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is the company still run by its founders or has the board shuffled in a lot of new faces younger companies tend to be founder led research the bios of management to find out their level of expertise and experience bio information can be found on the company s website | whether founders and executives hold a high proportion of shares and whether they have been selling shares recently is a significant factor in due diligence high ownership by top managers is a plus and low ownership is a red flag shareholders tend to be best served when those running the company have a vested interest in stock performance the p e ratio gives a sense of the expectations that investors have for the stock s near term performance the company s consolidated balance sheet will show its assets and liabilities as well as how much cash is available check the company s level of debt and how it compares to others in the industry debt is not necessarily a bad thing depending on the company s business model and industry but make sure those debts are highly rated by the rating agencies some companies and whole industries like oil and gas are very capital intensive while others require few fixed assets and capital investment determine the debt to equity ratio to see how much positive equity the company has typically the more cash a company generates the better an investment it s likely to be because the company can meet its debts and still grow if the figures for total assets total liabilities and stockholders equity change substantially from one year to the next try to figure out why reading the footnotes that accompany the financial statements and the management s discussion in the quarterly or annual reports can shed light on what s really happening in a company the firm could be preparing for a new product launch accumulating retained earnings or in a state of financial decline investors should research both the short term and long term price movements of the stock and whether the stock has been volatile or steady compare the profits generated historically and determine how it correlates with the price movement keep in mind that past performance does not guarantee future price movements if you re a retiree looking for dividends for example you might not want a volatile stock price stocks that are continuously volatile tend to have short term shareholders which can add extra risk for certain investors investors should know how many shares outstanding the company has and how that number relates to the competition is the company planning on issuing more shares if so the stock price might take a hit investors should find out what the consensus of wall street analysts is for earnings growth revenue and profit estimates for the next two to three years investors should also look for discussions of long term trends affecting the industry and company specific news about partnerships joint ventures intellectual property and new products or services be sure to understand both the industry wide risks and company specific risks are there outstanding legal or regulatory matters is there unsteady management investors should play devil s advocate at all times picturing worst case scenarios and their potential outcomes on the stock if a new product fails or a competitor brings a new and better product forward how would this affect the company how would a jump in interest rates affect the company once you ve completed the steps outlined above you ll have a better sense of the company s performance and how it stacks up to the competition you will be better informed to make a sound decision due diligence basics for startup investments | |
when considering investing in a startup some of the 10 steps above are appropriate while others just aren t possible because the company doesn t have the track record here are some startup specific moves | m a due diligencein the mergers and acquisitions m a world a company that is considering a deal will perform a financial analysis on a target company the due diligence might also include an analysis of future growth the acquirer may ask questions that address the structuring of the acquisition the acquirer is also likely to look at the current practices and policies of the target company and perform a shareholder value analysis in traditional m a activity the acquiring firm deploys risk analysts who perform due diligence by studying costs benefits structures assets and liabilities that s known colloquially as hard due diligence increasingly however m a deals are also subject to the study of a company s culture management and other human elements via soft due diligence in an m a deal hard due diligence is the battlefield of lawyers accountants and negotiators typically hard due diligence focuses on earnings before interest taxes depreciation and amortization ebitda the aging of receivables and payables cash flow and capital expenditures in sectors such as technology or manufacturing additional focus is placed on intellectual property and physical capital other examples of hard due diligence activities include conducting soft due diligence is not an exact science it should focus on how well a targeted workforce will mesh with the acquiring corporation s culture hard and soft due diligence intertwine when it comes to compensation and incentive programs these programs are not only based on real numbers making them easy to incorporate into post acquisition planning but they can also be discussed with employees and used to gauge cultural impact soft due diligence is concerned with employee motivation and compensation packages are specifically constructed to boost those motivations it is not a panacea or a cure all but soft due diligence can help the acquiring firm predict whether a compensation program can be implemented to improve the success of a deal soft due diligence can also concern itself with the target company s customers even if the target employees accept the cultural and operational shifts from the takeover the target customers and clients may well resent a change in service products or procedures this is why many m a analyses now include customer reviews supplier reviews and test market data | |
what exactly is due diligence | due diligence is a process or effort to collect and analyze information before making a decision it is a process often used by investors to assess risk it involves examining a company s numbers comparing the numbers over time and benchmarking them against competitors to assess an investment s potential in terms of growth | |
what is the purpose of due diligence | due diligence is primarily a way to reduce exposure to risk the process ensures that a party is aware of all the details of a transaction before they agree to it for example a broker dealer will give an investor the results of a due diligence report so that the investor is fully informed and cannot hold the broker dealer responsible for any losses | |
what is a due diligence checklist | a due diligence checklist is an organized way to analyze a company the checklist will include all the areas to be analyzed such as ownership and organization assets and operations the financial ratios shareholder value processes and policies future growth potential management and human resources | |
what is a due diligence example | examples of due diligence can be found in many areas of our daily lives for example conducting a property inspection before completing a purchase to assess the risk of the investment an acquiring company that examines a target firm before completing a merger or acquisition and an employer performing a background check on a potential recruit the bottom linedue diligence is a process or effort to collect and analyze information before making a decision or conducting a transaction so a party is not held legally liable for any loss or damage the term applies to many situations but most notably to business transactions due diligence is performed by investors who want to minimize risk broker dealers who want to ensure that a party to any transaction is fully informed of the details so that the broker dealer is not held responsible and companies who are considering acquiring another firm fundamentally doing your due diligence means that you have gathered the necessary facts to make a wise and informed decision | |
what is dumping | dumping is a term used in the context of international trade it s when a country or company exports a product at a price that is lower in the foreign importing market than the price in the exporter s domestic market because dumping typically involves substantial export volumes of a product it often endangers the financial viability of the product s manufacturer or producer in the importing nation investopedia nono floresunderstanding dumpingdumping is considered a form of price discrimination it occurs when a manufacturer lowers the price of an item entering a foreign market to a level that is less than the price paid by domestic customers in the originating country the practice is considered intentional with the goal of obtaining a competitive advantage in the importing market advantages and disadvantages of dumpingthe primary advantage of trade dumping is the ability to permeate a market with product prices that are often considered unfair the exporting country may offer the producer a subsidy to counterbalance the losses incurred when the products sell below their manufacturing cost one of the biggest disadvantages of trade dumping is that subsidies can become too costly over time to be sustainable additionally trade partners who wish to restrict this form of market activity may increase restrictions on the good which could result in increased export costs to the affected country or limits on the quantity a country will import international attitude on dumpingwhile the world trade organization wto reserves judgment on whether dumping is an unfair competitive practice most nations are not in favor of dumping dumping is legal under wto rules unless the foreign country can reliably show the negative effects the exporting firm has caused its domestic producers to counter dumping and protect their domestic industries from predatory pricing most nations use tariffs and quotas dumping is also prohibited when it causes material retardation in the establishment of an industry in the domestic market 1 the majority of trade agreements include restrictions on trade dumping violations of such agreements may be difficult to prove and can be cost prohibitive to enforce fully if two countries do not have a trade agreement in place then there is no specific ban on trade dumping between them real world examplein january 2017 the international trade association ita decided that the anti dumping duty levied on silica fabric products from china the previous year would remain in effect based on the investigation by the department of commerce and the international trade commission that showed that the silica products from china were selling at less than fair value in the united states the ita ruling was based on the fact that there was a strong likelihood that dumping would repeat if the tariff was removed 2 | |
what is dun bradstreet d b | dun bradstreet is a global company that provides business intelligence products to clients through its database and analytics software the products are used in improving business profits marketing and risk management dun bradstreet s enterprise software is supported by its proprietary analytics tool dunsright quality process the company s unique data universal numbering system duns numbers assigns a dun number for each client that facilitates easier management of data across its global client base dun bradstreet was established as the result of a merger between r g dun co and bradstreet co in the 1930s the company has had two rounds of funding for a total of 375 million and it has made several acquisitions and divestitures its key segments are information services and internet software and services understanding dun bradstreet d b dun bradstreet dnb is a 180 year old company that supports companies in the areas of sales finance compliance procurement and marketing after launching the revolutionary duns numbers a unique nine digit identifier for every company that allowed greater data exchange the company launched its data cloud which gives access to a range of data points about a company such as its credit score regulatory filings and business structure ownership and principals its revenue segments include subscription services business intelligence reports data license agreements partnerships with the public sector and concierge support services for small businesses in 2020 the company stock was relisted under the ticker dnb on the new york stock exchange nyse after having been made private in 2019 the history of dun bradstreetthe formation of dun bradstreet can be linked back to 1841 when lewis tappan established the mercantile agency in new york city tappan handed the reins of the company to benjamin douglass in the latter part of the decade the company was reincorporated under the name r g dun co in 1859 when robert graham dun purchased it in 1931 the company purchased the national credit office and was reorganized becoming r g dun corp john bradstreet formulated and established bradstreet co in cincinnati in 1849 the firm published the first ever book of commercial ratings in 1851 and made the use of credit ratings popular bradstreet moved his company to new york in 1855 in 1933 negotiations between the two companies began over the idea of a merger after one month of discussions the merger took place the wall street journal published a notification of the merger and indicated that the newly formed company would be operating under the name r g dun bradstreet changed to dun bradstreet inc in 1939 as part of a rebranding campaign the company officially changed its name to d b in 2001 the company has a long record of mergers acquisitions and divestitures leading up to its most recent acquisition of bisnode a european data and analytics firm in january 2021 the deal was a combination of cash and private placement of newly issued dnb common stock in november 2021 the company announced its plans to acquire eyeota and netwise companies that provide data and audience solutions for digital marketing after buying back its outstanding shares in 2019 d b launched an initial public offering ipo on june 24 2020 relisting on the new york stock exchange nyse under the ticker dnb for 2020 its revenues stood at 1 7 billion the company serves around 420 million businesses globally across 243 countries and regions data universal numbering systemthe data universal numbering system was introduced by the company in 1963 and started as a seven digit code assigned to companies as a form of classification in 1964 d b published a codebook with the individual codes of all the companies that had received them and continued this until 1968 duns made an appearance for the first time in the million dollar directory in 1969 the duns system is composed of nine digits and is assigned to every business location in the d b database each of the digits has a unique and distinct operation that identifies each specific business the number itself is assigned randomly d b ratingd b rating is a credit rating tool that has two parts common credit appraisal which assesses and rates a company based on several metrics such as payment histories and public records and rating classification which scores businesses net worth based on the strength of their current financial statements | |
what is a duopoly | a duopoly is a situation where two companies together own all or nearly all of the market for a given product or service a duopoly is the most basic form of oligopoly a market dominated by a small number of companies a duopoly can have the same impact on the market as a monopoly if the two players collude on prices or output understanding a duopolyin a duopoly two competing businesses control the majority of the market sector for a particular product or service they provide a business can be part of a duopoly even if it provides other services that do not fall into the market sector in question for example google and meta formerly facebook have dominated digital advertising for much of the 21st century and function as a duopoly in that field but google is not associated with a duopoly in its other product sectors such as computer software a duopoly is a form of oligopoly and should not be confused with a monopoly where only a single producer exists and controls the market with a duopoly each company will tend to compete against the other keeping prices lower and benefiting consumers however since there are only two major players in an industry under a duopoly there is some likelihood that a monopoly could be formed either through collusion between the two companies or if one goes out of business in a duopoly oligopoly or monopoly the parties involved may collude and use their power to inflate prices since it results in consumers paying higher prices than they would in a truly competitive market collusion is illegal under u s antitrust law 1a duopoly is a particular type of oligopoly an oligopoly exists when a few businesses control the vast majority of the market sector while a duopoly qualifies as an oligopoly not all oligopolies are duopolies for example the automobile industry is an oligopoly because there are a limited number of producers but more than two who must respond to worldwide demand duopoly vs duopsonya duopoly should not be confused with a duopsony in a duopoly two competing businesses control the majority of the market sector for a particular product or service they provide for example coca cola and pepsi represent a duopoly because the two firms control almost the entire market for cola beverages a duopsony however is an economic condition whereby there are only two large buyers for a specific product or service the buyers thus have considerable bargaining power and can determine market demand as long as there are plenty of firms vying to sell to them intel corp intc and advanced micro devices inc amd are an example of a duopsony combined they command nearly 100 of sales in the computer processing chip market and have substantial influence over their suppliers duopsony is also known as a buyer s duopoly and is related to oligopsony a term describing a market where there are a limited number of buyers advantages and disadvantages of a duopolyduopolies can have both positive and negative effects on the companies in the duopoly and the consumer first the two companies can cooperate with each other and maximize their profits as there are no other competitors in other words there is a collusive cooperative equilibrium the companies in a duopoly can concentrate on improving their existing products rather than feeling pressure to create new products for the market because the two companies compete with each other the consumer benefits because prices are controlled to some extent and do not become monopoly prices the disadvantages of duopolies are that they limit free trade with a duopoly the supply of goods and services lacks diversity and there are limited options for consumers also it is difficult for other competitors to enter the industry and gain market share the absence of competitors in a duopoly stifles innovation with a duopoly prices may be higher for consumers when the competition is not driving prices down price fixing and collusion can occur in duopolies which means consumers pay more and have fewer alternatives the two companies benefit by cooperating to improve profits companies do not have to constantly engage in fruitless competition or worry about disruptors prices may be controlled by the rivalry between the two companies free market trading and the entrance of new companies are restricted industry innovation and progress can be curtailed consumers have limited options price fixing and collusion may cost consumers more examples of duopolyboeing and airbus have been considered a duopoly for their command of the large passenger airplane manufacturing market similarly apple and samsung dominate the smartphone market while there are other companies in the business of producing passenger planes and smartphones the market share is highly concentrated between the two businesses identified in the duopoly visa v and mastercard ma are considered a duopoly the two financial powerhouses own over 80 of all european union card transactions this dominance has led the european central bank ecb to try to find ways to break up the duopoly so far the ecb has tried interchange fee caps but a new scheme that would allow instant payments using national payment cards across european countries could be a game changer 2a european infrastructure for instant payments would eliminate the need for people to use the global services of visa or mastercard another suggestion is to allow instant payments at points of interaction or points of sale so that the need for the traditional cards would disappear altogether the bottom linethere are plenty of examples of duopolies in today s markets coca cola and pepsi in the soda industry and apple and samsung in the smartphone industry are two of them duopolies are a form of oligopoly and the biggest disadvantage of duopolies oligopolies and monopolies is that the companies involved can dominate markets collude with each other and raise prices for the consumer | |
what is a duopoly in economics | a duopoly exists when two companies dominate a market for a given product or service a duopoly can have the same impact on the market as a monopoly if the two players collude on prices or output | |
what are the types of duopoly | the two main types of duopoly the cournot duopoly and bertrand duopoly the cournot duopoly model states that the quantity of goods or services produced structures the competition among the two companies in an industry according to the model the two companies decide collaboratively to split the market between one another if one company alters its production levels the other company must also alter its production to maintain the equilibrium of a 50 50 split of the market on the other hand the bertrand duopoly model states that it is price and not production quantity that structures the competition between the two firms the model posits that consumers will choose the lower priced product when given two choices of equal quality this implies that the two companies in the duopoly will engage in a price war to gain market share | |
what is an example of a duopoly | an example of a duopoly is the dominance that apple and samsung have over the smartphone market | |
is duopoly a oligopoly | a duopoly is the most basic form of oligopoly a market dominated by a small number of companies | |
what is a duopoly | a duopoly is a situation where two companies together own all or nearly all of the market for a given product or service a duopoly is the most basic form of oligopoly a market dominated by a small number of companies a duopoly can have the same impact on the market as a monopoly if the two players collude on prices or output understanding a duopolyin a duopoly two competing businesses control the majority of the market sector for a particular product or service they provide a business can be part of a duopoly even if it provides other services that do not fall into the market sector in question for example google and meta formerly facebook have dominated digital advertising for much of the 21st century and function as a duopoly in that field but google is not associated with a duopoly in its other product sectors such as computer software a duopoly is a form of oligopoly and should not be confused with a monopoly where only a single producer exists and controls the market with a duopoly each company will tend to compete against the other keeping prices lower and benefiting consumers however since there are only two major players in an industry under a duopoly there is some likelihood that a monopoly could be formed either through collusion between the two companies or if one goes out of business in a duopoly oligopoly or monopoly the parties involved may collude and use their power to inflate prices since it results in consumers paying higher prices than they would in a truly competitive market collusion is illegal under u s antitrust law 1a duopoly is a particular type of oligopoly an oligopoly exists when a few businesses control the vast majority of the market sector while a duopoly qualifies as an oligopoly not all oligopolies are duopolies for example the automobile industry is an oligopoly because there are a limited number of producers but more than two who must respond to worldwide demand duopoly vs duopsonya duopoly should not be confused with a duopsony in a duopoly two competing businesses control the majority of the market sector for a particular product or service they provide for example coca cola and pepsi represent a duopoly because the two firms control almost the entire market for cola beverages a duopsony however is an economic condition whereby there are only two large buyers for a specific product or service the buyers thus have considerable bargaining power and can determine market demand as long as there are plenty of firms vying to sell to them intel corp intc and advanced micro devices inc amd are an example of a duopsony combined they command nearly 100 of sales in the computer processing chip market and have substantial influence over their suppliers duopsony is also known as a buyer s duopoly and is related to oligopsony a term describing a market where there are a limited number of buyers advantages and disadvantages of a duopolyduopolies can have both positive and negative effects on the companies in the duopoly and the consumer first the two companies can cooperate with each other and maximize their profits as there are no other competitors in other words there is a collusive cooperative equilibrium the companies in a duopoly can concentrate on improving their existing products rather than feeling pressure to create new products for the market because the two companies compete with each other the consumer benefits because prices are controlled to some extent and do not become monopoly prices the disadvantages of duopolies are that they limit free trade with a duopoly the supply of goods and services lacks diversity and there are limited options for consumers also it is difficult for other competitors to enter the industry and gain market share the absence of competitors in a duopoly stifles innovation with a duopoly prices may be higher for consumers when the competition is not driving prices down price fixing and collusion can occur in duopolies which means consumers pay more and have fewer alternatives the two companies benefit by cooperating to improve profits companies do not have to constantly engage in fruitless competition or worry about disruptors prices may be controlled by the rivalry between the two companies free market trading and the entrance of new companies are restricted industry innovation and progress can be curtailed consumers have limited options price fixing and collusion may cost consumers more examples of duopolyboeing and airbus have been considered a duopoly for their command of the large passenger airplane manufacturing market similarly apple and samsung dominate the smartphone market while there are other companies in the business of producing passenger planes and smartphones the market share is highly concentrated between the two businesses identified in the duopoly visa v and mastercard ma are considered a duopoly the two financial powerhouses own over 80 of all european union card transactions this dominance has led the european central bank ecb to try to find ways to break up the duopoly so far the ecb has tried interchange fee caps but a new scheme that would allow instant payments using national payment cards across european countries could be a game changer 2a european infrastructure for instant payments would eliminate the need for people to use the global services of visa or mastercard another suggestion is to allow instant payments at points of interaction or points of sale so that the need for the traditional cards would disappear altogether the bottom linethere are plenty of examples of duopolies in today s markets coca cola and pepsi in the soda industry and apple and samsung in the smartphone industry are two of them duopolies are a form of oligopoly and the biggest disadvantage of duopolies oligopolies and monopolies is that the companies involved can dominate markets collude with each other and raise prices for the consumer | |
what is a duopoly in economics | a duopoly exists when two companies dominate a market for a given product or service a duopoly can have the same impact on the market as a monopoly if the two players collude on prices or output | |
what are the types of duopoly | the two main types of duopoly the cournot duopoly and bertrand duopoly the cournot duopoly model states that the quantity of goods or services produced structures the competition among the two companies in an industry according to the model the two companies decide collaboratively to split the market between one another if one company alters its production levels the other company must also alter its production to maintain the equilibrium of a 50 50 split of the market on the other hand the bertrand duopoly model states that it is price and not production quantity that structures the competition between the two firms the model posits that consumers will choose the lower priced product when given two choices of equal quality this implies that the two companies in the duopoly will engage in a price war to gain market share | |
what is an example of a duopoly | an example of a duopoly is the dominance that apple and samsung have over the smartphone market | |
is duopoly a oligopoly | a duopoly is the most basic form of oligopoly a market dominated by a small number of companies | |
what are durable goods orders | durable goods orders is a broad based monthly survey conducted by the u s census bureau that measures current industrial activity and is used as an economic indicator by investors understanding durable goods ordersdurable goods orders reflect new orders placed with domestic manufacturers for delivery of long lasting manufactured goods durable goods in the near term or future the change in the total value of new orders is measured and shared with the public in two releases per month the advance report on durable goods and the manufacturers shipments inventories and orders durable goods are expensive items that last three years or more as a result companies purchase them infrequently examples include machinery and equipment such as computer equipment industrial machinery and raw steel as well as more expensive items such as steam shovels tanks and airplanes commercial planes make up a significant component of durable goods for the u s economy if a large order for some of these items comes through one month it can skew the month to month results for that reason many analysts will look at durable goods orders excluding the defense and transportation sectors | |
how durable goods orders data is used | durable goods orders are a key economic indicator for investors and others monitoring the health of economies because investment prices react to economic growth it is important for investors to be able to recognize these trends orders for durable goods for example can provide information on how busy factories may be in the future and whether they ll likely need to employ more or less staff to get through current workloads businesses and consumers generally buy durable goods when they are confident the economy is improving so an increase in these orders signifies an economy trending upwards it can also be an indicator of future increases in stock prices durable goods orders tell investors what to expect from the manufacturing sector a major component of the economy and provide more insight into the supply chain than most indicators this can be especially useful in helping investors understand the earnings in industries such as machinery technology manufacturing and transportation it s worth bearing in mind that the manufacturing lead time on capital goods takes longer on average so new orders are often used by investors to gauge the long term potential for sales and earnings by the companies who make them durable goods orders data can often be volatile and revisions are not uncommon so investors and analysts typically use several months of averages instead of relying too heavily on the data of a single month special considerationsgiven the global scale of manufacturing trade wars between countries can also lead to businesses and consumers retrenching their spending on new equipment and appliances for example several american manufacturers source raw materials from china or assemble their products there the imposition of tariffs or even the threat of such a measure can have a psychological effect on businesses and lead to lower spending example of durable goods orderspropelled by tax cuts and a loose monetary policy the numbers of durable goods orders peaked in december 2007 they then subsequently fell by 38 between december 2007 and march 2009 this sharp fall in durable goods orders was attributed to the great recession that engulfed the american economy during this period businesses cut back on investment in new equipment and technologies in response to lower demand from cash strapped consumers | |
what is duration | duration can measure how long it takes in years for an investor to be repaid a bond s price by the bond s total cash flows duration can also measure the sensitivity of a bond s or fixed income portfolio s price to changes in interest rates a bond s duration is easily confused with its term or time to maturity because certain types of duration measurements are also calculated in years however a bond s term is a linear measure of the years until repayment of principal is due it does not change with the interest rate environment duration on the other hand is nonlinear and accelerates as the time to maturity lessens michela buttignol investopedia | |
what is the purpose of duration | duration is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates in general the higher the duration the more a bond s price will drop as interest rates rise and the greater the interest rate risk for example if rates were to rise 1 a bond or bond fund with a five year average duration would likely lose approximately 5 of its value certain factors can affect a bond s duration including | |
what are different types of duration | the duration of a bond in practice can refer to two different things the macaulay duration is the weighted average time until all the bond s cash flows are paid by accounting for the present value of future bond payments the macaulay duration helps an investor evaluate and compare bonds independent of their term or time to maturity the second type of duration is called modified duration unlike macaulay duration modified duration is not measured in years modified duration measures the expected change in a bond s price to a 1 change in interest rates to understand modified duration keep in mind that bond prices are said to have an inverse relationship with interest rates therefore rising interest rates indicate that bond prices are likely to fall while declining interest rates indicate that bond prices are likely to rise macaulay duration finds the present value of a bond s future coupon payments and maturity value fortunately for investors this measure is a standard data point in most bond searching and analysis software tools because macaulay duration is a partial function of the time to maturity the greater the duration the greater the interest rate risk or reward for bond prices macaulay duration can be calculated manually as follows the previous formula is divided into two sections the first part is used to find the present value of all future bond cash flows the second part finds the weighted average time until those cash flows are paid when these sections are put together they tell an investor the weighted average amount of time to receive the bond s cash flows imagine a three year bond with a face value of 100 that pays a 10 coupon semiannually 5 every six months and has a yield to maturity ytm of 6 to find the macaulay duration the first step will be to use this information to find the present value of all the future cash flows as shown in the following table this part of the calculation is important to understand however it is not necessary if you already know the ytm for the bond and its current price this is true because by definition the current price of a bond is the present value of all its cash flows to complete the calculation an investor needs to take the present value of each cash flow divide it by the total present value of all the bond s cash flows and then multiply the result by the time to maturity in years this calculation is easier to understand in the following table the total row of the table tells an investor that this three year bond has a macaulay duration of 2 684 years traders know that the longer the duration is the more sensitive the bond will be to changes in interest rates if the ytm rises the value of a bond with 20 years to maturity will fall further than the value of a bond with five years to maturity how much the bond s price will change for each 1 the ytm rises or falls is called modified duration the modified duration of a bond helps investors understand how much a bond s price will rise or fall if the ytm rises or falls by 1 this is an important number if an investor is worried that interest rates will change in the short term the modified duration of a bond with semiannual coupon payments can be found with the following formula using the numbers from the previous example you can use the modified duration formula to find how much the bond s value will change for a 1 shift in interest rates as shown below in this case if the ytm increases from 6 to 7 because interest rates are rising the bond s value should fall by 2 61 similarly the bond s price should rise by 2 61 if the ytm falls from 6 to 5 unfortunately as the ytm changes the rate of change in the price will also increase or decrease the acceleration of a bond s price change as interest rates rise and fall is called convexity | |
how is duration used | investors need to be aware of two main risks that can affect a bond s investment value credit risk default and interest rate risk interest rate fluctuations duration is used to quantify the potential impact that these factors will have on a bond s price because both factors will affect a bond s expected ytm for example if a company begins to struggle and its credit quality declines investors will require a greater reward or ytm to own the bonds to raise the ytm of an existing bond its price must fall the same factors apply if interest rates are rising and competitive bonds are issued with a higher ytm the duration of a zero coupon bond equals its time to maturity since it pays no coupon | |
what are types of duration strategies | in the financial press you may have heard investors and analysts discuss long duration or short duration strategies which can be confusing in a trading and investing context the term long would be used to describe a position where the investor owns the underlying asset or an interest in the asset that will appreciate in value if the price rises the term short is used to describe a position where an investor has borrowed an asset or has an interest in the asset e g derivatives that will rise in value when the price falls in value however a long duration strategy describes an investing approach where a bond investor focuses on bonds with a high duration value in this situation an investor is likely buying bonds with a long time before maturity and greater exposure to interest rate risks a long duration strategy works well when interest rates are falling which usually happens during recessions a short duration strategy is one where a fixed income or bond investor is focused on buying bonds with a small duration this usually means that the investor is focused on bonds with a small amount of time to maturity a strategy like this would be employed when investors think interest rates will rise or when they are very uncertain about interest rates and want to reduce their risk | |
why is it called duration | duration measures a bond price s sensitivity to changes in interest rates so why is it called duration a bond with a longer time to maturity will have a price that is more sensitive to interest rates and thus a larger duration than a short term bond economists use a hazard rate calculation to determine the likelihood of the bond s performance at a given future time | |
what are some different types of duration | a bond s duration can be interpreted in several ways macaulay duration is the weighted average time to receive all the bond s cash flows and is expressed in years a bond s modified duration converts the macaulay duration into an estimate of how much the bond s price will rise or fall with a 1 change in the yield to maturity dollar duration measures the dollar change in a bond s value to a change in the market interest rate providing a straightforward dollar amount computation given a 1 change in rates effective duration is a duration calculation for bonds that have embedded options | |
what else does duration tell you | as a bond s duration rises its interest rate risk also rises because the impact of a change in the interest rate environment is larger than it would be for a bond with a smaller duration fixed income traders will use duration along with convexity to manage the riskiness of their portfolio and to make adjustments to it bond traders also use key rate duration to see how the value of their portfolio would change at a specific maturity point along the entirety of the yield curve when keeping other maturities constant the key rate duration is used to measure the sensitivity of price to a 1 change in yield for a specific maturity | |
what is the durbin watson statistic | the durbin watson dw statistic is a test for autocorrelation in the residuals from a statistical model or regression analysis the durbin watson statistic will always have a value ranging between 0 and 4 a value of 2 0 indicates there is no autocorrelation detected in the sample values from 0 to less than 2 point to positive autocorrelation and values from 2 to 4 means negative autocorrelation 1a stock price displaying positive autocorrelation would indicate that the price yesterday has a positive correlation on the price today so if the stock fell yesterday it is also likely that it falls today a security that has a negative autocorrelation on the other hand has a negative influence on itself over time so that if it fell yesterday there is a greater likelihood it will rise today the basics of the durbin watson statisticautocorrelation also known as serial correlation can be a significant problem in analyzing historical data if one does not know to look out for it for instance since stock prices tend not to change too radically from one day to another the prices from one day to the next could potentially be highly correlated even though there is little useful information in this observation in order to avoid autocorrelation issues the easiest solution in finance is to simply convert a series of historical prices into a series of percentage price changes from day to day autocorrelation can be useful for technical analysis which is most concerned with the trends of and relationships between security prices using charting techniques in lieu of a company s financial health or management technical analysts can use autocorrelation to see how much of an impact past prices for a security have on its future price autocorrelation can show if there is a momentum factor associated with a stock for example if you know that a stock historically has a high positive autocorrelation value and you witnessed the stock making solid gains over the past several days then you might reasonably expect the movements over the upcoming several days the leading time series to match those of the lagging time series and to move upward the durbin watson statistic is named after statisticians james durbin and geoffrey watson 2special considerationsa rule of thumb is that dw test statistic values in the range of 1 5 to 2 5 are relatively normal values outside this range could however be a cause for concern the durbin watson statistic while displayed by many regression analysis programs is not applicable in certain situations for instance when lagged dependent variables are included in the explanatory variables then it is inappropriate to use this test 1example of the durbin watson statisticthe formula for the durbin watson statistic is rather complex but involves the residuals from an ordinary least squares ols regression on a set of data the following example illustrates how to calculate this statistic assume the following x y data points pair one 10 1 100 pair two 20 1 200 pair three 35 985 pair four 40 750 pair five 50 1 215 pair six 45 1 000 begin aligned text pair one left 10 1 100 right text pair two left 20 1 200 right text pair three left 35 985 right text pair four left 40 750 right text pair five left 50 1 215 right text pair six left 45 1 000 right end aligned pair one 10 1 100 pair two 20 1 200 pair three 35 985 pair four 40 750 pair five 50 1 215 pair six 45 1 000 using the methods of a least squares regression to find the line of best fit the equation for the best fit line of this data is y 2 6268 x 1 129 2 y 2 6268 x 1 129 2 y 2 6268x 1 129 2this first step in calculating the durbin watson statistic is to calculate the expected y values using the line of best fit equation for this data set the expected y values are expected y 1 2 6268 10 1 129 2 1 102 9 expected y 2 2 6268 20 1 129 2 1 076 7 expected y 3 2 6268 35 1 129 2 1 037 3 expected y 4 2 6268 40 1 129 2 1 024 1 expected y 5 2 6268 50 1 129 2 997 9 expected y 6 2 6268 45 1 129 2 1 011 begin aligned text expected y left 1 right left 2 6268 times 10 right 1 129 2 1 102 9 text expected y left 2 right left 2 6268 times 20 right 1 129 2 1 076 7 text expected y left 3 right left 2 6268 times 35 right 1 129 2 1 037 3 text expected y left 4 right left 2 6268 times 40 right 1 129 2 1 024 1 text expected y left 5 right left 2 6268 times 50 right 1 129 2 997 9 text expected y left 6 right left 2 6268 times 45 right 1 129 2 1 011 end aligned expectedy 1 2 6268 10 1 129 2 1 102 9expectedy 2 2 6268 20 1 129 2 1 076 7expectedy 3 2 6268 35 1 129 2 1 037 3expectedy 4 2 6268 40 1 129 2 1 024 1expectedy 5 2 6268 50 1 129 2 997 9expectedy 6 2 6268 45 1 129 2 1 011 next the differences of the actual y values versus the expected y values the errors are calculated error 1 1 100 1 102 9 2 9 error 2 1 200 1 076 7 123 3 error 3 985 1 037 3 52 3 error 4 750 1 024 1 274 1 error 5 1 215 997 9 217 1 error 6 1 000 1 011 11 begin aligned text error left 1 right left 1 100 1 102 9 right 2 9 text error left 2 right left 1 200 1 076 7 right 123 3 text error left 3 right left 985 1 037 3 right 52 3 text error left 4 right left 750 1 024 1 right 274 1 text error left 5 right left 1 215 997 9 right 217 1 text error left 6 right left 1 000 1 011 right 11 end aligned error 1 1 100 1 102 9 2 9error 2 1 200 1 076 7 123 3error 3 985 1 037 3 52 3error 4 750 1 024 1 274 1error 5 1 215 997 9 217 1error 6 1 000 1 011 11 next these errors must be squared and summed sum of errors squared 2 9 2 123 3 2 52 3 2 274 1 2 217 1 2 11 2 140 330 81 begin aligned text sum of errors squared left 2 9 2 123 3 2 52 3 2 274 1 2 217 1 2 11 2 right 140 330 81 text end aligned sum of errors squared 2 92 123 32 52 32 274 12 217 12 112 140 330 81 next the value of the error minus the previous error are calculated and squared difference 1 123 3 2 9 126 2 difference 2 52 3 123 3 175 6 difference 3 274 1 52 3 221 9 difference 4 217 1 274 1 491 3 difference 5 11 217 1 228 1 sum of differences square 389 406 71 begin aligned text difference left 1 right left 123 3 left 2 9 right right 126 2 text difference left 2 right left 52 3 123 3 right 175 6 text difference left 3 right left 274 1 left 52 3 right right 221 9 text difference left 4 right left 217 1 left 274 1 right right 491 3 text difference left 5 right left 11 217 1 right 228 1 text sum of differences square 389 406 71 end aligned difference 1 123 3 2 9 126 2difference 2 52 3 123 3 175 6difference 3 274 1 52 3 221 9difference 4 217 1 274 1 491 3difference 5 11 217 1 228 1sum of differences square 389 406 71 finally the durbin watson statistic is the quotient of the squared values durbin watson 389 406 71 140 330 81 2 77 text durbin watson 389 406 71 140 330 81 2 77 durbin watson 389 406 71 140 330 81 2 77note tenths place may be off due to rounding errors in the squaring | |
what is a dutch auction | a dutch auction also called a descending price auction refers to a type of auction in which an auctioneer starts with a very high price incrementally lowering the price until someone places a bid that first bid wins the auction assuming the price is above the reserve price avoiding any bidding wars this contrasts with typical auction markets where the price starts low and then rises as multiple bidders compete to be the successful buyer financial markets employ a slightly different variant there a dutch auction happens when investors place bids for a security offering specifying what they are willing to buy in terms of quantity and price the price of the offering is then determined after taking in all bids to arrive at the highest price at which the total offering can be sold dutch auctions can be used to sell treasury securities initial public offerings ipos floating rate debt instruments and other securities the term dutch auction dates to 17th century holland when the method was used to improve the efficiency of the competitive dutch tulip market investopedia daniel fishelunderstanding dutch auctions for initial public offerings ipos if a company is using a dutch auction for an initial public offering ipo potential investors enter their bids for the number of shares they want to purchase as well as the price they are willing to pay for example an investor may place a bid for 100 stock shares at 100 while another investor offers 95 for 500 shares once all the bids are submitted the allotted placement is assigned to the bidders from the highest bids down until all the allotted shares are assigned however the price that each bidder pays is based on the lowest price of all the allotted bidders or essentially the last successful bid therefore even if you bid 100 for your 1 000 shares if the last successful bid is 80 then you will only have to pay 80 for your 1 000 shares ipos are typically open to favored investors of the underwriting banks with a dutch auction individual investors can participate helping to democratize the ipo process | |
how the u s treasury uses dutch auctions | the u s treasury uses a dutch auction to sell its securities to help finance the country s debt the u s treasury holds regular auctions to sell treasury bills t bills notes t notes and bonds t bonds collectively known as treasuries prospective investors submit bids electronically through treasurydirect or the treasury automated auction processing system taaps which accepts bids up to 30 days in advance of an auction suppose the treasury seeks to raise 9 million in two year notes with a 5 coupon let s assume the submitted bids are as follows the bids with the lowest yield will be accepted first since the issuer will prefer to pay lower yields to its bond investors in this case since the treasury is looking to raise 9 million it will accept the bids with the lowest yield up to 5 07 at this mark only 2 million of the 3 million bid will be approved all bids above the 5 07 yield will be rejected and bids below will be accepted in effect this auction is cleared at 5 07 and all successful bidders receive the 5 07 yield lowest bidding dutch auctionat a lowest bidding dutch auction prices start high and are dropped successively until a bidder accepts the going price once a bid is accepted the auction ends for example say an auctioneer starts at 2 000 for an item the bidders watch the price decline until it reaches a price that one of the bidders accepts no bidder sees the others bids until after their own bid is formulated and the winning bidder is the one with the highest bid so if there are no bidders at 2 000 the price is lowered by 100 to 1 900 and the bidding moves lower from there if no one bids at 1 900 if a bidder accepts the item of interest at say the 1 500 mark the auction ends benefits and drawbacks of dutch auctionsthe use of dutch auctions for initial public offerings offers benefits as well as drawbacks example of dutch auctionthe most prominent example of a dutch auction in recent times was google s ipo in august 2004 the company opted for this type of offering to prevent a pop in its prices on the first day of trading while the increase in share prices is a standard phenomenon in stock markets it had escalated to bubble territory for tech stocks during the internet bubble of 2000 from 1980 to 2001 the pop in first day trading was 18 8 that figure jumped to 77 in 1999 and in the first half of 2000 google s initial estimate for its offering was 25 9 million shares in the range of 108 to 135 but the company revised its expectations about a week before the actual offering after analysts questioned the reasoning behind those figures and suggested that google was overpricing its shares in the revised estimate google offered to sell 19 6 million shares to the public at a price range of 85 to 95 the response to the offering was considered a disappointment although google was considered a hot company and offering investors priced its shares at 85 the lower range of its estimates by the end of the day the shares were exchanging hands at 100 34 a pop of 17 6 during the first day of trading observers blamed the poor performance on negative press reports about the company leading up to its ipo a u s securities and exchange commission sec inquiry into its executive share allocation further dampened enthusiasm for google s offering the company was also said to be secretive about its use of raised funds making it difficult to evaluate its offering especially for small investors not aware of the emerging market for search engines and organizing information on the web | |
what is an initial public offering ipo | an ipo is a company s first sale of stock available to the public often securities offered in ipos are from newer smaller companies seeking outside equity capital and a public market for its stock | |
why is it called a dutch auction | the term dutch auction stems from the auction style used in 17th century holland s tulip markets the bulbs were wildly popular and the marketplace for them had been chaotic the exchange decided that the best way to sell the tulip bulbs was to do it quickly in as few bids as possible while still getting the best price possible | |
how do you win a dutch auction | in a dutch auction an item is offered at a set maximum price which is incrementally lowered until a bid is made whoever places the first bid wins the auction provided the bid is above the auction s reserve price the bottom linedutch auctions can provide an opportunity for individual investors to get involved in the ipo process usually only clients of the underwriting bank have dibs on ipo shares but with a dutch auction anyone can bid democratizing the process before participating in any ipo be sure you understand the company and the auction process and consider your own financial situation and risk tolerance | |
what is dutch disease | dutch disease is an economic term for the negative consequences that can arise from a spike in the value of a nation s currency it is primarily associated with the new discovery or exploitation of a valuable natural resource and the unexpected repercussions that such a discovery can have on the overall economy of a nation understanding dutch diseasedutch disease exhibits the following two chief economic effects 1both phenomena result from a higher local currency in the long run these factors can contribute to unemployment as manufacturing jobs move to lower cost countries meanwhile non resource based industries suffer due to the increased wealth generated by resource based industries origin of the term dutch diseasethe term dutch disease was coined by the economist magazine in 1977 when the publication analyzed a crisis that occurred in the netherlands after the discovery of vast natural gas deposits in the north sea in 1959 the newfound wealth and massive exports of oil caused the value of the dutch guilder to rise sharply making dutch exports of all non oil products less competitive on the world market unemployment rose from 1 1 to 5 1 and capital investment in the country dropped 2dutch disease became widely used in economic circles as a shorthand way of describing the paradoxical situation in which seemingly good news such as the discovery of large oil reserves negatively impacts a country s broader economy examples of dutch diseasein the 1970s dutch disease hit great britain when the price of oil quadrupled making it economically viable to drill for north sea oil off the coast of scotland by the late 1970s britain had become a net exporter of oil though it had previously been a net importer although the value of the pound skyrocketed the country fell into recession as british workers demanded higher wages and britain s other exports became uncompetitive 31in 2014 economists in canada reported that the influx of foreign capital related to exploitation of the country s oil sands may have led to an overvalued currency and a decreased competitiveness in the manufacturing sector simultaneously the russian ruble greatly appreciated for similar reasons 4 in 2016 the price of oil dropped significantly and both the canadian dollar and the ruble returned to lower levels easing the concerns of dutch disease in both countries 5 | |
what was the dutch tulip bulb market bubble | the dutch tulip bulb market bubble was one of the most famous market bubbles and crashes of all time also known as tulipmania it occurred in holland during the early to mid 1600s when speculation drove the value of tulip bulbs to extremes the rarest tulip bulbs traded for as much as six times the average person s annual salary at the market s peak the story of tulipmania serves as a parable for the pitfalls of excessive greed and speculation in investing history of the dutch tulip bulb market bubbletulips first appeared in europe in the 16th century arriving via the spice trading routes that lent a sense of exoticism to these imported flowers they looked like no other flower native to the continent 1it is no surprise that tulips became a luxury item destined for the gardens of the affluent it was deemed a proof of bad taste in any man of fortune to be without a collection of tulips according to the library of economics and liberty 2the merchant middle classes of dutch society which didn t exist in such a developed form elsewhere in europe at the time sought to emulate their wealthier neighbors they also demanded tulips they were initially a status item that was purchased for the sole reason that they were expensive but tulips were known to be notoriously fragile and would die without careful cultivation professional cultivators of tulips began to refine techniques to grow and produce the flowers locally in holland in the early 1600s they established a flourishing business sector that has persisted to this day 2according to smithsonian magazine the dutch learned that tulips could grow from seeds or buds that grew on the mother bulb a bulb that grew from seed would take seven to 12 years before flowering but a bulb itself could flower the very next year so called broken bulbs were a type of tulip with a striped multicolored pattern rather than a single solid color they evolved from a mosaic virus strain this variation was a catalyst for the growing demand for rare broken bulb tulips which ultimately led to the high market price 1tulips sweep hollandtulipmania swept through holland in 1634 the library of economics and liberty writes the rage among the dutch to possess tulip bulbs was so great that the ordinary industry of the country was neglected and the population even to its lowest dregs embarked in the tulip trade 2a single bulb could be worth as much as 4 000 or even 5 500 florins it s hard to make an accurate estimation of today s value in dollars because 1630s florins were gold coins of uncertain weight and quality but scottish journalist charles mackay does give us some points of reference in his famous 1841 book memoirs of extraordinary popular delusions and the madness of crowds four tuns of beer cost 32 florins that s around 1 008 gallons or 65 kegs of beer a keg of coors light costs around 120 so four tuns of beer 7 800 and 1 florin 244 23 the best of tulips cost upwards of 1 million in today s money with many bulbs trading in the 50 000 to 150 000 range the demand for the tulip trade was so large by 1636 that regular marts for their sale were established on the stock exchange of amsterdam in rotterdam haarlem and other towns 1it was at this time that professional traders stock jobbers got in on the action and everyone appeared to be making money simply by possessing some of these rare bulbs it seemed at the time that the price could only go up that the passion for tulips would last forever people had purchased bulbs on credit hoping to repay their loans when they sold their bulbs for a profit but holders were forced to sell their bulbs at any price and to declare bankruptcy in the process when prices began to drop people began buying tulips with leverage using margined derivatives contracts to buy more than they could afford but confidence was dashed as quickly as the run up began prices began to fall by the end of 1637 and they never recovered 4the bubble burststhe bubble had burst by the end of 1637 buyers announced that they couldn t pay the high prices previously agreed upon for bulbs and the market fell apart it wasn t a devastating occurrence for the nation s economy but it did undermine social expectations 5 the event destroyed relationships built on trust and people s willingness and ability to pay according to smithsonian magazine dutch calvinists painted an exaggerated scene of economic ruin because they worried that the tulip driven consumerism boom would lead to societal decay they insisted that such great wealth was ungodly and the belief remains to this day 1real world examples of extreme buyingthe obsession with tulips has captured the public s imagination for generations and it s been the subject of several books including tulip fever a novel by deborah moggach 6 the tulip craze took hold of all levels of dutch society in the 1630s according to popular legend mackay wrote that the wealthiest merchants to the poorest chimney sweeps jumped into the tulip fray buying bulbs at high prices and selling them for even more 3tulipmania is a model for the general cycle of a financial bubble similar cycles have been observed in the prices of beanie babies baseball cards non fungible tokens nfts and shipping stocks dutch speculators spent incredible amounts of money on bulbs at the time that only produced flowers for a week many companies were formed with the sole purpose of trading tulips but the trade reached its fever pitch in the late 1630s the dutch currency was the guilder in the 1600s this preceded the use of the euro tulips sold for approximately 10 000 guilders at the height of the bubble a price of 10 000 guilders in the 1630s equated roughly to the value of a mansion on the amsterdam grand canal 7did the dutch tulipmania really exist mackay who had never lived in or even visited holland published his classic analysis extraordinary popular delusions and the madness of crowds in 1841 the book documented several prominent asset price bubbles the mississippi scheme and the south sea bubble as well as the tulipmania of the 1600s mackay s short chapter on the subject prompted the popularization of the paradigm for an asset bubble 3there were always a few years of lag between demand pressures and supply because of the timing of tulip cultivation this wasn t an issue under normal conditions because future consumption was contracted for a year or more in advance but growers wouldn t have had an opportunity to increase production in response to price when the 1630s increase in prices occurred so rapidly and after bulbs already were planted for the year 3earl thompson an economist has determined that prices rose simply because suppliers couldn t satisfy all the demand due to this sort of production lag and the fact that growers entered into legal contracts to sell their tulips at a later date similar to futures contracts these contracts were rigorously enforced by the dutch government actual sales of new tulip bulbs remained at ordinary levels throughout the period 8using data about the specific payoffs present in the contracts thompson argued that tulip bulb contract prices hewed closely to what a rational economic model would dictate tulip contract prices before during and after the tulipmania appear to provide a remarkable illustration of market efficiency indeed tulip production had risen to match the earlier demand by 1638 the earlier demand had waned by then creating an oversupply in the market and further depressing prices 8economist earl thompson has studied tulipmania and has concluded that the mania was a rational response to demands arising from contractual obligations 8anne goldgar historian at king s college london has also written extensively about tulipmania and agrees with thompson casting doubt on its bubbleness goldgar argues that tulipmania may not have constituted an economic or speculative bubble but it was nonetheless traumatic to the dutch for other reasons even though the financial crisis affected very few the shock of tulipmania was considerable goldgar writes 9goldgar goes on to argue that the tulip bubble was not at all a mania although a few people did pay very high prices for a few very rare bulbs and some lost a lot of money as well the story has instead been incorporated into the public discourse as a moral lesson that greed is bad and chasing prices can be dangerous 10 | |
what is tulipmania | tulipmania is the story of a major commodity bubble that took place in the 17th century as dutch investors began to madly purchase tulips pushing their prices to unprecedented highs | |
what does tulipmania have to do with market bubbles | tulipmania reflects the general cycle of a bubble from the irrational biases and group mentalities that push up prices of an asset to an unsustainable level to the eventual collapse of those inflated prices the example of tulipmania is used as a parable for other speculative assets such as cryptocurrencies or dotcom stocks | |
how did tulipmania affect the dutch economy | tulipmania and its ultimate crash didn t damage the dutch economy as journalist charles mackay wrote but there was still some collateral damage historian anne goldgar found evidence from court records of reputations lost and relationships broken when buyers who promised to pay 100 or 1 000 guilders for a tulip refused to pay up the author said that those defaults caused a certain level of cultural shock in an economy based on trade and extensive credit relationships 5 | |
how does tulipmania relate to bitcoin | the bitcoin market is frequently compared with tulipmania both prompted highly speculative prices for a product with little clear utility bitcoin prices tend to crash after significant gains exhibiting many signs of a classic bubble the bottom linethe dutch tulipmania of the 1600s is often cited as an example of greed excess and financial mania with the prices of flower bulbs reaching extraordinary heights not backed by fundamentals but rather by the fear of missing out and crowd psychology but some analyses question whether tulipmania was the widespread financial crisis that is referenced today in relation to other bubbles like dotcom stocks before 2001 the subprime housing market before 2008 or the crypto market before 2022 these scholars suggest that the idea of tulipmania has been greatly exaggerated as a parable or lesson in taming greed and excess the actual extent and severity of the tulip bulb bubble and crash were far smaller in reality than we have been led to believe 1 | |
what is a dynasty trust | a dynasty trust is a long term trust created to pass wealth from generation to generation without incurring transfer taxes such as the gift tax estate tax or generation skipping transfer tax gstt for as long as assets remain in the trust the dynasty trust s defining characteristic is its duration if properly designed it can last for many generations ruleshistorically many states had a rule against perpetuities and stipulated when a trust had to end a common rule was that a trust could continue for 21 years after the death of the last beneficiary alive when the trust was established 2under those circumstances a trust could theoretically last for 100 years or so some states however allow wealthy individuals to create dynasty trusts that can endure for many generations into the future a dynasty trust is a type of irrevocable trust grantors can set rules for how the money will be managed and distributed to beneficiaries once the trust is funded the grantor will not have any control over the assets or be permitted to amend the trust s terms the same is true for the trust s future beneficiaries beneficiariesthe immediate beneficiaries of a dynasty trust are usually the grantor s children after the last child s death the grantor s grandchildren or great grandchildren generally become the beneficiaries the trust s operation is controlled by a trustee whom the grantor appoints the trustee is typically a bank or other financial institution anyone can be appointed as a trustee but an organization with a proven history of managing long term trusts is beneficial because a dynasty trust can last for a long time taxesassets transferred to a dynasty trust can be subject to gift estate and gstt taxes only when the transfer is made and if the assets exceed federal tax exemptions 3 however income taxes apply to a dynasty trust if assets produce income therefore individuals often transfer assets to dynasty trusts that don t produce taxable income to minimize the income tax burden such as non dividend paying stocks and tax free municipal bonds additionally the assets that go into a dynasty trust and any appreciation on those assets are permanently removed from the grantor s taxable estate providing another layer of tax relief 4 a trustee can distribute money from the trust to support beneficiaries as outlined in the trust terms because beneficiaries lack control over the trust s assets it will not count toward their taxable estates similarly the trust s assets are protected from claims by a beneficiary s creditors because the assets belong to the trust not the beneficiary | |
is a dynasty trust beneficial | establishing a trust can have benefits and drawbacks depending on your financial situation if an individual has significant assets and wishes to create a legacy of wealth for your family a dynasty trust might be a good idea | |
what are the disadvantages of a dynasty trust | individuals lose control of all assets within the trust because it is irrevocable additionally they cannot change the terms of the trust once it is created who pays taxes on a dynasty trust the grantor is responsible for paying taxes on a dynasty trust the beneficiaries pay income taxes if they receive income from the trust and generation skipping taxes are deferred until the trust terminates and the final beneficiaries receive the remaining assets the bottom lineindividuals with significant taxable assets in the estates benefit the most from dynasty trusts the dynasty trust becomes the asset owner so the assets are not included in the estate when the grantor dies in 2024 an individual can put up to 13 61 million in a dynasty trust | |
what is an e mini | the term e mini refers to an electronically traded futures contract that is a fraction of the size of a standard contract e minis are used to trade a variety of assets such as commodities and currencies but the most commonly traded assets using e minis are indexes the chicago mercantile exchange cme launched the first e mini futures contract in 1997 to give individual investors for whom standard contract sizes were often too expensive access to the futures market 1 like other futures contracts e minis are traded on the cme and other exchanges and allow investors to hedge their bets or speculate on the price movements of the underlying asset understanding e minisall futures are financial contracts that obligate the holder to buy or sell an asset such as a physical commodity or a financial instrument at a predetermined future date and price futures contracts detail the quality and quantity of the underlying asset and are standardized to facilitate trading on a futures exchange some futures contracts may call for physical delivery of the asset while others are settled in cash futures contracts were typically only accessible to institutional investors because of their size which was often too large for small investors the cme launched the first e mini contract in 1997 to draw in average traders who were keen on taking part in this alternative investment 1 this first e mini contract allowed traders to trade s p 500 futures its value was set at one fifth of the full sized contract 2the e mini quickly became a success and led to other similar contracts there are now e mini contracts that cover a variety of assets including the e mini s p 500 however remains the most actively traded e mini contract in the world 3just like other futures contracts traders can use a single e mini contract to hedge or speculate on broad market moves because they are traded electronically e mini futures contracts trade almost 24 hours a day between sunday and friday 4 investors are required to open an account with a brokerage firm in order to begin e mini futures trading the cme delisted the standard sized s p 500 index futures and options on which the e mini contract was based in september 2021 5 this contract was worth 250 times the value of the s p 500 index so if the index was 2 100 the contract would be worth 525 000 6e minis vs full sized futurese mini contracts aren t that much different than full sized futures contracts these smaller contracts also allow investors to hedge or speculate on price movements of the underlying asset whether it s an index commodity or currency as such investors can achieve their trading strategies with e minis including spread trading and e minis are so popular that their trading volumes eclipse those of full sized futures contracts e mini s p 500 futures contract specificationsas noted above the e mini contract was created to be one fifth of the size of the standard sized contract 2 the contract size is the value of the contract based on the price of the futures contract times a contract specific multiplier for instance the e mini s p 500 has a contract size of 50 times the value of the s p 500 if the s p 500 trades at 2 580 the value of the contract is 129 000 50 x 2 580 7 this means that a 0 25 point change in the s p 500 index has a monetary value of 12 50 the e mini s p 500 trades under the globex ticker es as noted above it is available on the cme nearly 24 7 from sunday to friday 6 p m to 5 p m et with a temporary trading halt between 5 p m and 6 p m et contracts are quarterly march june september december and are listed for nine consecutive quarters as well as three additional december contract months 8irs form 6781 stipulates that any gains from futures contracts traded on a u s exchange foreign currency contracts dealer equities options dealer securities futures contracts or non equity options contracts are taxed at a combination of the long term and short term capital gains rates 60 is treated as long term gain and 40 is treated as short term gain regardless of the length of the contract 9advantages and disadvantages of e minise minis are ideal trading instruments for active traders because they offer round the clock trading low margin rates volatility liquidity and greater affordability than standard contracts another benefit is that the fees associated with trading e minis are typically lower than those linked to the buying and selling of regular securities as with any financial instrument e minis also have their downsides for example because of their round the clock and electronic trading component the price of e minis can move very quickly another downfall to these alternative investments is their limited scope the selection of available e mini contracts can be limited and doesn t necessarily span as wide an array of assets as say an exchange traded fund etf or mutual fund low costs and affordablenearly 24 7 tradinghighly volatilelimited selection of contracts | |
what is an e mini s p 500 | the e mini s p 500 is an electronically traded futures contract that is one fifth the size of now delisted standard s p futures 2 its futures and options are based on the underlying s p 500 stock index consisting of 500 individual stocks representing the market capitalizations of large companies the s p 500 is a leading indicator of large cap u s equities the e mini s p 500 contract trades under the globex code es 8 | |
how much does an e mini s p 500 contract cost | the e mini s p 500 is priced at 50 times the value of the s p 500 8 this means if the s p 500 is at 2 500 the value of the contract is 50 x 2 500 or 125 000 | |
how much money do you need to trade e mini futures | there is no legal minimum on what balance you must maintain to day trade futures although you must have enough in the account to cover all day trading margins and fluctuations which result from your positions these can vary by broker however some require as little as 500 to open an account | |
how much is a micro e mini futures contract | as the name suggests micro e mini futures offer investors an even cheaper futures contract than e minis whereas the e mini s p 500 has a contract price of 50 times the s p 500 the micro e mini s contract price is 5 times the index 10 | |
what is the eafe index | the eafe index is a stock index offered by morgan stanley capital international msci it covers non u s and non canadian equity markets the eafe index serves as a performance benchmark for the major international equity markets and includes companies in 21 countries in europe australasia and the far east east asia the eafe index is the oldest international stock index and is also known as the msci eafe index understanding the eafe indexthe eafe index was created to track the performance of mid and large cap stocks across 21 developed market countries in europe australasia and the far east eafe australasia is an area that includes australia and new zealand the index was launched by morgan stanley capital international msci in 1986 and covers 795 stocks from 21 countries 1the eafe index is a market capitalization weighted index its individual components are weighted according to their market capitalization this means that countries with the largest stock markets such as japan and the united kingdom have the largest relative weighting in the index in addition changes in the market value of larger cap securities will result in a bigger move in the index than changes in the market value of smaller cap stocks countries in the eafe indexthe countries covered by the msci eafe index are shown in the chart below israel was classified by msci as a developed country in may 2010 and added to the eafe index at that time 12composition of the eafe indexas of feb 28 2023 equities of companies listed on japanese exchanges accounted for the index s largest allocation at 21 22 the top four countries in the eafe index following japan include the united kingdom 15 33 france 12 41 switzerland 9 84 and germany 8 49 1the top 10 company listings and their index weights are shown below these companies account for 2 15 trillion in market cap value and approximately 14 of the index s market capitalization 1the table below shows the sectors represented in the msci eafe index and their respective weights advantages and disadvantages of the eafe indexthe pros and cons of the eafe index discussed below relate to exchange traded funds etfs and mutual funds that are designed to track its performance diversification the eafe index is diversified across 21 countries and more than 700 companies so investors in etfs and mutual funds that seek to match the performance of the index can get a well diversified international portfolio conveniently with a single purchase less volatility the performance of the eafe index is less volatile than some other international indices because of its focus on companies in developed countries rather than in developing or emerging market countries so investments that track it should have less volatile performance as well lower costs securities that seek to match the index s performance will be passively managed and thus be able to offer investors lower costs relative to actively managed etfs and mutual funds limited country exposure countries such as china india brazil and russia are excluded from the eafe index therefore investments tracking it will also exclude them and their potentially attractive return opportunities less growth potential the eafe index is focused on 21 companies within developed countries this means that companies in developing and emerging market countries that may offer the potential for growth and appealing returns will be excluded from eafe tracking investments investments based on market cap since the eafe index weights its allocations according to market capitalization funds do the same so fund investments will be most concentrated in the companies of a few countries that may limit potential return diversificationless volatilitylower costslimited country exposureless growth potentialinvestments based on market capeafe index as a benchmarkinstitutional investors and asset managers use the eafe index as a performance benchmark for the international developed equity market by comparing the performance of funds to that of the eafe index a manager can ascertain whether they are adding value to their clients portfolios investors and portfolio managers who want an increased level of diversification beyond the u s and canadian equity borders can include stocks from eafe in their portfolios typically this is done by purchasing index tracking financial products such as etfs an example of an etf that tracks the performance of the eafe index is the ishares msci eafe etf efa efa has net assets of 49 billion and a 0 33 expense ratio as of february 2023 3 other etfs that mirror the performance of the eafe index are ishares core msci eafe iefa and the ishares msci eafe small cap scz etfs eafe vs acwithe msci acwi all country world index represents the performance of the global market the acwi covers more than 2 933 companies across 47 countries 23 developed countries and 24 emerging economies 4 like the eafe the acwi provides a transparent vehicle that can be tracked investors can take advantage of potentially profitable investments in multiple capital markets throughout the world the table below compares the performance of both indices | |
what does msci eafe stand for | msci eafe is an international equity index the two acronyms stand for morgan stanley capital international and europe australasia and far east | |
does msci eafe include china | no it excludes china and certain other countries with major economies such as india brazil and russia | |
what companies are in the msci eafe index | there are 21 countries included in the eafe index they are australia austria belgium denmark finland france germany hong kong ireland israel italy japan the netherlands new zealand norway portugal singapore spain sweden switzerland and the uk the bottom linethe eafe index is an international stock index that was launched in 1986 by morgan stanley capital international the index follows the stocks of companies located in 21 developed countries throughout the world the u s and canada are among the countries excluded by the index the eafe index is used as a benchmark by managers of etfs and mutual funds who seek to provide investors with the potential for return from the countries followed by the index and to match its performance | |
what is an early adopter | the term early adopter refers to an individual or business who uses a new product innovation or technology before others an early adopter is likely to pay more for the product than later adopters but accepts this premium if using the product improves efficiency reduces cost increases market penetration or raises the early adopter s social status companies rely on early adopters to provide feedback about product deficiencies and to cover the cost of the product s research and development | |
how an early adopter works | the rate of diffusion or adoption of a new product by the market at large can vary according to the type of product and its price early adopters in the business world face a high level of risk in that they are using a product or technology that may not be perfected and which may not work with the products used by suppliers and customers or may not be compatible with other products they own the term early adopter comes from a book by everett m rogers titled diffusion of innovations 1962 in which he discusses five types of adopter stages for products the five types are 1 innovator 2 early adopter 3 early majority 4 late majority and 5 laggard 1advantages and disadvantages of being an early adopterearly adopters of hardware that is content reliant may face a lack of ways they can use their equipment until producers catch up for example early adopters of recorded media players may have only had a shortlist of titles they could choose from when the hardware was first released from manufacturers the expectation is that over time more content would become available for the chosen media format but there is no guarantee for instance after the introduction of high definition television early adopters waited for television broadcasters to supply more and more of their shows in the new format that took advantage of the higher visual clarity when it came to high definition home video playback a format war arose between manufacturers of blu ray and hd dvd players early adopters of either disc player were anticipating their format would eventually win out as the high definition video disc of choice for the market in those early years entertainment companies released movies and the video content might have been published on either one of the formats this left early adopters with limited options on the content their disc players could access only rarely did content get published by entertainment companies for both standards eventually the blu ray platform became universally adopted for high definition video discs leaving early adopters of hd dvd players with unsupported equipment that would have to be replaced early adopters may enjoy a period of prestige by being the first to own a new form of technology yet they also face the high probability that the equipment or service they are using will be made obsolete in future iterations of the product in addition the price they pay to be an early adopter is high as the technology is new this also results in a loss of value as successive iterations will be more advanced as a result early adopters experience more defects in new technology that hasn t been fully tested as early adopters are the first to use a product they can provide feedback to the manufacturer about where the product can be improved thereby having some influence on the technology this unique position can also lead them to be a thought leader on the new tech as they are one of the few people who know how the technology works if they position this right it can lead to competitive advantages prestigesome influence on developing the technologygaining a competitive advantagebecoming a thought leader on the techlimitations in applicabilityrisk of utilizing soon to be obsolete producthigh price for new technologyloss of valuehigher risk of defectsspecial considerationsthe five stages of technology adoption are as follows innovators are those that adopt new technology first they tend to be younger in age take more risks are in a higher social class have greater access to wealth and have access to scientific resources and other innovators early adopters are the class right after innovators in using new technology like innovators early adopters have greater access to wealth are younger in age and have higher education they are more selective in their adoption of new technology and become opinion leaders on the new innovations the early majority group adopts new technology way after innovators and early adopters do once new technology is accepted by the early majority it tends to become widely adopted soon after the early majority group adopts new technology due to utility and practicality members of the late majority group adopt technology well after the average person has they are more cautious and skeptical of new technology and resist until it is widely accepted or impossible to ignore they typically need assistance in understanding the new technology laggards are those that adopt new technology last because they have to and there is no other option for them they tend to be advanced in age and focus on what they were comfortable with in their younger years example of early adopteras the world began to focus on climate change and reducing carbon emissions electric cars became a point of discussion elon musk created tesla one of the first producers of an electric car not only is the auto industry notoriously difficult to break into but doing so with a car that doesn t rely on the combustible engine but rather electricity and batteries is significantly harder but elon musk did that and successfully so he introduced new technology and disrupted the market when the first cars were released many individuals opted to buy tesla s cars instead of traditional cars becoming early adopters of the technology initially this was a big risk as the product was new and not fully tested the cars were expensive and still are to this day and there were not many charging stations available for the car as the entire operational grid had not yet been created these early adopters of tesla carried a bit of mystique and prestige in being the first individuals to use new ground breaking technology and own an automobile that very few people did over time the price of the cars has come down the quality has gotten better and charging stations are widely available early adopter faqsthe early adopter tax refers to the premium that early adopters pay for new technology as new tech always costs more upon release in addition to the cost the early adopter tax includes the bugs and defects in new technology that have not yet been ironed out as well as missing out on the new features that are included in successive iterations the best ways to market to early adopters include understanding what they need meeting them in person providing them with a product they can use right away targeting specific individuals and companies addressing an existing alternative and telling a story approximately 13 5 of people are early adopters 2the bottom lineearly adopters are those individuals that use new products before the majority of people they are risk takers and trendsetters and have a strong influence on the success or failure of a new product it is for this reason many businesses seek to gain the approval of early adopters though early adopters can become opinion leaders on new technology they also incur higher costs from using new tech and are at risk of losing value if the new technology is not accepted on a wider scale | |
what is early exercise | early exercise of an options contract is the process of buying or selling shares of stock under the terms of that option contract before its expiration date for call options the options holder can demand that the options seller sell shares of the underlying stock at the strike price for put options it is the converse the options holder may demand that the options seller buy shares of the underlying stock at the strike price understanding early exerciseearly exercise is only possible with american style option contracts which the holder may exercise at any time up to expiration with european style option contracts the holder may only exercise on the expiration date making early exercise impossible 1most traders do not use early exercise for options they hold traders will take profits by selling their options and closing the trade their goal is to realize a profit from the difference between the selling price and their original option purchase price for a long call or put the owner closes a trade by selling rather than exercising the option this trade often results in more profit due to the amount of time value remaining in the long option lifespan the more time there is before expiration the greater the time value that remains in the option exercising that option results in an automatic loss of that time value benefits of early exercisethere are certain circumstances under which early exercise may be advantageous for a trader early exercise and employee optionsthere is another type of early exercise that pertains to company awarded stock options eso given to employees if the particular plan allows employees may exercise their awarded stock options before they become fully vested employees a person may choose this option to obtain a more favorable tax treatment however the employee will have to foot the cost to buy the shares before taking full vested ownership also any purchased shares must still follow the vesting schedule of the company s plan the money outlay of early exercise within a company plan is the same as waiting until after vesting ignoring the time value of money however since the payment is shifted to the present it may be possible to avoid short term taxation and the alternative minimum tax amt of course it does introduce the risk that the company may not be around when the shares are fully vested 4early exercise examplesuppose an employee is awarded 10 000 options to buy company abc s stock at 10 per share they vest after two years the employee exercises 5 000 of those options to purchase abc s stock which is valued at 15 after a year exercising those options will cost 7 000 based on a federal amt rate of 28 5 however the employee can reduce the federal tax percentage by holding onto the exercised options for another year to meet requirements for long term capital gains tax 6 | |
what is earmarking | earmarking is the practice of setting particular money aside for a specific purpose the term can be used in several contexts such as in congressional appropriations of taxpayer funds to individual practices like mental accounting understanding earmarkingthe phrase has an agricultural origin farmers would cut recognizable notches in their livestock s ears to mark the animals as belonging to them in its most basic sense to earmark is to flag something for a specific purpose in practice it generally means to set funds aside for a particular project a company might earmark a sum to spend on upgrading its it system or a city government might earmark the proceeds of a municipal bond issue to pay for a new road or bridge in social science the term earmarking has been associated with the economic sociologist viviana zelizer who identifies the practice of earmarking as imbuing certain dollars with specific meaning related to the relational ties and cultural meaning for what that money is earmarked for claiming the not all dollars are equal therefore money earmarked for a loved one will be treated more carefully than money for a friend likewise people may be more willing to lend money to somebody they trust than a stranger the behavioral economics concept of mental accounting is a case of personal earmarking whereby people allocate money to specific tasks or purposes making those funds non fungible earmarking doctrine in bankruptcy lawin bankruptcy law the earmarking doctrine allows certain borrowed funds to be excluded from a bankrupt party s assets as long as they were lent to the borrower 90 or fewer days before the bankruptcy filing and were lent with the express intention of paying a specific creditor earmarking ensures that the funds will go to the intended creditor rather than being subject to claims by other creditors who have preference in the bankruptcy proceedings the doctrine is based on the idea that because there was no net decrease in the bankrupt party s asset base the funds never really belonged to the bankrupt party they borrowed from peter to pay paul earmarks in politics and appropriationsearmarking is a longstanding and controversial practice in the u s congress where parties have historically won support for contentious votes by offering or threatening to revoke funds for projects in particular members districts absent such earmarking funds are apportioned to agencies of the executive branch which decide what specific projects to spend federal money on say for example that a party wants to pass a law banning a particular toxic substance a move that would be popular with its supporters nationwide the party controls the minimum number of seats to pass the law but one member is hesitant to vote for it because a factory in their district would have to cut jobs if the substance were banned to win the member s vote the party might amend the bill to include an earmark a port in their district would receive federal funds for an upgrade rather than a port a hundred miles up the coast such earmarks also known as pork barrel spending or pork for short are controversial they are seen as a form of corruption allowing d c power brokers to trade in the fortunes of the people they represent and squander taxpayers money on giveaways to particular districts the most famous recent example of an earmark is the bridge to nowhere a 398 million bridge that would have connected an island housing an airport and 50 permanent residents to a larger island containing the city of ketchikan alaska in 2005 members of congress pushed to defund the bridge and divert the money to rebuild a bridge destroyed by hurricane katrina but senator ted stevens r alaska threatened to quit congress if the earmark was scrapped the bridge was not built but funds for a road leading to it continued to flow so the state built a three mile highway from the airport that dead ends at the shore passing nothing on the way outrage over pork led congress to ban earmarks in 2011 with republicans leading the effort citizens against government waste a fiscally conservative watchdog group claims that this ban has failed in practice writing in its 2017 pig book pork barrel spending is alive and well in washington d c despite claims to the contrary 1 the group counted 285 earmarks worth 16 8 billion in fiscal 2021 up from 274 worth 15 9 billion the previous year and a 74 8 increase from the 163 in 2017 2leaving aside the ban s effectiveness some commentators have called for earmarking to be restored in a 2014 new york times op ed columbia journalism professor thomas edsall argued the prohibition on earmarks has done nothing to restore respect for congress just the opposite it has contributed to legislative gridlock and increased the difficulty of winning enactment of tax and immigration reform 3edsall also wrote that earmarks role in building majorities was essential and that banning them would have little effect on the perception of congress as corrupt due to the near simultaneous loosening of campaign finance laws the citizens united decision was handed down in 2010 43another argument in favor of the practice of earmarking is that members of congress are more accountable than the bureaucrats who otherwise make decisions about how to allocate money apportioned to their agencies these members of the executive branch are appointed by the white house and cannot directly be voted out of their positions finally some consider the costs of earmarking to be negligible compared to the costs of the gridlock edsall described 3 notably 398 million for a questionable bridge pales in comparison to the monetary and nonmonetary costs of a broken immigration system tax code or healthcare sector the argument goes | |
what is earned income | earned income is money received as pay for work performed such as wages salaries bonuses commissions tips and net earnings from self employment it can also include long term disability union strike benefits and in some cases payments from certain deferred retirement compensation arrangements earned income can be contrasted with unearned income also known as passive income which is money not acquired through working understanding earned incomefor tax purposes earned income is any income you receive for work you have done for an employer or a business of your own 1examples of income that isn t considered earned include government benefits such as payments from the temporary assistance for needy families program often referred to as welfare unemployment workers compensation and social security also excluded are disbursements from non deferred pensions and retirement plans alimony capital gains interest income from a bank account stock dividends bond interest passive income generated from rental property and salaries paid to inmates who work in a penal institution 2both earned and other types of income are generally taxable although sometimes at different percentage rates for example in the 2023 and 2024 tax years the federal government taxes earned income at seven separate rates or brackets ranging from 10 to 37 the thresholds tend to rise yearly to account for inflation and differ for single filers married couples filing jointly and heads of households 34long term capital gains on assets held for a year or more are taxed at 0 15 and 20 depending on the amount and your filing status short term capital gains which have been held for less than a year are taxed at the same rate as your earned income 5tax considerationsdetermining whether income is earned or unearned and reporting it on the appropriate lines of a form 1040 or other tax return is relatively straightforward for some taxpayers however other ramifications of earned income are worth considering if you are receiving social security benefits for example you may have to pay income tax on a portion of those benefits if you have earned income or other income over a certain threshold in that case up to either 50 or 85 of your benefits will be subject to tax depending on your income and filing status 6this can be an important consideration for people who plan to continue working after they are eligible for social security benefits or are deciding whether to delay filing for benefits if you are self employed you also need to consider how much earned and other income you expect to have for the year and pay estimated taxes each quarter based on that amount 7 if you fail to pay enough tax throughout the year you ll have to make it up when you file your tax return and you also may be subject to internal revenue service irs penalties 8if you receive social security benefits having earned income can affect whether those benefits are taxable 6types of earned incometaxpayers may collect an array of earned income and a single taxpayer may collect more than one type of earned income at any given time below are examples of types of earned income earned income tax credit eitc if you have a relatively low earned income and meet other qualifications you may be eligible for the federal earned income tax credit eic or eitc a refundable tax credit that can reduce your tax bill or result in a refund 9 to qualify for the credit you must file a tax return even if you don t owe any tax or otherwise wouldn t be required to file one 10the eitc was conceived as a type of work bonus plan to supplement the wages of low income workers help offset the effect of social security taxes and encourage work as a way to move people off welfare it continues to be viewed as an anti poverty tax benefit aimed to reward people for employment 11qualification for the earned income tax creditto qualify for the eitc you must have worked during the year and earned an income below a certain threshold depending on your marital status and number of children for example a single individual with one child would have a phaseout cap of 46 560 in 2023 and 56 004 in 2024 you may have investment income but it must be below 11 000 in 2023 and 11 600 in 2024 1213you must also the amount of eitc benefit you can receive depends on your income and the number of dependents you claim 1213if you are unsure whether you qualify or have questions about your specific situation seek advice from the irs or an independent tax expert most of this information will also be included in any tax filing software you use example of earned incomeimagine a taxpayer who earned a 50 000 salary from their day job a 10 000 bonus for their performance a 5 000 wage from their side gig and a 500 tip for that side gig in addition that taxpayer earned 1 000 in ordinary dividends and recognized 25 000 in capital gain distributions in this example the taxpayer must calculate their earned income to appropriately their tax liability based on the numbers above the only forms of earned income include therefore the taxpayer s earned income is 65 500 the remaining 26 000 1 000 of ordinary dividends and 25 000 of capital gain distributions are not considered earned income | |
what are some examples of unearned income | unearned income includes interest from savings certificates of deposit cds or other bank accounts bond interest alimony capital gains and dividends from stock income from retirement accounts social security benefits inheritances gifts welfare payments rental income and annuities are all also classified as unearned income 2 | |
how do i know if i have earned income | first you need to know if you have any type of income at all consider avenues in which you received compensation in return for something whether it was time spent working a job or profit for selling something then compare your activity against irs guidance manuals to determine if that activity is earned or unearned income very broadly speaking if you earned money for a job it was likely earned income | |
what is the difference between earned and unearned income | earned income comes from working while unearned income does not the irs may treat each type of income differently for tax purposes tax rates vary among sources of unearned income most unearned income sources are not subject to payroll taxes and none of them are subject to employment taxes such as social security and medicare unearned income cannot be used to contribute to a qualified retirement account such as an ira 141516the bottom lineearned income is any income that you receive from a job or self employment it can include wages tips salary commissions or bonuses it is different from unearned income which comes from things like investments or government benefits the two types of income are taxed differently by the irs if you have earned income that is below a certain threshold you may qualify for the earned income tax credit this is a refundable tax credit that can lower your tax bill or result in a tax refund | |
what is the earned income tax credit eitc | the earned income tax credit eitc is a refundable tax credit that helps certain u s taxpayers with low earnings by reducing the amount of tax owed on a dollar for dollar basis taxpayers may be eligible for refunds if their tax credit exceeds their tax liability for the year understanding the earned income tax credit eitc the earned income tax credit eitc also called the earned income credit eic was conceived as a work bonus plan to supplement the wages of low income workers and help offset the effect of social security taxes it continues to be viewed as an anti poverty tax benefit the eitc is available only to taxpayers with low or moderate earnings whether or not they have qualifying dependents to claim the credit an individual taxpayer or if the taxpayer is married the individual or their spouse filing jointly with no qualifying dependents must be at least 19 years old and must live in the united states for more than half of the tax year 1the credit percentage earnings cap and credit amount vary according to a taxpayer s filing status and number of dependents qualifying dependents which can include dependent children who are under age 19 students under age 24 or dependents with a disability these factors also determine the income phaseout range over which the credit diminishes to zero no credit is allowed above the ceiling for the phaseout range 2to be eligible for the eitc a taxpayer must have earnings but cannot have investment income in excess of a specified level for 2023 the maximum level of investment income was set at 11 000 increasing to 11 600 in 2024 13 age relationship and residency requirements also apply with respect to qualifying dependents the credit reduces the amount of tax owed on a dollar for dollar basis if the amount of the eitc is greater than the amount of tax owed by a taxpayer then the taxpayer may be eligible for a refund 4the eitc is one of the most important tax credits available to individual taxpayers the taxpayer must be a u s citizen or a resident alien for the entire year and have a valid social security number by the tax return s due date the amount of credit that can be claimed on a tax return depends on the taxpayer s annual earned income for the tax year filing status and number of qualified dependents 2if you qualify for the eitc you may or may also be eligible for the child tax credit child and dependent care credit or education credits 4example of the eitca refundable tax credit reduces the value of a taxpayer s liability dollar for dollar and results in a refund if the liability is reduced below zero for example an individual who has a tax bill of 2 900 and can claim a 529 credit will owe 2 371 2 900 529 2 371 that lower amount is the total that the taxpayer must pay to the internal revenue service irs for the year if a taxpayer has a total tax liability of 1 000 and a credit of 1 500 then the taxpayer should be entitled to a refund of 500 qualifying for the eitcto qualify for the eitc a taxpayer s earned income and adjusted gross income agi must be below certain income limits the limits on the income level credit amount and investment income for a single or married taxpayer vary depending on the number of qualifying dependents in the household for the 2023 tax year those limits were as follows with 2024 figures updated in the table below as well 53the irs has posted an eitc calculator the eitc calculator helps determine eligibility for the credit and provides an estimate of the credit amount to use the calculator you can input information about your income qualifying children or relatives filing status and relevant financial documents such as w 2s and 1099s you ll also need to include details about taxes withheld or money received as well as any relevant expenses or income adjustments note that the calculator should be used for estimation purposes only and does not implicitly mean you will get the credit 6 taxpayers who claim the eitc under married filing separately must meet the eligibility requirements under the special rule in the american rescue plan act arpa of 2021 7taxpayers who are married filing separately can qualify for this credit provided that they meet the eligibility requirements under the arpa the tax law provides special eitc rules for clergy and members of the military stationed abroad and specific rules coordinating the credit with the tax laws applicable in puerto rico guam and american samoa 2 | |
how to claim the eitc | if you can claim the eitc be aware that your refund may be delayed as the irs cannot issue eitc and additional child tax credit actc refunds before mid february most eitc and actc related refunds usually hit taxpayer bank accounts by march 1 assuming there are no other issues with their tax return you can also track your irs tax refund using the online tool or irs2go mobile app 8 | |
what is the difference between a tax credit and a tax deduction | a tax credit lowers the amount of tax you owe on a dollar by dollar basis for example a 1 000 tax credit means that you owe 1 000 less in taxes by contrast a tax deduction lowers your taxable income if your taxable income drops by 1 000 and you re in the 24 tax bracket you d save 240 in taxes | |
how much income can you earn in investments and still take the eitc | for the 2023 tax year the maximum investment income you can earn from investments rose to 11 000 9 for 2024 the maximum investment income is 11 600 3 | |
how do you qualify for the earned income tax credit | in order to qualify for the earned income tax credit a taxpayer must be a u s citizen or resident alien for the entire tax year with a social security card that was issued before they file their tax return in addition they must have worked and had an earned income that was lower than the eitc income threshold for the tax year investment income must also be below a certain limit and the taxpayer cannot claim foreign earned income that year members of the military clergy and dependents with disabilities also have special rules 1the bottom linethe eitc is a federal tax credit designed to provide financial assistance to low to moderate income working individuals and families it reduces the amount of taxes owed and can result in a refund for eligible taxpayers the credit amount depends on income filing status and the number of qualifying children | |
what is an earned premium | the term earned premium refers to the premium collected by an insurance company for the portion of a policy that has expired it is what the insured party has paid for a portion of time in which the insurance policy was in effect but has since expired since the insurance company covers the risk during that time it considers the associated premium payments it takes from the insured party as unearned once the time has expired it can then record it as earned or as a profit understanding earned premiumsan earned insurance premium is commonly used in the insurance industry because policyholders pay premiums in advance insurers don t immediately consider premiums paid for an insurance contract as earnings while the policyholder meets their financial obligation and receives the benefits an insurer s obligation begins when it receives the premium | |
when the premium is paid it is considered an unearned premium not a profit that s because as mentioned above the insurance company still has an obligation to fulfill the insurer can change the status of the premium from unearned to earned only when the entire premium is considered profit | the earned premium for a full year policy paid up front and in effect for 90 days would be for those 90 days say the insurance company records the premium as an earning and the time period hasn t elapsed but the insured party files a claim during that time period the insurance company will have to reconcile its books to unwind the transaction listing the premium as an earning so it makes more sense to hold off on recording it as an earning in the event that a claim is filed special considerationsthere are two different ways to calculate earned premiums the accounting method and the exposure method the accounting method is the most commonly used this method is the one used to show earned premium on the majority of insurers corporate income statements the calculation used in this method involves dividing the total premium by 365 and multiplying the result by the number of elapsed days for example an insurer who receives a 1 000 premium on a policy that has been in effect for 100 days would have an earned premium of 273 97 1 000 365 x 100 the exposure method does not take into account the date a premium is booked instead it looks at how premiums are exposed to losses over a given period of time it is a complicated method and involves examining the portion of unearned premium exposed to loss during the period being calculated the exposure method involves the examination of different risk scenarios using historical data that may occur over a period of time from high risk to low risk scenarios and applies the resulting exposure to premiums earned earned vs unearned premiumswhile earned premiums refers to any premiums paid in advance that are earned and belong to the insurer unearned premiums are different these are premiums collected in advance by insurance companies who are required to give them back to policyholders if coverage is terminated before the period covered by the premium is over say for example you take out an automobile insurance policy and prepay for a six month term if you get into a car crash and total your vehicle in the second month of the policy the insurance company keeps the premiums paid for the first two months these are the company s earned premiums but the remaining four months worth of premiums are returned to the insured party because they are unused they are called unearned premiums similarly if a policyholder pays 200 per month for a 12 month insurance policy and decides to terminate coverage after three months the insurance company keeps 600 as earned premiums and refunds 1 800 to the policyholder as unearned premiums | |
what is earnest money | earnest money is a deposit made to a seller that represents a buyer s good faith to make a purchase such as the acquisition of a new home in many ways earnest money can be considered a deposit on a home an escrow deposit or good faith money investopedia ellen lindnerunderstanding earnest moneyin most cases earnest money is delivered when the sales contract or purchase agreement is signed but it can also be attached to the offer once deposited the funds are typically held in an escrow account until closing at which time the deposit is applied to the buyer s down payment and closing costs the money gives the buyer extra time to get financing and conduct the title search property appraisal and inspections before closing | |
when a buyer decides to purchase a home from a seller both parties enter into a contract the contract doesn t obligate the buyer to purchase the home because reports from the home appraisal and inspection may later reveal problems with the house the contract does however ensure the seller takes the house off the market while it s inspected and appraised to prove the buyer s offer to purchase the property is made in good faith the buyer makes an earnest money deposit emd | the buyer might be able to reclaim the earnest money deposit if something that was specified ahead of time in the contract goes wrong for instance the earnest money would be returned if the house doesn t appraise for the sales price or the inspection reveals a serious defect provided these contingencies are listed in the contract in general earnest money is returned to the buyer if the seller terminates the deal but is awarded to the seller if the buyer unreasonably terminates the deal | |
how much are the earnest money amounts | while the buyer and seller can negotiate the earnest money deposit it often ranges between 1 and 2 of the home s purchase price depending on the market in hot housing markets the earnest money deposit might range between 5 and 10 of a property s sale price while the earnest money deposit is often a percentage of the sales price some sellers prefer a fixed amount such as 5 000 or 10 000 of course the higher the earnest money amount the more serious the seller is likely to consider the buyer therefore a buyer should offer a high enough earnest deposit to be accepted but not one so high as to put extra money at risk a seller may also require ongoing periodic earnest deposits to have a prospective buyer continue to show good faith during their due diligence process for example a seller may require a buyer to make monthly earnest deposits on a fixed schedule over a three month due diligence period should the buyer fail to meet any earnest money deposit requirements the seller may be entitled to bring the property back to market and potentially recover losses via keeping portions of the earnest money | |
how is earnest money paid | earnest money is usually paid by certified check personal check or a wire transfer into a trust or escrow account that is held by a real estate brokerage legal firm or title company the funds are held in the account until closing when they are applied toward the buyer s down payment and closing costs it s important to note that escrow accounts like any other bank account can earn interest if the earnest funds in the escrow account earn interest of more than 600 the buyer must fill out tax form w 9 with the irs to receive the interest 1different jurisdictions may have different legal circumstances around earnest money for example washington state legislature stipulates slightly different definitions than minnesota statutes 23 | |
is earnest money refundable | earnest money isn t always refundable the good news for buyers is in most situations as long as a buyer acts in good faith earnest money is refundable as long as any contract agreements are not broken or decision deadlines are met buyers usually get their earnest money back specific conditions where buyers often get their earnest money back include every situation is different but broadly speaking the seller gets to keep the earnest money if the buyer decides not to go through with the home purchase for reasons not specified as part of the contract for example if a buyer simply has a change of heart decides not to buy the property the seller is most likely entitled to retain earnest money proceeds protecting your earnest money depositprospective buyers can do several things to protect their earnest money deposits earnest money vs down paymentearnest money and down payments are both used in real estate transactions yet they serve different purposes earnest money is a sum of money provided by the buyer to prove seriousness on the other hand a down payment is usually a larger sum of money paid by the buyer at the time of closing to secure financing for the purchase of the property unlike earnest money which is more of a gesture of commitment the down payment represents a portion of the total purchase price and is required by lenders as a form of collateral the size of the down payment is determined by various factors including the type of mortgage the lender s requirements and the buyer s financial situation for instance for transactions where the seller has more risk they may require a higher down payment i e 20 of the acquisition price as opposed to 10 the down payment reduces the amount of money that needs to be borrowed thereby lowering the loan to value ratio and potentially improving the terms of any mortgage while earnest money could be applied as a down payment it is usually returned to the buyer as part of the transaction as it initially never represented a portion of the purchase price example of earnest moneysuppose tom wants to buy a home worth 100 000 from joy to facilitate the transaction the broker arranges to deposit 10 000 as a deposit in an escrow account the terms of the subsequent agreement signed by both parties state that joy who is currently living in the home will move out of it within the next six months however joy is unable to find another place of residence by moving day as a result tom cancels the transaction and gets his deposit money back the deposit money has earned interest of 500 from the escrow account during this time period since the amount is less than 600 tom is not required to fill out an irs form to retrieve the amount 1 | |
what is earnest money | in real estate earnest money is effectively a deposit to buy a home usually it ranges between 1 10 of the home s sale price while earnest money doesn t obligate a buyer to purchase a home it does require the seller to take the property off of the market during the appraisal process earnest money is deposited to represent good faith in purchasing the home who keeps earnest money if a deal falls through earnest money gets returned if something goes awry during the appraisal that was predetermined in the contract this could include an appraisal price that is lower than the sale price or if there is a significant flaw with the house importantly though earnest money may not be returned if the flaw was not predetermined in the contract or if the buyer decides not to purchase the house during an agreed upon time period | |
how can earnest money be protected | to protect an earnest money deposit prospective buyers can follow a number of precautionary steps first buyers can ensure that contingencies apply to defects financing and inspections this protects the deposit from being forfeited in the case that a major flaw is discovered or that financing is not secured second carefully read and follow the terms of the contract in some cases the contract will indicate a certain date by which the inspection must be made to prevent forfeiture the buyer should abide by these terms accordingly finally ensure the deposit is handled adequately which means that the buyer should work with a reputable broker title firm escrow company or legal firm | |
do you get earnest money back | as long as a buyer follows the terms of the contract and adheres to all deadlines agreed to with the seller a buyer will most often receive their full earnest money deposit s back should the buyer fail to comply with the agreement the seller may be entitled to receive some or all earnest deposit funds | |
how do you lose earnest money | in an agreement between a buyer and seller there are often a number of contingencies outlined that spell out the terms where a buyer may back out of an agreement these contingencies include failure of a home inspection failure to secure financing or failure to sell a separate existing property if the buyer decides to not proceed with the sale for reasons outside of these agreed to contingencies the buyer is at risk of losing earnest money the bottom line | |
what are earnings | a company s earnings are its after tax net income this is the company s bottom line or its profits earnings are perhaps the single most important and most closely studied number in a company s financial statements it shows a company s real profitability compared to the analyst estimates its own historical performance and the earnings of its competitors and industry peers earnings are the main determinant of a public company s share price because they can be used in only two ways they can be invested in the business to increase its earnings in the future or they can be used to reward stockholders with dividends understanding earningsearnings are the profit that a company produces in a specific period usually defined as a quarter or a year after the end of each quarter analysts wait for the earnings of the companies they follow to be released earnings are studied because they represent a direct link to company performance earnings that deviate from the expectations of the analysts that follow that stock can have a great impact on the stock s price at least in the short term for instance if analysts on average estimate that earnings will be 1 per share and they come in at 0 80 per share the price of the stock is likely to fall on that earnings miss a company that beats analysts earnings estimates is looked on favorably by investors a company that consistently misses earnings estimates may be considered an unattractive and risky investment even if the company only needs to improve its financial forecasting abilities for better earnings guidance its stock price may be hurt in the process there are exceptions to these outcomes depending on the circumstances of the company for example amazon amzn missed its estimates for several quarters in the early 2000s while it was building out its various business units 1 some investors were able to understand the long term potential and it continued to attract investors the opposite example is google a company known for underpromising and overdelivering hence google has repeatedly beat earnings expectations however the analysts community understood that and started to embed google s conservative strategy into the eps expectations generally a new entrepreneurial company that is seen as having strong potential can survive a few disappointing quarters though it generally needs a good explanation for the earnings miss as was the case for amazon that explanation was a heavy investment in future earnings measures of earningsthere are many measures and uses of earnings some analysts like to calculate earnings before taxes ebt also known as pre tax income some analysts prefer to see earnings before interest and taxes ebit still other analysts mainly in industries with a high level of fixed assets prefer to see earnings before interest taxes depreciation and amortization also known as ebitda all three figures provide varying degrees of measuring profitability earnings per share eps is a commonly cited ratio used to show the company s profitability on a per share basis it is calculated by dividing the company s total earnings by the number of shares outstanding earnings are also used to determine a key indicator known as the price to earnings p e ratio the price to earnings ratio calculated as share price divided by earnings per share is used by investors and analysts to compare the relative values of companies in the same industry or sector the stock of a company with a high p e ratio relative to its industry peers may be considered overvalued a company with a low price compared with its earnings might appear to be undervalued the earnings yield or the earnings per share for the most recent 12 month period divided by the current market price per share is another way of measuring earnings it is in fact simply the inverse of the p e ratio criticism of earningssince corporate earnings are such an important metric and have a direct impact on share price managers may be tempted to manipulate earnings figures this is both illegal and unethical some companies attempt to sway investors by prominently displaying their earnings on their financial statements in order to hide deficiencies reported lower down that reveal weaknesses like dubious accounting practices or an unanticipated drop in sales these companies are said to have a poor or weak quality of earnings the earnings per share number may also be inflated with share buybacks or other methods of changing the number of shares outstanding companies can do this by repurchasing shares with retained earnings or debt to make it appear as if they are generating greater profits per outstanding share other companies may purchase a smaller company with a higher p e ratio to bootstrap their own numbers into a favorable territory | |
are a company s earnings the same as its income | a company s earnings are its profit in a given time period this is the same as the net income earnings are different however than gross income which is income before taxes and other expenses are deducted | |
where are earnings listed on a financial statement | earnings are often referred to as a company s bottom line because they are listed on the literal bottom line of the financial statement they are often labeled net income or net losses | |
what are retained earnings | retained earnings are the portion of the net income or profit that the company has set aside to use in the future these are earnings that were not paid out as dividends to shareholders retained earnings indicate how much the company is saving for future expenses such as investing in equipment hiring paying down debt or other necessary spending the bottom lineearnings are the profits from a company usually calculated over a quarter or a fiscal year they are a key element in determining the value of a company s stock if earnings are lower than expected a company s stock price may go down if they are higher than expected the price may go up earnings are a key part of many financial ratios that are used to analyze the financial stability of a company they can also help analysts determine whether a company s stock is over or undervalued because earnings are so important to the value of a company s stock there is always the potential for the numbers to be manipulated | |
what is an earnings announcement | an earnings announcement is an official public statement of a company s profitability for a specific period typically a quarter or a year an earnings announcement occurs on a specific date during earnings season and is preceded by earnings estimates issued by equity analysts if a company has been profitable leading up to the announcement its share price will usually increase up to and slightly after the information is released because earnings announcements can have such a prominent effect on the market they are often considered when predicting the next day s open understanding earnings announcementsthe data in the announcements must be accurate according to securities and exchange commission regulations because the earnings announcement is the official statement of a company s profitability the days leading up to the announcement are often filled with speculation among investors analyst estimates can be notoriously off the mark and can rapidly adjust up or down in the days leading up to the announcement artificially inflating the share price and affecting speculative trading for analysts valuing a firm s future earnings per share eps estimates are arguably the most important input analysts use forecasting models management guidance and other fundamental information on a company to derive an eps estimate for example they might use a discounted cash flows model or dcf dcf analyses use future free cash flow projections and discount them this is done using a required annual rate to arrive at present value estimates which in turn is used to evaluate the potential for investment if the value arrived at through dcf analysis is higher than the current cost of the investment the opportunity could be a good one calculated as dcf cf1 1 r 1 cf2 1 r 2 cfn 1 r n cf cash flowr discount rate wacc analysts may also rely on fundamental factors outlined in the management discussion and analysis md a section of a company s financial reports this section provides an overview of the previous year or quarter s operations and how the company performed financially it outlines the reasons behind certain aspects of growth or decline in the company s income statement balance sheet and statement of cash flows the md a discusses growth drivers risks and even pending litigation management also often uses this section to discuss the upcoming year by outlining future goals and approaches to new projects along with any changes in the executive suite and or key hires finally analysts may take into account external factors such as industry trends e g large mergers acquisitions bankruptcies etc the macroeconomic climate pending u s federal reserve meetings and potential interest rate hikes | |
what is earnings before interest after taxes ebiat | earnings before interest after taxes ebiat is one of a number of financial measures that is used to evaluate a company s profitability over a certain period such as a quarter or a year it is calculated by subtracting taxes from a company s earnings before interest and taxes ebit ebiat is not generated using generally accepted accounting principles gaap so it is not required to be used for external reporting or public disclosures 1 this also means that ebiat can be calculated differently by companies which can make comparisons between companies more challenging ebiat may still be a useful metric for internal management and investors it can help inform key decisions such as how much to invest in future growth understanding ebiatebiat s primary function is to gauge the amount of cash a company has to repay its debt obligations before considering any debt interest expenses and after factoring in taxes one key feature of ebiat is the fact that it considers taxes an unavoidable expense the calculation of ebiat includes taxes and removes any potential tax benefits that might be gained from debt financing such as the ability to deduct interest on debt to reduce a company s taxable income the purpose of the ebiat approach is to gain a more accurate picture of the company s financial standing because it removes factors that could artificially boost or reduce its financial strength ebiat may be more relevant in analyzing companies that have significant tax liabilities because it reflects a company s tax burden and can provide a more realistic view of the cash available to repay its obligations | |
how to calculate ebiat | the calculation for ebiat is relatively straightforward it is the company s ebit x 1 tax rate a company s ebit is calculated in the following way for example let s assume a company reports sales revenue of 1 million for the year and a non operating income of 30 000 its cost of goods sold amounts to 200 000 while depreciation and amortization expenses are 75 000 selling general and administrative expenses are 150 000 and other miscellaneous expenses are 20 000 finally the company also reports a one time special expense of 50 000 for the year in this example the ebit for the company would be calculated as ebit revenues operating expenses non operating incomeebit 1 000 000 200 000 75 000 150 000 20 000 50 000 30 000 535 000if the tax rate for the company is 30 then ebiat is calculated as ebiat ebit x 1 tax rate 535 000 x 1 0 3 374 500some analysts may argue that the special expense should not be included in the calculation because it is not recurring whether to include it depends on the analyst s judgment the significance of the special expense plays a role in this decision for example if we exclude this one time special expense from the company s calculations the results would be by omitting the special expense the ebiat for the company is 9 4 higher which could impact the decisions of its management team or other stakeholders ebiat vs ebitda vs ebit what s the difference ultimately ebiat ebitda and ebit are all used to measure a company s profitability but they differ in what s included in their calculations understanding the differences between the three metrics can help you more accurately evaluate a company s financial health investors should note that non gaap metrics like ebiat ebitda and ebit do not have to adhere to the strict guidelines of gaap some companies may use non gaap measures like ebiat to paint a company s performance in a more favorable light for example in the fiscal year 2019 pinterest recorded a loss of 1 36 billion however by adjusting certain costs the company transformed this loss into a non gaap profit of 17 million 2the bottom lineebiat is just one of a few metrics for assessing a company s profitability and financial health its value lies in offering potential valuable insights especially for companies with significant tax liabilities but as a non gaap measure it does not conform to the standardized practices of gaap metrics so ebiat results can differ from one company to another company insiders investors and financial analysts should consider evaluating a company s ebiat along with other non gaap metrics like ebitda and ebit and with gaap metrics such as net income operating income and cash flow to gain a more balanced view of a company s financial health | |
what is earnings before interest and taxes ebit | earnings before interest and taxes ebit indicate a company s profitability ebit is calculated as revenue minus expenses excluding tax and interest ebit is also called operating earnings operating profit and profit before interest and taxes investopedia daniel fishelunderstanding earnings before interest and taxes ebit ebit or operating profit measures the profit generated by a company s operations by ignoring taxes and interest expenses ebit identifies a company s ability to generate enough earnings to be profitable pay down debt and fund ongoing operations ebit is not a gaap metric and not labeled on financial statements but may be reported as operating profits in a company s income statement 1 operating expenses including the cost of goods sold are subtracted from total revenue or sales a company may include non operating income such as income from investments a company may include interest income in ebit depending on its sector if the company extends credit to its customers as an integral part of its business this interest income is a component of operating income if interest income is derived from bond investments it may be excluded formula and calculationebit revenue cogs operating expenses or ebit net income interest taxes where cogs cost of goods sold begin aligned text ebit text revenue text cogs text operating expenses text or text ebit text net income text interest text taxes textbf where text cogs text cost of goods sold end aligned ebit revenue cogs operating expensesorebit net income interest taxeswhere cogs cost of goods sold the ebit calculation combines a company s manufacturing cost including raw materials and total operating expenses including employee wages these items are subtracted from revenue | |
what is earnings before interest depreciation and amortization ebida | earnings before interest depreciation and amortization ebida is a measure of the earnings of a company that adds the interest expense depreciation and amortization back to the net income number however it does include tax expenses this measure is not as well known or used as often as its counterpart earnings before interest taxes depreciation and amortization ebitda understanding earnings before interest depreciation and amortization ebida there are various ways to calculate ebida such as adding interest depreciation and amortization to net income another way to calculate ebida is to add depreciation and amortization to earnings before interest and taxes ebit and then subtract taxes the metric is generally used to analyze companies in the same industry it does not include the direct effects of financing where taxes a company pays are a direct result of its use of debt ebida can often be found as a metric for companies that do not pay taxes this can include many nonprofits such as non for profit hospitals or charity and religious organizations in this case it can be used interchangeably with ebitda all components needed to calculate ebida can be found on a company s income statement formula and calculation for ebidaebida is calculated by deducting certain costs from ebit or operating profit the formula for ebida is ebitda ebit depreciation amortization taxesas an example consider a company with the following financial information ebida is calculated by first finding ebit which is calculated as the difference between total net revenue and operating costs in this example we ll want to subtract the cost of goods sold s a expenses depreciation expense and amortization expenses from total revenue in this example ebit or operating profit is 575 000 however ebida does not want to consider the non cashflow items such as depreciation or amortization both are typically accounting entries that record an expense that does not tie to the cash outlay on the financial statements therefore both depreciation and amortization need to be added back in last ebida also considers interest because interest is not an operating expense it is not naturally included in operating profit therefore companies will want to include this expense in as it is often avoidable and on a fixed schedule in this example the final ebida is calculated as ebida 575 000 ebit 50 000 25 000 100 000 550 000special considerationsearnings before interest depreciation and amortization ebida is considered to be a more conservative valuation measure than ebitda because it includes the tax expense in the earnings measure the ebida measure removes the assumption that the money paid in taxes could be used to pay down debt an assumption made in ebitda this debt payment assumption is made because interest payments are tax deductible which in turn may lower the company s tax expense giving it more money to service its debt ebida however does not make the assumption that the tax expense can be lowered through the interest expense and therefore does not add it back to net income ebida is not regulated or required as part of gaap reporting therefore you probably won t see it explicitly calculated or reported as part of a company s financial statements criticism of ebidaebida as an earnings measure is very rarely calculated by companies and analysts it serves little purpose then if ebida is not a standard measure to track compare analyze and forecast instead ebitda is widely accepted as one of the major earnings metrics as well ebida can be deceptive as it ll still always be higher than net income and in most cases higher than ebit as well and like other popular metrics such as ebitda and ebit ebida isn t regulated by generally accepted accounting principles gaap thus what s included is at the company s discretion along with the criticism of ebit and ebitda the ebida figure does not include other key information such as working capital changes and capital expenditures capex | |
what is the difference between ebida and ebitda | ebida and ebitda are both profitability measurements that compare a company s earnings after certain expenses have been considered the only difference between the two is the treatment of taxes ebida does not consider taxes while ebitda does deduct the amount of taxes owed therefore ebida is often a higher calculation due to it consider one less corporate expense | |
what is ebida used for | ebida is used to gauge how profitable a company is when not considered some non cashflow expenses for instance both depreciation and amortization are expensed over time not in line with when an initial investment and cash outlay may have occurred therefore ebida gives an organization a better understanding of what its profitability is from a cash generating standpoint | |
what is a good ebida | as a baseline a company s ebida must be positive if it hopes to achieve positive cashflow even then ebida adds back in depreciation and amortization so it is possible for a company to have a positive ebida and yet still lose money each period a company should strive to have an ebida high enough to sustain company growth as well as tracking what competitive company ebida s are to make sure their own is comparable the bottom lineebida is a measure of company earnings that considers operating profit depreciation amortization and interest companies use ebida to better understand their profitability as well as getting a gauge on how their earnings are after stripping away some financial accounting calculations that are not tied to cashflow ebida is very similar to ebitda though the latter also incorporates taxes | |
what is ebitda | ebitda or earnings before interest taxes depreciation and amortization is an alternate measure of profitability to net income by excluding depreciation and amortization as well as taxes and debt payment costs ebitda attempts to represent the cash profit generated by the company s operations ebitda is not a metric recognized under generally accepted accounting principles gaap some public companies report ebitda in their quarterly results along with adjusted ebitda figures typically excluding additional costs such as stock based compensation increased focus on ebitda by companies and investors has prompted criticism that it overstates profitability the u s securities and exchange commission sec requires listed companies reporting ebitda figures to show how they were derived from net income and it bars them from reporting ebitda on a per share basis 1investopedia zoe hansenebitda formulas and calculationif a company doesn t report ebitda it can be easily calculated from its financial statements software like excel can make the calculation process easy the earnings net income tax and interest figures are found on the income statement while the depreciation and amortization figures are normally found in the notes to operating profit or on the cash flow statement there are two ebitda formulas one based on net income and the other on operating income both of which will arrive at basically the same result net income is operating income minus non operating expenses such as taxes and interest the respective ebitda formulas are ebitda net income taxes interest expense d aorebitda operating income d awhere d a depreciation and amortization begin aligned text ebitda text net income text taxes text interest expense text d a text or text ebitda text operating income text d a textbf where text d a text text depreciation and amortization end aligned ebitda net income taxes interest expense d aorebitda operating income d awhere d a depreciation and amortization | |
what does ebitda actually tell you | by adding interest taxes depreciation and amortization back to net income ebitda can be used to track and compare the underlying profitability of companies regardless of their depreciation assumptions or financing choices like earnings ebitda is often used in valuation ratios notably in combination with enterprise value as ev ebitda also known as the enterprise multiple ebitda is widely used in the analysis of asset intensive industries with a lot of property plant and equipment and correspondingly high non cash depreciation costs in those sectors the costs that ebitda excludes may obscure changes in the underlying profitability for example as with energy pipelines meanwhile amortization is often used to expense the cost of software development or other intellectual property that s one reason early stage technology and research companies may use ebitda when discussing their performance annual changes in tax liabilities and assets that must be reflected on the income statement may not relate to operational performance interest costs depend on debt levels interest rates and management preferences regarding debt vs equity financing excluding all of these items keeps the focus on the cash profits generated by the company s business of course not everyone agrees references to ebitda make us shudder berkshire hathaway inc brk a ceo warren buffett has written according to buffett depreciation is a real cost that can t be ignored and ebitda is not a meaningful measure of performance 2example of ebitdasuppose a company generates 100 million in revenue and incurs 40 million in cost of goods sold cogs and another 20 million in overhead depreciation and amortization expenses total 10 million yielding an operating profit of 30 million interest expense is 5 million leaving earnings before taxes of 25 million with a 20 tax rate net income equals 20 million after 5 million in taxes is subtracted from pretax income if depreciation amortization interest and taxes are added back to net income ebitda equals 40 million history of ebitdaebitda is the invention of one of the very few investors with a record rivaling buffett s liberty media chairman john malone the cable industry pioneer came up with the metric in the 1970s to help sell lenders and investors on his leveraged growth strategy which deployed debt and reinvested profits to minimize taxes during the 1980s the investors and lenders involved in leveraged buyouts lbos found ebitda useful in estimating whether the targeted companies had the profitability to service the debt that was expected to be incurred in the acquisition since a buyout would likely entail a change in the capital structure and tax liabilities it made sense to exclude the interest and tax expense from earnings as non cash costs depreciation and amortization expense would not affect the company s ability to service that debt at least in the near term 3the lbo buyers tended to target companies with minimal or modest near term capital spending plans while their own need to secure financing for the acquisitions led them to focus on the ebitda to interest coverage ratio which weighs core operating profitability as represented by ebitda against debt service costs 3ebitda gained notoriety during the dotcom bubble when some companies used it to exaggerate their financial performance 4the metric received more bad publicity in 2018 after wework companies inc a provider of shared office space filed a prospectus for its initial public offering ipo defining its community adjusted ebitda as excluding general and administrative as well as sales and marketing expenses 5criticisms of ebitdabecause ebitda is a non gaap measure the way it is calculated can vary from one company to the next it is not uncommon for companies to emphasize ebitda over net income because the former makes them look better an important red flag for investors is when a company that hasn t reported ebitda in the past starts to feature it prominently in results this can happen when companies have borrowed heavily or are experiencing rising capital and development costs in those cases ebitda may serve to distract investors from the company s challenges these are among the other criticisms of ebitda a common misconception is that ebitda represents cash earnings however unlike free cash flow ebitda ignores the cost of assets one of the most common criticisms of ebitda is that it assumes profitability is a function of sales and operations alone almost as if the company s assets and debt financing were a gift to quote buffett again does management think the tooth fairy pays for capital expenditures 6while the formulas for calculating ebitda may seem simple enough different companies use different earnings figures as the starting point in other words ebitda is susceptible to the earnings accounting games found on the income statement all the cost exclusions in ebitda can make a company appear much less expensive than it really is when analysts look at stock price multiples of ebitda rather than at bottom line earnings they produce lower multiples consider the historical example of wireless telecom operator sprint nextel on april 1 2006 the stock was trading at 7 3 times its forecast ebitda that might sound like a low multiple but it didn t mean that the company was a bargain as a multiple of forecast operating profits sprint nextel traded at a much higher 20 times and the company traded at 48 times its estimated net income there s been some real sloppiness in accounting and this move toward using adjusted ebitda and adjusted earnings has produced some companies that i think are trading on valuations that are not supported by the real numbers hedge fund manager daniel loeb said in 2015 not much has changed on that front since then investors using solely ebitda to assess a company s value or results risk getting the wrong answer ebitda vs ebit vs ebtearnings before interest and taxes ebit is a company s net income plus income tax and interest expenses ebit is used to analyze the profitability of a company s core operations the following formula is used to calculate ebit since net income includes interest and tax expenses to calculate ebit these deductions from net income must be reversed earnings before tax ebt reflects how much of an operating profit has been realized before accounting for taxes while ebit excludes both taxes and interest payments ebt is calculated by adding just tax expense to the company s net income by excluding tax liabilities investors can use ebt to evaluate performance after eliminating a variable typically not within the company s control in the united states this is most useful for comparing companies that might be subject to different state tax rates or federal tax rules unlike ebitda ebt and ebit do include the non cash expenses of depreciation and amortization ebitda vs operating cash flowoperating cash flow is a better measure of how much cash a company is generating because it adds non cash charges depreciation and amortization back to net income while also including changes in working capital including receivables payables and inventory that use or provide cash working capital trends are an important consideration in determining how much cash a company is generating if investors don t include working capital changes in their analysis and rely solely on ebitda they can miss clues for example difficulties with receivables collection that may impair cash flow | |
how do you calculate earnings before interest taxes depreciation and amortization ebitda | the formula for calculating ebitda is ebitda operating income depreciation amortization you can find this figures on a company s income statement cash flow statement and balance sheet | |
what is a good ebitda | a strong ebitda is considered to be at least two times the company s interest expense for example if a company s annual interest expense is 1 million then a strong ebitda would be at least 2 million in some industries a higher ebitda margin above 15 or more may be considered favorable a good ebitda varies by industry company size industry norms growth stage and capital structure | |
is ebitda the same as gross profit | no ebitda is not the same as gross profit while they are related ebitda and gross profit are distinct financial metrics gross profit represents revenue minus the cost of goods sold cogs indicating the profitability of core business operations before deducting other expenses ebitda however reflects operating performance by excluding interest taxes depreciation and amortization providing a clearer view of operational profitability by excluding non operating expenses and non cash items | |
what is amortization in ebitda | as it relates to ebitda amortization is the gradual discounting of the book value of a company s intangible assets amortization is reported on a company s income statement intangible assets include intellectual property such as patents or trademarks as well as goodwill the bottom lineebitda can be a useful tool for comparing companies subject to disparate tax treatments and capital costs or analyzing them in situations where these are likely to change it also omits non cash depreciation costs that may not accurately represent future capital spending requirements at the same time excluding some costs while including others has opened the door to the ebitda s abuse by unscrupulous corporate managers the best defense for investors against such practices is to read the fine print reconciling the reported ebitda to net income correction april 30 2023 an earlier version of this article contained an arithmetic error in the calculation of ebitda the expected taxes were 5 million not 4 million | |
what is earnings before tax ebt | earnings before tax ebt is a measure of financial performance it reveals a company s earnings before taxes are deducted is calculated by subtracting all expenses excluding taxes from revenue and appears as a line item in the income statement ebt is sometimes also called pretax income profit before tax or income before income taxes understanding earnings before tax ebt ebt is the money retained internally by a company before deducting tax expenses it is an accounting measure of a company s operating and nonoperating profits all companies calculate ebt in the same manner and it is a pure ratio meaning it uses numbers found exclusively in the income statement analysts and accountants derive ebt through that specific financial statement deducting the cost of goods sold cogs interest depreciation general and administrative expenses and other operating expenses from gross sales ebt sometimes appears as income before income taxes or something similar and can be found just above the net income line item example of ebtif a company sells 30 widgets for 1 000 apiece during january its revenue for the period is 30 000 the company then assesses its cogs and subtracts that number from the 30 000 revenue if it costs the company 100 to produce a single widget then its cogs for january is 3 000 this means that its gross revenue is 27 000 30 000 3 000 27 000 after a company determines its gross revenue it tallies all its operating costs together and subtracts that figure from the gross the operating costs of a company may include any expenses related to its daily activities such as salary and wages rent and other overhead expenses if the company is a technology company with substantial investments in human capital it might have salaries of 10 000 a month and monthly rent of 1 000 subtract that 11 000 in total overhead from its gross revenue as well as 1 000 of interest expenses and you re left with ebt of 15 000 ebt as a tool for comparisonebt is crucial because it removes the effects of taxes when comparing businesses for example while u s based corporations face the same tax rates at the federal level they may face different tax rates at the state level since companies may pay different tax rates in different states ebt allows investors to compare the profitability of similar companies in various tax jurisdictions further ebt is used to calculate performance metrics such as pretax profit margin | |
how do i calculate earnings before tax ebt | ebt can be calculated in the following ways | |
is earnings before tax the same as income before tax | yes income before tax or pretax income means the same thing as earnings before tax these terms can be used interchangeably | |
what is the difference between ebt ebit and ebitda | earnings before interest and taxes ebit and earnings before interest taxes depreciation and amortization ebitda add additional layers of comparability by adding back more stuff whereas ebt just adds tax expenditures to net income ebit adds back interest expenses as well and ebitda goes another step further by also adding back depreciation and amortization | |
why is that because interest and depreciation and amortization like taxes are expenses that don t necessarily reflect a company s ability to generate earnings from its operations | the bottom lineebt is a useful way to compare the profitability of similar companies operating in different tax jurisdictions tax rates do not reflect performance and can vary considerably across borders making ebt a more effective metric than net income when seeking to gauge a company s ability to generate earnings from its operations relative to its peers | |
what is an earnings call | an earnings call is a conference call between the management of a public company analysts investors and the media to discuss the company s financial results during a given reporting period such as a quarter or a fiscal year an earnings call is usually preceded by an earnings report which contains summary information on financial performance for the period |
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