many different purposes but one of the most used ways is as a platform for others to scale and use one of the more well known distributed ledgers is hyperledger fabric it is a modular and scalable dlt platform several businesses have used to create solutions that span many industries some industries that have implemented dlt solutions include aviation education healthcare insurance manufacturing transportation and utilities 2supply chains can benefit greatly from dlt many factors make these chains inefficient inaccurate and susceptible to corruption or losses fujitsu a global data and information technology company has designed distributed ledger technology to enhance supply chain transparency and fraud prevention by securing and tracking data fujitsu s rice exchange was created to trade rice ensuring data regarding sources prices insurance shipping and settlement are recorded on the ledger anyone involved can look at any data and find accurate information regarding the entire process because it cannot be changed all data is entered and secured automatically by the platform it will eventually provide tracking information for rice shipping containers as they are shipped to their final destinations 3uses of distributed ledger technologyaside from specific industries there are also specific situations where dlt solutions have proven to add value some examples of specific dlt uses include dlt may also be referred to as a shared ledger as it requires a ledger to be shared across a peer to peer computer network advantages and disadvantages of distributed ledger technologydlt holds many benefits over more traditional centralized ledger systems because dlt is a decentralized system there is no central point of control or failure this makes dlt more resilient to attacks and less vulnerable to system wide failures also because dlt uses cryptographic algorithms to secure data it is nearly impossible to tamper with or forge records this enhances the trustworthiness of the data and reduces the risk of fraud dlt allows for transparent access to data and transactions allowing all users greater visibility into the operations of the system this may lead to greater buy in from users due to transparency and accountability of records dlt can streamline processes by removing intermediaries and automating transactions through smart contracts because smart contracts may automatically execute when contract conditions are met there may be less need for human interaction or administration this can reduce costs and increase efficiency lastly dlt can enable greater financial inclusion some people may not have access to traditional banking services as dlt often relies only on an internet connection individuals who would be otherwise limited may have access to a greater range of services this extends to the use of different platforms and networks via interoperability due to dlt s infancy there are still considerable downsides to the technology dlt is still complex and difficult to implement and maintain leveraging the solution often requires specialized knowledge and expertise especially to implement dlt can struggle with scalability as the number of participants and transactions increases as a result dlt processes may lead to slower processing capabilities or higher use costs in addition some dlts such as bitcoin require a significant amount of energy to maintain the network and process transactions this can have negative environmental impacts the lack of regulation and standardization in the blockchain industry blockchains are derived from dlt can lead to risk for users and investors by extension dlt requires widespread adoption to be effective and many industries and organizations may be hesitant to adopt new technologies due to these security concerns distributed ledgers might be immutable but this benefit also comes with a significant downside if mistakes are made they cannot be changed unless there are users with permission to do so in a public dlt like the bitcoin blockchain this can be problematic for instance if a user typed an erroneous address in their wallet and sent the wrong person some bitcoin they cannot reverse the transaction spreads systematic risk around minimizing the risk of a single point of failure | |
has greater security due to cryptographic algorithms | allows for transparency and visibility into operationsmay prove to be more efficient due to smart contract automationoffers individuals with limited access to traditional systems potentially greater capabilities | |
is more complex compared to traditional ledger solutions | can require higher energy consumption for operationmay have difficult scaling as more users transactions occursome applications remain risky due to lack of regulationmay prove to be difficult to reverse fraudulent or erroneous activity | |
why distribute ledger technology is important | dlt is important because it has the potential to transform how information is recorded stored and distributed the importance is often cited across three pillars security transparency and accessibility traditional ledger technology often has a central point of control with one single entity often in charge of the ledger dlt makes the ledger more resilient to attacks and less vulnerable to system wide failures as dlt uses cryptographic algorithms to secure data it also makes it more difficult to tamper with or forge records consider a traditional banking system where a banker is the central point in ensuring your transaction is recorded correctly in contrast consider a dlt solution built on a consensus mechanism where all distributed ledgers must be in agreement about how a transaction is recorded this validation of transactions allows greater trust among users and removes the power an individual might have to alter data centralized traditional ledgers often restrict access to specific individuals though this still holds value for sensitive information there are many use cases where it is more beneficial for all when data and information are broadly distributed and transparent consider the example above of voting having digitally distributed undisputable verifiable records of voting may enhance the believability of results dlt is also important as it holds the theory of reducing fraud and increasing accountability in the long term note how all transactions within a dlt system are able to be viewed by anyone with access to the dlt the information may be audited by anyone at any time potentially demotivating bad actors from entering into nefarious activity in such a public sphere last dlt may eventually be critically important to developing and emerging countries or regions where centralized technologies are limited think about the banking limitations of different countries around the world dlt boasts the ability to store and record transactions using only a network connection as opposed to a very niche and expensive connection such as a bank account at a specific bank as dlt is a relatively new technology that is still being explored and developed this presents opportunities for innovation and the creation of new applications and use cases in general because of the easier access to dlt solutions there are many positive implications notably the broad public s ability to communally access a shared network often has fewer bureaucratic hurdles distributed ledger technology consensus mechanismsa central facet of dlt is how transactions are approved when consensus needs to be reached among a disparate user base without a universally agreed upon system of how items are accepted within the dlt users of the dlt would be unable to agree on the validity of information this process of reviewing transactions is called a consensus mechanism and a dlt may leverage any of the following processes not all dlt applications will require a consensus mechanic note that consensus mechanisms are constantly evolving and only the more common approaches are listed below distributed ledgers vs blockchainseveral key factors distinguish blockchain from distributed ledgers in general blockchain is a specific type of dlt dlts may take various forms while a blockchain uses one specific infrastructure a linear system of blocks that records information blockchains often leverage a proof of work or proof of stake consensus mechanism whereas a dlt has a much broader range of mechanisms available in addition dlts are often more broadly used across industries as they can be leveraged for problems in those industries blockchain has historically been most associated with the financial sector as a means of recording a payment system the security behind either may also vary with blockchain having a very defined set of criteria within the dlt realm data can be chainedcan be encryptedprivate or public and permissioned but can be permissionlesscan be immutabledata is stored in chained files called blocks always encryptedgenerally public and permissionless but some are permissionedalways immutable | |
what is a distributed ledger example | one example is hyperledger a dlt designed by the linux and hyperledger foundations | |
are dlt and blockchain the same | all blockchains are distributed ledgers dls but the opposite is not true blockchains are derived from dls | |
what are the three types of distributed ledgers | the types of distributed ledgers are permissioned only those with permission can view or access public anyone can view or access and private controlled by a central authority with limited access | |
what is the meaning of dlt | distributed ledger technology is the concept of using modern networking systems hardware and programming to distribute copies of a database to multiple nodes that synchronize it to maintain it the bottom linedistributed ledger technology uses databases stored on separate connected devices in a network to ensure data accuracy and security blockchains evolved from distributed ledgers to address growing concerns that too many third parties are involved in too many transactions distributed ledger technology is becoming necessary in modern businesses and enterprises that need to ensure accuracy in financial reporting manage supply chains prevent fraud and identify inefficiencies it has many more use cases in time consuming and costly business activities the comments opinions and analyses expressed on investopedia are for informational purposes online read our warranty and liability disclaimer for more info | |
what are distributed ledgers | a distributed ledger is a database that is consensually shared and synchronized across multiple sites institutions or geographies accessible by multiple people it allows transactions to have public witnesses the participant at each node of the network can access the recordings shared across that network and can own an identical copy of it any changes or additions made to the ledger are reflected and copied to all participants in a matter of seconds or minutes a distributed ledger stands in contrast to a centralized ledger which is the type of ledger that most companies use a centralized ledger is more prone to cyber attacks and fraud as it has a single point of failure underlying distributed ledgers is the same technology that is used by blockchain which is the technology that is used by bitcoin blockchain is a type of distributed ledger used by bitcoin understanding distributed ledgerssince ancient times ledgers have been at the heart of economic transactions with the purpose of recording contracts payments buy sell deals or moving assets or property the journey which began with recording on clay tablets or papyrus made a big leap with the invention of paper over the last couple of decades computers have provided the process of record keeping and ledger maintenance with great convenience and speed today with innovation the information stored on computers is moving towards being cryptographically secured fast and decentralized companies can take advantage of this technology in many forms one way being through distributed ledgers a distributed ledger can be described as a ledger of any transactions or contracts maintained in decentralized form across different locations and people eliminating the need for a central authority to keep a check against manipulation in this manner a central authority is not needed to authorize or validate any transactions all the information on the ledger is securely and accurately stored using cryptography and can be accessed using keys and cryptographic signatures once the information is stored it becomes an immutable database which the rules of the network govern advantages of distributed ledgerswhile centralized ledgers are prone to cyber attacks distributed ledgers are inherently harder to attack because all of the distributed copies need to be attacked simultaneously for an attack to be successful furthermore these records are resistant to malicious changes by a single party by being difficult to manipulate and attack distributed ledgers allow for extensive transparency 1distributed ledgers also reduce operational inefficiencies speed up the amount of time a transaction takes to complete and are automated and therefore function 24 7 all of which reduce overall costs for the entities that use them distributed ledgers also provide for an easy flow of information which makes an audit trail easy to follow for accountants when they conduct reviews of financial statements this helps remove the possibility of fraud occurring on the financial books of a company the reduction in the use of paper is also a benefit to the environment use of distributed ledgersdistributed ledger technology has great potential to revolutionize the way governments institutions and corporations work it can help governments collect tax issue passports and record land registries licenses and the outlay of social security benefits as well as voting procedures the technology is making waves in several industries including while the distributed ledger technology has multiple advantages it s in a budding stage and is still being explored in how to adopt it in the best possible way one thing is clear though the future format of centuries old ledgers is to be decentralized | |
what is distribution | the word distribution has several meanings in the financial world most of them pertaining to the payment of assets from a fund account or individual security to an investor or beneficiary retirement account distributions are among the most common and are required after the account holder reaches a certain age a distribution also refers to a company s or a mutual fund s payment of stock cash and other payouts to its shareholders distributions come from several different financial products however whatever the source the distribution payment usually goes directly to the beneficiary either electronically or by check | |
how distributions work | in finance a distribution can mean many things however the term is used most commonly to describe the following situations regardless of the situation distributions can generally be regarded as cash that goes straight into your pocket distributions from mutual fundswith mutual funds distributions represent the allocation of capital gains and dividend or interest income generated by the fund for the investors periodically during a calendar year one common type is the net capital gains distributions that come from profits on the sale of a mutual fund s holdings for example if a stock is bought for 75 and later sold for 150 the capital gains are 75 minus the fund s operating expenses the exact amount of the distribution is tallied after the subtraction of these operating expenses once dividends and distributions are disbursed the fund s share price declines by the total of the per share distribution to the fund s shareholders the price falls because the distribution is withdrawn from the fund s assets which decreases the net asset value nav stock and bond distributionswith securities like stocks or bonds a distribution is a payment of interest principal or dividend by the issuer of the security to the shareholders or bondholders | |
when a corporation earns a profit it can reinvest the funds in the business but may also pay a portion of the profit to shareholders in the form of a dividend sometimes the company offers a dividend reinvestment plan where the amount can be applied to buying additional shares of the stock or fund | without a reinvestment plan the funds flow into the investor s account as cash investment trust distributionsthe income generated from an investment trust is awarded to investors typically as a monthly or quarterly distribution for this reason distributions function similarly to stock dividends however distributions typically offer higher yields that can be as high as 10 a year the distributions received lower a trust s taxable income and as a result little or no income tax is paid 1mutual fund owners can reinvest their distributions at the fund s net asset value on the ex dividend date settles in one day etf owners meanwhile have to wait a few business days to reinvest their distributions usually takes three days to settle 2retirement account distributionsdistributions from a traditional individual retirement account ira can happen at any time after the creation of the account retirement account distributions fall into two categories 3roth iras also generally require the funds to remain in the account until age 59 before distribution after the account has been in existence for a certain number of years account holders may withdraw funds early but will pay penalty fees if they withdraw a sum greater than their contributions if the distribution includes the account s earnings in other words 4other retirement accounts also have age limitations for withdrawals without penalties distributions from qualified plans such as 403 b accounts and 457 plans are two examples of such plans specific public school employees members of religious orders and other tax exempt groups have 403 b plans 5 the 457 plans contain deferred salary contributions and are mainly used by state and local governments 6required distributions from retirement plansexcept for the roth ira all retirement plans mentioned earlier require the holder to begin withdrawing funds once they reach the age of 73 if they were born between 1951 and 1959 or 75 if they were born in 1960 or after the exact amount of this annual required minimum distribution rmd depends on the account holder s age and the value of funds in the account as per irs guidelines 78all distributions from these retirement accounts are taxed based on the individual s tax bracket at the time of withdrawal the tax assessment reflects the fact that contributions to the account were made with pretax dollars note that only distributions from roth iras or roth 401 k s can be taken without income tax being due on them because roth contributions are made with after tax dollars the investor didn t receive a tax deduction or credit at the time further the roth accounts do not have the required minimum distributions at any age 9real world examplethe fidelity 500 index fund fxaix which seeks to duplicate the performance of the s p 500 disburses dividend distributions quarterly in april july october and december 10in 2022 investors received 0 462 0 577 0 581 and 0 636 for every share of the fund they owned for april july october and december respectively 10 unless a customer specifies otherwise fidelity automatically reinvests these distributions increasing the number of shares of the fund owned | |
what is a capital gains distribution | a capital gains distribution is a cash payment made by a mutual fund or exchange traded fund etf to fund owners if a mutual fund holds a capital asset for more than one year and then sells it the fund usually passes on the profit to you as a capital gains distribution 11 | |
what is a deed of distribution | a deed of distribution is a method of legally transferring property when the rightful receiver can t be determined from the descendant s will | |
what is a lump sum distribution | a lump sum distribution is a cash disbursement that is paid out all at once as opposed to being paid out in steady installments lump sum distributions can come from retirement plans earned commissions or certain debt instruments | |
what is a non taxable distribution | a non taxable distribution is a payment to its shareholders that is classified as a return of capital these distributions aren t paid from the company s earnings and aren t taxed until the investor sells stock in the company the bottom linein the world of finance a distribution generally refers to the disbursement of assets from a fund account or individual security to an investor by understanding the ins and outs of various types of distributions their purpose how they re used and how they work you won t be left scratching your head when you hear the term thrown around during your investing life | |
what is a distribution channel | a distribution channel is the network of businesses or intermediaries through which a good or service passes until it reaches the final buyer or the end consumer distribution channels can include wholesalers retailers distributors and even the internet distribution channels are part of the downstream process answering the question how do we get our product to the consumer this is in contrast to the upstream process also known as the supply chain which answers the question who are our suppliers jessica olah investopediaunderstanding distribution channelsa distribution channel is a path by which all goods and services travel to arrive at the intended consumer distribution channels can be short or long and depend on the number of intermediaries required to deliver a product or service increasing the number of ways a consumer can find a good can increase sales but it can also create a complex system that sometimes makes distribution management difficult longer distribution channels can also mean less profit for each intermediary along the way components of a distribution channelproducer producers combine labor and capital to create goods and services for consumers agent agents commonly act on behalf of the producer to accept payments and transfer the title of the goods and services as they move through distribution wholesaler a person or company that sells large quantities of goods often at low prices to retailers retailer a person or business that sells goods to the public in small quantities for immediate use or consumption end consumer a person who buys a product or service types of distribution channelsa direct channel allows the consumer to make purchases from the manufacturer this direct or short channel may mean lower costs for consumers because they are buying directly from the manufacturer an indirect channel allows the consumer to buy the goods from a wholesaler or retailer indirect channels are typical for goods that are sold in traditional brick and mortar stores hybrid distribution channels use both direct channels and indirect channels a product or service manufacturer may use both a retailer to distribute a product or service and may also make sales directly with the consumer distribution channel levelsthis is a direct to consumer model where the producer sells its product directly to the end consumer amazon which uses its platform to sell kindles to its customers is an example of a direct model this is the shortest distribution channel possible cutting out both the wholesaler and the retailer a producer sells directly to a retailer who sells the product to the end consumer this level includes only one intermediary hp and dell are large enough to sell their computer products directly to reputable retailers such as best buy including two intermediaries this level is one of the longest because it includes the producer wholesaler retailer and consumer in the wine and adult beverage industry a winery cannot sell directly to a retailer 1it operates in a multi tiered system meaning the law requires the winery to first sell its product to a wholesaler who then sells to a retailer the retailer then sells the product to the end consumer 1this level may add the jobber this level adds the role of the individual who may assemble products from a variety of producers store them sell them to retailers and act as a middle man for wholesalers and retailers a distribution channel also known as placement can be part of a company s marketing strategy which also includes the product promotion and price distribution channels in the digital eradigital technology has transformed the way businesses especially small businesses use direct channels of distribution with increasing consumer demand for online shopping and easy to use e commerce tools direct selling means more success for businesses rather than having to rely on relationships with retailers to sell their products software and artificial intelligence ai sales technology allows companies to manage sales and automatically achieve high customer relationship management crm online advertising through social networks and search engines targets specific areas or demographics and social media networks are increasingly considered the industry standard and are changing traditional marketing strategies if a company continues to use indirect channels of distribution digital technology also allows it to manage relationships with wholesale and retail partners more efficiently choosing the right distribution channelnot all distribution channels work for all products so companies need to choose the right one the channel should align with the firm s overall mission and strategic vision including its sales goals the method of distribution should add value to the consumer do consumers want to speak to a salesperson will they want to handle the product before they make a purchase or do they want to purchase it online with no hassles answering these questions can help companies determine which channel they choose secondly the company should consider how quickly it wants its product s to reach the buyer certain products are best served by a direct distribution channel such as meat or produce while others may benefit from an indirect channel if a company chooses multiple distribution channels such as selling products online and through a retailer the channels should not conflict with one another companies should strategize so one channel doesn t overpower the other | |
what is a distribution channel and what components does it have | the term distribution channel refers to the methods used by a company to deliver its products or services to the end consumer it often involves a network of intermediary businesses such as manufacturers wholesalers and retailers selecting and monitoring distribution channels is a key component of managing supply chains | |
what is the difference between direct and indirect distribution channels | direct distribution channels are those that allow the manufacturer or service provider to deal directly with its end customer for example a company that manufactures clothes and sells them directly to its customers using an e commerce platform would be utilizing a direct distribution channel by contrast if that same company were to rely on a network of wholesalers and retailers to sell its products then it would be using an indirect distribution channel | |
how is placement important in a distribution channel | placement is the way a company ensures its target market has access to its products or services in the location where they would be most likely to look for that product or service an effective distribution system ensures that products are placed in the right location as needed the bottom linea distribution channel is the network of businesses or intermediaries through which a good or service passes until it reaches the end consumer distribution channels can contain many levels or intermediaries such as wholesalers or retailers as products move from manufacturer to consumer the introduction of e commerce platforms has streamlined distribution enabling producers to sell directly to consumers | |
what is a distribution in kind | a distribution in kind also referred to as a distribution in specie is a payment made in the form of securities or other property rather than in cash a distribution in kind may be made in several different situations including the payment of a stock dividend or inheritance or taking securities out of a tax deferred account it can also refer to the transfer of an asset to a beneficiary over the option of liquidating the position and transferring the cash understanding distributions in kindinvestors can invest in a company by buying bonds or stocks bonds pay investors a return in the form of interest payments stocks pay investors a return in the form of dividends and share price appreciation a dividend or share buyback is a distribution of cash to investors in general companies that are doing well pay out healthy and growing dividends these companies also buy back stock companies with declining earnings may be forced to buy back stock or pay dividends with borrowed funds another alternative is to distribute dividends in kind a distribution in kind may also be employed for tax reasons in certain situations receiving appreciated property directly can result in a lower tax bill versus selling the property and receiving the value of the property in cash some funds deliver distributions in kind to investors after a certain threshold if an investor redeems shares in the fund over the threshold the remainder of the redemption value is paid in kind with shares of the fund the reason for doing this is to prevent large tax hits in the event of high redemption activity advantages of distributions in kindin kind distributions are not just advantageous for the company investors in tax deferred accounts like to receive distributions in kind because they help to reduce taxes people who inherit shares generally receive them in kind for this reason investors with individual retirement plans can also take distributions in kind such as for the required minimum distributions rmds they have to take this means people can take the actual stocks and bonds out of the account as a distribution without liquidating them distributions in kind can be used for an entire required minimum distribution rmd investors who wish to keep fully invested accounts may find this to be a valuable option distributions in kind are also good for stocks that are undervalued or may go up significantly this allows the investor to record the profit from share price appreciation as a capital gain rather than as ordinary income which is generally taxed at a higher rate in kind distributions are also a favored method for distributing proceeds in the venture capital and private equity fields instead of liquidating holdings and making cash distributions to limited partners funds hand the investors equivalent securities to avoid capital gains tax on liquidated holdings distributions in kind in real estate and trustsdistributions in kind for real estate transactions may not be exempt from capital gains tax the company or organization making an in kind distribution of property instead of cash will still have to pay capital gains tax incurred by any appreciation in the property s price a similar case exists for transfers made to estates or trusts by a settlor such transfers of assets are taxable and so the settlor is required to report capital gains or losses and the tax due if any on their income tax returns | |
what is a required minimum distribution | a required minimum distribution rmd is the amount of money that you must withdraw from a retirement account each year after you reach a certain age 72 or 73 depending on your birth year it is a rule established by the internal revenue service irs to ensure that the funds in your retirement account are being withdrawn rather than kept in a tax sheltered account indefinitely as for example an eventual inheritance for your heirs if you re 72 or 73 and still working you can delay taking rmds from your workplace plan such as a 401 k until you retire unless you own 5 or more of the business that s sponsoring the retirement plan 1 | |
how does capital gains tax compare to income tax | capital gains taxes are typically lower than income taxes the capital gains tax ranges from 0 to 20 with a few exceptions some stock and collectibles might be taxed at a 28 rate and real estate gains can be up to 25 income taxes on the other hand go even higher up to 37 the 2024 tax brackets are 10 12 22 24 32 35 and 37 | |
what s the difference between dividends and distributions | both dividends and distributions serve as payouts for investors however they re taxed differently dividends are with after tax funds whereas distributions are with before tax funds the bottom linenot all distributions are made in cash some are made in kind the most common form of distribution in kind is when a company pays a dividend in stock rather than in cash distributions in kind can also be used in real estate trusts venture capital and private equity primarily for tax reasons | |
what is distribution management | distribution management refers to the process of overseeing the movement of goods from supplier or manufacturer to point of sale it is an overarching term that refers to numerous activities and processes such as packaging inventory warehousing supply chain and logistics distribution management is an important part of the business cycle for distributors and wholesalers the profit margins of businesses depend on how quickly they can turn over their goods the more they sell the more they earn which means a better future for the business having a successful distribution management system is also important for businesses to remain competitive and to keep customers happy understanding distribution managementdistribution management is critical to a company s ability to successfully attract customers and operate profitably executing it successfully requires effective management of the entire distribution process the larger a corporation or the greater the number of supply points a company has the more it will need to rely on automation to effectively manage the distribution process modern distribution management encompasses more than just moving products from point a to point b it also involves gathering and sharing relevant information that can be used to identify key opportunities for growth and competitiveness in the market most progressive companies now use their distribution forces to obtain market intelligence which is vital in assessing their competitive position there are basically two types of distribution commercial distribution commonly known as sales distribution and physical distribution better known as logistics distribution involves diverse functions such as customer service shipping warehousing inventory control private trucking fleet operations packaging receiving materials handling along with plant warehouse store location planning and the integration of information the goal is to achieve ultimate efficiency in delivering raw materials and parts both partially and completely finished products to the right place and time in the proper condition physical distribution planning should align with the overall channel strategy advantages of a distribution management strategyaside from keeping profits up there are many reasons a company may want to use a distribution management strategy first it keeps things organized if there was no proper management system in place retailers would be forced to hold stock in their own locations a bad idea especially if the seller lacks proper storage space a distribution management system also makes things easier for the consumer it allows them to visit one location for a variety of different products if the system didn t exist consumers would have to visit multiple locations just to get what they need putting a proper distribution management system in place also alleviates any potential for errors in delivery as well as the times products need to be delivered businesses can adopt distribution management strategies through electronic platforms which can help simplify the process and boost product sales distribution management as a marketing functionthe fundamental idea of distribution management as a marketing function is that the management of distribution happens in an ecosystem that also involves the consideration of the following effective distribution management involves selling your product while assuring sufficient stocks in channels while managing promotions in those channels and their varying requirements it also involves making sure a supply chain is efficient enough that distribution costs are low enough to allow a product to be sold at the right price thus supporting your marketing strategy and maximizing profit | |
how does distribution management impact business | distribution management is a key leg in the business cycle for both distributors and wholesalers with company sales and ongoing profitability impacted by how quickly and efficiently a company can sell and distribute their products | |
what activities occur during distribution management | distribution management involves moving finished goods from a manufacturer or supplier to the so called end user the process includes warehousing inventory management packing shipping and delivery | |
what are the main distribution channels | distribution channels are the intermediaries through which goods or services pass on their way to the final buyer or consumer the main channels include wholesalers retailers distributors and in some cases the internet | |
what is a distribution network | in a supply chain a distribution network is an interconnected group of storage facilities and transportation systems that receive inventories of goods and then deliver them to customers it is an intermediate point to get products from the manufacturer to the end customer either directly or through a retail network a fast and reliable distribution network is essential in today s instant gratification society of consumers understanding a distribution networkdeveloping an efficient distribution network is one of the most critical aspects of the success of a company it is a component of strategic planning that allows a company s products to reach customers quickly and efficiently while at the same time keeping costs low for the company so that they may realize larger profit margins the supply chain for goods can involve a far reaching distribution network depending on the product and where the end customers are located a manufacturer may have a distribution network to serve wholesalers who in turn have their own network to ship to distribution networks operated by retailers who at the last link of the supply chain would sell the goods in their retail stores alternatively a simplified supply chain could involve a manufacturer shipping finished products to its distribution network and then directly to end consumers location proximity to the customer and infrastructure quality are two important attributes of a distribution network additionally the storage handling and transportation functions at a distribution site are set up to suit the particular needs of the company to serve its customer base in a geographic area there can be a high level of sophistication at a single site and by extension the entire distribution network to optimally process order flow of finished goods whether a handful of large items such as farm tractors or thousands of skus for a retail chain for the entire distribution network a company must plan out needs for equipment workers information technology systems and transportation fleets the company must determine whether a hub and spoke distribution network is right for its business or a decentralized network distribution networks come at the post manufacturing part of a supply chain the flow of goods and services and include all stages that deliver final products into the hands of consumers real world examplesestablishing an effective distribution network requires a studied approach because it is increasingly considered a critical asset in this new age of e commerce walmart wmt for example with 190 distribution facilities as of 2020 is allocating more capital to build out additional fulfillment centers for its distribution network as it evolves with the competitive demands of the market as of july 2020 walmart s distribution network including its retail stores is 924 million square feet it is so large that in comparison the island of manhattan is 661 million square feet for even more efficiency walmart divides its distribution network into specific categories for example it has regional distribution centers food distribution centers fashion distribution centers and more this ensures that each distribution center is focused on one product area and is therefore perfectly designed to meet the needs of delivering that product quickly and at the lowest cost amazon amzn has also increased its distribution network building out enormous robotically controlled warehouses across the world and operating its own freight trucking fleets and cargo planes amazon has even discussed using autonomous drones to deliver goods to customers which would be an innovation in the distribution of goods amazon is a massive global retailer and therefore its distribution network spans many countries as of july 2020 amazon has 1 215 distribution facilities in 21 countries amazon primarily breaks its distribution network down into prime hubs fulfillment centers inbounds and outbound sortation centers and delivery stations | |
what is a distribution waterfall | a distribution waterfall is a way to allocate investment returns or capital gains among participants of a group or pooled investment commonly associated with private equity funds the distribution waterfall defines the pecking order in which distributions are allocated to limited and general partners usually the general partners receive a disproportionately larger share of the total profits relative to their initial investment once the allocation process is complete this is done to incentivize the fund s general partner to maximize profitability for its investors understanding distribution waterfallsa distribution waterfall describes the method by which capital is distributed to a fund s various investors as underlying investments are sold for gains essentially the total capital gains earned are distributed according to a cascading structure made up of sequential tiers hence the reference to a waterfall when one tier s allocation requirements are fully satisfied the excess funds are then subject to the allocation requirements of the next tier and so on though waterfall schedules may be customized generally the four tiers in a distribution waterfall are hurdle rates for the schedule also may be tiered depending on the total amount of carried interest of the general partners typically the more carried interest the higher the hurdle rate additionally a feature called clawback is frequently included in the fund prospectus and is meant to protect investors from paying more incentive fees than required in case of such an occurrence the manager is obligated to pay back the excess fees american vs european waterfall structuresinvestment waterfall mechanics are detailed in the distribution section of the private placement memorandum ppm there are two common types of waterfall structures american which favors the general partner and european which is more investor friendly | |
why is it called a distribution waterfall | imagine a waterfall cascading down into a series of vertically aligned buckets the water represents money and the buckets represent investors partners or stakeholders the water fills the first bucket first the second bucket will fill only after the first is completely full and spills over as water flows more buckets are filled in the order in which they appear | |
what s the key difference between an american and european distribution waterfall | in the european style distribution waterfall investors are given precedent over fund managers whereas managers may be paid ahead of investors using the american style waterfall | |
how do private equity and hedge fund managers get paid | often private equity and hedge funds will feature a two and twenty payment scheme under this the fund managers retain 2 of assets under management aum each year plus 20 of any profits returned above some hurdle rate or benchmark | |
what is a distribution yield | a distribution yield is the measurement of cash flow paid by an exchange traded fund etf real estate investment trust or another type of income paying vehicle rather than calculating the yield based on an aggregate of distributions the most recent distribution is annualized and divided by the net asset value nav of the security at the time of the payment understanding distribution yieldsdistribution yields can be used as a metric for cash flow comparisons for annuity and fixed income investments but basing the calculation on a single payment can distort the actual returns paid over longer periods the calculation for distribution yields employs the most recent distribution which may be interest a special dividend or a capital gain and multiplies the payment by 12 to get an annualized total the annualized total is then divided by the net asset value nav to determine the distribution yield while this metric is often used to compare fixed income investments the single payment calculation method can potentially extrapolate larger or smaller than normal payments into distribution yields that do not reflect the actual payments made over the trailing 12 months or another representative period of time calculating distribution yieldsthe distribution of one time special dividends can skew distribution yields higher than actual returns when a non recurring dividend is paid by a company in a fund s portfolio the payment is included with the recurring dividends for that month a yield calculated on a payment including a special dividend may reflect a larger distribution yield than is actually being paid by the fund yield calculations based on distributions composed of interest and recurring dividends are generally more accurate than those using one time or infrequent payments the exclusion of non recurring payments however can result in a distribution yield lower than the actual payouts during the preceding year distribution yields generally provide a snapshot of income payments for investors but the variables posed by capital gains distributions and special dividends can skew returns to determine true yield investors can total all distributions over the preceding 12 months and divide the sum by the nav at that time capital gains and distribution yieldmutual funds and etfs usually issue capital gains distributions on an annual basis these distributions represent the net trading profits realized during the year which are divided into long term and short term gains a distribution yield calculated using either of these payments has the potential to reflect an inaccurate annualized return for example calculating the yield based on a long term capital gain distribution greater than monthly interest payments results in a distribution yield higher than the amount paid to investors over the preceding year on the other hand a calculation using a capital gains distribution less than monthly interest payments results in a lower than actual distribution yield sec yield vs distribution yieldinvestors often consider and compare the sec yield also known as the 30 day yield with the distribution yield while making an investment decision while both estimates are estimates of bond returns they are calculated differently the sec yield is an annualized figure based on returns over the most recent 30 day period as outlined above the distribution yield on the other hand takes the most recent distribution multiplies it by 12 to get an annualized total and then divides the result by the nav opinions between analysts and investors are split over which yield is better to evaluate investment returns proponents of the sec yield point to the fact that calculations for distribution yield vary between bond funds making it an unreliable indicator of performance meanwhile calculations for the sec yield are standardized and determined by a centralized agency because it is based on yields from trailing periods the distribution yield is also considered to be an inaccurate representation of current economic circumstances according to vanguard the sec yield approximates the after expenses yield an investor would receive yearly assuming bonds are held till maturity and income is reinvested but bonds are rarely held till maturity by a majority of investors for the most part they are traded in the open market where conditions are constantly in a state of flux due to external circumstances in a 2008 note discussing the importance of bond yields research firm morningstar made the case that 12 month yields offer a more accurate picture than the sec yield because it accounts for 12 distinct dividend payments reflecting the bond s performance under a variety of different circumstances example of distribution yieldsuppose a fund is priced at 20 per share and collects 8 cents in interest payments during a month the interest is multiplied by 12 for an annualized total of 96 cents dividing 96 cents by 20 gives a distribution yield of 4 8 | |
what is divergence | divergence is when the price of an asset is moving in the opposite direction of a technical indicator such as an oscillator or is moving contrary to other data divergence warns that the current price trend may be weakening and in some cases may lead to the price changing direction there is positive and negative divergence positive divergence indicates a move higher in the price of the asset is possible negative divergence signals that a move lower in the asset is possible image by sabrina jiang investopedia 2021 | |
what does divergence tell you | divergence in technical analysis may signal a major positive or negative price move a positive divergence occurs when the price of an asset makes a new low while an indicator such as money flow starts to climb conversely a negative divergence is when the price makes a new high but the indicator being analyzed makes a lower high traders use divergence to assess the underlying momentum in the price of an asset and for assessing the likelihood of a price reversal for example investors can plot oscillators like the relative strength index rsi on a price chart if the stock is rising and making new highs ideally the rsi is reaching new highs as well if the stock is making new highs but the rsi starts making lower highs this warns the price uptrend may be weakening this is negative divergence the trader can then determine if they want to exit the position or set a stop loss in case the price starts to decline positive divergence is the opposite situation imagine the price of a stock is making new lows while the rsi makes higher lows with each swing in the stock price investors may conclude that the lower lows in the stock price are losing their downward momentum and a trend reversal may soon follow divergence is one of the common uses of many technical indicators primarily the oscillators the difference between divergence and confirmationdivergence is when the price and indicator are telling the trader different things confirmation is when the indicator and price or multiple indicators are telling the trader the same thing ideally traders want confirmation to enter trades and while in trades if the price is moving up they want their indicators to signal that the price move is likely to continue limitations of using divergenceas is true with all forms of technical analysis investors should use a combination of indicators and analysis techniques to confirm a trend reversal before acting on divergence alone divergence will not be present for all price reversals therefore some other form of risk control or analysis needs to be used in conjunction with divergence also when divergence does occur it doesn t mean the price will reverse or that a reversal will occur soon divergence can last a long time so acting on it alone could be mean substantial losses if the price doesn t react as expected | |
what is divergence | divergence is when the price of an asset is moving in the opposite direction of a technical indicator such as an oscillator or is moving contrary to other data divergence warns that the current price trend may be weakening and in some cases may lead to the price changing direction there is positive and negative divergence positive divergence indicates a move higher in the price of the asset is possible negative divergence signals that a move lower in the asset is possible image by sabrina jiang investopedia 2021 | |
what does divergence tell you | divergence in technical analysis may signal a major positive or negative price move a positive divergence occurs when the price of an asset makes a new low while an indicator such as money flow starts to climb conversely a negative divergence is when the price makes a new high but the indicator being analyzed makes a lower high traders use divergence to assess the underlying momentum in the price of an asset and for assessing the likelihood of a price reversal for example investors can plot oscillators like the relative strength index rsi on a price chart if the stock is rising and making new highs ideally the rsi is reaching new highs as well if the stock is making new highs but the rsi starts making lower highs this warns the price uptrend may be weakening this is negative divergence the trader can then determine if they want to exit the position or set a stop loss in case the price starts to decline positive divergence is the opposite situation imagine the price of a stock is making new lows while the rsi makes higher lows with each swing in the stock price investors may conclude that the lower lows in the stock price are losing their downward momentum and a trend reversal may soon follow divergence is one of the common uses of many technical indicators primarily the oscillators the difference between divergence and confirmationdivergence is when the price and indicator are telling the trader different things confirmation is when the indicator and price or multiple indicators are telling the trader the same thing ideally traders want confirmation to enter trades and while in trades if the price is moving up they want their indicators to signal that the price move is likely to continue limitations of using divergenceas is true with all forms of technical analysis investors should use a combination of indicators and analysis techniques to confirm a trend reversal before acting on divergence alone divergence will not be present for all price reversals therefore some other form of risk control or analysis needs to be used in conjunction with divergence also when divergence does occur it doesn t mean the price will reverse or that a reversal will occur soon divergence can last a long time so acting on it alone could be mean substantial losses if the price doesn t react as expected | |
what is a diversified company | a diversified company is a type of company that has multiple unrelated businesses or products unrelated businesses are those that one of the benefits of being a diversified company is that it buffers a business from dramatic fluctuations in any one industry sector however this model is also less likely to enable stockholders to realize significant gains or losses because it is not singularly focused on one business the best management teams can balance the alluring desires of business diversification with the practical pitfalls of growth and the challenges it brings with it | |
how a diversified company works | companies may become diversified by entering into new businesses on its own by merging with another company or by acquiring a company operating in another field or service sector one of the challenges facing diversified companies is the need to maintain a strong strategic focus to produce solid financial returns for shareholders instead of diluting corporate value through ill conceived acquisitions or expansions one common form of a diversified company is the conglomerate conglomerates are large companies that are made up of independent entities that operate in multiple industries many conglomerates are multinationals and multi industry corporations every one of a conglomerate s subsidiary businesses runs independently of the other business divisions but the subsidiaries management report to the senior management of the parent company taking part in many different businesses help a conglomerate s parent company cut back the risks from being in a single market doing so also helps the parent lower costs and use fewer resources but there are times when a company grows too big that it loses efficiency in order to deal with this the conglomerate may divest diversified companies in practicesome of the historically best known diversified companies are general electric 3m sara lee and motorola european diversified companies include siemens and bayer while diversified asian companies include hitachi toshiba and sanyo electric the general idea behind diversifying is the spread or smoothly of financial operational or geographic risk concentrations financial markets generally focus on two sources of risk unique or firm specific risk and the other systemic or market risk according to capital market theory only market risk is rewarded because a rational investor always has the opportunity to diversify thus eliminating unique or idiosyncratic risk knowing investors vary capital costs based on risk return profiles businesses often use a strategy to diversify themselves from within critics can point to entities growing for the sake of growth under the guise of diversification bigger businesses generally pay executives more enjoy more press and can fall prey to entrenchment and status quo whereas one observer might see diversification another may see bloat | |
what is a divestiture | a divestiture is the partial or full disposal of a business unit through sale exchange closure or bankruptcy a divestiture most commonly results from a management decision to cease operating a business unit because it is not part of a company s core competency a divestiture may also occur if a business unit is deemed to be redundant after a merger or acquisition if the disposal of a unit increases the sale value of the firm or if a court requires the sale of a business unit to improve market competition understanding divestituresa divestiture is the disposition or sale of an asset by a company as a way to manage its portfolio of assets as companies grow they may find they re in too many lines of business and must close some operational units to focus on more profitable lines many conglomerates face this problem companies may also sell off business lines if they are under financial duress for example an automobile manufacturer that sees a significant and prolonged drop in competitiveness may sell off its financing division to pay for the development of a new line of vehicles divested business units may be spun off into their own companies companies may be required to divest some of their assets as part of the terms of a merger or acquisition governments may divest some of their interests or property called privatization to raise money to pay off debt or give the private sector a chance to profit by divesting some of its assets a company may be able to cut its costs repay its outstanding debt reinvest focus on its core business es and streamline its operations this in turn can enhance shareholder value large companies experiencing unstable market conditions and competitive pressures may divest part of their business divesting assetsthere are many different reasons why a company may decide to sell off or divest itself of some of its assets here are some of the most common ones government regulation may require corporations to divest some of their assets especially to avoid a monopoly examples of divestituresdivestitures can come about in many different forms including the sale of a business unit to improve financial performance and due to an antitrust violation in 2023 meta formerly facebook sold the animation database giphy to shutterstock for 53 million that was an 83 loss from what the company had paid for giphy just three years earlier the sale was forced by u k regulators who believed that facebook s acquisition of the gif animation platform represented a violation of the country s antitrust laws in 2022 foods manufacturer kellogg announced its plans to split into three separate companies spinning off its cereal and plant based food brands while the legacy kellogg s company will focus on the frozen breakfast and snack foods that bring in 80 of the old company s revenue the spin offs will focus on the cereal markets and plant based foods | |
why are companies divesting from israel | in 2002 archbishop desmond tutu launched a campaign calling on international investors to divest from israel over the country s alleged colonization of the west bank and other occupied palestinian territories the calls for divestment have intensified since the israel hamas war an ongoing conflict that erupted after a surprise attack by hamas in october of 2023 activists claim that several high profile institutions have reduced or eliminated investments in israeli companies and businesses and that businesses within the country have taken an economic hit because of pressure campaigns | |
what led to the at t divestiture in 1982 | one of the most famous cases of court ordered divestiture involves the breakup of the old at t in 1982 the u s government determined at t controlled too large a portion of the nation s telephone service and brought antitrust charges against the company in 1974 the divestiture created seven different companies including one retaining the name at t as well as new equipment manufacturers the bottom linea divestiture happens when a company decides to sell or spin off part of its business into a new entity companies may divest in order to focus on a core competency raise cash or reduce exposure to an underperforming business segment they may also divest due to regulatory pressure if the combined entity has too large of a market share | |
what is divestment | divestment is the process of selling subsidiary assets investments or divisions of a company in order to maximize the value of the parent company also known as divestiture divestment is effectively the opposite of an investment and is usually done when that subsidiary asset or division is not performing up to expectations in some cases however a company may be forced to sell assets as a result of legal or regulatory action companies can also look to a divestment strategy to satisfy other strategic business financial social or political goals understanding divestmentdivestment involves a company selling off a portion of its assets often to improve company value and obtain higher efficiency many companies will use divestment to sell off peripheral assets that enable their management teams to regain sharper focus on the core business divestment can result from a corporate optimization strategy or be driven by extraneous circumstances such as when investments are reduced and firms withdraw from a particular geographic region or industry due to political or social pressure one major recent instance is the impact of the pandemic remote work and the rise of technology use and their impact on offices and commercial real estate items that are divested may include a subsidiary business department real estate holding equipment and other property or financial assets proceeds from these sales are typically used to pay down debt make capital expenditures fund working capital or pay a special dividend to a company s shareholders while most divestment transactions are premeditated company initiated efforts this process could be forced upon them at times as a result of regulatory action regardless of why a company chooses to adopt a divestment strategy asset sales will generate revenue that can be used elsewhere in the organization in the short run this increased revenue will benefit organizations in that they can divert the funds to help another division that is not quite performing up to expectations the norm is that divestment is done within the framework of restructuring and optimization activities the exception would be if the company was being forced to divest a profitable asset or division for political or social reasons that could lead to a loss of revenue types of divestmentsdivestment will typically take the form of a spinoff equity carve out or direct sale of assets spinoffs are non cash and tax free transactions when a parent company distributes shares of its subsidiary to its shareholders thus the subsidiary becomes a stand alone company whose shares can be traded on a stock exchange spinoffs are most common among companies that consist of two separate and distinct businesses that have different growth or risk profiles under the equity carve out scenario a parent company sells a certain percentage of the equity in its subsidiary to the public through a stock market offering equity carve outs are often tax free transactions that involve an equal exchange of cash for shares because the parent company typically retains a controlling stake in the subsidiary equity carve outs are most common among companies that need to finance growth opportunities for one of their subsidiaries additionally equity carve outs allow companies to establish trading avenues for their subsidiaries shares and later dispose of the remaining stake under proper circumstances a direct sale of assets including entire subsidiaries is another common form of divestment in this case a parent company sells assets such as real estate or equipment to another party the sale of assets typically involves cash and may trigger tax consequences for a parent company if assets are sold at a gain this type of divestiture that occurs under duress may result in a fire sale with assets sold for below book value major reasons for divestmentthe most common reason for divestment is to eliminate nonperforming noncore businesses companies especially large corporations or conglomerates may own different business units that operate in very different industries and that either can be quite difficult to manage or distract from their core competencies divesting a nonessential business unit can free up time and capital for a parent company s management to focus on its primary operations and expertise for instance in 2014 general electric ge decided to divest its noncore financing arm by selling its shares of synchrony financial as a spinoff syf on the new york stock exchange additionally companies divest their assets to obtain funds shed an underperforming subsidiary respond to regulatory action and realize value through a breakup if companies are going through the process of bankruptcy they will often be required by legal ruling to sell off parts of the business finally companies may engage in divestment for political and social reasons such as selling assets contributing to global warming | |
what does divestment involve | divestment involves a company selling off a portion of its assets this is often done to improve company value and obtain higher efficiency divestment lets many companies sell off peripheral assets to enable their management teams to better focus on the core business | |
what forms does divestment take | divestment typically takes one of three forms | |
why does divestment occur | most often it s for a company to eliminate nonperforming noncore businesses other reasons include the bottom linedivestment which is also called divestiture is the process of selling subsidiary assets investments or divisions of a company to maximize the parent company s value it is done when divestment is the opposite of investment | |
how do dividends work | dividends are the percentage of a company s earnings that is paid to its shareholders as their share of the profits dividends are generally paid quarterly with the amount decided by the board of directors based on the company s most recent earnings dividends may be paid in cash or additional shares when a company announces a dividend it also will announce the payment date on which the dividend will be paid into the shareholders accounts the dividend yield of a stock is the dividend amount paid per share and is expressed as a percentage of the company s share price such as 2 5 1not all companies pay dividends to the owners of common shares owners of preferred shares are guaranteed a set dividend payment investopedia julie bangunderstanding dividendsdividends must be approved by the shareholders by voting rights 2 although cash dividends are common dividends can also be issued as shares of stock various mutual funds and exchange traded funds etfs also pay dividends a dividend is a reward paid to the shareholders for their investment in a company and it usually is paid out of the company s net profits some companies continue to make dividend payments even when their profits don t justify the expense a steady track record of paying dividends makes stocks more attractive to investors common stock shareholders of dividend paying companies are eligible to receive a distribution as long as they own the stock before the ex dividend date this is essentially a cutoff date for assigning the dividend payment when shares change hands dividends are paid on a schedule picked by the board they may be paid monthly quarterly or annually for example walmart inc wmt and unilever ul make regular quarterly dividend payments 34companies can also issue non recurring special dividends either individually or in addition to a scheduled dividend united bancorp inc declared a 15 cents per share special dividend on feb 23 2023 5dividend paying companieslarger established companies with predictable profits are often the best dividend payers companies within the following industry sectors maintain a regular record of dividend payments companies structured as master limited partnerships mlps and real estate investment trusts reits are required to make specified distributions to their shareholders 67funds may also issue regular dividend payments as stated in their investment objectives young fast growing companies such as those in the technology and biotechnology sectors may not pay regular dividends since they may be in the early stages of development and retain all of their earnings for research and development business expansion and operational activities investors tend to forgive the lack of a dividend if the company s stock price is growing rapidly not surprisingly once a company begins paying dividends it finds it difficult to reduce or suspend the payments this is seen as a sign of falling profits not to mention a loss of income to shareholders important dividend datesdividend payments follow a chronological order of events and the associated dates are important to determining which shareholders qualify to receive the dividend payment | |
how do dividends affect a stock s share price | a stock s share price will change to reflect a dividend payment as an example a company that is trading at 60 per share declares a 2 dividend as the news becomes public the share price may increase by 2 and hit 62 the stock might trade at 63 one business day before the ex dividend date on the ex dividend date it s adjusted by 2 and begins trading at 61 at the start of the trading session on the ex dividend date because anyone buying on the ex dividend date will not receive the dividend | |
why do companies pay dividends | many investors buy stocks for their dividends rather than for their potential for share price growth some extraordinarily successful companies like coca cola co are prized more by investors for their steady dividends than for their potential price growth dividends are often expected by shareholders as their share of the company s profits dividend payments reflect positively on a company and help maintain investors trust a high value dividend declaration can indicate that a company is doing well and has generated good profits but some may interpret it as an indication that the company does not have much going in the way of new projects to generate better returns in the future it s using its cash to pay shareholders instead of reinvesting it into growth a company with a long history of dividend payments that declares a reduction or elimination of its dividend signals trouble at t inc cut its annual dividend in half to 1 11 on feb 1 2022 and its shares fell 4 that day 910however a dividend cut does not necessarily translate into bad news the company s management may have a plan for investing the money in a high return project that could magnify returns for shareholders in the long run mutual fund dividendsdividends paid by funds are different from dividends paid by companies funds employ the principle of net asset value nav which reflects the valuation of their holdings or the price of the assets that a fund has in its portfolio 11regular dividend payments should not be misread as a stellar performance by the fund for example a bond investing fund may pay monthly dividends because it receives monthly interest on its interest bearing holdings and merely transfers the income from the interest fully or partially to the fund s investors a stock investing fund pays dividends from the earnings received from the many stocks held in its portfolio or by selling a certain share of stocks and distributing capital gains | |
are dividends irrelevant | economists merton miller and franco modigliani argued that a company s dividend policy is irrelevant and has no effect on its stock price or its cost of capital a shareholder may be indifferent to a company s dividend policy especially if the dividend is used to buy more shares if a dividend payout is seen as inadequate an investor can sell shares to generate cash in either case the combination of the value of an investment in the company and the cash they hold will remain the same miller and modigliani thus conclude that dividends are irrelevant and investors shouldn t care about the firm s dividend policy because they can create their own synthetically 12this argument has not persuaded the many investors who consider dividends to be an attractive investment incentive | |
how to buy dividend paying investments | investors seeking dividend investments have several options including stocks mutual funds and exchange traded funds etfs the dividend discount model or the gordon growth model can help investors choose individual stocks these techniques rely on anticipated future dividend streams to value shares to compare multiple stocks based on their dividend payment performance investors can use the dividend yield factor which measures the dividend in terms of a percentage of the current market price of the company s share the dividend rate can be quoted in terms of the dollar amount each share receives as dividends per share dps in addition to dividend yield another important performance measure to assess the returns generated from a particular investment is the total return factor this figure accounts for interest dividends and increases in share price among other capital gains tax is another important consideration when investing in dividend gains investors in high tax brackets often prefer dividend paying stocks if their jurisdiction allows zero or comparatively lower tax on dividends for example greece and slovakia have a lower tax on dividend income for shareholders while dividend gains are tax exempt in hong kong 1314 | |
how often are dividends distributed to shareholders | dividends are commonly distributed to shareholders quarterly though some companies may pay dividends semi annually payments can be received as cash or as reinvestment into shares of company stock | |
what is an example of a dividend | if a company s board of directors decides to issue an annual 5 dividend per share and the company s shares are worth 100 the dividend is 5 if the dividends are issued every quarter each distribution is 1 25 | |
why are dividends important | dividends signal that a company has stable cash flow and is generating profits they also provide investors with recurring income dividend payouts may also help provide insight into a company s intrinsic value many countries also offer preferential tax treatment to dividends treating them as tax free income 1516the bottom linedividends are seen by many investors as a sign that a company is earning a healthy profit and more to the point is willing to share it with its investors not all companies pay dividends and not all investors care about them if you do look for the best dividend paying stocks for your money | |
what is a dividend aristocrat | a dividend aristocrat is a company in the s p 500 index that not only consistently pays a dividend to shareholders but annually increases the size of its payout a company will be considered a dividend aristocrat if it raises its dividends consistently for at least the past 25 years some aficionados of dividend aristocrats rank them according to additional factors such as company size and liquidity for instance having a market capitalization in excess of 3 billion understanding the dividend aristocratcompanies that are able to maintain high dividend yields are relatively rare and their businesses are usually very stable they tend to have products that are recession proof allowing them to keep taking in profits and paying dividends even while other companies are struggling there are usually fewer than 100 dividend aristocrats at any given time in 2021 just 65 dividend aristocrats were listed among the standard poor s 500 they can be found in many sectors including health care retail oil and gas and construction startup companies and high flyers in technology rarely offer dividends at all their management teams prefer to reinvest any earnings back into the operations to help sustain higher than average growth some fledgling companies even run at a net loss and don t have the cash on hand to pay dividends large established companies with predictable profits are better dividend payers in general many do not enjoy regular robust growth or a constantly rising stock price these companies tend to issue regular dividends as an alternative way of rewarding their shareholders examples of dividend aristocratsanalysts have many ways to evaluate dividend aristocrats as investments they include the growth of the stock prices of companies over time their resilience to a downturn in the stock market and their expectations for future prosperity that means there is an ever changing hierarchy among dividend aristocrats forbes selected its top dividend aristocrats for 2021 based on its expectations of the companies total future returns note that these choices particularly exxon mobil were made prior to the 2021 collapse in oil prices sparked by the spread of the novel coronavirus 65 stocks meet the criteria required to be a dividend aristocrat in 2021 some examples include two ways to track the performance of these stocks include the s p dividend aristocrats index and the s p high yield dividend aristocrats index advantages and disadvantages of dividend aristocratsa company that pays out an ever increasing dividend is ideal for investors looking for stable income and being such a company is a positive signal that the firm is on sound financial footing remember however that a dividend is a portion of a firm s profits that it is paying to its owners shareholders in the form of cash any money that is paid out in a dividend is not reinvested in the business if a business is paying shareholders too high a percentage of its profits it may be a sign that management prefers not to reinvest in the company given a lack of growth opportunities therefore a dividend aristocrat may be squandering growth opportunities or not have any such opportunities to redirect profits moreover company management can use dividends to placate frustrated investors when the stock isn t appreciating that said if a dividend aristocrat is able to grow the payout it gives to shareholders on a regular basis it does imply some organic level of growth in order to fund those payments provides stable income for shareholders | |
is a positive signal indicating strong financials | dividends may be paid in lieu of growth opportunitiesdividend stocks may produce lesser capital gainsdividend payments are taxable eventsdividend aristocrats vs dividend kingssimilar to the dividend aristocrats dividend kings are companies that are known for paying out dividends consistently over time while a dividend aristocrat must be a member of the s p 500 and have an increasing dividend payout over 25 years or more to qualify as a dividend king a firm must only meet one hurdle paying an increasing dividend consistently for at least 50 years some dividend kings will also be dividend aristocrats and not all aristocrats will be dividend kings for instance they have not been around for 50 years or are not in the s p 500 it is less common for companies to consistently increase their dividends for over half a century so the number of dividend kings tends to be fewer than their aristocrat cousins dividend king the tootsie roll co tr has increased its annual cash dividend for 54 consecutive years and has paid continuous quarterly dividends for even longer identifying other quality dividend payersin general companies have dividend policies that fall into three categories a stable dividend policy a constant dividend policy or a residual dividend policy dividend aristocrat faqsall companies that are dividend aristocrats are members of the s p 500 and so one can identify those stocks and construct a dividend focused portfolio in 2021 there were 65 such stocks which can be found by searching the internet as several financial sites maintain up to date lists of the dividend aristocrats like the ones offered by dogs of the dow or sure dividend the weight given to dividend stocks will depend on several factors including your risk tolerance time horizon need for current income and tax situation because dividend aristocrats tend to be large mature companies with fewer growth prospects they can be less volatile but also carry lower expected returns retired individuals may especially benefit from the relatively lower risk and additional income that these stocks provide this will depend on the time period examined as of 2021 the dividend aristocrats index has performed almost identically to the broader market over the last decade with a 14 3 total annual return for the dividend aristocrats versus 14 2 for the s p 500 index however on a risk adjusted basis the dividend aristocrats have exhibited somewhat lower volatility than the broader market since these companies are mature and have weathered economic downturns before increasing dividends during recessions no less it can make sense to seek these stocks out as safe havens while growth stocks flounder | |
what is the dividend discount model ddm | the dividend discount model ddm is a quantitative method used for predicting the price of a company s stock based on the theory that its present day price is worth the sum of all of its future dividend payments when discounted back to their present value it attempts to calculate the fair value of a stock irrespective of the prevailing market conditions and takes into consideration the dividend payout factors and the market expected returns if the value obtained from the ddm is higher than the current trading price of shares then the stock is undervalued and qualifies for a buy and vice versa investopedia zoe hansenunderstanding the ddma company produces goods or offers services to earn profits the cash flow earned from such business activities determines its profits which gets reflected in the company s stock prices companies also make dividend payments to stockholders which usually originate from business profits the ddm model is based on the theory that the value of a company is the present worth of the sum of all of its future dividend payments time value of moneyimagine you gave 100 to your friend as an interest free loan after some time you go to them to collect your loaned money your friend gives you two options most individuals will opt for the first choice taking the money now will allow you to deposit it in a bank if the bank pays a nominal interest say 5 then after a year your money will grow to 105 it will be better than the second option where you get 100 from your friend after a year mathematically future value present value 1 interest rate for one year begin aligned textbf future value qquad mathbf textbf present value mathbf 1 textbf interest rate mathbf hspace 2 65in textit for one year end aligned future value present value 1 interest rate for one year the above example indicates the time value of money which can be summarized as money s value is dependent on time looking at it another way if you know the future value of an asset or a receivable you can calculate its present worth by using the same interest rate model rearranging the equation present value future value 1 interest rate begin aligned textbf present value frac textbf future value mathbf 1 textbf interest rate end aligned present value 1 interest rate future value in essence given any two factors the third one can be computed the dividend discount model uses this principle it takes the expected value of the cash flows a company will generate in the future and calculates its net present value npv drawn from the concept of the time value of money tvm 1essentially the ddm is built on taking the sum of all future dividends expected to be paid by the company and calculating its present value using a net interest rate factor also called discount rate expected dividendsestimating the future dividends of a company can be a complex task analysts and investors may make certain assumptions or try to identify trends based on past dividend payment history to estimate future dividends one can assume that the company has a fixed growth rate of dividends until perpetuity which refers to a constant stream of identical cash flows for an infinite amount of time with no end date for example if a company has paid a dividend of 1 per share this year and is expected to maintain a 5 growth rate for dividend payment the next year s dividend is expected to be 1 05 2alternatively if one spots a certain trend like a company making dividend payments of 2 00 2 50 3 00 and 3 50 over the last four years then an assumption can be made about this year s payment being 4 00 such an expected dividend is mathematically represented by d discounting factorshareholders who invest their money in stocks take a risk as their purchased stocks may decline in value against this risk they expect a return compensation similar to a landlord renting out their property for rent the stock investors act as money lenders to the firm and expect a certain rate of return a firm s cost of equity capital represents the compensation the market and investors demand in exchange for owning the asset and bearing the risk of ownership 3this rate of return is represented by r and can be estimated using the capital asset pricing model capm or the dividend growth model however this rate of return can be realized only when an investor sells their shares the required rate of return can vary due to investor discretion 4companies that pay dividends do so at a certain annual rate which is represented by g the rate of return minus the dividend growth rate r g represents the effective discounting factor for a company s dividend the dividend is paid out and realized by the shareholders the dividend growth rate can be estimated by multiplying the return on equity roe by the retention ratio the latter being the opposite of the dividend payout ratio since the dividend is sourced from the earnings generated by the company ideally it cannot exceed the earnings the rate of return on the overall stock has to be above the rate of growth of dividends for future years otherwise the model may not sustain and lead to results with negative stock prices that are not possible in reality ddm formulabased on the expected dividend per share and the net discounting factor the formula for valuing a stock using the dividend discount model is mathematically represented as value of stock edps cce dgr where e d p s expected dividend per share c c e cost of capital equity d g r dividend growth rate begin aligned textit textbf value of stock frac textit textbf edps textbf textit cce textbf textit dgr textbf where edps text expected dividend per share cce text cost of capital equity dgr text dividend growth rate end aligned value of stock cce dgr edps where edps expected dividend per sharecce cost of capital equitydgr dividend growth rate since the variables used in the formula include the dividend per share and the net discount rate represented by the required rate of return or cost of equity and the expected rate of dividend growth the value comes with certain assumptions since dividends and their growth rate are key inputs to the formula the ddm is believed to be applicable only to companies that pay out regular dividends however it can still be applied to stocks that do not pay dividends by making assumptions about what dividend they would have paid otherwise 5ddm variationsthe ddm has many variations that differ in complexity while not accurate for most companies the simplest iteration of the dividend discount model assumes zero growth in the dividend in which case the value of the stock is the value of the dividend divided by the expected rate of return the most common and straightforward calculation of a ddm is known as the gordon growth model ggm which assumes a stable dividend growth rate and was named in the 1960s after american economist myron j gordon 6this model assumes a stable growth in dividends year after year to find the price of a dividend paying stock the ggm takes into account three variables d the estimated value of next year s dividend r the company s cost of capital equity g the constant growth rate for dividends in perpetuity begin aligned d text the estimated value of next year s dividend r text the company s cost of capital equity g text the constant growth rate for dividends in perpetuity end aligned d the estimated value of next year s dividendr the company s cost of capital equityg the constant growth rate for dividends in perpetuity using these variables the equation for the ggm is price per share d r g text price per share frac d r g price per share r gd a third variant exists as the supernormal dividend growth model which takes into account a period of high growth followed by a lower constant growth period during the high growth period one can take each dividend amount and discount it back to the present period for the constant growth period the calculations follow the ggm model all such calculated factors are summed up to arrive at a stock price examples of the ddmassume company x paid a dividend of 1 80 per share this year the company expects dividends to grow in perpetuity at 5 per year and the company s cost of equity capital is 7 the 1 80 dividend is the dividend for this year and needs to be adjusted by the growth rate to find d1 the estimated dividend for next year this calculation is d1 d0 x 1 g 1 80 x 1 5 1 89 next using the ggm company x s price per share is found to be d 1 r g 1 89 7 5 94 50 a look at the dividend payment history of leading american retailer walmart inc wmt indicates that it has paid out annual dividends of 2 08 2 12 2 16 2 20 and 2 24 between 2019 and 2024 in chronological order 7one can see a pattern of a consistent increase of 4 cents in walmart s dividend each year which equals an average growth of about 2 assume an investor has a required rate of return of 5 using an estimated dividend of 2 28 at the beginning of 2024 the investor would use the dividend discount model to calculate a per share value of 2 28 05 02 76 shortcomings of the ddmwhile the ggm method of the ddm is widely used it has two well known shortcomings the model assumes a constant dividend growth rate in perpetuity this assumption is generally safe for very mature companies that have an established history of regular dividend payments however ddm may not be the best model to value newer companies that have fluctuating dividend growth rates or no dividends at all one can still use the ddm on such companies but with more and more assumptions the precision decreases the second issue with the ddm is that the output is very sensitive to the inputs for example in the company x example above if the dividend growth rate is lowered by 10 to 4 5 the resulting stock price is 75 24 which is more than a 20 decrease from the earlier calculated price of 94 50 the model also fails when companies may have a lower rate of return r compared to the dividend growth rate g this may happen when a company continues to pay dividends even if it is incurring a loss or relatively lower earnings 5using the ddm for investmentsall ddm variants especially the ggm allow valuing a share exclusive of the current market conditions it also aids in making direct comparisons among companies even if they belong to different industrial sectors 8investors who believe in the underlying principle that the present day intrinsic value of a stock is a representation of their discounted value of future dividend payments can use it for identifying overbought or oversold stocks if the calculated value comes to be higher than the current market price of a share it indicates a buying opportunity as the stock is trading below its fair value as per the ddm however one should note that the ddm is another quantitative tool available in the big universe of stock valuation tools like any other valuation method used to determine the intrinsic value of a stock one can use the ddm in addition to the several other commonly followed stock valuation methods since it requires lots of assumptions and predictions it may not be the sole best way to base investment decisions | |
what are the types of dividend discount models | the main types of dividend discount models are the gordon growth model the two stage model the three stage model and the h model |
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