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how to implement enterprise risk management practices | erm practices will vary based on a company s size risk preferences and business objectives below are best practices that most companies can use to implement erm strategies as a company implements erm practices it is widely advised to continually gather feedback from all employees everyone will have a different perspective of what might not be working or what could be done better advantages and disadvantages of enterprise risk managementerm sets the organization wide expectations around a company s culture this includes communicating more openly about the risks a company faces and how to mitigate them this leads to less unexpected risks and more guided direction on how to respond to certain events in addition this may lead to greater employee satisfaction knowing plans are in place to protect company resources as well as greater customer service knowing how to respond to customers should certain risks actually occur erm practices are often synthesized by a standardized risk report delivered to upper management this report succinctly summarizes the risks a company faces the actions being taken and the information needed for decision making as a result a company may be more efficient with its time especially considering what is delivered to upper management erm may also have a company wide positive impact on the resourcefulness of the business erm may eliminate redundant processes ensure efficient use of staff reduce theft or increase profitability by better understanding what markets to enter into as a company builds out its erm practices it will likely consider familiar risks it has been exposed to in the past therefore erm is limited in identifying future risks that the organization is unaware of that may have more detrimental impacts in this manner some may consider erm as reactive as companies can only forecast risk based on what they have prior experience with erm also relies very heavily on management estimates and inputs this may be nearly impossible to accurately predict for example in the very low chance that a company forecasts the occurrence of the covid 19 pandemic would a company be able to accurately calculate the fiscal impact of business closures or changes in consumer spending erm mitigation costs may also be difficult to assess erm practices are time intensive and therefore require the resources of the company to be successful though the company will benefit from protecting its assets a company must detract time of its staff and may make capital investments to implement erm strategies in addition a company may find it difficult to quantify the success of erm as financial risks that do not occur must simply be projected may make a company more prepared for risks and uncertaintiesmay leave employees more satisfied with the future state of the companymay result in greater customer service as companies are prepared for certain situationsmay result in efficient reporting to upper management that enhances decision makingmay lead to more efficient company wide operationsmay not accurately identify the risks a company is likely to experiencemay not accurately assess the financial impact or likelihood of an outcomeoften requires time investment from a company to be successfuloften requires capital investment from a company to be successful | |
what types of risk does enterprise risk management address | erm can help devise plans for almost any type of business risk business risk threatens a company s ability to survive and these risks may be further classified into different risks discussed below in general erm most commonly addresses the following types of risk ideal entities for erm systemserm is particularly well suited for large corporations operating in complex and diverse environments these companies often face a bunch of risks across different business units regions and functions erm helps large corporations systematically identify assess and manage risks at both the operational and strategic levels erm can also be specifically useful in certain industries for example erm is great for financial institutions such as banks insurance companies and investment firms these companies operate within highly regulated and volatile markets these institutions face so many of the risks discussed above by integrating erm into their operations financial institutions can strengthen risk management practices optimize capital allocation and enhance their resilience to economic downturns last it s worth calling out multinational corporations and global enterprises as ideal entities these companies benefit from erm because of their expansive operations across multiple countries and jurisdictions these companies encounter diverse risks related to geopolitical instability currency fluctuations supply chain disruptions and regulatory compliance in varying regions by implementing erm frameworks global enterprises can better track and maintain these risks especially if their entity has higher risks in certain areas departments or business units erm vs erperm is primarily concerned with identifying assessing managing and mitigating risks across an organization on the other hand enterprise resource planning erp tools focus on integrating and optimizing core business processes the primary purpose of erp systems is to streamline operations across finance manufacturing sales and marketing amongst others erm addresses risks across various functions and departments within an organization erp systems are generally more specific in their scope they tend to focus on more granular operational efficiencies instead of bigger picture comprehensive risks implementing erm tools requires collaboration among key stakeholders like risk managers compliance officers executives and board members these stakeholders work together to establish risk management frameworks erp implementations may be more geared towards collaboration among it teams department heads and end users in addition to having a heavy part to play in operations a primary component of erp systems is the potentially live interconnected play between data for this reason as opposed to an erm tool erp systems may have a more technical demand to them last risk management strategies in erm are designed to support long term sustainability protect organizational assets and minimize potential disruptions erp systems align with an organization s strategic goals by improving productivity reducing costs and providing real time insights into business operation opportunities in a sense erm and erp systems may counteract each other for instance an erp system may signal growth and efficiency opportunities to expand in a specific new market an erm may signal that a new market is too great of a risk to consider erm vs crmcustomer relationship management crm systems are centered around managing interactions with customers and prospects it leverages technology and processes to organize automate and synchronize sales marketing customer service and support activities the primary aim of crm is to improve relationships with customers streamline business processes and increase profitability by understanding and meeting customer needs effectively like an erm a crm system consolidates data however the nature of the data is entirely different while erms track and monitor risks crms care most about customer data interactions and insights that enable the company to enhance customer engagement and satisfaction crm implementation is crucial for sales teams marketing departments customer service representatives and executives who rely on customer data to drive sales growth and improve overall business performance alternatively erms are more useful for operational teams like risk insurance operations or finance an erm focuses on comprehensive risk management across all facets of an organization this tends to be inward looking though it can also incorporate external market forces a crm alternatively is much more outward facing while it will consider current processes and resources within a company a crm exists to monitor what is going on outside of the company with a company s arguably most important resource i e its customers example of ermexxonmobil is a robust example of how erm is implemented in a large multinational corporation operating in the oil and gas industry erm at exxonmobil is a structured approach that spans all levels of the organization aiming to identify assess manage and mitigate risks that could impact its business operations and overall performance information on exxonmobil s erm strategy is on the company s website exxonmobil s framework integrates five core elements organizing and aggregating risks rigorous risk identification practices a prioritization method systems and processes for risk management and comprehensive risk governance this multi layered approach includes defined roles and responsibilities for risk owners functional experts and independent verifiers the goal is that each type of risk is actively managed and aligned with corporate requirements and processes 3prior to initiating new developments the company employs advanced data and computer modeling to assess potential environmental socioeconomic and health risks associated with construction and operations engaging with communities through public meetings and collaborating with regulators ensures transparent communication and compliance with regulatory standards both of which can minimize risks in the future 3this rigorous process guided by an integrated erm also enables exxonmobil to implement tailored measures to prevent minimize or mitigate environmental impacts these different types of risks could range from changing weather patterns to sea level rise seismic activity or geological conditions exxonmobil s environmental assessments with its erm are conducted for both offshore and onshore facilities to deploy protective measures effectively and uphold operational safety 3 | |
what is erm | erm is a company s approach to managing risk it is the practices policies and framework for how a company handles a variety of risks that its business faces | |
why is erm important | erm is important because it helps prevent losses or unexpected negative outcomes erm is also important because it helps a company set the plans in place to strategically approach risk and garner employee buy in | |
what are the 3 types of enterprise risk | erm often summarizes the risks a company faces into operational financial and strategic risks operational risks impact day to day operations while strategic risks impact long term plans financial risks impact the general financial standing and health of a company | |
what are the 8 components of erm | the coso framework for erm identifies eight components internal environment objective setting event identification risk assessment risk response control activities information communication and monitoring these eight core components drive a company s erm practices | |
what is the difference between risk management and enterprise risk management | risk management has traditionally been used to describe the practices and policies surrounding a specific risk that a company faces more modern risk management has introduced erm a comprehensive company wide approach to view risk holistically for the entire company the bottom lineas a company makes sells and delivers goods to customers it faces countless risks from numerous sources to better plan for these risks companies are turning to enterprise risk management a company wide top down approach to assessing risk and devising plans the ultimate goal of erm is to protect a company s assets and operations while having strategies in place should certain unfortunate events occur | |
what is enterprise value ev | enterprise value ev measures a company s total value often used as a more comprehensive alternative to market capitalization ev includes in its calculation not only the market capitalization of a company but also short term and long term debt and any cash or cash equivalents on the company s balance sheet michela buttignol investopediacomponents of enterprise value ev enterprise value uses figures from a company s financial statements and current market prices the components that make up ev are 1enterprise value formula and calculatione v m c t o t a l d e b t c where m c market capitalization equal to the current stock price multiplied by the number of outstanding stock shares t o t a l d e b t equal to the sum of short term and long term debt c cash and cash equivalents the liquid assets of a company but may not include marketable securities begin aligned ev mc total debt c textbf where mc text small market capitalization equal to the current stock text small price multiplied by the number of outstanding stock shares total debt text small equal to the sum of short term and text small long term debt c text small cash and cash equivalents the liquid assets of text small a company but may not include marketable securities end aligned ev mc total debt cwhere mc market capitalization equal to the current stockprice multiplied by the number of outstanding stock sharestotal debt equal to the sum of short term andlong term debtc cash and cash equivalents the liquid assets ofa company but may not include marketable securities to calculate market capitalization if not readily available online you would multiply the number of outstanding shares by the current stock price next total all debt on the company s balance sheet including both short term and long term debt finally add the market capitalization to the total debt and subtract any cash and cash equivalents from the result | |
what does ev tell you | enterprise value ev differs significantly from simple market capitalization in several ways and many consider it to be a more accurate representation of a firm s value ev tells investors or interested parties a company s value and how much another company would need if it wanted to purchase that company there is one other consideration a company s ev can be negative if the total value of its cash and cash equivalents surpasses that of the combined total of its market cap and debts this is a sign that a company is not using its assets very well it has too much cash sitting around not being used extra cash can be used for many things such as distributions buybacks expansion research and development maintenance employee pay raises bonuses or paying off debts market capitalization is not intended to represent a company s book value instead it represents a company s value as determined by market participants ev as a valuation multipleenterprise value is used as the basis for many financial ratios that measure the performance of a company for example the enterprise multiple contains enterprise value it relates the total value of a company from all sources to a measure of operating earnings generated the earnings before interest taxes depreciation and amortization ebitda ebitda measures a company s ability to generate revenue and is used as an alternative to simple earnings or net income in some circumstances ebitda however can be misleading because it strips out the cost of capital investments like property plant and equipment another figure ebit can be used as a similar financial metric without the drawback of removing depreciation and amortization expenses related to property plant and equipment pp e ebitda calculates a company s income before interest taxes depreciation and amortization ebitda is calculated using the following formula the enterprise multiple ev ebitda metric is used as a valuation tool to compare the value of a company and its debt to the company s cash earnings less its non cash expenses as a result it s ideal for analysts and investors looking to compare companies within the same industry ev ebitda is useful in several situations ev ebitda has a few drawbacks another commonly used multiple for determining the relative value of firms is the enterprise value to sales ratio or ev sales ev sales is regarded as a more accurate measure than the price sales ratio since it considers the value and amount of debt that a company must repay at some point it s believed that the lower the ev sales multiple the more attractive or undervalued the company is the ev sales ratio can be negative when the cash held by a company is more than the market capitalization and debt value a negative ev sales implies that a company can pay off all of its debts enterprise value vs market cap | |
why doesn t market capitalization properly represent a firm s value it leaves a lot of essential factors out such as a company s debt and cash reserves | enterprise value is a modification of market cap as it incorporates debt and cash for determining a company s value here s an example imagine two identical widget manufacturers company a and company b have the same stock price of 4 32 per share each has 1 million outstanding shares with a market cap of 4 32 million now imagine company a has 500 000 in cash and cash equivalents and 250 000 in total debt its ev total worth is 4 320 000 250 000 500 000 4 07 million company b has 1 million in cash and 250 000 in debt its ev is 4 320 000 250 000 1 000 000 3 57 million the companies looked identical using market cap but a much different picture appears when ev is calculated enterprise value vs p e ratiothe price to earnings ratio p e ratio is the ratio for valuing a company that measures its current share price relative to its earnings per share eps the price to earnings ratio is sometimes known as the price multiple or the earnings multiple the p e ratio doesn t consider the amount of debt that a company has on its balance sheet ev includes debt when valuing a company and is often used in tandem with the p e ratio to achieve a comprehensive valuation limitations of evas stated earlier ev includes total debt but it s essential to consider how the company s management utilizes the debt for example capital intensive industries such as the oil and gas industry typically carry significant amounts of debt which is used to foster growth the debt could have been used to purchase a plant and equipment as a result the ev can be skewed when comparing companies across industries this is essential to consider if the company being looked at is undergoing a merger or acquisition this is because the acquiring company will need to account for the amount of debt it is taking on in the merger investors can use this information to evaluate what the merged companies will look like in the future as with any financial metric it s best to compare companies within the same industry to better understand how the company is valued relative to its peers example of evas stated earlier the formula for ev is essentially the sum of the market value of equity market capitalization and the market value of a company s debt less any cash a company s market capitalization is calculated by multiplying the share price by the number of outstanding shares the net debt is the market value of debt minus cash a company acquiring another company keeps the cash of the target firm which is why cash needs to be deducted from the firm s price as represented by the market cap let s calculate the enterprise value for macy s m for its 2021 fiscal year macy s recorded the following 2we can calculate macy s market cap from the information above macy s has 292 4 million outstanding shares valued at 25 44 per share at the end of its fiscal year jan 29 2022 32enterprise value is considered comprehensive when valuing a company because if a company were to purchase macy s outstanding shares for 7 44 billion it would also have to settle macy s 3 30 billion in outstanding debts in total the acquiring company will spend more than 10 billion to purchase macy s however since macy s has 1 71 billion in cash this amount could be added to repay the debt | |
what is enterprise value and why is it important | enterprise value shows a company s total value and is generally used in mergers and acquisitions to evaluate a prospect you might also see embedded value used to value life insurance companies primarily in europe | |
how do you calculate enterprise value | to calculate market capitalization multiply the number of outstanding shares by the current stock price next total all debt on the company s balance sheet finally add the market capitalization to the total debt and subtract any cash and cash equivalents from the result | |
what is a good enterprise value | enterprise value is a good indicator of a company s total value but the ev ebitda is a better indicator demonstrating the total value to actual earnings an ev ebitda below 10 is considered healthy | |
what is enterprise value vs market value | enterprise value is the total value of a company while market value is the value of its shares on the stock market market capitalization is the total value of all sthares on the stock market the bottom lineenterprise value estimates a company s total value generally used by other companies when considering a merger or acquisition investors can also use ev to estimate a company s size and worth to help them evaluate their stock choices ev is best used with other metrics for valuating a stock some popular ratios are ev sales and ev ebitda correction dec 17 2022 the article has been updated from a previous version that incorrectly omitted debt when describing the formula for calculating enterprise value debt is a necessary element of the formula | |
what is the enterprise value to revenue multiple ev r | the enterprise value to revenue multiple ev r is a measure of the value of a stock that compares a company s enterprise value to its revenue ev r is one of several fundamental indicators that investors use to determine whether a stock is priced fairly the ev r multiple is also often used to determine a company s valuation in the case of a potential acquisition it s also called the enterprise value to sales multiple understanding enterprise value to revenue multiple ev r the enterprise value to revenue ev r multiple helps compare a company s revenues to its enterprise value the lower the better in that a lower ev r multiple signals a company is undervalued generally used as a valuation multiple the ev r is often used during acquisitions an acquirer will use the ev r multiple to determine an appropriate fair value the enterprise value is used because it adds debt and takes out cash which an acquirer would take on and receive respectively | |
how to calculate enterprise value to revenue multiple ev r | the enterprise value to revenue ev r is easily calculated by taking the enterprise value of the company and dividing it by the company s revenue ev r enterprise value revenue where enterprise value mc d cc mc market capitalization d debt cc cash and cash equivalents begin aligned text ev r frac text enterprise value text revenue textbf where text enterprise value text mc text d text cc text mc text market capitalization text d text debt text cc text cash and cash equivalents end aligned ev r revenueenterprise value where enterprise value mc d ccmc market capitalizationd debtcc cash and cash equivalents example of how to use enterprise value to revenue multiple ev r say a company has 20 million in short term liabilities on the books and 30 million in long term liabilities it has 125 million worth of assets and 10 of those assets are reported as cash there are 10 million shares of the company s common stock outstanding and the current price per share of the stock is 17 50 the company reported 85 million in revenue last year using this scenario the enterprise value of the company is enterprise value 10 000 000 17 50 20 000 000 30 000 000 125 000 000 0 1 175 000 000 50 000 000 12 500 000 212 500 000 begin aligned text enterprise value 10 000 000 times 17 50 quad 20 000 000 30 000 000 quad 125 000 000 times 0 1 175 000 000 50 000 000 quad 12 500 000 212 500 000 end aligned enterprise value 10 000 000 17 50 20 000 000 30 000 000 125 000 000 0 1 175 000 000 50 000 000 12 500 000 212 500 000 next to find the ev r simply take the ev and divide it by the revenue for the year ev r 212 500 000 85 000 000 2 5 begin aligned text ev r frac 212 500 000 85 000 000 2 5 end aligned ev r 85 000 000 212 500 000 2 5 enterprise value can be calculated using a slightly more complicated formula that includes a few more variables some analysts prefer this method over the more simplified version the version of enterprise value with added terms is enterprise value mc d psc mi cc where psc preferred shared capital mi minority interest begin aligned text enterprise value text mc text d text psc text mi text cc textbf where text psc text preferred shared capital text mi text minority interest end aligned enterprise value mc d psc mi ccwhere psc preferred shared capitalmi minority interest as a real life example consider the major retail sector notably wal mart nyse wmt target nyse tgt and big lots nyse big the enterprise values of wal mart target and big lots are 433 9 billion 79 33 billion and 3 36 billion respectively as of aug 15 2020 1 2 3 meanwhile the three have revenues over the trailing 12 months of 534 66 billion 80 1 billion and 5 47 billion respectively dividing each of their enterprise values by revenues means wal mart s ev r is 0 81 target s is 0 99 and big lots is 0 61 1 2 3 the difference between enterprise value to revenue multiple ev r and enterprise value to ebitda ev ebitda the enterprise value to revenue ev r looks at a companies revenue generating ability while the enterprise value to ebitda ev ebitda also known as the enterprise multiple looks at a company s ability to generate operating cash flows ev ebitda takes into account operating expenses while ev r looks at just the top line the advantage that ev r has is that it can be used for companies that are yet to generate income or profits such as the case with amazon amzn in its early days limitations of using enterprise value to revenue multiple ev r the enterprise value to revenue multiple should be used to compare companies in the same industry and as a benchmark of the ratio from best in breed in the industry to know whether the ratio represents a good performance or poor one also unlike market cap which is readily available on the likes of yahoo finance the ev r multiple requires calculating the enterprise value this requires adding the debt and subtracting out the cash and could involve additional factors if using the expanded version | |
what is enterprise value to sales ev sales | enterprise value to sales ev sales is a financial valuation measure that compares the enterprise value ev of a company to its annual sales the ev sales multiple gives investors a quantifiable metric of how to value a company based on its sales while taking account of both the company s equity and debt the formula for enterprise value to sales ev sales mc d cc annual sales where mc market capitalization d debt cc cash and cash equivalents begin aligned text ev sales frac text mc text d text cc text annual sales textbf where text mc text market capitalization text d text debt text cc text cash and cash equivalents end aligned ev sales annual salesmc d cc where mc market capitalizationd debtcc cash and cash equivalents | |
how to calculate enterprise value to sales | enterprise value to sales is calculated by a slightly more complicated version of enterprise value with a few more variables is sometimes used the more complex formula for ev is ev mc d ps mi cc where ps preferred shares mi minority interest begin aligned text ev text mc text d text ps text mi text cc textbf where text ps text preferred shares text mi text minority interest end aligned ev mc d ps mi ccwhere ps preferred sharesmi minority interest | |
what does enterprise value to sales tell you | enterprise value to sales is an expansion of the price to sales p s valuation the latter of which uses market capitalization instead of enterprise value ev sales is perceived to be more accurate than p s in part because the market capitalization alone does not take a company s debt into account when valuing the company while enterprise value does ev to sales multiples are usually found to be between 1x and 3x generally a lower ev sales multiple will indicate that a company may be more attractive or undervalued in the market the ev sales measure can also be negative when the cash balance of the company is greater than the market capitalization and debt structure signaling that the company can essentially be bought with its own cash the ev to sales measure can however be slightly deceptive in that a higher multiple is not always a signal of over valuation a high ev to sales can be a positive sign that investors believe that future sales will greatly increase a lower ev to sales can likewise signal that future sales prospects are not very attractive to make the most out of this metric compare the ev to sales to that of other companies in the same industry and look deeper into the company you are analyzing example of how to use enterprise value to salesassume that a company reports sales for the year of 70 million the company has 10 million of short term liabilities on the books and 25 million of long term liabilities it has 90 million worth of assets with 20 of that in cash lastly the company has 5 million shares of common stock outstanding and the current price of the stock is 25 per share using this scenario the company s enterprise value is ev market cap 5 million shares 25 stock price total debt 10 million 25 million cash 90 million 20 125 million 35 million 18 million 142 million begin aligned text ev text market cap 5 million shares times text 25 stock price quad text total debt 10 million text 25 million quad text cash 90 million times 20 125 text million 35 text million 18 text million 142 text million end aligned ev market cap 5 million shares 25 stock price total debt 10 million 25 million cash 90 million 20 125 million 35 million 18 million 142 million next to find the ev to sales simply divide the calculated enterprise value by sales in this example the ev to sales is ev sales 142 million 70 million 2 03 begin aligned text ev sales frac 142 text million 70 text million 2 03 end aligned ev sales 70 million 142 million 2 03 taking the ev sales ratio a step further consider coca cola the company has a market cap of 237 billion as of dec 31 2019 1enterprise value to sales vs price to salesthe ev to sales ratio takes into account the debt and cash a company has the price to sales ratio meanwhile does not the price to sales ratio is quicker to calculate using only a company s market cap as the numerator however debtholders do have a claim on sales and should theoretically be included in the valuation limitations of using enterprise value to salesthe ev sales ratio requires calculating the enterprise value which involves a little more digging into financial statements ev is generally used for valuing acquisitions where the acquirer will assume the debt of the company but also get the cash another limitation to be aware of is that sales do not take into account a company s expenses or taxes | |
what is the entity theory | the entity theory is a legal theory and accounting concept that all of the business activity conducted by any corporation or limited liability business is separate from that of its owners the entity theory has two aspects in accounting it means that business and personal accounts transactions assets and liabilities should be accounted for under separate and district entities independently of the owners personal finances in business law it means that under the premise of limited liability the owners of a business that is structured as a separate entity should not be held personally liable for the liabilities incurred by the business despite some criticisms due in large part to its fictitious nature and the agency problems it creates in practice the entity theory has been invaluable to limited liability company llc accounting practices and the status of corporations today as juridical persons understanding the entity theoryunder the entity theory an individual or group of people working together as a business firm is treated as a separate legal and accounting entity essentially creating a fictional person anyone who does business with that individual or group is considered in the legal and accounting senses to be doing business with the firm rather than the people with whom they are actually dealing this allows both 1 the collective accounting for transactions and 2 the legal ownership and responsibility for assets and liabilities to be recorded and adjudicated separately from any other activities that the members of the firm engage in grouping the accounting of transactions together under separate entities means that profits or losses and the net value of relevant assets can be calculated more easily in order to facilitate rational economic decision making making business firms fictional persons in the eyes of the law means that firms can own assets and property issue debt borrow money enter into contracts and so on firms can also be sued without also suing the ownership and management personally under the entity theory the accounting equation for a business balance sheet depicts the firm as an entity the sum total of its assets on one side of the equation against two separate entities the stockholders who hold the firm s equity and the creditor who hold the firm s liabilities or debts assets liabilities stockholders equity where liabilities all current and long term debts and obligations stockholders equity assets available to shareholders after all liabilities begin aligned text assets text liabilities text stockholders equity textbf where text liabilities text all current and long term text debts and obligations text stockholders equity text assets available to text shareholders after all liabilities end aligned assets liabilities stockholders equitywhere liabilities all current and long termdebts and obligationsstockholders equity assets available toshareholders after all liabilities this can be contrasted to the equation for the balance sheet equation of a sole proprietorship or non limited liability company or the net worth of an individual which depicts the value of the business or individual as the difference between the assets that they own and the debts that they are liable for all as a single legal and accounting entity by insulating owners of a business from full liability for the actions of business the application of the entity theory facilitates the concentration of productive assets under the control of managers and employees of a business who usually have more specialized knowledge and skills as to how to apply those assets profitably limiting owner s liability is a way to induce them to entrust control over their assets to managers who can use them more productively than the owners themselves can increasing opportunities for cooperative business activities that produce value for all the individuals involved criticisms of the entity theorythough the basic concept of the entity theory has been circulating since at least the 19th century and is the prevailing manner in which business is conducted and accounted for all over the world it is not always intuitively understood by many people this is mainly due to the somewhat obvious problem that it requires that people believe or at least pretend to believe in imaginary entities that exist only on paper in accounting statements and legal documents in reality a company is not itself an independent entity but a collective pretense of the owners managers employees and other stakeholders involved in business transactions with them however entity theory requires that real people at least in their business and legal dealings act as if they believe that imaginary people really exist this legal and accounting pretense is designed to help keep track of and protect profits that the business generates and encourage productive investment though it may seem almost like magic or perhaps voluntary insanity this profit is invariably linked to the owners wallets but the application of entity theory in accounting and law shields those wallets from the full costs and risks that the business also generates the second criticism of entity theory is that it can create and exacerbate agency problems by separating ownership claims on profits from control over the actual business activities that generate those profits owners who are insulated in an accounting sense but especially in a legal sense from full liability for the costs and risks that their business creates simply have less incentive to care if a firm incurs debts it cannot pay or imposes costs and risks on outsiders and bystanders which economists call externalities employees and managers likewise have less incentive to care if their actions harm the interests of the owners or third parties when they know that the owners risk is limited and that their own risk of loss is similarly limited to the risk of losing their jobs | |
what is an entrepreneur | an entrepreneur is an individual who creates a new business bearing most of the risks and enjoying most of the rewards the process of setting up a business is known as entrepreneurship entrepreneurs play a key role in any economy using the skills and initiative necessary to anticipate needs and bring new ideas to market entrepreneurship that proves to be successful in taking on the risks of creating a startup is rewarded with profits and growth opportunities investopedia yurle villegas | |
why are entrepreneurs important | entrepreneurship is one of the resources economists categorize as integral to production the other three being land natural resources labor and capital an entrepreneur combines the first three of these to manufacture goods or provide services they typically create a business plan hire labor acquire resources and financing and provide leadership and management for the business economists have never had a consistent definition of entrepreneur or entrepreneurship the word entrepreneur comes from the french verb entreprendre meaning to undertake though the concept of an entrepreneur existed and was known for centuries the classical and neoclassical economists left entrepreneurs out of their formal models they assumed that perfect information would be known to fully rational actors leaving no room for risk taking or discovery it wasn t until the middle of the 20th century that economists seriously attempted to incorporate entrepreneurship into their models three thinkers were central to the inclusion of entrepreneurs joseph schumpeter frank knight and israel kirzner schumpeter suggested that entrepreneurs not just companies were responsible for the creation of new things in the search for profit knight focused on entrepreneurs as the bearers of uncertainty and believed they were responsible for risk premiums in financial markets kirzner thought of entrepreneurship as a process that led to the discovery of opportunities fast forward to today entrepreneurs commonly face many obstacles when building their companies the three that many of them cite as the most challenging include overcoming bureaucracy hiring talent and obtaining financing | |
what are different types of entrepreneurs | not every entrepreneur is the same and not all have the same goals here are a few types of entrepreneurs builders seek to create scalable businesses within a short time frame builders typically pass 5 million in revenue in the first two to four years and continue to build up until 100 million or beyond these individuals seek to build out a strong infrastructure by hiring the best talent and seeking the best investors sometimes they have temperamental personalities that are suited to the fast growth they desire but may make personal and business relationships difficult opportunistic entrepreneurs are optimistic individuals with the ability to pick out financial opportunities get in at the right time stay on board during the time of growth and exit when a business hits its peak these types of entrepreneurs are concerned with profits and the wealth they will build so they are attracted to ideas where they can create residual or renewal income because they are looking to find well timed opportunities opportunistic entrepreneurs can be impulsive innovators are those rare individuals that come up with a great idea or product that no one has thought of before think of thomas edison steve jobs and mark zuckerberg these individuals worked on what they loved and found business opportunities through their vision and ideas rather than focusing on money innovators tend to care more about the impact that their products and services have on society these individuals are not the best at running a business as they are idea generating individuals so they often leave the day to day operations to those more capable in that respect these individuals are analytical and risk averse they have a strong skill set in a specific area obtained through education or apprenticeship a specialist entrepreneur will build out their business through networking and referrals sometimes resulting in slower growth than a builder entrepreneur 4 types of entrepreneurshipas there are different types of entrepreneurs there are also different types of businesses they create below are the main different types of entrepreneurship small business entrepreneurship refers to opening a business without turning it into a large conglomerate or opening many chains a single location restaurant one grocery shop or a retail shop to sell goods or services would all be examples of small business entrepreneurship these people usually invest their own money and succeed if their businesses turn a profit which serves as their income sometimes they don t have outside investors and will only take a loan if it helps continue the business these are companies that start with a unique idea that can be built to a large scale think silicon valley the hopes are to innovate with a unique product or service and continue growing the company continuously scaling up over time these types of companies often require investors and large amounts of capital to grow their idea and expand into multiple markets large company entrepreneurship is a new business division created within an existing company the existing company may be well placed to branch out into other sectors or it may be positioned well to become involved in new technology ceos of these companies either foresee a new market for the company or individuals within the company generate ideas that they bring to senior management to start the process and development social entrepreneurshipthe goal of social entrepreneurship is to create a benefit to society and humankind this form of business focuses on helping communities or the environment through their products and services they are not driven by profits but rather by helping the world around them | |
how to become an entrepreneur | after retiring her professional dancing shoes judi sheppard missett became an entrepreneur by teaching a dance class in order to earn some extra cash but she soon learned that women who came to her studio were less interested in learning precise steps than they were in losing weight and toning up sheppard missett then trained instructors to teach her routines to the masses and jazzercise was born soon a franchise deal followed and today the company has more than 8 300 locations worldwide following an ice cream making correspondence course two entrepreneurs jerry greenfield and ben cohen paired 8 000 in savings with a 4 000 loan leased a burlington vermont gas station and purchased equipment to create uniquely flavored ice cream for the local market today ben jerry s hauls in millions in annual revenue in the 21st century the example of internet giants like google goog and later its parent company alphabet as well as facebook and now its parent company meta meta both companies have made their founders wildly wealthy have been clear examples of the lasting impact of entrepreneurs on society unlike traditional professions where there is often a defined path to follow the road to entrepreneurship is mystifying to most what works for one entrepreneur might not work for the next and vice versa that said there are seven general steps that many successful entrepreneurs have followed this first step is not a strict requirement but is definitely recommended while entrepreneurs have built successful businesses while being less than financially flush starting out with an adequate cash supply and stable ongoing funding is a great foundation this increases an entrepreneur s personal financial runway and gives them more time to work on building a successful business rather than worrying about having to keep raising money or paying back short term loans once a person has strong finances it is important to build a diverse set of skills and then apply those skills in the real world the beauty of step two is it can be done concurrently with step one building a skill set can be achieved through learning and trying new tasks in real world settings for example if an aspiring entrepreneur has a background in finance they can move into a sales role at their existing company to learn the soft skills necessary to be successful once a diverse skill set is built it gives an entrepreneur a toolkit that they can rely on when they are faced with the inevitability of tough situations much has been discussed about whether going to college is necessary to become a successful entrepreneur many well known entrepreneurs are famous for having dropped out of college steve jobs mark zuckerberg and larry ellison to name a few though going to college isn t necessary to build a successful business it can teach young individuals a lot about the world in many other ways and these famous college dropouts are the exception rather than the norm college may not be for everyone and the choice is personal but it is something to think about especially with the high price tag of a college education in the u s as important as developing a diverse skill set is the need to consume a diverse array of information and knowledge building materials is equally so this content can be in the form of podcasts books articles or lectures the important thing is that the content no matter the channel should be varied in what it covers aspiring entrepreneurs should always familiarize themselves with the world around them so they can look at industries with a fresh perspective giving them the ability to build a business around a specific sector through the consumption of content across multiple channels an aspiring entrepreneur is able to identify various problems in need of solutions one business adage dictates that a company s product or service needs to solve a specific pain point either for another business or for a consumer group through the identification of a problem an aspiring entrepreneur is able to build a business around solving that problem it is important to combine steps three and four so it is possible to identify a problem to solve by looking at various industries as an outsider this often provides an aspiring entrepreneur with the ability to see a problem others might not successful startups solve a specific pain point for other companies or for the public this is known as adding value within the problem only through adding value to a specific problem or pain point does an entrepreneur become successful say for example you identify that the process for making a dental appointment is complicated for patients and dentists are losing customers as a result the value could be to build an online appointment system that makes it easier to book appointments most entrepreneurs can t do it alone the business world is a cutthroat one and getting any help you can will likely help and reduce the time it takes to achieve a successful business networking is critical for any new entrepreneur meeting the right people who can introduce you to contacts in your industry such as the right suppliers financiers and even mentors can mean the difference between success and failure attending conferences emailing and calling people in the industry speaking to your cousin s friend s brother who is in a similar business will help you get out into the world and discover people who can guide you once you have your foot in the door with the right people conducting a business becomes easier every entrepreneur needs to be a leader within their company simply doing the day to day requirements will not lead to success a leader needs to work hard motivate and inspire their employees to reach their best potential which will lead to the success of the company look at some of the greatest and most successful companies all of them have had great leaders apple with steve jobs and microsoft with bill gates are just a couple examples study these people and read their books to see how to be a great leader and become the leader that your employees can follow by the example you set entrepreneurship financinggiven the riskiness of a new venture the acquisition of capital funding is particularly challenging and many entrepreneurs deal with it via bootstrapping financing a business using methods such as using their own money providing sweat equity to reduce labor costs minimizing inventory and factoring receivables while some entrepreneurs are lone players struggling to get small businesses off the ground on a shoestring others take on partners armed with greater access to capital and other resources in these situations new firms may acquire financing from venture capitalists angel investors hedge funds crowdfunding or through more traditional sources such as bank loans there are a variety of financing resources for entrepreneurs starting their own businesses obtaining a small business loan through the small business administration sba can help entrepreneurs get the business off the ground with affordable loans here the sba helps connect businesses to loan providers if entrepreneurs are willing to give up a piece of equity in their business then they may find financing in the form of angel investors and venture capitalists these types of investors also provide guidance mentorship and connections in addition to capital crowdfunding has also become a popular way for entrepreneurs to raise capital particularly through kickstarter or indiegogo in this way an entrepreneur creates a page for their product and a monetary goal to reach while promising certain givebacks to those who donate such as products or experiences bootstrapping refers to building a company solely from your savings as an entrepreneur as well as from the initial sales made from your business this is a difficult process as all the financial risk is placed on the entrepreneur and there is little room for error if the business fails the entrepreneur also may lose all of their life savings the advantage of bootstrapping is that an entrepreneur can run the business with their own vision and no outside interference or investors demanding quick profits that being said sometimes having an outsider s assistance can help a business rather than hurt it many companies have succeeded with a bootstrapping strategy but it is a difficult path a small business and entrepreneurship have a lot in common but they are different a small business is a company usually a sole proprietorship or partnership that is not a medium sized or large sized business operates locally and does not have access to a vast amount of resources or capital entrepreneurship is when an individual who has an idea acts on that idea usually to disrupt the current market with a new product or service entrepreneurship usually starts as a small business but the long term vision is much greater to seek high profits and capture market share with an innovative new idea entrepreneurs seek to generate revenues that are greater than costs increasing revenues is the goal and that can be achieved through marketing word of mouth and networking keeping costs low is also critical as it results in higher profit margins this can be achieved through efficient operations and eventually economies of scale the taxes you will pay as an entrepreneur will depend on how you structure your business sole proprietorship a business set up this way is an extension of the individual business income and expenses are filed on schedule c on your u s personal tax return and you are taxed at your individual tax rate partnership for tax purposes a partnership functions the same way as a sole proprietorship in the u s with the only difference being that income and expenses are split amongst the partners entrepreneurs operating as sole proprietors can deduct any legitimate business expenses from their income to lower their tax bill this includes expenses such as their home office and utilities mileage for business travel advertising and travel expenses c corporation a c corporation is a separate legal entity and has separate taxes filed with the irs from the entrepreneur the business income will be taxed at the corporate tax rate rather than the personal income tax rate s corporation an is corporation is a corporation that is not taxed like a typical corporation all the income passes through to the individual owner or owners and is reported and taxed on their personal returns limited liability company llc an llc can either be taxed as a corporation a partnership or on the individual s return this will depend on the number of members and how they elect to be taxed 7 characteristics of entrepreneurs | |
what else do entrepreneurial success stories have in common they invariably involve industrious people diving into things they re naturally passionate about | giving credence to the adage find a way to get paid for the job you d do for free passion is arguably the most important attribute entrepreneurs must have and every edge helps while the prospect of becoming your own boss and raking in a fortune is alluring to entrepreneurial dreamers the possible downside to hanging out one s own shingle is vast income isn t guaranteed employer sponsored benefits go by the wayside and when your business loses money your personal assets can take a hit it s not a corporation s bottom line but adhering to a few tried and true principles can go a long way in diffusing risk the following are a few characteristics required to be a successful entrepreneur | |
when starting out it s essential to personally handle sales and other customer interactions whenever possible direct client contact is the clearest path to obtaining honest feedback about what the target market likes and what you could be doing better if it s not always practical to be the sole customer interface entrepreneurs should train employees to invite customer comments as a matter of course not only does this make customers feel empowered but happier clients are more likely to recommend businesses to others | personally answering phones is one of the most significant competitive edges home based entrepreneurs hold over their larger competitors in a time of high tech backlash where customers are frustrated with automated responses and touch tone menus hearing a human voice is one surefire way to entice new customers and make existing ones feel appreciated an important fact given that a significant percentage of business is generated from repeat customers paradoxically while customers value high touch telephone access they also expect a highly polished website even if your business isn t in a high tech industry entrepreneurs still must exploit internet technology to get their message across a startup garage based business can have a superior website to an established company valued at 100 million just make sure a live human being is on the other end of the phone number listed few successful business owners find perfect formulas straight out of the gate on the contrary ideas must morph over time whether tweaking product design or altering food items on a menu finding the perfect sweet spot takes trial and error former starbucks chair and ceo howard schultz initially thought playing italian opera music over store speakers would accentuate the italian coffeehouse experience he was attempting to replicate but customers saw things differently and didn t seem to like arias with their espressos as a result schultz jettisoned the opera and introduced comfortable chairs instead at the heart of any successful new business is steady cash flow which is essential for purchasing inventory paying rent maintaining equipment and promoting the business the key to staying in the black is rigorous regular cash flow management and since most new businesses don t make a profit within the first year by setting money aside for this contingency entrepreneurs can help mitigate the risk of falling short of funds related to this it s essential to keep personal and business costs separate and never dip into business funds to cover the costs of daily living of course it s important to pay yourself a realistic salary that allows you to cover essentials but not much more especially where investors are involved of course such sacrifices can strain relationships with loved ones who may need to adjust to lower standards of living and endure worry over risking family assets for this reason entrepreneurs should communicate these issues well ahead of time and make sure significant loved ones are on board running your own business is extremely difficult especially getting one started from scratch it requires a lot of time dedication and often failure a successful entrepreneur must show resilience to all the difficulties on the road ahead whenever they meet with failure or rejection they must keep pushing forward starting your business is a learning process and any learning process comes with a learning curve which can be frustrating especially when money is on the line it s important never to give up through the difficult times if you want to succeed similar to resilience a successful entrepreneur must stay focused and eliminate the noise and doubts that come with running a business becoming sidetracked not believing in your instincts and ideas and losing sight of the end goal is a recipe for failure a successful entrepreneur must always remember why they started the business and remain on course to see it through knowing how to manage money and understanding financial statements are critical for anyone running their own business knowing your revenues your costs and how to increase or decrease them respectively is important making sure you don t burn through cash will allow you to keep the business alive implementing a sound business strategy knowing your target market your competitors and your strengths and weaknesses will allow you to maneuver the difficult landscape of running your business successful communication is important in almost every facet of life regardless of what you do it is also of the utmost importance in running a business from conveying your ideas and strategies to potential investors to sharing your business plan with your employees and negotiating contracts with suppliers all require successful communication entrepreneurship in economicsin economist speak an entrepreneur acts as a coordinating agent in a capitalist economy this coordination takes the form of resources being diverted toward new potential profit opportunities the entrepreneur moves various resources both tangible and intangible promoting capital formation in a market full of uncertainty it is the entrepreneur who can actually help clear up uncertainty as they make judgments or assume risk to the extent that capitalism is a dynamic profit and loss system entrepreneurs drive efficient discovery and consistently reveal knowledge established firms face increased competition and challenges from entrepreneurs which often spurs them toward research and development efforts as well in technical economic terms the entrepreneur disrupts the course toward steady state equilibrium in 2023 there were about 33 2 million small businesses in the united states nurturing entrepreneurship can have a positive impact on an economy and society in several ways for starters entrepreneurs create new businesses they invent goods and services resulting in employment and often create a ripple effect resulting in more and more development for example after a few information technology companies began in india in the 1990s businesses in associated industries like call center operations and hardware providers began to develop too offering support services and products entrepreneurs add to the gross national income existing businesses may remain confined to their markets and eventually hit an income ceiling but new products or technologies create new markets and new wealth additionally increased employment and higher earnings contribute to a nation s tax base enabling greater government spending on public projects entrepreneurs create social change they break tradition with unique inventions that reduce dependence on existing methods and systems sometimes rendering them obsolete smartphones and their apps for example have revolutionized work and play across the globe entrepreneurs invest in community projects and help charities and other non profit organizations supporting causes beyond their own bill gates for example has used his considerable wealth for education and public health initiatives overall though entrepreneurship is a critical driver of innovation and economic growth therefore fostering entrepreneurship is an important part of the economic growth strategies of many local and national governments around the world to this end governments commonly assist in the development of entrepreneurial ecosystems which may include entrepreneurs themselves government sponsored assistance programs and venture capitalists they may also include non government organizations such as entrepreneurs associations business incubators and education programs california s silicon valley is often cited as an example of a well functioning entrepreneurial ecosystem the region has a well developed venture capital base a large pool of well educated talent especially in technical fields and a wide range of government and non government programs fostering new ventures and providing information and support to entrepreneurs questions for entrepreneursembarking on the entrepreneurial career path to being your own boss is exciting but along with all your research make sure to do your homework about yourself and your situation | |
what does it mean to be an entrepreneur | an entrepreneur is an individual who starts their own business based on an idea they have or a product they have created while assuming most of the risks and reaping most of the rewards of the business | |
what is the best definition of entrepreneurship | entrepreneurship is the process of setting up a business taking it from an idea to realization | |
what are the four types of entrepreneurs | four types of entrepreneurs include builders opportunists innovators and specialists | |
what are the seven characteristics of entrepreneurs | seven primary characteristics among entrepreneurs include versatility resilience flexibility money savviness business smarts focus and having strong communication skills the bottom linean entrepreneur is an individual who takes an idea or product and creates a business a process known as entrepreneurship creating a business requires a lot of work and dedication which not everyone is cut out for entrepreneurs are often young highly motivated risk takers who have a vision and often sacrifice a lot to achieve that vision entrepreneurs enter the market because they love what they do believe their product will have a positive impact and hope to make profits from their efforts the steps entrepreneurs take fuel the economy they create businesses that employ people and make products and services that consumers buy today | |
what is an envelope | envelopes are technical indicators that are typically plotted over a price chart with upper and lower bounds the most common example of an envelope is a moving average envelope which is created using two moving averages that define upper and lower price range levels envelopes are commonly used to help traders and investors identify extreme overbought and oversold conditions as well as trading ranges | |
how envelopes work | traders can interpret envelopes in many different ways but most use them to define trading ranges when the price reaches the upper bound the security is considered overbought and a sell signal is generated conversely when the price reaches the lower bound the security is considered oversold and a buy signal is generated these strategies are based on mean reversion principles the upper and lower bounds are typically defined such that the price tends to stay within the upper and lower thresholds during normal conditions for a volatile security traders may use higher percentages when creating the envelope to avoid whipsaw trading signals meanwhile less volatile securities may necessitate lower percentages to create a sufficient number of trading signals envelopes are commonly used in conjunction with other forms of technical analysis to enhance the odds of success for example traders may identify potential opportunities when the price moves outside of the envelope and then look at chart patterns or volume metrics to identify when a tipping point is about to occur after all securities can trade at overbought or oversold conditions for a prolonged period of time example of an envelopemoving average envelopes are the most common type of envelope indicator using either a simple or exponential moving average an envelope is created by defining a fixed percentage to create upper and lower bounds let s take a look at a five percent simple moving average envelope for the s p 500 spdr spy image by sabrina jiang investopedia 2021the calculations for this envelope are upper bound sma 50 sma 50 0 05 lower bound sma 50 sma 50 0 05 midpoint sma 50 where sma 50 50 day simple moving average begin aligned text upper bound text sma 50 text sma 50 0 05 text lower bound text sma 50 text sma 50 0 05 text midpoint text sma 50 textbf where text sma 50 text 50 day simple moving average end aligned where upper bound sma50 sma50 0 05lower bound sma50 sma50 0 05midpoint sma50 sma50 50 day simple moving average traders may have taken a short position in the exchange traded fund when the price moved beyond the upper range and a long position when the price moved below the lower range in these cases the trader would have benefited from the reversion to the mean over the following periods traders may set stop loss points at a fixed percentage beyond the upper and lower bounds while take profit points are often set at the midpoint line | |
what is environmental economics | environmental economics is the study of the cost effective allocation use and protection of the world s natural resources economics broadly speaking is the study of how humans produce and consume goods and services environmental economics focuses on how they use and manage finite resources in a manner that serves the population while meeting concerns about environmental impact this helps governments weigh the pros and cons of alternative measures and design appropriate environmental policies understanding environmental economicsthe basic theory underpinning environmental economics is that environmental amenities or environmental goods have economic value and there are costs to economic growth that are not accounted for in more traditional models environmental goods include things like access to clean water clean air the survival of wildlife and the general climate although it is hard to put a price tag on environmental goods there may be a high cost when they are lost environmental goods are usually difficult to fully privatize and subject to the tragedy of the commons destruction or overuse of environmental goods like pollution and other kinds of environmental degradation can represent a form of market failure because it imposes negative externalities environmental economists analyze the costs and benefits of specific economic policies that seek to correct such problems and they may run theoretical tests or studies on the possible consequences of these policies in the united states any federal project that is likely to affect the environment such as a highway dam or other infrastructure must publish an environmental impact statement describing any potential risks to the natural environment these documents are used to assess any negative externalities of the project strategies in environmental economicsenvironmental economists are concerned with identifying specific problems but there can be many approaches to solving the same environmental issue if a state is trying to impose a transition to clean energy for example they have several options the government can impose a fixed limit on carbon emissions or it can adopt more incentive based solutions like placing quantity based taxes on emissions or offering tax credits to companies that adopt renewable power sources mitigation banking is a system of credits and debits that ensure ecological loss is compensated through preservation and restoration primarily mitigation banking deals with wetland and stream preservation it is simular to conservation banking which deals with endangered species all of these strategies rely on state intervention in the market but some governments prefer to use a light touch and others may be more assertive the degree of acceptable state intervention is an important political factor in determining environmental economic policy broadly speaking environmental economics may produce two types of policies in a prescriptive approach the government dictates specific measures to reduce environmental harm for example they may prohibit highly polluting industries or require certain emissions controlling technologies market based policies use economic incentives to encourage desired behaviors for example cap and trade regulations do not prohibit companies from pollution but they place a financial burden on those who do these incentives reward companies for reducing their emissions without dictating the method they use to do so the environmental protection agency was created by president richard nixon in 1970 1challenges of environmental economicsbecause the nature and economic value of environmental goods often transcend national boundaries environmental economics frequently requires a transnational approach for example an environmental economist could identify overfishing as a negative externality to be addressed the united states could impose regulations on its own fishing industry but the problem wouldn t be solved without similar action from many other nations the global character of such environmental issues has led to the rise of non governmental organizations ngos like the intergovernmental panel on climate change ipcc which organizes annual forums for heads of state to negotiate international environmental policies another challenge of environmental economics is the degree to which its findings affect other industries more often than not findings from environmental economists can result in controversy and their policy prescriptions may be difficult to implement due to the complexity of the world market the presence of multiple marketplaces for carbon credits is an example of the chaotic transnational implementation of ideas stemming from environmental economics fuel economy standards set by the environmental protection agency epa are another example of the balancing act required by policy proposals related to environmental economics in the u s policy proposals stemming from environmental economics tend to cause contentious political debate leaders rarely agree about the degree of externalized environmental costs making it difficult to craft substantive environmental policies the epa uses environmental economists to conduct analysis related policy proposals these proposals are then vetted and evaluated by legislative bodies the epa oversees a national center for environmental economics which emphasizes market based solutions like cap and trade policies for carbon emissions their priority policy issues are encouraging biofuel use analyzing the costs of climate change and addressing waste and pollution problems 2example of environmental economicsa prominent contemporary example of the use of environmental economics is the cap and trade system companies purchase carbon offsets from developing countries or environmental organizations to make up for their carbon emissions another example is the use of a carbon tax to penalize industries that emit carbon corporate average fuel economy cafe regulations are another example of environmental economics at work these regulations are prescriptive and specify the gallons per mile of gas for cars for car makers they were introduced during the 1970s to promote fuel efficiency in an era of gas shortages | |
what is the difference between environmental economics and ecological economics | environmental and ecological economics are both sub fields of economic thought that study the interactions between human activity and the natural environment the difference is that environmental economics studies the relationship between the environment and the economy while ecological economics considers the economy to be a subsystem of the wider ecosystem | |
what is the relationship between neoclassical economics and environmental economics | neoclassical economics is a broad theory that focuses on supply and demand as the driving forces of economic activity environmental economics is based on the neoclassical model but places a greater emphasis on negative externalities such as pollution and ecosystem loss | |
what are some jobs in environmental economics | environmental economists may find ready employment at the environmental protection agency or other environmental bodies at the state or local level these specialists are responsible for enforcing regulations to protect the environment and calculating the economic costs of enforcing regulations | |
what is the environmental protection agency epa | the environmental protection agency epa was established in december 1970 by the executive order of president richard nixon it is an agency of the united states federal government whose mission is to protect human and environmental health headquartered in washington d c the epa is responsible for creating standards and laws promoting the health of individuals and the environment understanding the environmental protection agency epa | |
why was the epa created it was formed in response to widespread public environmental concerns that gained momentum in the 1950s and 1960s from the epa s creation it has sought to protect and conserve the natural environment and improve the health of humans by researching the effects of and mandating limits on the use of pollutants | the epa regulates the manufacturing processing distribution and use of chemicals and other pollutants also the epa is charged with determining safe tolerance levels for chemicals and other pollutants in food animal feed and water the epa enforces its findings through fines sanctions and other procedures under the trump administration the epa s regulations of carbon emissions from power plants automobiles and other contributors to climate change instituted by president obama were significantly rolled back the epa s size and influence have also been diminished and criminal prosecutions for those who aren t following regulations are at a 30 year low the epa is led by the epa administrator a cabinet level post nominated by the president and confirmed by the senate that position is currently held by michael regan the first black man to ever hold that position he is expected to reverse many of the regulatory rollbacks of the trump administration examples of epa programsthe epa oversees several programs intended to promote energy efficiency environmental stewardship sustainable growth air and water quality and pollution prevention these programs include the epa protects human health and the environment with programs such as safer choice and the national pollutant discharge elimination system the epa also runs programs to | |
how the epa enforces laws | to protect communities and the environment the epa works to enforce laws such as the clean air act the safe drinking water act the national environmental education act and the clean water act some of which predate the formation of the agency itself the epa is also responsible for the detection and prevention of environmental crimes monitoring pollution levels and setting standards for the handling of hazardous chemicals and waste as part of its strategic plan when violations occur the epa investigates and pursues action against violators environmental offenses are categorized as civil or criminal civil offenses arise when environmental violations occur and no consideration is given to whether the offender knew of their transgression criminal offenses which comprise most of what the epa investigates arise when a violation occurs and the offender knew that their action caused it because of the severity of charges and punishment criminal convictions require proof beyond a reasonable doubt violators can be held civilly and or criminally responsible with punishments for civil offenses ranging from monetary fines to repairing environmental damage and punishments for criminal offenses ranging from monetary relief to imprisonment the largest civil penalty assessed for violating environmental law for civil violations the epa may enforce actions by issuing orders or seeking court rulings criminal violations are enforced by the epa or the governing state with punishments imposed by a judge examples of what the epa doesn t dobecause of its name there tends to be some confusion about what the epa does and doesn t do it doesn t handle every issue or concern that affects the environment the agency suggests contacting local state or other federal agencies to find out who is responsible for example the u s fish and wildlife service is responsible for the endangered species act while local and state wildlife officers are responsible for concerns about foxes birds rabbits and other animals the u s army corps of engineers is the agency that determines and issues permits for wetland areas food safety is the responsibility of the food and drug administration fda while issues about nuclear waste are handled by the department of energy s office of environmental management criticism of the epanot everyone supports the epa some critics argue that the epa s environmental regulations are too expensive and offer little benefits others claim that the epa stifles the economy contributes to unemployment rates and adversely affects international trade these opponents believe that the associated costs for companies to remain in compliance with environmental laws and standards erode profits and cause widespread layoffs contributing to unemployment these absorbent costs also prevent companies from being competitive globally they suggest that the costs are inflated and that those earmarked funds could be used for more productive ways to advance the economy and trade some proponents for environmental regulation disfavor the epa for not acting swiftly on matters that concern the environment for example in 2020 congress and environmentalists criticized the epa for moving slowly on limiting the use of perfluoroalkyl and polyfluoroalkyl pfas substances toxic chemicals found to cause cancer infertility and other diseases research shows that these toxins are contaminating the nation s drinking water and have been found in lifesaving equipment and household items these critics claim that in light of the research the epa is not doing enough or moving fast enough to protect public health the epa responded with action plans to address how communities monitor and address pfas contamination however critics argue that their plan lacks action and as a result is detrimental to the environment and the nation s citizens environmental protection agency epa faqsestablished by president nixon in december 1970 the epa a u s federal agency designed to protect human and environmental health was created in response to heightened concerns about pollution and its negative externalities the environmental protection agency epa creates and enforces laws designed to protect the environment and human health as part of their mission they seek to ensure that americans have a clean environment including the air water and land they use and enjoy in addition to creating and enforcing environmental laws they provide education and guidance on protecting the environment conduct research and development issue grants to state programs schools and other non profit organizations to further their mission and more you can contact the epa online by phone or in writing how to contact them depends on the nature of your concern or question for more information visit their website epa gov epa violations consist of intentional and nonintentional violations of environmental laws common examples include illegal disposal of hazardous chemicals or products illegal discharge of pollutants in bodies of water in the u s and tampering with water supplies the bottom linethe environmental protection agency epa is a federal government agency created by the nixon administration to protect human health and the environment the epa creates and enforces environmental laws inspects the environment and provides technical support to minimize threats and support recovery planning it consists of different programs such as the energy star program the smart growth program and water sense that promote energy efficiency environmental care and pollution prevention not all concerns with the environment are handled by the epa however for example protecting endangered species falls under the jurisdiction of the u s fish and wildlife service and protecting our nation s wetlands is under the authority of the u s army corps of engineers critics argue that the epa imposes unnecessary and large costs on corporations and strains the economy and international trade however the agency stands firms on its mission to create a better tomorrow for future generations by promoting a cleaner and safer environment and protecting human health | |
what is esg investing | esg stands for environmental social and governance esg investing refers to how companies score on these responsibility metrics and standards for potential investments environmental criteria gauge how a company safeguards the environment social criteria examine how it manages relationships with employees suppliers customers and communities governance measures a company s leadership executive pay audits internal controls and shareholder rights investopedia julie bang | |
how esg investing works | esg investing is sometimes referred to as sustainable investing responsible investing impact investing or socially responsible investing sri to assess a company based on esg criteria investors look at a broad range of behaviors and policies esg investors seek to ensure the companies they fund are responsible stewards of the environment good corporate citizens and led by accountable managers based on criteria including esg investors help inform the investment choices of large institutional investors such as public pension funds esg specific mutual funds and etfs reached a record 480 billion aum in 2023 4brokerage and mutual fund companies offer exchange traded funds etfs and other financial products that follow esg investing strategies robo advisors including betterment and wealthfront have promoted these esg themed offerings to younger investors socially responsible investing sri is an investment strategy highlighting one facet of esg sri investors seek companies that promote ethical and socially conscious themes including diversity inclusion community focus social justice corporate ethics and racial gender and sexual discrimination esg metricsinvestment firms like boston based trillium asset management use a variety of esg factors to help identify companies positioned for strong long term performance the criteria are set by analysts who identify the relevant issues facing specific sectors industries and companies 5trillium s esg criteria preclude investments in companies that operate in higher risk areas or have exposure to coal or hard rock mining nuclear or coal power private prisons agricultural biotechnology tobacco tar sands or weapons and firearms they do not invest in companies involved in major or recent controversies over human rights animal welfare environmental concerns governance issues or product safety 5trillium s metrics include investments in companies that support the environment through renewable energy sources and published sustainability reports social metrics include companies that operate ethical supply chains and avoid overseas labor with questionable workplace or child labor policies metrics for governance require companies to embrace diversity on the board of directors and maintain corporate transparency 5investors and esgas esg business practices gain traction investment firms track their performance financial services companies such as jpmorgan chase jpm wells fargo wfc and goldman sachs gs publish annual reports that extensively review their esg approaches and the bottom line results 678the ultimate value of esg investing depends on whether they encourage companies to drive real change for the common good or merely check boxes and publish reports 9 that in turn will depend on whether the investment flows follow esg tenets that are realistic measurable and actionable tobacco and defense are two industries avoided by many esg investors but historically produced above average market returns and can buck recessionary trends to support esg u s investors may be sacrificing returns in exchange for values many esg investors are willing to make that tradeoff though according to a survey of investopedia and treehugger readers nearly half of esg investors said they d be willing to take a 10 loss over five years to invest in a company that aligns exceptionally against esg standards but 74 of respondents said that valuation price was very or extremely important to them | |
how is esg investing different from sustainable investing | esg and sustainability are closely related esg investing screens companies based on criteria related to being pro social environmentally friendly and with good corporate governance together these features can lead to sustainability esg therefore looks at how a company s management and stakeholders make decisions sustainability considers the impact of those decisions on the world | |
what does esg mean for a business | adopting esg principles means corporate strategy focuses on environment social and governance this means taking measures to lower pollution and co2 output and reduce waste it also means having a diverse and inclusive workforce at the entry level and the board of directors | |
how do i know which investments are esg | several financial firms have esg ratings and scoring systems for instance msci has a rating scheme covering over 8 500 companies giving them scores and letter grades based on their compliance with esg standards and initiatives several other companies like morningstar and bloomberg have also created criteria for scoring companies on the esg objectives the bottom lineesg investing focuses on companies that follow positive environmental social and governance principles investors are increasingly eager to align their portfolios with esg related companies and fund providers making it an area of growth with positive effects on society and the environment | |
what is the equal credit opportunity act ecoa | the equal credit opportunity act ecoa is a federal civil rights law designed to ensure fair lending practices it prohibits lenders from discriminating against loan applicants with the sole exception being their ability to repay the loan specifically ecoa protects consumers from discrimination based on race color religion national origin sex marital status age eligibility for public assistance or the exercise of any rights under the consumer credit protection act this legislation serves as a vital safeguard against unfair lending practices and aims to promote equal access to credit opportunities for all individuals | |
how the equal credit opportunity act ecoa works | the equal credit opportunity act was enacted in 1974 and is detailed in title 15 of the united states code 5 the act as implemented by regulation b states that individuals applying for loans and other credit can be evaluated only using factors directly related to their creditworthiness it prohibits creditors and lenders from considering factors that are unrelated to creditworthiness specifically the following protected classes in 2021 the consumer financial protection bureau clarified that the prohibition against sex discrimination in ecoa and regulation b encompasses sexual orientation discrimination and gender identity discrimination including discrimination based on an applicant s nonconformity with sex based or gender based stereotypes 7ecoa prohibits discrimination in all aspects of a credit transaction and applies to any organization that extends credit including banks small loan and finance companies retail stores credit card companies and credit unions it also applies to anyone involved in the decision to grant credit or set credit terms ecoa covers various types of credit including personal loans credit cards home loans student loans car loans small business loans and loan modifications and it s not limited to just consumer loans ecoa applies to any extension of credit including those made to small businesses corporations partnerships and trusts 8special considerations | |
when a borrower applies for credit the lender may ask about some of the personal facts that ecoa prohibits 9 while these questions can t be used to make lending decisions and answering them is optional the information does help federal agencies enforce anti discrimination laws 10 | another aspect of ecoa allows each spouse in a marriage to have a credit history in their own name still if a borrower has any joint accounts with their spouse the accounts will appear on both credit reports that means a spouse s financial behavior can positively or negatively impact an individual borrower s credit score 11if you were turned down for a loan or a line of credit the lender must tell you in an adverse action notice the specific reasons your application was rejected or disclose that you have the right to request the reason for denial within 60 days of receiving the creditor s notification 12while ecoa prohibits lenders from basing their decisions on marital status some loans such as mortgages require a borrower to disclose if they are relying on alimony or child support income as a basis for obtaining the credit 13 however a borrower can t be denied a loan simply because they are divorced your equal credit opportunity rights | |
when you apply for a loan or line of credit ecoa gives you certain rights | additionally creditors can t detecting the signs of credit discriminationcredit discrimination is not always obvious which makes it hard to spot cfpb advises consumers to watch for warning signs of ecoa violations | |
what to do if you suspect discrimination | if you feel you ve been discriminated against at any point during a credit transaction there are several steps you can take examples of equal credit opportunity act ecoa enforcementone common violation of the ecoa is charging higher rates or fees to black indigenous and people of color bipoc applicants in july 2012 the department of justice doj reached a settlement of more than 175 million with wells fargo bank for a pattern or practice of discriminatory lending black and hispanic borrowers who qualified for loans were charged higher fees or rates or were improperly placed into subprime loans which are more costly 20in january 2017 a 53 million settlement was made against jpmorgan chase for lending discrimination based on race and national origin the doj found that the bank s brokers charged higher interest rates to bipoc borrowers than white borrowers in the run up to and during the 2008 financial crisis 21on november 8 2023 citibank was ordered by the cfpb to pay a 24 5 million civil penalty as a result of citibank s discriminatory practices against credit card applicants of armenian national origin between 2015 and 2021 22according to the cfpb citibank subjected these applicants to extra scrutiny negative assessments and frequent denials additionally the cfpb said that citibank failed to provide adequate reasons for these actions violating ecoa and the consumer financial protection act cfpa citibank is required to compensate affected consumers with 1 4 million and implement measures to prevent future discrimination 23who supervises the equal credit opportunity act ecoa the consumer financial protection bureau cfpb writes rules to implement ecoa and supervises institutions e g banks and lending companies to ensure they follow the law several other federal agencies share the job of supervising for compliance including the the cfpb enforces ecoa with the agencies listed above the department of justice and the federal trade commission 24 | |
what is the penalty for violating the equal credit opportunity act ecoa | lenders found in violation of ecoa can potentially face class action lawsuits from the department of justice doj if the doj or any affiliate agencies recognize a pattern of discrimination 2 the consumer financial protection bureau enforces ecoa with other federal agencies if found guilty the offending organization could have to pay out punitive damages that can be significant and cover any costs incurred by the wronged party 19 | |
does ecoa apply to all creditors | yes the equal credit opportunity act applies to all creditors financial institutions and other firms engaged in the extension of credit can t discriminate against an applicant based on a prohibited basis during any aspect of a credit transaction additionally lending officers and employees can t do anything that would on a prohibited basis discourage a reasonable person from applying for a loan 2513the bottom lineecoa is an important federal law promoting fair lending practices it bars lender discrimination and guards against bias related to race religion national origin gender marital status age public assistance eligibility or consumer protection rights ecoa has broad applicability covering various credit types and creditors consumers should be vigilant for signs of discrimination and can respond by contacting creditors state authorities government agencies or pursuing legal action ecoa enforcement involves multiple agencies including the cfpb and penalties for violations can be substantial ecoa s scope also extends to all creditors making sure everyone has a fair chance to get credit while stopping unfair treatment in credit transactions | |
what is the equal employment opportunity commission eeoc | the u s equal employment opportunity commission eeoc is the agency responsible for enforcing federal laws regarding discrimination or harassment against a job applicant or an employee in the united states the eeoc was formed by congress to enforce title vii of the civil rights act of 1964 opening its door for business on july 2 1965 1 it is headquartered in washington d c and as of 2021 it maintains 37 other field offices throughout the united states in 15 districts 2due to the covid 19 pandemic the eeoc has closed all of its physical field offices however you can still file a discrimination charge online or by phone at 1 800 669 4000 3 | |
how the eeoc works | the eeoc enforces federal laws that make it illegal to discriminate because of a person s race color religion sex including pregnancy gender identity and sexual orientation national origin age 40 or older disability or genetic information 4 in addition it is against the law to discriminate against a person who complains about discrimination has filed a charge of discrimination or has participated in an employment discrimination investigation or lawsuit 5 in fact 55 8 of charges filed with the eeoc in the 2020 fiscal year were for retaliation 6 indeed business ethics have changed considerably since the turbulent 1960s first roiled their relatively placid waters on june 15 2020 in a 6 to 3 ruling in bostock v clayton county georgia the u s supreme court determined that protections against discrimination by sex in title vii of the civil rights act protect lgbtq workers justice neil m gorsuch who wrote the opinion stated today we must decide whether an employer can fire someone simply for being homosexual or transgender the answer is clear an employer who fires an individual for being homosexual or transgender fires that person for traits or actions it would not have questioned in members of a different sex sex plays a necessary and undisguisable role in the decision exactly what title vii forbids 7the eeoc s authority and rolethe eeoc is vested with the authority to investigate any charges of discrimination brought against employers who are generally subject to eeoc laws if they have at least 15 employees in the case of age discrimination that minimum rises to 20 many labor unions and employment agencies fall under its jurisdiction as well 4the eeoc s role is to fairly and accurately assess allegations in the charge and then make a finding if it finds discrimination has occurred then it will try to settle the charge it also has the authority to file a lawsuit to protect individuals and the interests of the public 4the laws enforced by the eeoc apply to all types of work situations processes and functions this includes the hiring and firing of employees harassment among the staff or management job training promotions wages and benefits another role of the eeoc is to seek to prevent discrimination before it can occur 4 | |
how does the eeoc prevent discrimination | the eeoc works on preventing workplace discrimination through outreach and a variety of educational and technical assistance programs employers are liable for both their own behavior and that of their staff members even including independent contractors | |
what to do if you feel you ve been discriminated against at work | if you believe you ve been discriminated against at work because of your race color religion sex including pregnancy gender identity and sexual orientation national origin age 40 or older disability or genetic information then you can file a charge of discrimination with the eeoc this is a signed statement describing how an employer union or labor organization engaged in employment discrimination that asks the eeoc to take remedial action all of the laws enforced by the eeoc except for the equal pay act require you to file a charge of discrimination before you can file a job discrimination lawsuit against your employer 13there are time limits of either 180 or 300 calendar days depending on certain circumstances 14 you can file a charge through the eeoc public portal after you submit an online inquiry and have an intake interview with an eeoc staff member 15examples of eeoc jurisdictionthe eeoc may specifically investigate not only employers for violations but also members of their staff accused of engaging in harassment or discrimination 16 for example if a manager refuses to interview or hire qualified job candidates solely because of their ethnicity or race then the employer can be held accountable for allowing racist behavior to persist this also can be applied to employers who permit harassment to continue unchecked and although the eeoc itself says that independent contractors are not subject to anti discrimination laws 16 in 2009 the u s second circuit court of appeals ruled in halpert v manhattan apartments that companies can be held liable for independent contractors who act on their behalf 17the eeoc has filed lawsuits against companies where corrective action was not taken after derogatory slurs threats assaults unwanted sexual comments or inappropriate touching occurred in the workplace companies also can be penalized for not warning employees about past misconduct committed by another employee or manager with whom they are directed to work eeoc lawsuits might seek monetary damages including punitive and compensatory damages and injunctive relief in fiscal year 2020 the eeoc received 67 448 charges of workplace discrimination with 38 of claims being allegations of discrimination based on race or color 18 charges for sex based harassment which includes charges for sexual harassment clocked in at 11 497 down by nearly 1 300 from 2019 19the eeoc is open to attempts to settle cases before the issue is investigated and possibly taken to trial it offers a mediation procedure an informal process in which two parties can work with a neutral mediator to see if they can reach a reconciliation of their differences the mediator doesn t ultimately make a determination however serving only to help the two parties reach a settlement on their own if mediation fails then the eeoc proceeds to formally investigate the complaint 20 | |
equal weight is a type of proportional measuring method that gives the same importance to each stock in a portfolio index or index fund so stocks of the smallest companies are given equal statistical significance or weight to the largest companies when it comes to evaluating the overall group s performance | an equal weight index is also known as an unweighted index understanding equal weightequal weight differs from the method more commonly used by indexes funds and portfolios in which stocks are weighted based on their market capitalization many of the largest and most well known market indices are either market capitalization weighted or price weighted market cap weighted indices such as the standard poor s s p 500 give greater weight to the biggest companies according to market capitalization large caps such as apple and microsoft are among the biggest holdings in the s p 500 price weighted indices such as the dow jones industrial average djia give larger weightings to stocks with higher stock prices the concept of equally weighted portfolios has gained interest due to the historical performance of small cap stocks and the emergence of several exchange traded funds etfs standard poor s has developed more than 80 different equal weight indices based on combinations of market cap market and sector in the dow spdr dow jones industrial average etf trust dia an exchange traded fund that tracks the djia the largest holdings as of september 2021 are united healthgroup goldman sachs and the home depot 1performance of equal weighted indicessmall cap stocks are generally considered to be higher risk higher potential return investments compared to large caps in theory giving greater weight to the smaller names of the s p 500 in an equal weight portfolio should increase the return potential of the portfolio historically this has been the case in the short term from september 2020 to september 2021 the total one year return for the s p 500 equal weight index ewi was 41 93 vs 33 72 for the traditional s p 500 index 2however over the long term the gap narrows and in fact the returns flip the 10 year annualized total return september 2019 september 2021 for the s p 500 equal weight index was 15 32 but the s p 500 outperformed it returning 16 32 2s p global the parent company of standard poor s developed the s p 500 equal weight index in january 2003 an equal weight version of the popular s p 500 index as the name suggests although both indexes are comprised of the same stocks the different weighting schemes result in two indexes with different properties and different benefits for investors examples of equal weight fundsinvesco offers more than a dozen different equal weight funds covering not only major indices such as the s p 500 but also many of the market s major sectors the invesco s p 500 equal weight etf rsp for example provides the same exposure to the smallest companies in the s p 500 as it does to corporate giants such as general electric 3equal weight index funds tend to have higher portfolio turnover than market cap weighted index funds the fund manager has to periodically rebalance investment amounts so that each holding represents the same percentage amount of the total portfolio as a result they usually have higher trading costs and their trading prices can be more volatile than in regular index funds however equal weight etfs offer more protection if a large sector experiences a downturn other examples of equal weight index etfs include the invesco russell 1000 equal weight etf 4 which is based on the russell 1000 equal weight index and the first trust nasdaq 100 equal weighted index fund which uses the nasdaq 100 equal weighted index as its benchmark 5 | |
what is an equated monthly installment emi | an equated monthly installment emi is a fixed payment amount made by a borrower to a lender at a specified date each calendar month equated monthly installments are applied to both interest and principal each month so that over a specified number of years the loan is paid off in full in the most common types of loans such as real estate mortgages auto loans and student loans the borrower makes fixed periodic payments to the lender over several years to retire the loan | |
how an equated monthly installment emi works | emis differ from variable payment plans in which the borrower can pay higher amounts at his or her discretion in emi plans borrowers are usually only allowed one fixed payment amount each month the benefit of an emi for borrowers is that they know precisely how much money they will need to pay toward their loan each month which can make personal budgeting easier the benefit to lenders or investors the loan is sold to is that they can count on a steady predictable income stream from the loan interest the emi can be calculated using either the flat rate method or the reducing balance aks the reduce balance method the emi flat rate formula is calculated by adding together the principal loan amount and the interest on the principal and dividing the result by the number of periods multiplied by the number of months the emi reducing balance method is calculated using this formula examples of equated monthly installment emi to demonstrate how emi works let s walk through a calculation of it using both methods assume an individual takes out a mortgage to buy a new home the principal amount is 500 000 and the loan terms include an interest rate of 3 5 for 10 years using the flat rate method to calculate the emi the homeowner s monthly payments come out to 5 625 or 500 000 500 000 x 10 x 0 035 10 x 12 using the emi reducing balance method monthly payments would be approximately 4 944 29 or 500 000 0 0029 1 0 0029 120 1 0 0029 120 1 note that in the emi flat rate calculation the principal loan amount remains constant throughout the 10 year mortgage period this suggests that the emi reducing balance method may be a better option because the dwindling loan principal also shrinks the amount of interest due in the flat rate method each interest charge is calculated based on the original loan amount even though the loan balance outstanding is gradually being paid down the emi reducing balance method often works out to be more cost friendly to borrowers the flat rate method results in a higher effective interest rate equated monthly installment emi faqsin the finance world emi stands for equated monthly installment it refers to periodic payments made to settle an outstanding loan within a stipulated time frame as the name suggests these payments are the same amount each time there are two ways to calculate emi the flat rate method and the reducing balance or reduce balance method both take into account the loan principal the loan interest rate and the term of the loan in their calculations as soon as you purchase something on a credit card with an emi option that is doesn t demand payment in full each month your card s available credit limit is reduced by the total cost of the goods or service the emi on credit cards then works much like a home loan or a personal loan you pay back the principal and interest each month gradually reducing your debt over some time until you pay it off in full emi is deducted from a credit card using the reduce balance method emi is neither inherently good nor bad unless you consider borrowing and accruing debt bad and paying for things in full the only good option in terms of borrowing options emi does have its good points though because it divides the debt into the same fixed payments each month it helps borrowers budget their finances and keep in mind their outstanding obligations they know how much they have to pay and how long it will take them to settle their debt in full | |
what is the equation of exchange | the equation of exchange is an economic identity that shows the relationship between the money supply the velocity of money the price level and an index of expenditures it says that the total amount of money that changes hands in the economy will always equal the total money value of the goods and services that change hands in the economy understanding the equation of exchangethe original form of the equation is as follows m v p t where m the money supply or average currency units in circulation in a year v the velocity of money or the average number of times a currency unit changes hands per year p the average price level of goods during the year t an index of the real value of aggregate transactions begin aligned m times v p times t textbf where begin aligned m text the money supply or average currency units in text circulation in a year end aligned begin aligned v text the velocity of money or the average number of text times a currency unit changes hands per year end aligned p text the average price level of goods during the year t text an index of the real value of aggregate transactions end aligned m v p twhere m the money supply or average currency units incirculation in a year v the velocity of money or the average number oftimes a currency unit changes hands per year p the average price level of goods during the yeart an index of the real value of aggregate transactions m x v can then be interpreted as the average currency units in circulation in a year multiplied by the average number of times each currency unit changes hands in that year which is equal to the total amount of money spent in an economy in the year on the other hand p x t can be interpreted as the average price level of goods during the year multiplied by the real value of purchases in an economy during the year which is equal to the total money spent on purchases in an economy in the year so the equation of exchange says that the total amount of money that changes hands in the economy will always equal the total money value of the goods and services that change hands in the economy 1later economists restate the equation more commonly as m v p q where q an index of real expenditures p q nominal gdp begin aligned m times v p times q textbf where q text an index of real expenditures p times q text nominal gdp end aligned m v p qwhere q an index of real expendituresp q nominal gdp so now the equation of exchange says that total nominal expenditures are always equal to total nominal income 2the equation of exchange has two primary uses it represents the primary expression of the quantity theory of money which relates changes in the money supply to changes in the overall level of prices additionally solving the equation for m can serve as an indicator of the demand for money in a macroeconomic model the quantity theory of moneyin the quantity theory of money if the velocity of money and real output are assumed to be constant in order to isolate the relationship between money supply and price level then any change in the money supply will be reflected by a proportional change in the price level 3to show this first solve for p p m v q p m times left frac v q right p m qv and differentiate with respect to time d p d t d m d t frac dp dt frac dm dt dtdp dtdm this means inflation will be proportional to any increase in the money supply this then becomes the fundamental idea behind monetarism and the impetus for milton friedman s dictum that inflation is always and everywhere a monetary phenomenon money demandalternatively the equation of exchange can be used to derive the total demand for money in an economy by solving for m m p q v m left frac p times q v right m vp q assuming that money supply is equal to money demand i e that financial markets are in equilibrium m d p q v m d left frac p times q v right md vp q or m d p q 1 v m d left p times q right times left frac 1 v right md p q v1 this means the demand for money is proportional to nominal income and the inverse of the velocity of money economists typically interpret the inverse of the velocity of money as the demand to hold cash balances so this version of the equation of exchange shows that the demand for money in an economy is made up of demand for use in transactions p x q and liquidity demand 1 v | |
what is fisher s equation of exchange | fisher s equation of exchange is mv pt where m money supply v velocity of money p price level and t transactions when t cannot be obtained it is often substituted with y which is national income nominal gdp | |
what is the formula for gdp | the formula for gross domestic product gdp is gdp c i g nx where c consumption i business investment g government spending and nx net exports | |
what is the quantity theory of money | the quantity theory of money states that money supply and price level are directly proportional to each other when there is a change in the price level there is a proportional change in the money supply and vice versa the bottom linethe equation of exchange is a mathematical representation of the quantity theory of money stating that the value of money exchanged in a society equals the value of goods and services exchanged in the same society it shows that inflation is proportional to money supply changes and that the demand for money has two components demand for use in transactions and demand for a hold of liquidity | |
what is equilibrium | equilibrium is the state in which market supply and demand balance each other and as a result prices become stable generally an over supply of goods or services causes prices to go down which results in higher demand while an under supply or shortage causes prices to go up resulting in less demand the balancing effect of supply and demand results in a state of equilibrium investopedia paige mclaughlinunderstanding equilibriumthe equilibrium price is where the supply of goods matches demand when a major index experiences a period of consolidation or sideways momentum it can be said that the forces of supply and demand are relatively equal and the market is in a state of equilibrium economists find that prices tend to fluctuate around the equilibrium levels if the price rises too high market forces will incentivize sellers to come in and produce more if the price is too low additional buyers will bid up the price these activities keep the equilibrium level in relative balance over time special considerationseconomists like adam smith believed that a free market would tend toward equilibrium for example a dearth of any one good would create a higher price generally which would reduce demand leading to an increase in supply provided the right incentive the same would occur in reverse order provided there was excess in any one market modern economists point out that cartels or monopolistic companies can artificially hold prices higher and keep them there in order to reap higher profits the diamond industry is a classic example of a market where demand is high but supply is made artificially scarce by companies selling fewer diamonds in order to keep prices high as noted by paul samuelson in his 1983 work foundations of economic analysis the term equilibrium with respect to a market is not necessarily a good thing from a normative perspective and making that value judgment could be a misstep 1markets can be in equilibrium but it may not mean that all is well for example the food markets in ireland were at equilibrium during the great potato famine in the mid 1800s higher profits from selling to the british made it so the irish and british market was at an equilibrium price that was higher than what consumers could pay and consequently many people starved equilibrium vs disequilibrium | |
when markets aren t in a state of equilibrium they are said to be in disequilibrium disequilibrium can happen in a flash in a more stable market or can be a systematic characteristic of certain markets | at times disequilibrium can spill over from one market to another for instance if there aren t enough transport companies or resources available to ship coffee internationally then the coffee supply for certain regions could be reduced affecting the equilibrium of coffee markets economists view many labor markets as being in disequilibrium due to how legislation and public policy protect people and their jobs or the amount they are compensated for their labor types of equilibriumeconomic equilibrium refers broadly to any state in the economy where forces are balanced this can be related to prices in a market where supply is equal to demand but can also represent the level of employment interest rates and so on the process by which equilibrium prices are reached is through a process of competition among sellers to be the low cost producer to grab the largest market share and also among buyers to snatch up the best deals general equilibrium considers the aggregation of forces occurring at the macro economic level and not the micro forces of individual markets it is a cornerstone of walrasian economics economists have found that there is a level of persistent unemployment that is observed when there is general equilibrium in an economy this is known as underemployment equilibrium and is predicted by keynesian economic theory lindahl equilibrium is a special case where in theory the optimal amount of public goods is produced and the cost of public goods is fairly shared among everyone it describes an ideal state rarely if ever achieved in reality but is used to help craft tax policy and is an important concept in welfare economics because prices may swing above or below the equilibrium level due to proximate changes in supply or demand at a given moment it is best to look at this effect over time known as intertemporal equilibrium the concept is also used in understanding how firms and households budget and smooth spending over longer time horizons in game theory nash equilibrium is a state of play whereby the optimal strategy involves considering the optimal strategy of the other player or opponent the prisoner s dilemma is a common situation in game theory that exemplifies the nash equilibrium example of equilibriuma store manufactures 1 000 spinning tops and retails them at 10 per piece but no one is willing to buy them at that price to pump up demand the store reduces its price to 8 there are 250 buyers at that price point in response the store further slashes the retail cost to 5 and garners five hundred buyers in total upon further reduction of the price to 2 one thousand buyers of the spinning top materialize at this price point supply equals demand hence 2 is the equilibrium price for the spinning tops | |
how do you calculate equilibrium price | in economics the equilibrium price is calculated by setting the supply function and demand function equal to one another and solving for the price | |
what is equilibrium quantity | the amount supplied that exactly equals demand is the equilibrium quantity in such a case there will neither be an oversupply nor a shortage | |
what is equilibrium | equilibrium is the state in which market supply and demand balance each other and as a result prices become stable generally an over supply of goods or services causes prices to go down which results in higher demand while an under supply or shortage causes prices to go up resulting in less demand the balancing effect of supply and demand results in a state of equilibrium investopedia paige mclaughlinunderstanding equilibriumthe equilibrium price is where the supply of goods matches demand when a major index experiences a period of consolidation or sideways momentum it can be said that the forces of supply and demand are relatively equal and the market is in a state of equilibrium economists find that prices tend to fluctuate around the equilibrium levels if the price rises too high market forces will incentivize sellers to come in and produce more if the price is too low additional buyers will bid up the price these activities keep the equilibrium level in relative balance over time special considerationseconomists like adam smith believed that a free market would tend toward equilibrium for example a dearth of any one good would create a higher price generally which would reduce demand leading to an increase in supply provided the right incentive the same would occur in reverse order provided there was excess in any one market modern economists point out that cartels or monopolistic companies can artificially hold prices higher and keep them there in order to reap higher profits the diamond industry is a classic example of a market where demand is high but supply is made artificially scarce by companies selling fewer diamonds in order to keep prices high as noted by paul samuelson in his 1983 work foundations of economic analysis the term equilibrium with respect to a market is not necessarily a good thing from a normative perspective and making that value judgment could be a misstep 1markets can be in equilibrium but it may not mean that all is well for example the food markets in ireland were at equilibrium during the great potato famine in the mid 1800s higher profits from selling to the british made it so the irish and british market was at an equilibrium price that was higher than what consumers could pay and consequently many people starved equilibrium vs disequilibrium | |
when markets aren t in a state of equilibrium they are said to be in disequilibrium disequilibrium can happen in a flash in a more stable market or can be a systematic characteristic of certain markets | at times disequilibrium can spill over from one market to another for instance if there aren t enough transport companies or resources available to ship coffee internationally then the coffee supply for certain regions could be reduced affecting the equilibrium of coffee markets economists view many labor markets as being in disequilibrium due to how legislation and public policy protect people and their jobs or the amount they are compensated for their labor types of equilibriumeconomic equilibrium refers broadly to any state in the economy where forces are balanced this can be related to prices in a market where supply is equal to demand but can also represent the level of employment interest rates and so on the process by which equilibrium prices are reached is through a process of competition among sellers to be the low cost producer to grab the largest market share and also among buyers to snatch up the best deals general equilibrium considers the aggregation of forces occurring at the macro economic level and not the micro forces of individual markets it is a cornerstone of walrasian economics economists have found that there is a level of persistent unemployment that is observed when there is general equilibrium in an economy this is known as underemployment equilibrium and is predicted by keynesian economic theory lindahl equilibrium is a special case where in theory the optimal amount of public goods is produced and the cost of public goods is fairly shared among everyone it describes an ideal state rarely if ever achieved in reality but is used to help craft tax policy and is an important concept in welfare economics because prices may swing above or below the equilibrium level due to proximate changes in supply or demand at a given moment it is best to look at this effect over time known as intertemporal equilibrium the concept is also used in understanding how firms and households budget and smooth spending over longer time horizons in game theory nash equilibrium is a state of play whereby the optimal strategy involves considering the optimal strategy of the other player or opponent the prisoner s dilemma is a common situation in game theory that exemplifies the nash equilibrium example of equilibriuma store manufactures 1 000 spinning tops and retails them at 10 per piece but no one is willing to buy them at that price to pump up demand the store reduces its price to 8 there are 250 buyers at that price point in response the store further slashes the retail cost to 5 and garners five hundred buyers in total upon further reduction of the price to 2 one thousand buyers of the spinning top materialize at this price point supply equals demand hence 2 is the equilibrium price for the spinning tops | |
how do you calculate equilibrium price | in economics the equilibrium price is calculated by setting the supply function and demand function equal to one another and solving for the price | |
what is equilibrium quantity | the amount supplied that exactly equals demand is the equilibrium quantity in such a case there will neither be an oversupply nor a shortage | |
what is equitable relief | equitable relief is a court granted remedy that requires a party to act or refrain from performing a particular act in cases where legal remedies are not considered to provide sufficient restitution | |
how equitable relief works | equitable relief is distinct from a legal claim such as monetary compensation and is employed to prompt or prevent action in cases when a legal remedy would not constitute adequate restitution for the breach of contract or other offense this prompting often takes the form of a court injunction which enforces the remedy by punishing non compliance with civil or criminal penalties jurisdictional clauses that provide for equitable relief often require such cases to include an acknowledgment between both parties that legal relief wouldn t compensate for a breach of contract or that a breach would result in irreparable damages or injury and acknowledgment between parties that a breach of contract could result in the offended party seeking an injunction or another form of equitable relief the offended party must also be found to be entirely free from blame in the dispute often called the clean hands principle it can be applied to deny equitable relief if the offended party has not acted entirely in good faith or has delayed unnecessarily in seeking a remedy equitable relief is not the same as monetary compensation equitable relief in practiceequitable relief is almost always incurred when there has been a breach of contract a common form of equitable relief will order the rescission of a contract which cancels all terms and obligations and restores both parties to their pre contract position these often occur during contracts involving property because the personal value of property to a party can often extend beyond monetary compensation a court could order the property to be sold pursuant to the terms of the original contract or cancel the contract courts could order rectification a revision to a contract so that it more accurately reflects the intentions of both parties in essence stating what had been initially understood they could also order that the obligations of a contract be fulfilled as initially drafted if they are found to have breached its terms equitable relief is often provided in cases where intellectual property or other sensitive information has been stolen or otherwise ill gotten for example gag orders which prevent a party from publishing sensitive information are often issued in cases of intellectual property theft in these cases the potential business or reputation challenges of the offending party releasing the ill gotten information could not be adequately rectified with monetary compensation | |
what is equity | equity referred to as shareholders equity or owners equity for privately held companies represents the amount of money that would be returned to a company s shareholders if all of the assets were liquidated and all of the company s debt was paid off in the case of liquidation in the case of acquisition it is the value of company sales minus any liabilities owed by the company not transferred with the sale in addition shareholder equity can represent the book value of a company equity can sometimes be offered as payment in kind it also represents the pro rata ownership of a company s shares equity can be found on a company s balance sheet and is one of the most common pieces of data employed by analysts to assess a company s financial health investopedia katie kerpel | |
how shareholder equity works | by comparing concrete numbers reflecting everything the company owns and everything it owes the assets minus liabilities shareholder equity equation paints a clear picture of a company s finances easily interpreted by investors and analysts 1 equity is used as capital raised by a company which is then used to purchase assets invest in projects and fund operations a firm typically can raise capital by issuing debt in the form of a loan or via bonds or equity by selling stock investors usually seek out equity investments as it provides a greater opportunity to share in the profits and growth of a firm equity is important because it represents the value of an investor s stake in a company represented by the proportion of its shares owning stock in a company gives shareholders the potential for capital gains and dividends owning equity will also give shareholders the right to vote on corporate actions and elections for the board of directors these equity ownership benefits promote shareholders ongoing interest in the company shareholder equity can be either negative or positive if positive the company has enough assets to cover its liabilities if negative the company s liabilities exceed its assets if prolonged this is considered balance sheet insolvency typically investors view companies with negative shareholder equity as risky or unsafe investments shareholder equity alone is not a definitive indicator of a company s financial health used in conjunction with other tools and metrics the investor can accurately analyze the health of an organization formula and how to calculate shareholders equitythe following formula and calculation can be used to determine the equity of a firm which is derived from the accounting equation shareholders equity total assets total liabilities text shareholders equity text total assets text total liabilities shareholders equity total assets total liabilitiesthis information can be found on the balance sheet where these four steps should be followed 1shareholder equity can also be expressed as a company s share capital and retained earnings less the value of treasury shares this method however is less common though both methods yield the exact figure the use of total assets and total liabilities is more illustrative of a company s financial health | |
what the components of shareholder equity are | retained earnings are part of shareholder equity and are the percentage of net earnings that were not paid to shareholders as dividends think of retained earnings as savings since it represents a cumulative total of profits that have been saved and put aside or retained for future use retained earnings grow larger over time as the company continues to reinvest a portion of its income 2at some point the amount of accumulated retained earnings can exceed the amount of equity capital contributed by stockholders retained earnings are usually the largest component of stockholders equity for companies operating for many years treasury shares or stock not to be confused with u s treasury bills represent stock that the company has bought back from existing shareholders companies may do a repurchase when management cannot deploy all of the available equity capital in ways that might deliver the best returns shares bought back by companies become treasury shares and the dollar value is noted in an account called treasury stock a contra account to the accounts of investor capital and retained earnings companies can reissue treasury shares back to stockholders when companies need to raise money 3many view stockholders equity as representing a company s net assets its net value so to speak would be the amount shareholders would receive if the company liquidated all of its assets and repaid all of its debts example of shareholder equityas part of its 2023 annual report apple reported 73 812 billion of shareholder equity this value was made up of common stock and additional paid in capital of the 50 4 million shares authorized the company had issued roughly 15 5 million shares 4apple also has several other types of shareholder equity activity as of september 30 2023 the date listed on the company s 2023 annual report the company had an accumulated deficit of 214 million the company also reported an accumulated other comprehensive loss of 11 4 billion 4as part of apple s 2023 report the company listed 62 146 billion of shareholder equity this is up from 50 672 billion from on year prior 4other forms of equitythe concept of equity has applications beyond just evaluating companies we can more generally think of equity as a degree of ownership in any asset after subtracting all debts associated with that asset below are several common variations on equity private equity | |
when an investment is publicly traded the market value of equity is readily available by looking at the company s share price and its market capitalization for private entities the market mechanism does not exist so other valuation forms must be done to estimate value | private equity generally refers to such an evaluation of companies that are not publicly traded the accounting equation still applies where stated equity on the balance sheet is what is left over when subtracting liabilities from assets arriving at an estimate of book value privately held companies can then seek investors by selling off shares directly in private placements these private equity investors can include institutions like pension funds university endowments insurance companies or accredited individuals private equity is often sold to funds and investors that specialize in direct investments in private companies or that engage in leveraged buyouts lbos of public companies in an lbo transaction a company receives a loan from a private equity firm to fund the acquisition of a division of another company cash flows or the assets of the company being acquired usually secure the loan mezzanine debt is a private loan usually provided by a commercial bank or a mezzanine venture capital firm mezzanine transactions often involve a mix of debt and equity in a subordinated loan or warrants common stock or preferred stock private equity comes into play at different points along a company s life cycle typically a young company with no revenue or earnings can t afford to borrow so it must get capital from friends and family or individual angel investors venture capitalists enter the picture when the company has finally created its product or service and is ready to bring it to market some of the largest most successful corporations in the tech sector like google apple amazon and meta or what is referred to as gafam began with venture capital funding venture capitalists vcs provide most private equity financing in return for an early minority stake sometimes a venture capitalist will take a seat on the board of directors for its portfolio companies ensuring an active role in guiding the company venture capitalists look to hit big early on and exit investments within five to seven years an lbo is one of the most common types of private equity financing and might occur as a company matures a final type of private equity is a private investment in a public company pipe a pipe is a private investment firm s a mutual fund s or another qualified investors purchase of stock in a company at a discount to the current market value cmv per share to raise capital unlike shareholder equity private equity is not accessible to the average individual only accredited investors those with a net worth of at least 1 million can take part in private equity or venture capital partnerships 5 such endeavors might require form 4 depending on their scale 6 for investors who don t meet this marker there is the option of private equity exchange traded funds etfs home equityhome equity is roughly comparable to the value contained in homeownership the amount of equity one has in their residence represents how much of the home they own outright by subtracting from the mortgage debt owed equity on a property or home stems from payments made against a mortgage including a down payment and increases in property value home equity is often an individual s greatest source of collateral and the owner can use it to get a home equity loan which some call a second mortgage or a home equity line of credit heloc an equity takeout is taking money out of a property or borrowing money against it for example let s say sam owns a home with a mortgage on it the house has a current market value of 175 000 and the mortgage owed totals 100 000 sam has 75 000 worth of equity in the home or 175 000 asset total 100 000 liability total brand equity | |
when determining an asset s equity particularly for larger corporations it is important to note these assets may include both tangible assets like property and intangible assets like the company s reputation and brand identity through years of advertising and the development of a customer base a company s brand can come to have an inherent value some call this value brand equity which measures the value of a brand relative to a generic or store brand version of a product 7 | for example many soft drink lovers will reach for a coke before buying a store brand cola because they prefer the taste or are more familiar with the flavor if a 2 liter bottle of store brand cola costs 1 and a 2 liter bottle of coke costs 2 then coca cola has brand equity of 1 there is also such a thing as negative brand equity which is when people will pay more for a generic or store brand product than they will for a particular brand name negative brand equity is rare and can occur because of bad publicity such as a product recall or a disaster equity vs return on equityreturn on equity roe is a measure of financial performance calculated by dividing net income by shareholder equity because shareholder equity is equal to a company s assets minus its debt roe could be considered the return on net assets roe is considered a measure of how effectively management uses a company s assets to create profits equity as we have seen has various meanings but usually represents ownership in an asset or a company such as stockholders owning equity in a company roe is a financial metric that measures how much profit is generated from a company s shareholder equity equity and financial accountingthe fundamental accounting equation is assets equalling the sum of liabilities and equity this equation is the basis for the balance sheet which summarizes a company s financial position at a specific point in time in all of the examples we ve discussed in this article the basis of calculating that equity was rooted in this accounting equation liabilities are obligations that the company owes to external parties such as loans accounts payable and accrued expenses equity represents the residual claim on assets after satisfying liabilities a company can pay for something by either taking out debt i e liabilities or paying for it with money they own i e equity therefore the equation reflects the principle that all of a company s resources assets can be paid in one of those two ways | |
what is equity in finance | equity is an important concept in finance that has different specific meanings depending on the context perhaps the most common type of equity is shareholders equity which is calculated by taking a company s total assets and subtracting its total liabilities shareholders equity is therefore essentially the net worth of a corporation if the company were to liquidate shareholders equity is the amount of money that would theoretically be received by its shareholders | |
what are some other terms used to describe equity | other terms that are sometimes used to describe this concept include shareholders equity book value and net asset value depending on the context the precise meanings of these terms may differ but generally speaking they refer to the value of an investment that would be left over after paying off all of the liabilities associated with that investment this term is also used in real estate investing to refer to the difference between a property s fair market value and the outstanding value of its mortgage loan | |
how is equity used by investors | equity is a very important concept for investors for instance in looking at a company an investor might use shareholders equity as a benchmark for determining whether a particular purchase price is expensive if that company has historically traded at a price to book value of 1 5 for instance then an investor might think twice before paying more than that valuation unless they feel the company s prospects have fundamentally improved on the other hand an investor might feel comfortable buying shares in a relatively weak business as long as the price they pay is sufficiently low relative to its equity | |
how is equity calculated | equity is equal to total assets minus its total liabilities these figures can all be found on a company s balance sheet for a company for a homeowner equity would be the value of the home less any outstanding mortgage debt or liens the bottom linefinancial equity represents the ownership interest in a company s assets after deducting liabilities it reflects the value that belongs to the shareholders or owners of the business equity can also refer to other items like brand equity or other non financial concepts | |
what is equity accounting | equity accounting is an accounting process for recording investments in associated companies or entities companies sometimes have ownership interests in other companies typically equity accounting also called the equity method is applied when an investor or holding entity owns 20 50 of the voting stock of the associate company the equity method of accounting is used only when an investor or investing company can exert a significant influence over the investee or owned company understanding equity accountingthe investee company will record a profit or loss for the period in its own income statement under the equity method an investing company will recognize it s share of the investee company profit or loss for the period in its own income statement the share it recognizes will be it s percentage ownership in the investee company the initial investment amount in the company is recorded as an asset on the investing company s balance sheet the investing company records its share of profit or loss in the income statement for the year at the same time the profit increases the investment value while losses would decrease the investment amount on the balance sheet the requirements for the equity method are set out in both u s gaap and the ifrs rules however there is specific guidance in u s gaap that does not exist in the ifrs 1equity accounting and investor influenceunder equity accounting the biggest consideration is the level of investor influence over the operating or financial decisions of the investee when there s a significant amount of money invested in a company by another company the investor can exert influence over the financial and operating decisions which ultimately impacts the financial results of the investee while no precise measure can gauge an exact level of influence several common indicators of operational and financial policies include | |
when an investor acquires 20 or more of the voting stock of an investee it is presumed that without evidence to the contrary that an investor maintains the ability to exercise significant influence over the investee conversely when an ownership position is less than 20 there is a presumption that the investor does not exert significant influence over the investee unless it can otherwise demonstrate such ability | interestingly substantial or even majority ownership of an investee by another party does not necessarily prohibit the investor from also having significant influence with the investee for instance many sizable institutional investors may enjoy more implicit control than their absolute ownership level would ordinarily allow equity accounting vs cost methodif there is no significant influence over the investee the investor instead uses the cost method to account for its investment in an associated company the cost method of accounting records the cost of the investment as an asset at its historical cost on the other hand the equity method makes periodic adjustments to the value of the asset on the investor s balance sheet since they have a 20 50 controlling investment interest in the investee | |
when do you use the equity accounting method | you should use the equity accounting method if the reporting entity has a significant but not controlling interest in another company in practice this means an ownership stake of 20 50 in the other company if the reporting company has a controlling interest 51 or greater it is reported as a consolidated subsidiary for smaller ownership stakes the investment is reported according to the fair value method 2 | |
what are the rules for the equity accounting method | under the equity accounting method an investing company records its stake in another company on its own balance sheet it also records the profits or losses of the invested company on its own income statement | |
what are the problems with the equity accounting method | one critique of the equity accounting method is that it does not provide usable insights to investors although it records the assets and profits of an investee in its own financial statements the investing company does not actually control how the investee uses its assets and it does not receive any financial profit unless that company chooses to pay a dividend 3the bottom linethe equity method is an accounting technique for reporting financials when one company invests in another if the investing company has a significant stake the company will report the value and profits of the investee on its own financial statements | |
what is the equity capital market ecm | the equity capital market ecm refers to the arena where financial institutions help companies raise equity capital and where stocks are traded it consists of the primary market for private placements initial public offerings ipos and warrants and the secondary market where existing shares are sold as well as futures options and other listed securities are traded understanding equity capital markets ecms the equity capital market ecm is broader than just the stock market because it covers a wider range of financial instruments and activities these include the marketing and distribution and allocation of issues initial public offerings ipos private placements derivatives trading and book building the main participants in the ecm are investment banks broker dealers retail investors venture capitalists private equity firms and angel investors together with the bond market the ecm channels money provided by savers and depository institutions to investors as part of the capital markets the ecm leads in theory to the efficient allocation of resources within a market economy the primary equity market where companies issue new securities is divided into a private placement market and a primary public market in the private placement market companies raise private equity through unquoted shares that are sold to investors directly in the primary public market private companies can go public through ipos and listed companies can issue new equity through seasoned issues 1private equity firms may use both cash and debt in their investment such as in a leveraged buyout whereas venture capital firms typically deal only with equity investments the secondary market where no new capital is created is what most people typically think of as the stock market it is where existing shares are bought and sold and consists of stock exchanges and over the counter otc markets where a network of dealers trade stocks without an exchange acting as an intermediary 2advantages and disadvantages of raising capital in equity marketsraising capital through equity markets offers several advantages for companies the first one is a lower debt to equity ratio companies will not need to access debt markets with expensive interest rates to finance future growth equity markets are also relatively more flexible and have a greater variety of financing options for growth as compared to debt markets in some instances especially in private placement equity markets also help entrepreneurs and company founders bring in experience and oversight from senior colleagues this will help companies expand their business to new markets and products or provide needed counsel but there are also problems with raising capital in equity markets for example the route to a public offering can be an expensive and time consuming one numerous actors are involved in the process resulting in a multiplication of costs and time required to bring a company to market 3added to this is the constant scrutiny while equity market investors are more tolerant of risk as compared to their debt market counterparts they are also focused on returns as such investors impatient with a company that has consistently produced negative returns may abandon it leading to a sharp drop in its valuation equity capital faqscompanies seek to raise capital in order to finance their operations and grow equity funding involves exchanging shares of a company s residual ownership in return for capital debt funding instead relies on borrowing where lenders are repaid principal and interest without receiving any ownership claim in general equity capital is more expensive and has fewer tax benefits than debt capital but also comes with a great deal of operational freedom and less liability in the case that business fails the equity of a company or shareholders equity is the net difference between a company s total assets and its total liabilities when a company has publicly traded stock the value of its market capitalization can be calculated as the share price times the number of shares outstanding equity can be categorized along several dimensions private equity differs from publicly traded shares where the former is placed via primary markets and the latter on secondary markets common stock is the most ubiquitous form of equity but companies may also issue different share classes including allocations to preferred stock capital is any resource including cash that a company possesses and uses for productive purposes equity is but one form of capital | |
what is an equity co investment | an equity co investment is a minority investment in a company made by investors alongside a private equity fund manager or venture capital vc firm equity co investment enables other investors to participate in potentially highly profitable investments without paying the usual high fees charged by a private equity fund opportunities for equity co investment are typically restricted to large institutional investors who have a relationship with the private equity fund manager and are often not available to smaller or retail investors understanding equity co investmentsas noted above a minority investment made by an investor into a company or venture is called an equity co investment many of the investors that make these investments are institutional investors such as pension funds and insurance companies these deals may also attract certain high net worth individuals hnwis 1 the majority of the money poured into an equity co investment known simply as a co investment typically comes from a private equity or vc firm in a typical equity co investment fund the investor pays a fund sponsor or general partner gp with whom the investor has a well defined private equity partnership the partnership agreement outlines how the gp allocates capital and diversifies assets co investments avoid typical limited partnerships lps and general funds by investing directly in a company 2because the co investor has a minority interest in the fund the sponsoring firm the private equity or venture capital firm retains control over how it is managed including the holdings and rebalancing as such the co investor cannot make any decisions about the fund equity co investment accounted for significant growth in private equity fundraising since the 2007 2008 financial crisis compared to traditional fund investments although interest in co investing remains high fundraising is limited this is largely due to economic conditions interest rates inflation and recessionary fears and geopolitical concerns 34source s p global a 5 year sector view of global limited partner co investments with private equity according to a study by preqin 80 of lps reported better performance from equity co investments compared to traditional fund structures 2advantages and disadvantages of equity co investmentsequity co investing in private equity deals has certain advantages but co investors who participate in these deals should read the fine print before agreeing to them there are several key benefits to co investments for both the investor and the private equity or venture capital firm that spearheads the fund among them including the most important aspect of co investments is their complicated nature these are risky ventures which require a great deal of transparency and disclosure since co investors take a minority stake in a co investment they should be sure that they are well apprised of how the fund is run and executed they should also research the fund s management and the team s responsibilities another key drawback of these deals can be the absence of fee transparency private equity firms don t offer much detail about the fees they charge lps there may be hidden costs in cases like co investing where they purportedly offer no fee services to invest in large deals for example they may charge monitoring fees which can amount to several million dollars this may not be evident at first glance from lps there is also the possibility that pe firms may receive payments from companies in their portfolio to promote the deals such deals are also risky for co investors because they have no say in selecting or structuring the deal the success or failure of the deals rests on the acumen of the private equity professionals in charge in some cases that may not always be optimal as the deal may sink exposure to new marketsaccess to capital and greater flexibilitysharing the riskbetter fee structurecomplicatedlack of fee transparencyco investors have no say in the dealexample of an equity co investmenthere s a hypothetical example to show how equity co investments work suppose a 500 million fund could select three enterprises valued at 300 million the partnership agreement might limit fund investments to 100 million which means the firms would be leveraged by 200 million for each company if a new opportunity merged with an enterprise value of 350 the gp would need to seek funding outside its fund structure because it can only invest 100 million directly the gp could borrow 100 million for financing and offer co investment opportunities to existing limited partnerships or outside parties | |
what role does the co investor play in an equity co investment | equity co investors are generally high net worth individuals and institutional investors such as endowments pension funds and corporations these investors provide a minority stake in an equity co investment less than 50 but have no decision making or voting power on how the investment or fund is operated as such investors should do their due diligence to ensure that their capital is protected in exchange for their investment co investors get access to new markets the potential for greater returns and lower fees | |
how much money have co investors put into deals | according to s p global sovereign wealth funds contributed the most to co investment deals between 2018 and 2023 this amounted to 331 41 billion for 469 deals corporate investors made the most investments providing financing to 3 182 deals for a total of 254 02 billion pension funds co invested in 288 deals with 193 40 billion while family offices contributed 54 35 billion to 683 deals 6 | |
do equity co investments always work | equity co investments present a big opportunity for institutional and high net worth individuals promising access to new and different markets and the potential for higher returns but they don t always work out one such example is the case of brazilian data center company aceco t1 private equity firm kkr acquired the company in 2014 along with co investors singaporean investment firm gic and the teacher retirement system of texas 7 the company was found to have cooked its books since 2012 and kkr wrote down its investment in the company to zero in 2017 8the bottom lineequity co investments allow investors with a large capital pool to access new markets so it s not an investment option for the average investor institutional and high net worth investors can access attractive investment opportunities with the potential for high returns although interest continues to remain strong equity co investments are impacted greatly by macroeconomic factors such as interest rates and geopolitical concerns | |
what is equity compensation | equity compensation is non cash pay that is offered to employees equity compensation may include options restricted stock and performance shares all of these investment vehicles represent ownership in the firm for a company s employees 1equity compensation allows the employees of the firm to share in the profits via appreciation and can encourage retention particularly if there are vesting requirements at times equity compensation may accompany a below market salary understanding equity compensationequity compensation is a benefit provided by many public companies and some private companies especially startup companies recently launched firms may lack the cash or want to invest cash flow into growth initiatives making equity compensation an option to attract high quality employees traditionally technology companies in both the start up phase and more mature companies have used equity compensation to reward employees with equity compensation there is never a guarantee that your equity stake will actually pay off as opposed to equity or in combination with equity compensation being paid a salary can be beneficial if you know exactly what you re getting there are many variables that can impact your equity compensation types of equity compensationcompanies that offer equity compensation can give employees stock options that offer the right to purchase shares of the companies stocks at a predetermined price also referred to as exercise price this right may vest with time allowing employees to gain control of this option after working for the company for a certain period of time when the option vests they gain the right to sell or transfer the option 2 this method encourages employees to stick with the company for the long term however the option typically has an expiration employees who have this option are not considered stockholders and do not share the same rights as shareholders there are different tax consequences to options that are vested versus those that are not so employees must look into what tax rules apply to their specific situations 3additional types of equity compensation include non qualified stock options nso and incentive stock options isos isos are only available to employees and not non employee directors or consultants these options provide special tax advantages for example with non qualified stock options employers do not have to report when they receive this option or when it becomes exercisable restricted stock requires the completion of a vesting period vesting may be done all at once after a certain period of time alternatively vesting may be done equally over a set period of years or any other combination that the management of a company finds suitable restricted stock units rsus are similar but they represent the company s promise to pay shares based on a vesting schedule this offers some advantages to the company but employees do not gain any rights of stock ownership such as voting until the shares are earned and issued performance shares are awarded only if certain specified measures are met these could include metrics such as an earnings per share eps target return on equity roe or the total return of the company s stock in relation to an index typically performance periods are over a multi year time horizon | |
what is an equity derivative | an equity derivative is a financial instrument whose value is based on the equity movements of the underlying asset for example a stock option is an equity derivative because its value is based on the price movements of the underlying stock investors can use equity derivatives to hedge the risk associated with taking long or short positions in stocks or they can use them to speculate on the price movements of the underlying asset understanding equity derivativesequity derivatives can act like an insurance policy the investor receives a potential payout by paying the cost of the derivative contract which is referred to as a premium in the options market an investor that purchases a stock can protect against a loss in share value by purchasing a put option on the other hand an investor that has shorted shares can hedge against an upward move in the share price by purchasing a call option equity derivatives can also be used for speculation purposes for example a trader can buy equity options instead of actual stock to generate profits from the underlying asset s price movements there are two benefits to such a strategy first traders can cut down on costs by purchasing options which are cheaper rather than the actual stock second traders can also hedge risks by placing put and call options on the stock s price other equity derivatives include stock index futures equity index swaps and convertible bonds using equity optionsequity options are derived from a single equity security investors and traders can use equity options to take a long or short position in a stock without actually buying or shorting the stock this is advantageous because taking a position with options allows the investor trader more leverage in that the amount of capital needed is much less than a similar outright long or short position on margin investors traders can therefore profit more from a price movement in the underlying stock for example buying 100 shares of a 10 stock costs 1 000 buying a call option with a 10 strike price may only cost 0 50 or 50 since one option controls 100 shares 0 50 x 100 shares if the shares move up to 11 the option is worth at least 1 and the options trader doubles their money the stock trader makes 100 position is now worth 1 100 which is a 10 gain on the 1 000 they paid comparatively the options trader makes a better percentage return if the underlying stock moves in the wrong direction and the options are out of the money at the time of their expiration they become worthless and the trader loses the premium they paid for the option another popular equity options technique is trading option spreads traders take combinations of long and short option positions with different strike prices and expiration dates for the purpose of extracting profit from the option premiums with minimal risk equity index futuresa futures contract is similar to an option in that its value is derived from an underlying security or in the case of an index futures contract a group of securities that make up an index for example the s p 500 the dow index and the nasdaq index all have futures contracts available that are priced based on the value of the indexes however the values of the indexes are derived from the aggregate values of all the underlying stocks in the index therefore index futures ultimately derive their value from equities hence their name equity index futures these futures contracts are liquid and versatile financial tools they can be used for everything from intraday trading to hedging risk for large diversified portfolios while futures and options are both derivatives they function in different ways options give the buyer the right but not the obligation to buy or sell the underlying at the strike price futures are an obligation for both the buyer and seller therefore the risk is not capped in futures like it is when buying an option investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal | |
what is an equity efficiency tradeoff | an equity efficiency tradeoff is when there is some kind of conflict between maximizing economic efficiency and maximizing the equity or fairness of society in some way when and if such a tradeoff exists economists or public policymakers may decide to sacrifice some amount of economic efficiency for the sake of achieving a more just or equitable society understanding the equity efficiency tradeoffan equity efficiency tradeoff results when maximizing the efficiency of an economy leads to a reduction in its equity as in how equitably its wealth or income is distributed economic efficiency producing those goods and services that provide the most benefit at the lowest cost is a primary normative goal for most economic theories this can apply to an individual consumer or a business firm but mostly it refers to the efficiency of an economy as a whole at satisfying the wants and needs of the people in the economy economists define and attempt to measure economic efficiency in several different ways but the standard approaches all involve a basically utilitarian approach an economy is efficient in this sense when it maximizes the total utility of the participants 1the concept of utility as a quantity that can be maximized and summed up across all people in a society is a way of making normative goals solvable or at least approachable with the positive mathematical models that economists have developed welfare economics is the branch of economics most concerned with calculating and maximizing social utility a conflict and tradeoff between efficiency and equity can occur if the members of society or the policymakers who decide how a society operates prefer other moral or ethical systems over pure utilitarianism when people decide that other moral values or rights outweigh pure utility maximization societies often pursue policies that do not lead to maximum social utility in favor of these other values the equity efficiency tradeoff is often associated with normative economics which emphasizes value judgments and statements of what ought to be examples of the equity efficiency tradeoffif the utility that one individual gains by poking another person in the eye is greater than the suffering caused then a purely utilitarian approach would permit or even encourage the eye poking to maximize total social utility however almost all people would agree that this violates basic morality and leads to an inequitable outcome for the eye poking victim in a more complicated example it is often the case that the greatest economic gains and thus the greatest total utility occurs when the most successful businesses and entrepreneurs earn higher incomes than others to encourage more productive behavior however this may lead to very unequal incomes when this happens policymakers may decide that it is better for society to redistribute some income from higher to lower income individuals for the sake of fairness even though this might reduce the utility of the high income earners or even society as a whole this is the most common form of the equity efficiency tradeoff though it also can involve the production distribution and consumption of all kinds of goods and services rather than just incomes | |
why do equity efficiency tradeoffs occur | maximizing economic efficiency and ensuring the equal distribution of resources seldom go hand in hand making equity efficiency tradeoffs fairly common there are arguments that economic gain doesn t necessarily have to come at the expense of greater inequality however in most capitalist societies that is precisely what happens | |
what is more important equity or efficiency | both are important though they cannot always be achieved simultaneously most economies generally strive to get the maximum benefits from the resources at their disposal which seems like a no brainer the issue is making sure those benefits are distributed fairly among all people in society it s tricky to keep everyone happy and opinions vary about which of the two equity or efficiency should take precedence assuming of course that they cannot co exist harmoniously can equity and efficiency be achieved simultaneously it is a common assumption that greater equity comes at a cost of less economic efficiency that isn t necessarily the case though for example the nordic model a set of economic standards loosely followed by sweden norway finland denmark and iceland has given the world an example of how free market capitalism and a generous welfare system can co exist harmoniously such a system works mainly because these countries have a culture of collectivity and taxpayers money is spent in a way that benefits all 2 | |
what is equity financing | equity financing is the process of raising capital through the sale of shares companies raise money because they might have a short term need to pay bills or need funds for a long term project that promotes growth by selling shares a business effectively sells ownership of its company in return for cash equity financing comes from a variety of sources for example an entrepreneur s friends and family professional investors or an initial public offering ipo may provide needed capital an ipo is a process that private companies undergo to offer shares of their business to the public in a new stock issuance public share issuance allows a company to raise capital from public investors industry giants such as google and meta formerly facebook raised billions in capital through ipos 12while the term equity financing refers to the financing of public companies listed on an exchange the term also applies to private company financing | |
how equity financing works | equity financing involves the sale of common stock and other equity or quasi equity instruments such as preferred stock convertible preferred stock and equity units that include common shares and warrants this action can affect existing shareholders and impact the ability to reach new shareholders a startup that grows into a successful company will have several rounds of equity financing as it evolves since a startup typically attracts different types of investors at various stages of its evolution it may use other equity instruments for its financing needs for example angel investors and venture capitalists generally the first investors in a startup favor convertible preferred shares rather than common stock in exchange for funding new companies because the former have more significant upside potential and some downside protection once a company has grown large enough to consider going public it may consider selling common stock to institutional and retail investors later if the company needs additional capital it may choose secondary equity financing options such as a rights offering or an offering of equity units that includes warrants as a sweetener equity financing is distinct from debt financing with debt financing a company assumes a loan and pays back the loan over time with interest equity financing involves selling ownership shares in return for funds types of equity financingthese are often friends family members and colleagues of business owners individual investors usually have less money to invest so more are needed to reach financing goals these investors may have no relevant industry experience business skills or guidance to contribute to a business often these are wealthy individuals or groups interested in funding businesses they believe will provide attractive returns angel investors can invest substantial amounts and provide needed insight connections and advice due to their industry experience typically angels invest in the early stage of a business s development venture capitalists are individuals or firms capable of making substantial investments in businesses that they view as having very high and rapid growth potential competitive advantages and solid prospects for success they usually demand a noteworthy share of ownership in a business for their financial investment resources and connections in fact they may insist on significant involvement in managing a company s planning operations and daily activities to protect their investment venture capitalists typically get involved early and exit at the ipo stage where they can reap enormous profits a more well established business can raise funds through ipos selling company stock shares to the public due to the expense time and effort that ipos require this type of equity financing occurs in a later stage of development after the company has grown investors in ipos expect less control than venture capitalists and angel investors crowdfunding involves individual investors investing small amounts via an online platform such as kickstarter indiegogo and crowdfundr to help a company reach particular financial goals such investors often share a common belief in the company s mission and goals equity financing vs debt financingbusinesses typically have two options for financing when they want to raise capital for business needs equity financing and debt financing debt financing involves borrowing money equity financing involves selling a portion of equity in the company while there are distinct advantages to both types of financing most companies use a combination of equity and debt financing the most common form of debt financing is a loan unlike equity financing which carries no repayment obligation debt financing requires a company to pay back the money it receives plus interest however an advantage of a loan and debt financing in general is that it does not require a company to give up a portion of its ownership to shareholders with debt financing the lender has no control over the business s operations once you pay back the loan your relationship with the lender ends companies that elect to raise capital by selling stock to investors must share their profits and consult with these investors when they make decisions that impact the entire company debt financing can also restrict a company s operations limiting its ability to take advantage of opportunities outside of its core business in general companies want a relatively low debt to equity ratio creditors look more favorably on such a metric and may allow additional debt financing in the future if a pressing need arises finally interest paid on loans is tax deductible as a business expense loan payments make forecasting for future expenses easy because the amount does not fluctuate 3 | |
when deciding whether to seek debt or equity financing companies usually consider these three factors | if a company has given investors a percentage of their company through the sale of equity the only way to remove them and their stake in the business is to repurchase their shares a process called a buy out however repurchasing the shares will likely cost more than you received when you issued them reasons to choose equity financingbusinesses in their early stages can be of particular interest to angel investors and venture capitalists that s because of the high return potential they may see due to their experience and skills equity financing is a solution when established financing methods aren t available due to the nature of the business for example traditional lenders such as banks often won t extend loans to companies they consider too significant a risk because of an owner s lack of business experience or an unproven business concept with equity financing you don t add to your existing debt load and don t have a payment obligation investors assume the risk of investment loss equity financing delivers more than money depending on the source of the funds you may also receive and benefit from the valuable resources guidance skills and experience of investors who want you to succeed equity financing can raise the substantial capital you may need to promote rapid and greater growth making your company attractive to buyers and a sale possible pros and cons of equity financingwhile equity financing has benefits there are some disadvantages to being funded this way no obligation to repay the moneyno additional financial burden on the companylarge investors can provide a wealth of business expertise resources guidance and contactsyou have to give investors an ownership percentage of your companyyou have to share your profits with investorsyou give up some control over your companyit may be more expensive than borrowingequity financing results in no debt that must be repaid it s also an option if your business can t obtain a loan it s seen as a lower risk financing option because investors seek a return on their investment rather than the repayment of a loan plus investors typically are more interested in helping you succeed than lenders are because the rewards can be substantial equity financing offered by angel investors and venture capitalists can provide access to outstanding business expertise insight and advice it can also provide you with new and vital business contacts and networks that may lead to additional funding the stakes taken by investors providing equity financing can be significant and thus profits going to the business owners are reduced even small common stock investors get a share of the profits moreover investors may want to be consulted whenever you plan to make decisions that will impact the company in exchange for the large amounts that angel investors and venture capitalists may invest business owners must give over some percentage of ownership that can translate to having less control over your own company the typically higher rate of return demanded by large investors can easily exceed that lenders charge also shareholder dividends aren t tax deductible interest payments on loans are with some exceptions 3example of equity financingsay that you ve started a small tech company with your own capital of 1 5 million at this stage you have 100 ownership and control due to the industry that you re in and a fresh social media concept your company attracts the interest of various investors including angel investors and venture capitalists you re aware that you ll need additional funds to keep up a rapid pace of growth so you decide to consider an outside investor after meeting with a few and discussing your company s plans goals and financial needs with each you decide to accept the 500 000 offered by an angel investor who you feel brings enough expertise to the table in addition to the funding the amount is enough for this round of funding plus you don t wish to relinquish a greater percentage of your company ownership by taking a larger amount thus the total invested in your company is now 2 million 1 5 million 500 000 the angel investor owns a 25 stake 500 000 2 million and you maintain a 75 stake special considerationsthe equity financing process is governed by rules imposed by a local or national securities authority in most jurisdictions such regulation is primarily designed to protect the investing public from unscrupulous operators who may raise funds from unsuspecting investors and disappear with the financing proceeds equity financing is thus often accompanied by an offering memorandum or prospectus which contains extensive information that should help the investor make an informed decision on the merits of the financing the memorandum or prospectus will state the company s activities give information on its officers and directors discuss how the financing proceeds will be used outline the risk factors and have financial statements investor appetite for equity financing depends significantly on the state of the financial markets in general and equity markets in particular while a steady pace of equity financing indicates investor confidence a torrent of financing may indicate excessive optimism and a looming market top for example ipos by dot coms and technology companies reached record levels in the late 1990s before the tech wreck that engulfed the nasdaq from 2000 to 2002 45the pace of equity financing typically drops off sharply after a sustained market correction due to investor risk aversion during such periods | |
how does equity financing work | equity financing involves selling a portion of a company s equity in return for capital by selling shares owners effectively sell ownership of their company in return for cash |
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