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what is an exchange | an exchange is a marketplace where securities commodities derivatives and other financial instruments are traded the core function of an exchange is to ensure fair and orderly trading and the efficient dissemination of price information for any securities trading on that exchange exchanges give companies governments and other groups a platform from which to sell securities to the investing public exchanges explainedan exchange may be a physical location where traders meet to conduct business or an electronic platform they also may be referred to as a share exchange or bourse depending on the geographical location exchanges are located in most countries worldwide the more prominent exchanges include the new york stock exchange nyse the nasdaq the london stock exchange lse and the tokyo stock exchange tse electronic exchangesin the most recent decade trading has transitioned to fully electronic exchanges sophisticated algorithmic price matching can ensure fair trading without requiring all members to be physically present on a centralized trading floor day to day operations are normally performed over multiple exchange networks though some orders may be processed in a physical location like the nyse the great majority of trades are completed through electronic means without regard to a physical location this process has resulted in a substantial increase in high frequency trading programs and the use of complex algorithms by traders on exchanges listing requirementseach exchange has specific listing requirements for any company or group that wishes to offer securities for trading some exchanges are more rigid than others but the basic requirements for stock exchanges include regular financial reports audited earning reports and minimum capital requirements for example the nyse has a key listing requirement that stipulates a company must have a minimum of 4 million in shareholder s equity se exchanges provide access to capitala stock exchange is used to raise capital for companies seeking to grow and expand their operations the first sale of stock by a private company to the public is referred to as an initial public offering ipo companies listed on the stock exchange typically have an enhanced profile having more visibility may attract new customers talented employees and suppliers who are eager to conduct business with a prominent industry leader private companies often rely on venture capitalists for investment and this usually results in the loss of operational control for example a seed funding firm may require that a representative from the funding firm hold a prominent position on the board alternatively companies listed on a stock exchange have more control and autonomy because investors who purchase shares have limited rights real world example of an exchangethe new york stock exchange is perhaps the most well known of exchanges in the u s located on wall street in manhattan in new york and it saw its first trade in 1792 1 the floor of the nyse sees stock transactions taking place in a continuous auction format mondays through fridays from 9 30 a m 4 p m 2 historically brokers employed by members of the nyse would facilitate trades by auctioning off shares the process started to become automated in the 1990s and by 2007 nearly all stocks became available via an electronic market the only exceptions are a few stocks with very high prices until 2005 only owners of seats on the exchange could trade directly on the exchange those seats now are leased on one year terms | |
what are exchange controls | exchange controls are government imposed limitations on the purchase and or sale of currencies these controls allow countries to better stabilize their economies by limiting in flows and out flows of currency which can create exchange rate volatility not every nation may employ the measures at least legitimately the 14th article of the international monetary fund s articles of agreement allows only countries with so called transitional economies to employ exchange controls understanding exchange controlsmany western european countries implemented exchange controls in the years immediately following world war ii the measures were gradually phased out however as the post war economies on the continent steadily strengthened the united kingdom for example removed the last of its restrictions in october 1979 countries with weak and or developing economies generally use foreign exchange controls to limit speculation against their currencies they often simultaneously introduce capital controls which limit the amount of foreign investment in the country countries with weak or developing economies may put controls on how much local currency can be exchanged or exported or ban a foreign currency altogether to prevent speculation exchange controls can be enforced in a few common ways a government may ban the use of a particular foreign currency and prohibit locals from possessing it alternatively they can impose fixed exchange rates to discourage speculation restrict any or all foreign exchange to a government approved exchanger or limit the amount of currency that can be imported to or exported from the country measures to thwart controlsone tactic companies use to work around currency controls and to hedge currency exposures is to use what are known as forward contracts with these arrangements the hedger arranges to buy or sell a given amount of an un tradable currency on a given forward date at an agreed rate against a major currency at maturity the gain or loss is settled in the major currency because settling in the other currency is prohibited by controls the exchange controls in many developing nations do not permit forward contracts or allow them only to be used by residents for limited purposes such as to buy essential imports consequently in countries with exchange controls non deliverable forwards are usually executed offshore because local currency regulations cannot be enforced outside of the country countries where active offshore ndf markets have operated include china the philippines south korea and argentina exchange controls in icelandiceland offers a recent notable example of the use of exchange controls during a financial crisis a small country of about 334 000 people iceland saw its economy collapse in 2008 its fishing based economy had gradually been turned into essentially a giant hedge fund by its three largest banks landsbanki kaupthing and glitnir whose assets measured 14 times that of the country s entire economic output the country benefited at least initially from a huge inflow of capital taking advantage of the high interest rates paid by the banks however when the crisis hit investors needing cash pulled their money out of iceland causing the local currency the krona to plummet the banks also collapsed and the economy received a rescue package from the imf under the exchange controls investors who held high yield offshore krona accounts were not able to bring the money back into the country in march 2017 the central bank lifted most of the exchange controls on the krona allowing the cross border movement of icelandic and foreign currency once again however the central bank also imposed new reserve requirements and updated its foreign exchange rules to control the flow of hot money into the nation s economy in an effort to settle disputes with foreign investors who had been unable to liquidate their icelandic holdings while the exchange controls were in place the central bank offered to buy their currency holdings at an exchange rate discounted about 20 percent from the normal exchange rate at the time icelandic lawmakers also required foreign holders of krona denominated government bonds to sell them back to iceland at a discounted rate or have their profits impounded in low interest accounts indefinitely upon the bonds maturity | |
what is exchange of futures for physical efp | exchange of futures for physical efp is a private agreement between two parties to trade a futures position for the basket of underlying actuals an exchange of futures for physicals can be used to open a futures position close a futures position or switch a futures position for the underlying asset understanding exchange of futures for physical efp exchange of futures for physical efp is one of a few types of privately negotiated agreements that can then be registered with the exchange the volume involved in the transaction is shown in the days trading when the transaction is registered but the price at which the transaction was completed the privately agreed upon price between the parties is not revealed 1 | |
when two parties have agreed to an exchange of futures for physicals they then register the transaction with the relevant exchange exchange of futures for physical is also referred to as exchange of futures for product and exchange of futures for cash as in cash commodity | the term exchange of futures for physical is generally used to describe transactions of this nature even when the underlying are financial products rather than cash commodities exchange of futures for swap efs can be used if the futures position is being traded for a swap contract example of exchange of futures for physical efp the most common examples of exchange of futures for physical are in the oil and gas sector this makes sense as these types of transactions are not done by small traders and speculators efps will usually involve large commercial and non commercial traders imagine an oil and gas producer is holding an inventory of one million barrels on the assumption that prices are trending up a refiner that is worried about prices going up wants to secure barrels of oil in the future so they buy 1 000 contracts each representing a contract unit of 1 000 barrels for a total of one million barrels the refiner and the producer get to talking and they realize that a they are both bullish on the price of oil and b they can switch positions to fulfill each other s needs they agree to a price and delivery date in the future where the producer hands over the physical oil to the refiner locking in the refiner s supply and receives the futures in return allowing the producer to continue the bullish position on oil prices this large transaction is registered with the exchange but it doesn t impact the price of oil because pricing information is not disclosed so the refiner has closed out a futures position and the producer has opened one benefits of exchange of futures for physical efp the obvious question is why not just do the transaction through the market the answer is simply for the sake of efficiency large transactions impact the market as they are executed this is why large traders sometimes break up transactions over time to reduce the impact of slippage doing the exchange of futures outside the market pricing mechanism allows large offsetting transactions to take place at a decided price efp is also used when the market depth is not able to absorb the transaction for example a transaction involving thousands of contracts | |
what is the difference between physical and cash settlement | a cash settlement is where the seller delivers to the buyer the net position in cash rather than the underlying asset of the derivatives contract in a physical settlement the underlying asset is delivered to the buyer rather than a net cash position physical settlement carries more risk and is less liquid | |
what happens in a physical settlement | a physical settlement can be quite complex depending on the underlying asset of the derivative for example if a physical settlement was in corn it involves the delivery of corn to the buyer this will include storage of the corn transportation of the corn inspection of the corn and then final movement of the corn to the buyer s warehouse | |
what is the fx exchange for physical | an fx exchange for physical involves simultaneous transactions in the cash and futures markets this is an ex pit transaction that can take place outside of the central limit order book as approved under rule 538 2the bottom linethe exchange of futures for physical efp allows two parties to swap equivalent positions in a futures contract and an underlying physical asset either to open or close a futures position efp is a market neutral transaction and the price is privately negotiated before the transaction is reported to the relevant exchange efp allows traders to switch up their holdings to meet their needs control how their exposure is held manage their inventory and take advantage of price changes | |
what is an exchange rate | an exchange rate is the value of a nation s currency when it is traded for another currency the relative strength or weakness of a nation s currency has a strong impact on its trade with other nations on its tourism industry and on the prices its consumers pay for imports exchange rates are always viewed in relation to the exchange rate of another currency for example the exchange rate from u s dollars to euros was 1 07 at the end of june 2024 that means one euro could be exchanged for 1 07 understanding exchange ratesthe exchange rate between any two currencies is commonly determined by interest rates economic activity gross domestic product and the unemployment rate in each of the countries commonly called market exchange rates currency prices are set in the global marketplace where financial institutions money managers and speculators trade currencies around the clock this is called the forex or f x market although the market has no physical presence and no owner changes in rates can occur hourly or daily with small changes or in large incremental shifts an exchange rate is commonly quoted using an acronym for the national currency it represents usd represents the u s dollar eur represents the euro it would be eur usd if you were quoting the currency pair for the dollar and the euro an exchange of u s dollars to japanese yen is labeled as usd jpy an exchange rate of 100 means that one dollar equals 100 yen | |
how exchange rates fluctuate | exchange rates can be free floating or fixed a free floating exchange rate rises and falls due to changes in the foreign exchange market a fixed exchange rate is pegged to the value of another currency the hong kong dollar is pegged to the u s dollar in a range of 7 75 to 7 85 so the value of the hong kong dollar to the u s dollar will remain within this range exchange rates have a spot rate or cash value that s the current market value they may also have a forward value that s based on expectations for the currency to rise or fall versus its spot price forward rate values fluctuate due to changes in expectations for future interest rates in one country versus another traders may buy the dollar versus the euro if they speculate that the eurozone will ease monetary policy versus the u s causing a downward trend in the value of the euro exchange rate examplesa traveler to germany from the u s wants 200 for the equivalent amount of euros on arrival in germany the sell rate is the rate at which a traveler sells foreign currency in exchange for local currency the buy rate is the rate at which one buys foreign currency back from travelers to exchange it for local currency if the current exchange rate is 1 05 200 will net 190 48 in return in this case the equation is dollars exchange rate euro suppose 66 is remaining after the trip the change from euros to dollars will be 67 32 if the exchange rate has dropped to 1 02 the japanese yen is calculated differently the dollar is placed in front of the yen in this case as in usd jpy the equation for usd jpy is dollars x exchange rate yen a traveler to japan would get 11 000 if they want to convert 100 into yen and the exchange rate is 110 convert the yen back into dollars by dividing the amount of the currency by the exchange rate or note that none of these travelers will be getting the market price when they exchange currency the bank or currency exchange store that they do business with will add its fee to the transaction | |
how do exchange rates affect the supply and demand of goods | changes in exchange rates affect businesses by increasing or decreasing the cost of supplies and finished products that are purchased from another country it changes for better or worse the demand abroad for their exports and the domestic demand for imports significant changes in a currency rate can encourage or discourage foreign tourism and investment in a country | |
what is the forex | the forex market also known as the f x is an over the counter marketplace for trading currencies this 24 hour market is responsible for trillions of dollars in daily trading activity as central banks financial institutions and speculators swap currencies to profit from their price movements or hedge against future price movements | |
what is a restricted currency | a restricted currency has its value set by the government some countries have restricted currencies meaning they restrict the exchange of their currency to within their borders or establish both an onshore rate and an offshore rate china is an example the chinese government sets a midpoint value for the currency every day allowing the yuan to trade in a band of 2 from this midpoint the bottom linean exchange rate is the value of one currency in relation to the value of another currency most exchange rates are floating and rise or fall based on the supply and demand in the foreign exchange market but some are pegged to another country s currency or are fixed in value fluctuations in a nation s exchange rate have an impact on the demand for its products abroad and the prices its consumers pay for imports | |
what is an exchange rate mechanism erm | an exchange rate mechanism erm is a set of procedures used to manage a country s currency exchange rate relative to other currencies it is part of an economy s monetary policy and is put to use by central banks such a mechanism can be employed if a country utilizes either a fixed exchange rate that is bounded by a currency peg or one with a constrained floating exchange rate known as an adjustable peg or crawling peg understanding the exchange rate mechanismmonetary policy is the process of drafting announcing and implementing the plan of actions taken by the central bank currency board or other competent monetary authority of a country that controls the quantity of money in an economy and the channels by which new money is supplied under a currency board the management of the exchange rate and money supply is given to a monetary authority that makes decisions about the valuation of a nation s currency often this monetary authority has direct instructions to back all units of domestic currency in circulation with foreign currency an exchange rate mechanism is not a new concept historically most new currencies started as a fixed exchange mechanism that tracked gold or a widely traded commodity it is loosely based on fixed exchange rate margins whereby exchange rates fluctuate within certain margins an upper and lower bound interval allows a currency to experience some variability without sacrificing liquidity or drawing additional economic risks the concept of currency exchange rate mechanisms is also referred to as a semi pegged currency system real world example the european exchange rate mechanismthe most notable exchange rate mechanism occurred in europe during the late 1970s the european economic community introduced the erm in 1979 as part of the european monetary system ems to reduce exchange rate variability and achieve stability before member countries moved to a single currency it was designed to normalize exchange rates between countries before they were integrated in order to avoid any problems with price discovery on september 16 1992 a day known as black wednesday a collapse in the pound sterling forced britain to withdraw from the european exchange rate mechanism erm the exchange rate mechanisms came to a head in 1992 when britain a member of the european erm withdrew from the treaty the british government initially entered the agreement to prevent the british pound and other member currencies from deviating by more than 6 real world example soros and black wednesdayin the months leading up to the 1992 event legendary investor george soros had built up a monumental short position in the pound sterling that became profitable if the currency fell below the lower band of the erm soros recognized that britain entered the agreement under unfavorable conditions the rate was too high and economic conditions were fragile in september 1992 now known as black wednesday soros sold off a large portion of his short position to the dismay of the bank of england who fought tooth and nail to support the pound sterling the european exchange rate mechanism dissolved by the end of the decade but not before a successor was installed the exchange rate mechanism ii erm ii was formed in january 1999 to ensure that exchange rate fluctuations between the euro and other eu currencies did not disrupt economic stability in the single market it also helped non euro area countries prepare to enter the euro area most non euro area countries agree to keep exchange rates bound to a 15 range up or down against the central rate when necessary the european central bank ecb and other nonmember countries can intervene to keep rates in the window some current and former members of the erm ii include greece denmark and lithuania | |
what is the exchange ratio | the exchange ratio is the relative number of new shares that will be given to existing shareholders of a company that has been acquired or that has merged with another after the old company shares have been delivered the exchange ratio is used to give shareholders the same relative value in new shares of the merged entity understanding the exchange ratioan exchange ratio is designed to give shareholders the amount of stock in an acquirer company that maintains the same relative value of the stock the shareholder held in the target or acquired company the target company share price is typically increased by the amount of a takeover premium or an additional amount of money an acquirer pays for the right to buy 100 of the company s outstanding shares and have a 100 controlling interest in the company relative value does not mean however that the shareholder receives the same number of shares or same dollar value based on current prices instead the intrinsic value of the shares and the underlying value of the company are considered when coming up with an exchange ratio calculating the exchange ratiothe exchange ratio only exists in deals that are paid for in stock or a mix of stock and cash as opposed to just cash the calculation for the exchange ratio is exchange ratio target share price acquirer share price begin aligned text exchange ratio frac text target share price text acquirer share price end aligned exchange ratio acquirer share pricetarget share price the target share price is the price offered for the target shares because both share prices can change from the time the initial numbers are drafted to when the deal closes the exchange ratio is usually structured as a fixed exchange ratio or a floating exchange ratio a fixed exchange ratio is fixed until the deal closes the number of issued shares is known but the value of the deal is unknown the acquiring company prefers this method as the number of shares is known therefore the percentage of control is known a floating exchange ratio is where the ratio floats so that the target company receives a fixed value no matter the changes in price shares in a floating exchange ratio the shares are unknown but the value of the deal is known the target company or seller prefers this method as they know the exact value they will be receiving example of the exchange ratioimagine that the buyer of a company offers the seller two shares of the buyer s company in exchange for one share of the seller s company prior to the announcement of the deal the buyer s or acquirer s shares may be trading at 10 while the seller s or target s shares trade at 15 due to the 2 to 1 exchange ratio the buyer is effectively offering 20 for a seller share that is trading at 15 fixed exchange ratios are usually limited by caps and floors to reflect extreme changes in stock prices caps and floors prevent the seller from receiving significantly less consideration than anticipated and they likewise prevent the buyer from giving up significantly more consideration than anticipated post announcement of a deal there is usually a gap in valuation between the seller s and buyer s shares to reflect the time value of money and risks some of these risks include the deal being blocked by the government shareholder disapproval or extreme changes in markets or economies taking advantage of the gap believing that the deal will go through is referred to as merger arbitrage and is practiced by hedge funds and other investors leveraging the example above assume that the buyer s shares stay at 10 and the seller s shares jump to 18 there will be a 2 gap that investors can secure by buying one seller share for 18 and shorting two buyer shares for 20 if the deal closes investors will receive two buyer shares in exchange for one seller share closing out the short position and leaving investors with 20 in cash minus the initial outlay of 18 investors will net 2 | |
what is an exchange traded derivative | an exchange traded derivative is a financial contract that is listed and traded on a regulated exchange simply put these are derivatives that are traded in a regulated environment exchange traded derivatives have become increasingly popular because of the advantages they have over over the counter otc derivatives these advantages include standardization liquidity and elimination of default risk futures and options are two of the most popular exchange traded derivatives exchange traded derivatives can be used to hedge exposure and to speculate on a wide range of financial assets including commodities equities currencies and even interest rates understanding exchange traded derivativesexchange traded derivatives include options futures and other financial contracts that are listed and traded on regulated exchanges such as the chicago mercantile exchange cme international securities exchange ise the intercontinental exchange ice or the liffe exchange in london to name a few unlike their over the counter cousins exchange traded derivatives can be well suited for some retail investors in the otc market it is easy to get lost in the complexity of the instrument and the exact nature of what is being traded 4in that regard exchange traded derivatives have two big advantages the exchange has standardized terms and specifications for each derivative contract this makes it easier for investors to determine essential information about what they re trading such as the value of a contract the amount of the security or item represented by a contract e g lots and how many contracts can be bought or sold 3individual contracts can be a size that is less daunting for the small investor for instance an investor with limited capital could consider mini options 10 shares on high priced stocks versus standard options 100 shares the exchange itself acts as the counterparty for each exchange traded derivative transaction it effectively becomes the seller for every buyer and the buyer for every seller this eliminates the risk of the counterparty to the derivative transaction defaulting on its obligations 5another defining characteristic of exchange traded derivatives is their mark to market feature mark to market means gains and losses on every derivative contract are calculated daily so on any trading day if the client incurs losses that erode the initial margin amount to a specific level they will have to provide the required capital in a timely manner if they don t their derivative position may be closed out by the firm financial futures are derivatives based on treasuries indexes currencies and more they re often used by financial institutions to hedge long positions held in the underlying security users of exchange traded derivativesall kinds of small retail investors and large institutional investors use exchange traded derivatives to hedge the value of portfolios and to speculate on price movements banks might hedge the value of their treasuries portfolio by taking an opposite position in treasury futures an import export organization might use currency futures to lock in currency rates for impending transactions retail investors might take a position in stock options to hedge the value of their stock portfolios or they simply might want the premium income obtained by selling an option contract most investors are reassured by the standardization and regulatory oversight offered by centralized exchanges however the transparency of exchange traded derivatives may be a hindrance to large institutions that may not want their trading intentions known to the public or their competitors in fact institutional investors might opt to work directly with issuers and investment banks to create tailored investments that give them the exact risk and reward profile they seek | |
what information does a derivative contract include | generally a contract will detail such things as the asset involved the dollar value or amount e g face amount or lot size of the security the settlement date and process trading hours price quotation and the contract expiration date | |
what are some types of derivatives traded on an exchange | some exchange traded derivatives include stock options currency futures options and swaps and index futures | |
why are exchange traded derivatives appealing to investors | investors large and small appreciate the fact that these investments are understandable reliable and liquid contract features are clear parties to a contract must abide by it default risk is eliminated exchanges are regulated trust in financial markets translates to liquidity which in turn means efficient access and pricing | |
what is an exchange traded fund etf | an exchange traded fund etf is a pooled investment security that can be bought and sold like an individual stock etfs can be structured to track anything from the price of a commodity to a large and diverse collection of securities etfs can even be designed to track specific investment strategies various types of etfs are available to investors for income generation speculation and price increases and to hedge or partly offset risk in an investor s portfolio the first etf was the spdr s p 500 etf spy which tracks the s p 500 index 1investopedia zoe hansen | |
how etfs work | an etf must be registered with the securities and exchange commission in the united states most etfs are set up as open ended funds and are subject to the investment company act of 1940 except where subsequent rules have modified their regulatory requirements 2 open end funds do not limit the number of investors involved in the product vanguard s consumer staples etf vdc tracks the msci us investable market consumer staples 25 50 index and has a minimum investment of 1 00 the fund holds shares of all 104 companies on the index some familiar to most because they produce or sell consumer items a few of the companies held by vdc are proctor gamble costco coca cola walmart and pepsico 34 investors who buy 1 00 in vdc own 1 00 shares representing 104 companies there is no transfer of ownership because investors buy a share of the fund which owns the shares of the underlying companies unlike mutual funds etf share prices are determined throughout the day a mutual fund trades only once a day after market close volatile stock performance is curtailed in an etf because they do not involve direct ownership of securities industry etfs are also used to rotate in and out of sectors during economic cycles as of january 2024 nine etfs focus on companies engaged in gold mining excluding inverse leveraged and funds with low assets under management aum 7pros and cons of etfsaccess to many stocks across various industrieslow expense ratios and fewer broker commissionsrisk management through diversificationetfs exist that focus on targeted industriesactively managed etfs have higher feessingle industry focused etfs limit diversificationlack of liquidity hinders transactionsbuying etfsetfs trade through online brokers and traditional broker dealers many sources provide pre screened brokers in the etf industry individuals can also purchase etfs in their retirement accounts an alternative to standard brokers is a robo advisor like betterment and wealthfront an etf s expense ratio is the cost to operate and manage the fund etfs typically have low expenses because they track an index etfs are available on most online investing platforms retirement account provider sites and investing apps like robinhood most of these platforms offer commission free trading meaning that investors don t have to pay fees to the platform providers to buy or sell etfs after creating and funding a brokerage account investors can search for etfs and make their chosen buys and sells one of the best ways to narrow etf options is to utilize an etf screening tool with criteria such as trading volume expense ratio past performance holdings and commission costs order a copy of investopedia s what to do with 10 000 for more wealth building advice popular etfsbelow are examples of popular etfs on the market some etfs track an index of stocks thus creating a broad portfolio while others target specific industries etfs vs mutual funds vs stocksmost stocks etfs and mutual funds can be bought and sold without a commission funds and etfs differ from stocks because of the management fees that most of them carry though they have been trending lower for many years in general etfs tend to have lower average fees than mutual funds 8dividends and taxesthough etfs allow investors to gain as stock prices rise and fall they also benefit from companies that pay dividends dividends are a portion of earnings allocated or paid by companies to investors for holding their stock etf shareholders are entitled to a proportion of the profits such as earned interest or dividends paid and may get a residual value if the fund is liquidated an etf is more tax efficient than a mutual fund because most buying and selling occur through an exchange and the etf sponsor does not need to redeem shares each time an investor wishes to sell or issue new shares each time an investor wishes to buy redeeming shares of a fund can trigger a tax liability so listing the shares on an exchange can keep tax costs lower in the case of a mutual fund each time an investor sells their shares they sell it back to the fund and incur a tax liability that must be paid by the shareholders of the fund creation and redemptionthe supply of etf shares is regulated through creation and redemption which involves large specialized investors called authorized participants aps when an etf wants to issue additional shares the ap buys shares of the stocks from the index such as the s p 500 tracked by the fund and sells or exchanges them to the etf for new etf shares at an equal value in turn the ap sells the etf shares in the market for a profit | |
when an ap sells stocks to the etf sponsor in return for shares in the etf the block of shares used in the transaction is called a creation unit if an etf closes with a share price of 101 and the value of the stocks that the etf owns is only worth 100 on a per share basis then the fund s price of 101 was traded at a premium to the fund s net asset value nav the nav is an accounting mechanism that determines the overall value of the assets or stocks in an etf | conversely an ap also buys shares of the etf on the open market the ap then sells these shares back to the etf sponsor in exchange for individual stock shares that the ap can sell on the open market as a result the number of etf shares is reduced through the process called redemption the amount of redemption and creation activity is a function of demand in the market and whether the etf is trading at a discount or premium to the value of the fund s assets etfs in the united kingdomthe u k etf market is one of the largest and most diverse in europe with etfs listed on the london stock exchange lse that offer exposure to various asset classes and markets including equities fixed income commodities currencies real estate and alternative investments 9buying etfs in the u k allows inclusion in individual savings accounts isas which are tax efficient savings vehicles that allow investors to invest up to 20 000 per year without paying any income or capital gains tax on their returns 10 another benefit is that etfs attract no stamp duty which is a tax levied on ordinary share transactions in the u k 11u k investors can buy shares in u s listed companies from the u k but due to local and european regulations you re not allowed to purchase u s listed exchange traded funds etfs in the u k 12 there are u k based etfs that track u s markets as long as it has the ucits moniker in the name this means the fund is fully regulated in the u k and allowed to track u s investments 13for broad based exposure to u k equities there are several ucits etfs that track the ftse 100 index which consists of the 100 largest publicly listed companies in the country the hsbc ftse ucits etf is listed on the london stock exchange and trades under the ticker symbol hukx the etf has an ongoing charge of 0 07 and a dividend yield of 3 62 as of january 2024 14 | |
what was the first exchange traded fund etf | the distinction of being the first exchange traded fund etf is often given to the spdr s p 500 etf spy launched by state street global advisors on jan 22 1993 1 there were however some precursors to the spy notably securities called index participation units listed on the toronto stock exchange tsx that tracked the toronto 35 index that appeared in 1990 15 | |
how is an etf different from an index fund | an index fund usually refers to a mutual fund that tracks an index an index etf is constructed in much the same way and will hold the stocks of an index tracking it however the difference between an index fund and an etf is that an etf tends to be more cost effective and liquid than an index mutual fund you can also buy an etf from a broker who will execute the trade throughout the trading day while a mutual fund trades via a broker only at the close of each trading day | |
do etfs provide diversity | nearly all etfs provide diversification benefits relative to an individual stock purchase still some etfs are highly concentrated either in the number of different securities they hold or in the weighting of those securities for example a fund that concentrates half of its assets in two or three positions may offer less diversification than a fund with fewer total portfolio constituents but broader asset distribution the bottom lineexchange traded funds represent a cost effective way to gain exposure to a broad basket of securities with a limited budget investors can build a portfolio that holds one many or only etfs instead of buying individual stocks investors buy shares of a fund that targets a representative cross section of the wider market however there are some additional expenses to keep in mind when investing in an etf | |
what are exchange traded notes etns | exchange traded notes etns are types of unsecured debt securities that track an underlying index of securities and trade on a major exchange like a stock etns are similar to bonds but do not have interest payments instead the prices of etns fluctuate like stocks investopedia michela buttignol | |
how exchange traded notes work | an etn is typically issued by financial institutions and bases its return on a market index etns are a type of bond at maturity the etn will pay the return of the index it tracks however etns do not pay any interest payments like a bond 1 | |
when the etn matures the financial institution takes out fees and then gives the investor cash based on the performance of the underlying index since etns trade on major exchanges like stocks investors can buy and sell etns and make money from the difference between the purchase and sale prices minus any fees 2 | etns are different from exchange traded funds etfs etfs own the securities in the index they track for example an etf that tracks the s p 500 will own all 500 stocks in the s p etns do not provide investors ownership of the securities but are merely paid the return that the index produces as a result etns are similar to debt securities the investors must trust that the issuer will make good on the return based on the underlying index 1etns were first issued by barclays bank plc in 2006 banks and other financial institutions typically issue etns at 50 per share part of the market price depends on how the underlying index is performing 34etn risksthe repayment of the principal invested depends in part on the performance of the underlying index if the index either goes down or does not go up enough to cover the fees involved in the transaction the investor will receive a lower amount at maturity than what was originally invested 2the etn s ability to pay back the principal plus gains from the index it tracks depends on the financial viability of the issuer as a result an etn s value is impacted by the credit rating of the issuer the value of the etn could decline due to a downgrade in the issuer s credit rating even though there was no change in the underlying index investors must be aware of the risk that the issuer of an etn may be unable to repay the principal and default on the bond also political economic legal or regulatory changes may affect the financial institution s ability to pay etn investors on time 5the financial institution issuing the etn might use options to achieve the return from the index which can increase the risk of losses to investors options are agreements that can magnify gains or losses where the issuer has the right to transact shares of stocks by paying a premium in the options market options are usually short term contracts and the premiums can fluctuate wildly based on market conditions 6investors also have closure risk meaning the issuer might be able to close the etn before maturity in this case the investor would be paid the prevailing price in the market if the sale price is lower than the purchase price the investor can realize a loss the early redemption feature of an etn is stated upfront 5the price of the etn should track the index closely but there can be times when it does not correlate well called tracking errors tracking errors happen if there are credit issues with the issuer and the price of the etn deviates from the underlying index 5if a financial institution decides not to issue new etns for a period prices of existing etns could jump significantly due to the lack of supply as a result existing etns could trade at a premium to the value of the index it tracks conversely if the bank suddenly decides to issue additional etns prices of existing etns could fall due to excess supply 5trading activity for etns can be low or fluctuate dramatically the result can be etn prices that are trading at far higher prices than their actual value for those looking to buy also these products may sell at far lower prices than their value for investors looking to sell due to the varying prices of etns investors who sell an etn before maturity can realize a large loss or gain 7etn investors earn profit if the underlying index is higher at maturity investors don t need to own the underlying securities of the index they track exchange traded notes trade on major exchanges exchange traded notes don t make regular interest payments etns have default risk since the repayment of principal is contingent on the issuer s financial viability trading volume can be low causing etn prices to trade at a premium tracking errors can occur if the etn doesn t track the underlying index closely tax treatment of etnstypically the difference between the purchase price and selling price of the etn should be treated as a capital gain or loss for income tax purposes the investor may defer the gain until the etn is sold or matures however investors should seek counsel from a tax professional for any potential tax ramifications that might exist for their specific situation 8example of an etnthe jpmorgan alerian mlp index etn amj is an energy infrastructure etn it tracks companies in the energy sector that are master limited partnerships mlps mlps are publicly traded partnerships some of which are responsible for building the energy infrastructure in the u s 9amj has 3 39 billion in assets and an expense ratio of 0 85 as of may 8 2024 since 2019 the etn has traded between approximately 6 and 29 per share 10911investors must consider the risks present with etns these risks include not only the credit risk of the issuer but also the risk that the etn s share price could decline significantly as in the case of amj | |
what is the difference between an etf and an etn | both exchange traded funds etfs and exchange traded notes etns are securities that track an index an etf outright owns the underlying securities of the index while an etn is like a bond it is an unsecured debt note issued by a financial institution that pays out the return over the index over a period of time | |
how do you buy exchange traded notes | exchange traded notes etns can be bought directly from the issuing institution or online through a brokerage they can be bought like stocks or etfs that are listed on an exchange | |
what are the risks of etns | exchange traded notes etns have risks such as liquidity risk credit risk closure risk volatility risk and price deviation risk the bottom lineexchange traded notes etns are a simple way to gain exposure to debt securities an etn is a debt security issued by a financial institution that tracks an index there is no ownership of the underlying security like in an etf and the etn investor receives the return on the index as payment | |
what is an exchange traded product etp | exchange traded products etps are instruments that track underlying securities an index or other financial products etps trade on exchanges similar to stocks meaning shares can be purchased and prices can fluctuate throughout a trading day etp share prices are derived from the underlying investments that they track types of exchange traded products etps exchange traded products can be benchmarked to myriad investments including commodities currencies stocks and bonds etps can contain a few or hundreds of underlying investments here are the types of etps trading on the market similar to a mutual fund an exchange traded fund contains a basket of investments that can include stocks and bonds an etf usually tracks an underlying index such as the s p 500 but it can follow an industry sector commodity or even a currency an exchange traded fund s price can rise and fall just like other investments contrasted with mutual funds that can only be traded after hours these products trade throughout the day 1the popularity surrounding etfs stems from their low fees since many are passively managed for example a passively managed etf might track the s p 500 index one of the most popular large cap stock indexes an etf that mirrors the s p 500 will generally hold all stocks listed on the index but some funds hold more or less than the index lists an example is vanguard s s p 500 etf which held 505 stocks on feb 1 2024 while the s p 500 listed 503 23in january 2024 the securities and exchange commission approved the first bitcoin spot etfs allowing fund managers to hold bitcoin and offer exchange traded shares to investors on official exchanges 4in an actively managed fund which an etf can also be the fund manager is responsible for maintaining fund performance by replacing non performers with better performers which can lead to higher fees the managers need to be paid for their time and there might be some trading fees to pass on some etfs share a combination of both passive and active attributes 5for example actively managed exchange traded funds are a hybrid investment vehicle that merges actively managed mutual funds with the trading flexibility associated with etfs exchange traded notes etns like etfs generally track an underlying index and trade on major exchanges however they track unsecured debt securities and are issued as bonds etns are issued as bonds which pay the return of their original invested amount the principal at maturity and any returns generated etns do not pay periodic interest payments called coupon payments as a result the likelihood that investors will be paid back the principal and the returns from the underlying index depends on the issuer s creditworthiness 6different tax treatments apply to the various types of etps investors should speak with a tax professional for any potential tax ramifications from investing in etps exchange traded commodities etcs are financial instruments designed to offer investors exposure to commodity prices these instruments can be structured as either etfs or etns etcs are traded on stock exchanges allowing investors to easily access and trade them just like they were individual stocks the underlying assets of etcs typically include a range of commodities such as precious metals agricultural products energy resources or a combination thereof etcs let investors buy and sell commodities without holding or owning any of the underlying commodities this means investors can capitalize on specific commodities commodity indices or commodity futures contracts without ever having to store or hold a tangible commodity 7exchange traded products vs mutual fundsmutual funds are typically priced at the end of the trading day when orders are actually filled etp shares trade like stocks with price movements throughout the day for example an investor can place a buy or sell order for an etf share at a specific price with a broker or buy the etf in the morning and sell it by the end of the day mutual funds can be purchased and sold during the day but are not priced until the market closes etps also often carry lower expense ratios than their mutual fund counterparts 1additionally differences in the bid and ask the buy and sell price could add to the cost of trading etps some no load or no fee mutual funds on the other hand can be bought and sold without any trading commission etps offer investors access to many securities and indices etps are usually a low cost alternative to mutual funds and actively managed funds many etps particularly etfs are gaining in popularity providing additional liquidity etps have the risk of market losses since their prices fluctuate etps are popular products but have varying trading volumes which can affect liquidity growth of exchange traded productssince the debut of the first etf in 1993 etps have grown significantly in size and popularity 8 at the end of 2023 global etfs had almost 11 trillion in total assets under management aum 9 the low cost structure of etps has contributed to their popularity which has attracted assets and capital away from actively managed funds real world example of an etpthe largest etf in the marketplace is the spdr s p 500 etf spy with assets of more than 480 billion as of january 2024 the etf owns shares of all 500 stocks listed on the s p here are a few of the top companies held by spy 10 | |
how do exchange traded products etps differ from traditional investment options | etps differ from traditional investment options such as mutual funds in their structure and tradability etp shares are traded on stock exchanges throughout the trading day at market prices providing intraday liquidity and flexibility traditional options often involve buying or selling at the end of the trading day at the nav price 1 additionally etps can track various indices commodities or currencies allowing for more targeted investment strategies 7 | |
are etps traded on stock exchanges | yes etps are traded on stock exchanges this means that investors can buy and sell etp shares throughout the trading day at market prices the stock exchange environment enhances liquidity and provides real time pricing information for etps 1 | |
how do leveraged and inverse etps work | leveraged etps seek to magnify the returns of an underlying index or asset class using financial derivatives and debt inverse etps on the other hand aim to provide the opposite inverse performance of the underlying index these etps are designed for sophisticated investors seeking to capitalize on short term market movements often contrasting how the etf is naturally moving 11 | |
what are the risks associated with investing in etps | investing in etps carries various risks including market risk liquidity risk tracking error and specific risks associated with the underlying assets market conditions geopolitical events and interest rate changes can impact etps performance 12 in many ways an etp can be considered similar to a stock consider all the ways a business can face risk an etp is susceptible to similar risks the bottom lineexchange traded products are financial instruments traded on stock exchanges that provide investors with exposure to diverse asset classes such as stocks bonds commodities and currencies etps can be etfs etns etcs or other vehicles representing structured investment products the comments opinions and analyses expressed on investopedia are for informational purposes online read our warranty and liability disclaimer for more info | |
what is an excise tax | an excise tax is a legislated tax on specific goods or services at the time they are purchased they re intranational taxes imposed within a government infrastructure rather than international taxes imposed across country borders 1 a federal excise tax is usually collected from motor fuel sales airline tickets tobacco and other goods and services investopedia crea taylor | |
how an excise tax works | excise taxes are primarily for businesses many of them are paid by merchants who then pass the tax on to consumers through higher prices merchants pay excise taxes to wholesalers and consider them in product pricing which increases the retail price overall 2 as such consumers may or may not see the cost of most excise taxes directly but there are some excise taxes that are paid directly by consumers including property taxes and levies on certain retirement account activities federal state and local governments have the authority to institute excise taxes while income tax is the primary revenue generator for federal and state governments excise tax revenue also makes up a small portion of total revenue 34excise taxes are primarily business taxes they are separate from other taxes that corporations must pay such as income taxes businesses charging and receiving excise taxes are required to file form 720 federal excise tax return on a quarterly basis and include quarterly payments business collectors of excise taxes must also maintain their obligations for passing on excise taxes to state and local governments as required merchants may be allowed deductions or credits on their annual income tax returns related to excise tax payments 5excise taxes can fall into one of two categories in some cases governments levy excise taxes on goods that have a high social cost such as cigarettes and alcohol these types of excise these taxes are sometimes called sin taxes because the good being taxed has a reputation for being sinful or with negative consequences associated with it 1the largest revenue producing excise taxes in the u s come from motor fuel airline tickets tobacco alcohol health related goods and health related services 2ad valorem excise taxesad valorem is a latin phrase that literally means according to value 6 an ad valorem tax is charged on a percentage basis this results in an excise tax that is based on the value of the product or service for example the internal revenue service irs levies a 10 excise tax on indoor tanning services 7 this means that if a tanning salon charges 100 for a tanning session it must pay the irs 10 in excise tax other types of ad valorem excise taxes include firearms 10 airline tickets 7 5 and heavy trucks 12 8 property taxes can also be considered a type of ad valorem excise tax specific excise taxesspecific excise taxes are a set tax or fee added to a certain product on a per unit basis some examples of federal specific excise taxes as of oct 2023 include small cigarettes 1 01 per pack of 20 pipe tobacco 2 83 per pound beer 3 50 for the first 60 000 barrels cruise ship passengers 3 per passenger and gasoline 0 183 per gallon 98sin taxes on targeted goods like beer and alcohol will often be taxed at the federal level and also taxed again by the state making the cost of these items higher for example new york has a specific excise tax of 4 35 per cigarette pack of 20 10 combining this with the federal tax of 1 01 makes the excise taxes alone 5 36 these taxes have a considerable impact on the consumer the irs provides guidance on excise taxes in publication 510 excise taxes on retirement accountsexcise taxes are also charged on some retirement account activities many people are familiar with these taxes as penalties a 6 excise tax is applied to excess individual retirement account ira contributions that are not corrected by the applicable deadline a 10 excise tax penalty applies to distributions from certain iras and other qualified plans when an investor makes withdrawals before age 59 1112also a 25 excise tax penalty is charged when investors do not take the mandatory required minimum distributions rmds from certain retirement accounts though this tax is reduced to 10 if the missed distribution is taken before the end of the correction window the correction window starts on the date the penalty is imposed usually january 1st after the year you missed the distribution 13 the window ends on the earliest of as of january 1 2023 rmds are mandatory starting at age 73 for owners of traditional ira accounts and several other tax deferred retirement savings plans 14who pays excise taxes excise taxes are imposed on certain goods and services such as gasoline and alcohol these taxes are paid directly by businesses this tax is often passed on to the consumer who may or may not be aware that they re paying it to the merchant because it s included in the price this is common in the fuel industry where companies charge excise taxes through the price you pay at the pump | |
what is a federal excise tax | a federal excise tax is charged on certain goods and services by the federal government it may or may not be included by the merchant into the price this means that consumers don t pay these taxes directly as they would any other type of tax such as income taxes federal excise taxes are commonly imposed on things like fuel airline tickets tobacco and alcohol | |
how is an excise tax different from a sales tax | excise and sales taxes are two different types of taxes an excise tax is imposed on specific goods and is generally the responsibility of the merchant to pay to the government the merchant in turn may or may not pass the tax on to the consumer by adding it into the price a sales tax on the other hand is charged on almost everything and is collected from the consumer by the merchant who passes it on to the government the sales tax is a percentage of the price of the good or service the bottom lineexcise taxes are assessed by federal and state governments on certain goods and services they are paid by the merchants that sell them excise taxes can be a flat tax amount known as a specific excise tax or a percentage of the cost of the good known as an ad valorem excise tax they may also be limited only to goods sold within the state of the taxing authority businesses often add the cost of an excise tax directly onto the price of the taxed good so the tax is passed onto the customer customers may or may not know they are paying the cost of the excise tax on top of the price of the good or service some companies are transparent about excise taxes though like fuel companies next time you go to fill up your gas tank take a look at the pump the company may break down how much of the price at the pump goes toward the fuel itself versus how much you pay in taxes | |
what is an exculpatory clause | an exculpatory clause is a contract provision that relieves one party of liability if damages are caused during the execution of the contract the party that issues the exculpatory clause is typically the one seeking to be relieved of the potential liability for example a venue may print an exculpatory clause on tickets it sells for a concert indicating that it is not responsible for personal injury caused by employees or others during the show understanding exculpatory clausesexculpatory clauses are often included in agreements where a service provider can come into contact with the personal property possessions or physical well being of a customer when a patron visits a restaurant or bar that offers coat check service the venue might inform the customer that the business is not responsible for items that go missing from their coat likewise the operator of a parking facility might post signs indicating that damages to vehicles stored at the facility and thefts that occur are not the responsibility of the company enforcement of exculpatory clauses may be challenged in court if a court finds that an exculpatory clause is unreasonable the clause will not be upheld the court can also determine that the clause is unreasonable if both parties in the contract do not have equal bargaining power or if the clause eliminates liability for negligence 1limitations of exculpatory clausesspecial conditions can also be included in an exculpatory clause to indicate circumstances when a party does not assume liability for damages passengers in vehicles operated by a third party are often informed of safe behavior and actions that are permitted on their journey if the passengers fail to abide by those rules and put themselves and other passengers at risk the operator of the vehicle might invoke the terms of their exculpatory clause if injuries occur for example flight attendants instruct passengers on the proper use of the available safety devices and equipment before each flight takes off passengers who disregard these instructions and act in defiance of these instructions may be held accountable for any harm that befalls them arguments made against exculpatory clauses might focus on how they are presented some of the measures for enforceability include whether the clause was displayed or made known in a conspicuous manner that all parties could readily find the language of the clause must also be made clear and understandable for all parties | |
what is an execution | execution is the completion of a buy or sell order for a security the execution of an order occurs when it gets filled not when the investor places it when the investor submits the trade it is sent to a broker who then determines the best way for it to be executed understanding executionbrokers are required by law to give investors the best execution possible the securities and exchange commission sec requires brokers to report the quality of their executions on a stock by stock basis as well as to notify customers who did not have their orders routed for best execution 1 the cost of executing trades has been significantly reduced due to the growth of online brokers many brokers offer their customers a commission rebate if they execute a certain amount of trades or dollar value per month this is particularly important for short term traders where execution costs need to be kept as low as possible if the order placed is a market order or an order which can be converted into a market order relatively quickly then the chances that it will be settled at the desired price are high but there might be instances especially in the case of a large order that is broken down into several small orders when it might be difficult to execute at the best possible price range in such cases an execution risk is introduced into the system the risk refers to the lag between the placement of an order and its settlement | |
how orders get executed | best execution and broker obligationsby law brokers are obligated to give each of their investors the best possible order execution 1 there is however the debate over whether this happens or if brokers are routing the orders for other reasons like the additional revenue streams we outlined above let s say for example you want to buy 1 000 shares of the tsj sports conglomerate which is selling at the current price of 40 you place the market order and it gets filled at 40 10 that means the order costs you an additional 100 some brokers state that they always fight for an extra one sixteenth but in reality the opportunity for price improvement is simply an opportunity and not a guarantee also when the broker tries for a better price for a limit order the speed and the likelihood of execution diminishes however the market itself and not the broker may be the culprit of an order not being executed at the quoted price especially in fast moving markets it is somewhat of a high wire act that brokers walk in trying to execute trades in the best interest of their clients as well as their own but as we will learn the sec has put measures in place to tilt the scale toward the client s best interests the sec has taken steps to ensure that investors get the best execution with rules forcing brokers to report the quality of executions on a stock by stock basis including how market orders are executed and what the execution price is compared to the public quote s effective spreads in addition when a broker while executing an order from an investor using a limit order provides the execution at a better price than the public quotes that broker must report the details of these better prices 1 with these rules in place it is much easier to determine which brokers get the best prices and which ones use them only as a marketing pitch additionally the sec requires broker dealers to notify their customers if their orders are not routed for best execution 1 typically this disclosure is on the trade confirmation slip you receive after placing your order unfortunately this disclaimer almost always goes unnoticed execution and dark poolsdark pools are private exchanges or forums that are designed to help institutional investors execute their large orders by not disclosing their quantity because dark pools are primarily used by institutions it is often easier to find liquidity to execute a block trade at a better price than if it was executed on a public exchange such as the nasdaq or new york stock exchange if an institutional trader places a sizable order on a public exchange it is visible in the order book and other investors may discover that there is a large buy or sell order getting executed which could push the price of the stock lower most dark pools also offer execution at the mid point of the bid and ask price which helps brokers achieve the best possible execution for their customers for example if a stock s bid price was 100 and the asking price was 101 a market order could get executed at 100 50 if there was a seller at that price in the dark pool main street is generally skeptical of dark pools due to their lack of transparency and lack of access to retail investors example of executionsuppose olga enters an order to sell 500 shares of stock abc for 25 her broker is under obligation to find the best possible execution price for the stock he investigates the stock s prices across markets and finds that he can get a price of 25 50 for the stock internally versus the 25 25 price at which it is trading in the markets the broker executes the order internally and nets a profit of 125 for olga | |
what is an executive mba emba | executive master of business administration is a degree program similar to a master of business administration mba program but specifically designed for corporate executives and senior managers already in the workforce an executive mba program referred to as an emba enables executives to earn the degree while continuing to hold their existing jobs typically emba students are relatively senior in their fields and possess considerable work experience before entering the program understanding the executive mba programthe emba program is comprised of a mix of classroom teaching on evenings and weekends online classes and tutorials and occasional full day workshops equivalent to a full time mba program in scope and requirements an emba program can last as long as 24 months intensive modular classes to reinforce expertise and fill knowledge gaps are primary motivators for executives to embark on this program they engage in core coursework in finance and accounting operations management strategic management marketing human resources and other disciplines and may take specialized electives an emba program may take up to two years to complete and could potentially cost 200 000 students in emba programs come away with an enhanced skills base to advance their career prospects at their organizations not to mention the credential of a master s degree and a new alumni network because most of these executives are also working while earning their embas they are better positioned to apply the management techniques and best practices learned in the classroom to real life situations than traditional mbas in school full time types of emba programsthere are numerous emba programs in the u s and abroad the economist cites 65 universities that offer embas and states that these pricey programmes are more popular than ever its top 10 rated programs ranked for 2020 rankings include those offered by the business schools at the university of california at berkeley northwestern brown and yale the economist ranks the school s emba programs on broad measures like personal development educational experience and career development as with the regular full time mba programs these universities have a competitive admissions process there is no absence of good emba programs in the u s and abroad from which to choose it s essential to research emba programs thoroughly to find the best school program and location for your particular needs however what is possibly more germane is to understand whether pursuing an emba degree is the right path | |
is an emba worth it | the question of whether an emba degree program would be worthwhile depends on your set of requirements career goals basic needs lifestyle and so on generally an excellent place to begin this investigation is by looking at time and money factors emba programs are not cheap and can cost as much as 200 000 so whether you are paying out of your pocket or being sponsored by your company you should perform a basic return on investment roi analysis to gauge if it is worthwhile financially if you are working full time and your company is footing the bill for your emba there would be no monetary opportunity cost but the time consideration remains suppose you as an executive cannot travel to close a deal meet with a client to develop new business or stay late in the office to satisfy a pressing deadline because you need to attend a class or do homework instead in that case there might be a huge opportunity cost to you and your career you must carefully review these and other criteria and include them as part of your cost benefit analysis to help decide if an emba is the best choice for you | |
what is an executor | an executor of an estate is an individual appointed to administer the last will of a deceased person and carry out the instructions to manage the affairs they are appointed either by the testator or a court executors ensure all assets in the will are accounted for and transfer these assets to the correct beneficiary assets can include financial holdings such as stocks or bonds real estate direct investments or collectibles | |
what is an exempt employee | the term exempt employee refers to a category of employees set out in the fair labor standards act flsa exempt employees do not receive overtime pay and do not qualify for minimum wage this is based on the type of work they perform when an employee is exempt it primarily means that they are exempt from receiving overtime pay exempt employees stand in contrast to nonexempt employees understanding exempt employeesin any workplace there are two types of employees exempt and nonexempt exempt employees are those who are exempt from minimum wage and overtime pay requirements this is because exempt employees are paid a salary rather than an hourly wage and they work in what are considered executive or professional jobs exempt employees often receive year end bonuses to compensate for the type of work they do as well as for any overtime work 1requirements vary by state but the flsa classifies exempt employees as any job that falls into these categories these classifications are quite broad which they are intended to be that s because they encompass a variety of jobs in different industries as of jan 1 2022 the flsa stipulates that employees in the above categories are exempt if they are paid by salary as opposed to hourly and if they earn a minimum of 684 per week or 35 568 annually 3 in 2022 26 u s states increased the minimum wage which means this threshold changed in certain regions 4in addition to the main categories of exempt employees other categories of employees may possibly be considered exempt from receiving overtime pay these include farm workers motion picture theater employees certain employees of nonmetropolitan broadcast stations taxi drivers and employees of railroads motor carriers and american vessels commissioned sales employees of retail or service entities also fall into this list 5employees who fall in the computer related categories may be paid an hourly salary in order to be considered exempt hourly employees must be paid no less than 27 63 per hour 6exempt employees nonexempt employees and the fair labor standards actthe exempt employee category was created by the flsa which was passed in 1938 the watershed labor law protects workers against unfair pay practices and work regulations the law changed greatly over the last 85 years but it is still one of the most important labor laws in the history of the united states setting regulations for a wide array of employee and employer related issues 7the flsa specifies the conditions when workers are to be paid and not expected to be paid for instance when working excess hours an exempt employee does not receive overtime or time and a half time and a half is 1 5 times the hourly rate of the employee the minimum that an employer has to pay for overtime the act marks overtime as any hours that exceed 40 hours in a seven day workweek 1the flsa s exemptions only apply to white collar employees who meet the salary and job requirement tests as such the exemption does not apply to blue collar workers or those who perform work involving repetitive operations with their hands physical skill and energy the flsa also excludes police officers firefighters paramedics and other first responders from the list of exempt employees 8advantages and disadvantages of exempt employee statusthe pros of being an exempt employee start with the security of knowing that you have a steady paycheck exempt employees tend to earn more than hourly workers they may also generally have access to such extras as retirement benefits including the downside comes largely in not being eligible for overtime pay depending on the mindset of your employer you could find yourself working long hours to fulfill an overloaded work portfolio without any recourse for additional reimbursement companies are often pressured to achieve better financial results and the first area they look at is payroll they hire less headcount so exempt employees end up doing the work of more than one employee this makes overtime work the norm hence many exempt employees have made the choice to leave and become self employed as freelancers paid by the hour this solution has worked for some people moving from employment to what is called the gig economy higher pay than hourly workersaccess to employer sponsored benefitsnot eligible for overtime payyou may have to work longer hours | |
what are the requirements of being an exempt employee | the fair labor standards act classifies exempt employees as anyone doing jobs that fall into these categories professional administrative executive outside sales stem science technology engineering and math related and computer related the flsa stipulates that employees in the above categories are exempt if they are paid by salary as opposed to hourly and if they earn a minimum of 684 per week or 35 568 annually 3 keep in mind that this may vary by state as 26 u s states increased their minimum wages in 2022 4 | |
what are the advantages of being an exempt employee | the advantages of being an exempt employee start with the security of knowing that you have a steady paycheck also exempt employees tend to earn more than hourly ones and have access to extras such as retirement benefits including individual retirement accounts 401 k plans and pensions bonuses employer sponsored healthcare plans and paid vacation time and sick days | |
what are the disadvantages of being and exempt employee | the main disadvantages lie in not being eligible for overtime or qualifying for minimum wage depending on the mindset of your employer you could find yourself working long hours to fulfill an overloaded work portfolio without any recourse for additional reimbursement or reducing the stress brought on by the long hours in short you are at the mercy of your boss the bottom lineexempt employees have the advantage of a steady income stream and generally earn more than nonexempt or hourly employees full time and many part time exempt employees also typically have access to retirement benefits like 401 k plans bonuses and employee sponsored healthcare plans as well as paid time off in the form of vacation and sick days the main downside of being an exempt employee is not being eligible for overtime pay however for most employees the benefits of exempt status likely outweigh that potential negative | |
what is exempt income | exempt income refers to certain types of income not subject to income tax some types of income are exempt from federal or state income tax or both the irs determines which types of income are exempt from federal income tax and the circumstances for each exemption states have their own rules that define what counts as exempt income understanding exempt incomesome income and benefits are nontaxable under certain circumstances several health related benefits are tax exempt including benefits from employer sponsored supplemental disability insurance purchased with after tax dollars private insurance plans funded with after tax dollars most benefits from employer sponsored health insurance plans and worker s compensation 3gifts that exceed a certain value can trigger a gift tax on the person providing the gift however any gift worth less than 17 000 in 2023 and 18 000 in 2024 is exempt from income tax 4 regardless of value gifts including medical expenses paid for someone else and charitable donations are income tax exempt charitable contributions are also tax deductible 5the tax cuts and jobs act tcja in 2017 eliminated personal exemptions from tax years 2018 to 2026 but roughly doubled the standard deduction 6 for tax years 2023 and 2024 the standard deductions are 74 | |
when you file your taxes you can choose between taking the standard deduction or itemizing your deductions examples of itemized deductions include medical expenses mortgage interest and charitable donations | examples of exempt incomedistributions from health savings accounts hsas are only exempt from income tax if they are used for qualified medical expenses qualified distributions from roth 401 k plans and roth iras funded with after tax dollars are tax exempt 8910other investments may also be protected from income tax for example interest earned from municipal bonds is exempt from federal and state income tax if you reside in the state where the bond was issued capital losses from sold investments can also reduce your taxable income by up to 3 000 annually 1112if someone dies and you are the beneficiary of a life insurance benefit that is also nontaxable income but may be subject to estate tax 1314 the estate tax or death tax applies to a portion of an estate after it exceeds a certain threshold 12 92 million in 2023 and 13 61 million in 2024 4the alternative minimum tax amt exemptions are in effect until 2025 15 the 2023 exemption amount was 81 300 with a phase out of 578 150 for individuals and 126 500 for married couples filing jointly with a phase out of 1 156 300 for tax year 2024 the exemption is 85 700 for single filers and begins to phase out at 609 350 for married couples in 2024 it s 133 300 for married couples filing jointly with phase out at 1 218 700 4 | |
what types of income are tax exempt | income from municipal bonds and distributions from roth 401 k s and roth iras are tax exempt 116income from employer sponsored benefits including supplemental disability insurance and most benefits from employer sponsored health insurance plans are exempt 2 | |
is unemployment income taxed | unemployment benefits are treated as ordinary income by the federal government but not all states tax unemployment income unemployment compensation is taxed based on the program paying the benefits 17 | |
how much is the gift tax | in 2023 gifts worth less than 17 000 are not subject to income tax this value increases to 18 000 in 2024 4the bottom linealmost all forms of income are taxable including wages salaries tips and other types of income from an employer or as a freelancer but certain forms of income aren t taxable exempt income includes things like distributions from some retirement accounts gifts under a certain amount certain benefits and private insurance plans | |
what is an exempt interest dividend | an exempt interest dividend is a distribution from a mutual fund that is not subject to federal income tax exempt interest dividends most often are derived from mutual funds that invest in municipal bonds while exempt interest dividends are not subject to federal income tax they may still be subject to state income tax or the alternative minimum tax amt the dividend income must be reported on the income tax return and it is reported by mutual funds on form 1099 int 1understanding an exempt interest dividenda dividend is a distribution of a company s profits to shareholders it is not an incurred mandatory cost set by the receivers such as in the case of debt obligations it is not classified as an expense and is deducted last after net earnings are determined and decisions are made to make distributions out of them dividends are commonly paid to shareholders of corporate stocks shareholders receive dividend payments periodically throughout the year commonly every quarter for example apple s dividend as of february 2 2023 was 0 23 per share apple makes four dividend payments a year all of which are taxable and paid by the shareholders 4an exempt interest dividend is a payment from a mutual fund that is not subject to federal income tax and is mainly found in mutual funds that contain some municipal bond investments people with high net worths are more likely to invest in municipal bonds because the tax savings outweigh the lower returns provided by the investments high net worth individuals are subject to higher taxes so a low tax investment is a popular choice the types of municipal bonds that are exempt from taxes are those that are raising money for uses that benefit the community the tax benefits provided by the investments including exempt interest dividends are lost if the investments are held in an individual retirement account ira this is because all dividends and interest within an ira are tax exempt state income taxthe dividend interest that is federally exempt may or may not be exempt from state taxes depending on the state where the municipal bonds were issued and the state in which you file your taxes depending on the state they may allow the entire portion of your dividend interest to be exempt or only the portion of the bonds that are issued in the state you are filing your taxes while bonds from other states will be taxed for example assume you have a total dividend interest of 100 60 of which comes from the state you reside in and 40 from another state the state you reside in only allows exemptions from its taxes on bonds within the state so you do not have to pay state tax on the 60 but you will have to on the 40 alternative minimum tax amt the alternative minimum tax amt places a floor on the percentage of taxes that an individual must pay regardless of how many deductions or exemptions they may claim on their returns the goal of the amt is to ensure that individuals pay a certain level of taxes rather than escaping their obligation through various tax breaks 2 therefore exempt interest dividends can be subject to the amt to ensure that some individuals are not avoiding paying their fair share irs form 6251 will help individuals determine if they owe an alternative minimum tax amt or a tax software will automatically calculate it for them 7 | |
how can i avoid paying tax on investment income | there are a number of investments and savings vehicles that yield returns that are tax free at least at the federal level the biggest category of these is municipal bonds these are issued by state and local governments and public institutions like school districts and water departments in order to raise money the money may be used for specific projects that benefit the community or it may go into the general fund in any case the interest they pay their bondholders is free of federal tax it may or may not be free of state and local tax each state and municipality sets its own rules but often the interest is tax exempt if it is issued in that state keep in mind that municipal bonds pay a lower rate of return than corporate bonds in return for that tax break they are a popular choice for high net worth investors who want to shelter some of their income from taxes | |
are mutual fund distributions taxable | almost always the exception is the exempt interest dividends that are paid to shareholders of mutual funds that invest some or all of their assets in tax exempt municipal bonds the amount of taxable distributions and any tax exempt distributions that you have received from a mutual fund will be recorded in the irs form 1099 div that you receive from the fund company after the end of the calendar year | |
why does tax exempt interest count as taxable income for alternative minimum tax | the alternative minimum tax is designed to capture some taxes from very high income people who use every possible deduction and loophole to reduce or eliminate the taxes they owe tax exempt municipal bonds are a good way to reduce the taxes owed on unearned income adding those distributions to gross income for people at certain high income levels cuts off a potential strategy for avoiding the alternative minimum tax | |
what is an exempt transaction | an exempt transaction is a type of securities transaction where a business does not need to file registrations with any regulatory bodies provided the number of securities involved is relatively minor compared to the scope of the issuer s operations and that no new securities are being issued understanding exempt transactionsan exempt transaction is a securities exchange that would otherwise have to register with the securities and exchange commission sec but does not because of the nature of the transaction in question exempt securities which have tax exempt status are the instruments that the government backs exempt transactions cut down the amount of paperwork needed for relatively minor transactions for example it would be a big hassle to perform a filing with the sec every time a non executive employee wanted to sell back some of the company s common shares he or she purchased as part of an employee stock purchase plan a private placement or reg d offering is a type of exempt transaction in which the securities are not offered to the public but are instead sold privately to an accredited investor according to the sec an accredited investor can be even with exempt transactions investors and companies are responsible for any misleading or false statements exempt transactions are also not exempt from the general provisions of regulating codes including reporting requirements special considerationsother types of exempt transactions include reg a offerings also known as small business company offerings which permit the issuing company to raise no more than 5 million in 12 months this allows smaller companies to access securities markets to raise capital rule 147 offerings or intrastate offerings are also exempt transactions with financial institutions fiduciaries and insurance underwriters may be considered exempt unsolicited orders which are those executed through a broker at the request of his or her client are also considered exempt usually an exempt transaction involves a small amount of money or an accredited or sophisticated investor or does not for some other reason warrant a full registration however even exempt transactions are subject to some regulations such as anti fraud provisions investors and companies can still be held liable to misleading or false statements made on behalf of the company the offering or the securities even if the transaction is exempt and while exempt transactions may not need to be registered with state securities regulators those state authorities retain the authority to investigate fraud collect associated state fees and enforce state filing requirements therefore companies should take care to remain in compliance with state securities regulations even if their offerings and transactions are exempt under federal filing regulations | |
what is an exemption | an exemption reduces the amount of income that is subject to income tax there are a variety of exemptions allowed by the internal revenue service irs previously the two most common types were personal and dependent exemptions but with the changes brought about by the 2017 tax cuts and jobs act tcja the personal exemption has disappeared until the end of 2025 1 dependent exemptions along with other types continue to exist | |
how an exemption works | prior to the tax cuts and jobs act there used to be a personal exemption it could be claimed in addition to the standard deduction by people who did not itemize their tax deductions instead there is now one higher standard deduction passed with the tcja while exemptions used to make a bigger difference in calculating your annual taxes prior to the tcja they still can drastically change your tax situation by reducing taxable income 1the personal exemption was repealed with the 2017 reforms but as mentioned was essentially replaced with higher standard deductions for both couples and individuals for tax year 2022 the standard deduction is 12 950 if you file as single 19 400 for heads of household and 25 900 for those married filing jointly for tax year 2023 the standard deduction increases to 13 850 if you file as single 20 800 for heads of household and 27 700 for married filing jointly taxpayers 3 these changes were among many in the tax cuts and jobs act 1through the 2017 filing year individual tax filers were able to claim 4 050 for each taxpayer spouse and dependent child previously for example a taxpayer who had three allowable exemptions could have deducted 12 150 from their total taxable income however if that person earned over a certain threshold the amount of the exemption would have been phased out and eventually eliminated 4tax filers were only able to claim a personal exemption if that person was not claimed as a dependent on someone else s income tax return this rule intentionally set exemptions apart from deductions for example take a college student with a job whose parents claimed them as a dependent on their income tax return because someone else claimed the student as a dependent the student could not claim the personal exemption but could still claim the standard deduction 5in most cases tax filers could also claim a personal deduction for a spouse as long as the spouse was not claimed as a dependent on another person s tax return 5in many cases dependents most commonly include the minor children of the taxpayer however taxpayers may claim exemptions for other dependents as well the irs has a litmus test for determining who is considered a dependent but in most cases it is defined as a relative of the taxpayer parent child brother sister aunt or uncle who is dependent on the taxpayer for support 6the child tax credit doubled to a maximum of 2 000 per child under the tax cuts and jobs act from 1 000 per dependent previously certain income thresholds exist affecting how much credit a family can actually receive 1other types of exemptionsin addition to the above exemptions can come in many forms some not for profit organizations american citizens who work abroad low income taxpayers and other special categories have tax exemptions other exemptions include the following employers withhold income tax from their employees and remit it to the irs however a person who has no tax liability can request an exemption from withholding this simply means that the employer will withhold medicare and social security taxes from the person s paycheck but will not withhold income tax 7certain kinds of income are exempt from taxes exempt income includes municipal bond income and gifts under 16 000 in 2022 and 17 000 in 2023 23 any distributions from health savings accounts hsas used for qualified medical expenses will also be not taxed 8the w 4 form allows employees to let employers know how much tax to withhold from their paycheck based on the employee s marital status number of exemptions and dependents etc every time an employee starts a new job they are required to fill out the w 4 which helps the employer estimate how much money to remit to tax authorities 9 | |
what is a qualified dependent | a dependent is a person who relies on someone else for financial support and typically includes children or other relatives the irs determines who qualifies as a dependent only one taxpayer can claim a given dependent on their income tax return 10 | |
what type of income is tax exempt | income from municipal bonds is exempt from taxes 2 distributions from health savings accounts hsas are exempt if they are used for qualified medical expenses 8 qualified distributions from roth 401 k plans and roth iras are also tax exempt 11 | |
how much is the standard deduction | the standard deduction for tax year 2022 is 12 950 if you file as single or married filing separately and 25 900 for those who are married and file jointly in 2023 it increases to 13 850 if you file as single and 27 700 for married taxpayers filing jointly 3 | |
what is exercise | exercise means to put into effect the right to buy or sell the underlying financial instrument specified in an options contract in options trading the holder of an option has the right but not the obligation to buy or sell the option s underlying security at a specified price on or before a specified date in the future understanding exerciseif the owner of an option decides to buy or sell the underlying instrument instead of allowing the contract to expire worthless or closing out the position they will be exercising the option or making use of the right or privilege that is available in the contract an options holder may exercise their right to buy or sell the contract s underlying shares at a specified price also called the strike price to exercise an option you simply advise your broker that you wish to exercise the option in your contract your broker will initiate an exercise notice which informs the seller or writer of the contract that you are exercising the option the notice is forwarded to the option seller via the options clearing corporation occ the seller is obligated to fulfill the terms of an options contract if the holder exercises the contract the decision to exercise an option isn t always a clear cut one there are several factors that need to be considered and more often than not it s safer to hold or sell the option instead the majority of options contracts are not exercised but instead are allowed to expire worthless or are closed by opposing positions for example the holder of an option can close out a long call or put prior to expiration by selling it assuming the contract has market value if an option expires unexercised the holder no longer has any of the rights granted in the contract in addition the holder loses the premium they paid for the option along with any commissions and fees related to its purchase things to consider when exercising an option | |
what is an exercise price | the exercise price is the price at which an underlying security can be purchased or sold when trading a call or put option respectively it is also referred to as the strike price and is known when an investor initiates the trade an option gets its value from the difference between the fixed exercise price and the market price of the underlying security understanding exercise prices exercise price is a term used in derivatives trading a derivative is a financial instrument based on an underlying asset options are derivatives while the stock for example refers to the underlying security in options trading there are calls and puts and the exercise price can be in the money itm or out of the money otm a call option would be itm if the exercise price is below the underlying security s price and otm if the exercise price is above the underlying security s price the converse would hold for a put option a put gives investors the right but not the obligation to sell a stock in the future investors buy puts if they think the stock is going down or if they own the stock and want to hedge against a possible price decline they buy puts because it allows them to sell the stock at the strike price of the option even if the stock falls dramatically a call meanwhile gives investors the right but not the obligation to buy a stock in the future investors buy calls if they think the stock is going up in the future or if they sold the stock short and want to hedge against a possible surge in price calls give them the right to buy at the strike price even if the stock price rallies aggressively typically put option investors only exercise their right to sell their shares at the exercise price if the price of the underlying is below the strike price likewise call options are usually only exercised if the price of the underlying is trading above the strike price exercise price examplelet s assume that sam owns call options for wells fargo company with an exercise price of 45 and the underlying stock is trading at 50 this means the call options are trading itm the exercise price is lower than the price at which the stock is currently trading by 5 the call options give sam the right to buy the stock at 45 even though it s trading at 50 allowing him to make 5 per share by exercising the option sam s profit would be 5 less the premium or cost he paid for the option if on the other hand wells fargo is trading at 50 and the strike price of sam s call option is 55 that option is otm it would not be beneficial for sam to exercise that option because there is no need to pay 55 using the option when he can currently buy the stock for 50 example of the exercise price strike price in wells fargo options tablethe further otm an option moves the less valuable it gets it only has extrinsic value or value based on the possibility that the price of the underlying could move through the strike price meanwhile the further itm an option is the more value it has giving sam a better price than what is available in the stock market or another underlying market | |
what is an exit strategy | an exit strategy is a contingency plan executed by an investor venture capitalist or business owner to liquidate a position in a financial asset or dispose of tangible business assets once predetermined criteria have been met or exceeded an exit strategy may be executed to exit a nonperforming investment or close an unprofitable business in this case the purpose of the exit strategy is to limit losses an exit strategy may also be executed when an investment or business venture has met its profit objective for instance an angel investor in a startup company may plan an exit strategy through an initial public offering ipo other reasons for executing an exit strategy may include a significant change in market conditions due to a catastrophic event legal reasons such as estate planning liability lawsuits or a divorce or even because the business owner investor is retiring and wants to cash out understanding exit strategiesan effective exit strategy should be planned for every positive and negative contingency regardless of the investment type or business venture this planning should be integral to determining the risk associated with the investment or business venture an exit strategy is a business owner s strategic plan to sell ownership in a company to investors or another company it outlines a process to reduce or liquidate ownership in a business and if the business is successful make a substantial profit if the business is not successful an exit strategy or exit plan enables the owner to limit losses an exit strategy may also be used by an investor such as a venture capitalist to prepare for a cash out of an investment for investors exit strategies and other money management techniques can greatly help remove emotion and reduce risk before entering an investment investors should set a point at which they will sell for a loss and a point at which they will sell for a gain who needs an exit plan business owners of both small and large companies need to create and maintain plans to control what happens to their business when they want to exit an entrepreneur of a startup may exit their business through an ipo a strategic acquisition or a management buyout while the ceo of a larger company may turn to mergers and acquisitions as an exit strategy investors such as venture capitalists or angel investors need an exit plan to reduce or eliminate exposure to underperforming investments so they can capitalize on other opportunities a well thought out exit strategy also provides guidance on when to book profits on unrealized gains | |
why is it important to have an exit plan | businesses and investors should have a clearly defined exit plan to minimize potential losses and maximize profits on their investments here are several specific reasons why it s important to have an exit plan 12removes emotions an exit plan removes emotions from the decision making process having a predetermined level at which to exit an investment or sell a business helps avoid panic selling or making rushed decisions when emotions are high which could accentuate a loss or not fully realize a profit goal setting having an exit plan with specific goals helps answer important questions and guides future strategic decision making for example a startup s exit plan might include a future buyout price that it would accept based on revenue turnover that figure would help make strategic decisions about how big to grow the company to reach predetermined sales targets unexpected events unexpected events are a part of life therefore it s essential to have an exit strategy for what happens when things don t go to plan for instance what happens to a business if the owner faces an unexpected illness what happens if the company loses a key supplier or customer these situations need planning in advance to minimize potential losses and capitalize on gains succession planning an exit plan specifies what happens to the business when key personnel leave for example an exit strategy might stipulate through a succession plan that the company passes to another family member or that the business sells a stake to other owners or founders carefully detailed succession planning of an exit strategy can help avoid potential conflict when a business owner wants to or has to depart exit strategies for startupsin the case of a startup business successful entrepreneurs plan for a comprehensive exit strategy to prepare for business operations not meeting predetermined milestones if cash flow draws down to a point where business operations are no longer sustainable and an external capital infusion is no longer feasible to maintain operations then a planned termination of operations and a liquidation of all assets are sometimes the best options to limit further losses most venture capitalists insist that a carefully planned exit strategy be included in a business plan before committing any capital business owners or investors may also choose to exit if a lucrative offer for the business is tendered by another party ideally an entrepreneur will develop an exit strategy in their initial business plan before launching the business the choice of exit plan will influence business development decisions common types of exit strategies include ipos strategic acquisitions and management buyouts mbos 3the exit strategy that an entrepreneur chooses depends on many factors such as how much control or involvement they want to retain in the business whether they want the company to continue being operated in the same way or if they are willing to see it change going forward the entrepreneur will want to be paid a fair price for their ownership share a strategic acquisition for example will relieve the founder of their ownership responsibilities but will also mean giving up control ipos are often considered the ultimate exit strategy since they are associated with prestige and high payoffs contrastingly bankruptcy is seen as the least desirable way to exit a startup a key aspect of an exit strategy is business valuation and there are specialists who can help business owners and buyers examine a company s financial statements to determine a fair value there are also transition managers whose role is to assist sellers with their business exit strategies exit strategies for established businessesin the case of an established business successful ceos develop a comprehensive exit strategy as part of their contingency planning for the company larger businesses often favor a merger or acquisition as an exit strategy as it can be a lucrative way to remunerate owners and or shareholders rival companies often pay a premium to buy out a company that allows them to increase market share acquire intellectual property or eliminate competition this raises the prospects of other rivals also placing a bid for the company ultimately rewarding the sellers of the business 3however a merger and acquisition focused exit strategy should factor in the time and costs to organize large deals as well as regulatory considerations such as antitrust laws established companies also plan for how to exit a failing business which usually involves liquidation or bankruptcy liquidation consists of closing down the business and selling off all its assets with any leftover cash going toward paying off debts and distributing among shareholders as mentioned above most businesses see bankruptcy as a last resort exit however it sometimes becomes the only viable option under this scenario a company s assets are seized and it receives relief from its debts however declaring bankruptcy could prevent business owners from borrowing credit or starting another company in the future exit strategies for investorsinvestors can use several different exit strategies to prudently manage their investments below we look at several strategies that help minimize losses and maximize gains 4selling equity stake investors with shares in a startup or small company could exit by selling their equity stake in the business to other investors or a family member selling an equity stake may form part of a succession plan agreed upon by founders when starting a business if selling a startup stake to a family member it s important that they understand any conditions tied to the investment the 1 rule investors apply this rule by exiting an investment if the maximum loss equals 1 of their liquid net worth for example if olivia has a liquid net worth of 2 million she would cut an investment if it generates a loss of 20 000 1 100 2 000 000 the 1 rule helps investors take a systematic approach to protect their capital percentage exit using this strategy investors exit an investment when it has gained or fallen by a certain percentage from its purchase price for instance ethan an angel investor may decide to sell his share in a startup if it achieves a 300 return on investment roi conversely amelia a venture capitalist may decide to sell her share in a startup if it drops 20 in value time based exit investors apply this strategy by exiting their investment after a specific amount of time has passed for example noah may decide to sell his stake in a business after 18 months if it has not generated a positive return a time based exit helps free up capital from underperforming investments that could be used for other opportunities | |
why is it important to have an exit plan | businesses should have a clearly defined exit plan to help manage risk and capitalize on opportunities specifically an exit plan helps remove emotion from decision making assists with strategic direction helps to plan for unexpected events and provides details about an actionable succession plan | |
what are common exit strategies used by startups | exit strategies used by early stage companies include initial public offerings ipos strategic acquisitions and management buyouts mbos entrepreneurs typically select an exit plan before launching a business that fits their longer term business development decisions and goals the exit strategy that an entrepreneur chooses depends on factors such as how much involvement they want to retain in the business and its future long term potential | |
what are common exit strategies used by established companies | more established companies favor mergers and acquisitions as an exit strategy because it often leads to a favorable deal for shareholders particularly if a rival company wants to increase its market share or acquire intellectual property larger companies may exit a loss making business by liquidating their assets or declaring bankruptcy | |
what exit strategies can investors use | investors can capitalize on gains and reduce risk by using exit strategies such as the 1 rule a percentage based exit a time based exit or selling their equity stake in a business to other investors or family members investors typically set an exit strategy before entering into an investment as it helps to manage emotions and determine if there is a favorable risk return tradeoff the bottom lineexit strategy refers to how a business owner or investor will liquidate an asset once predetermined conditions have been met an exit plan helps to minimize potential losses and maximize profits by keeping emotions in check and setting quantifiable goals common exit strategies for startups include ipos strategic acquisitions and mbos more established companies often favor a merger or acquisition as an exit strategy but may also choose to go into liquidation or file for bankruptcy if becoming insolvent meanwhile investors can exit investments using strategies such as the 1 rule a percentage based exit a time based exit or selling their equity stake in a business | |
what is exogenous growth | exogenous growth a key tenet of neoclassical economic theory states that economic growth is fueled by technological progress independent of economic forces understanding exogenous growththe exogenous growth theory states that economic growth arises due to influences outside the economy the underlying assumption is that economic prosperity is primarily determined by external independent factors as opposed to internal interdependent factors from a broad economic sense the concept of exogenous growth grew out of the neoclassical growth model the exogenous growth model factors in production diminishing returns of capital savings rates and technological variables to determine economic growth exogenous growth vs endogenous growththe exogenous growth and endogenous growth theories are part of the neoclassical growth models both models stress the role of technological progress in achieving sustained economic growth however the former posits that technological progress alone outside of the economic system is the key determinant in maximizing productivity whereas the latter suggests that an economy s long term growth is a byproduct of the activities within that economic system that result in technological progress exogenous external growth factors include things such as the rate of technological advancement or the savings rate endogenous internal growth factors meanwhile would be capital investment policy decisions and an expanding workforce population these factors are modeled by the solow model the ramsey model and the harrod domar model to sum up these models given a fixed amount of labor and static technology economic growth will cease at some point as ongoing production reaches a state of equilibrium based on internal demand factors once this equilibrium is reached exogenous factors are then needed to stoke growth | |
what is an exotic option | exotic options are a category of options contracts that differ from traditional options in their payment structures expiration dates and strike prices the underlying asset or security can vary with exotic options allowing for more investment alternatives exotic options are hybrid securities that are often customizable to the needs of the investor understanding exotic optionsexotic options are a variation of the american and european style options the most common options contracts available american options let the holder exercise their rights at any time before or on the expiration date european options have less flexibility only allowing the holder to exercise on the expiration date of the contracts exotic options are hybrids of american and european options and will often fall somewhere in between these other two styles a traditional options contract gives a holder a choice or right to buy or sell the underlying asset at an established price before or on the expiration date these contracts do not obligate the holder to transact the trade the investor has the right to buy the underlying security with a call option while a put option provides them the ability to sell the underlying security the process where an option converts to shares is called exercising and the price at which it converts is the strike price exotic option vs traditional optionan exotic option can vary in terms of how the payoff is determined and when the option can be exercised these options are generally more complex than plain vanilla call and put options exotic options usually trade in the over the counter otc market the otc marketplace is a dealer broker network as opposed to a large exchange such as the new york stock exchange nyse further the underlying asset for an exotic can differ greatly from that of a regular option exotic options can be used in trading commodities such as lumber corn oil and natural gas as well as equities bonds and foreign exchange speculative investors can even bet on the weather or price direction of an asset using a binary option despite their embedded complexities exotic options have certain advantages over traditional options which can include exotic options usually have lower premiums than the more flexible american options exotic options can be customized to meet the risk tolerance and desired profit of the investor exotic options can help offset risk in a portfolio some exotic options can have increased costs given their added features exotic options do not guarantee a profit the reaction of price moves for exotics to market events can be different than traditional options types of exotic optionsas you may imagine there are many types of exotic options available the risk to reward horizon spans everything from highly speculative to more conservative below are several of the most common types you may see chooser options allow an investor to choose whether the option is a put or call during a certain point in the option s life both the strike price and the expiration are usually the same whether it is a put or call chooser options are used by investors when there might be an event such as earnings or a product release that could lead to volatility or price fluctuations in the asset price compound options are options that give the owner the right not obligation to buy another option at a specific price on or by a specific date typically the underlying asset of a traditional call or put option is an equity security however the underlying asset of a compound option is another option compound options come in four types these types of options are commonly used in foreign exchange and fixed income markets barrier options are similar to plain vanilla calls and puts but only become activated or extinguished when the underlying asset hits a preset price level in this sense the value of barrier options jumps up or down in leaps instead of changing price in small increments these options are commonly traded in the foreign exchange and equity markets as an example let s say a barrier option has a knock out price of 100 and a strike price of 90 with the stock currently trading at 80 per share the option will behave like a standard option when the underlying is below 99 99 but once the underlying stock price hits 100 the option gets knocked out and becomes worthless a knock in would be the opposite if the underlying is below 99 99 the option does not exist but once the underlying hits 100 the option comes into existence and is 10 in the money itm barrier options can be used by investors to lower the premium for buying an option for example a knock out feature for a call option might limit the gains on the underlying stock there are four types of barrier options a binary option or digital option pays a fixed amount only if an event or price movement has occurred binary options provide an all or nothing payout structure unlike traditional call options in which final payouts increase incrementally with each rise in the underlying asset price above the strike binaries pay a finite lump sum if the asset is above the strike conversely a buyer of a binary put option is paid the finite lump sum if the asset closes below the stated strike price for example if a trader buys a binary call option with a stated payout of 10 at the strike price of 50 and the stock price is above the strike at expiration the holder will receive a lump sum payout of 10 regardless of how high the price has risen if the stock price is below the strike at expiration the trader is paid nothing and the loss is limited to the upfront premium besides equities investors can use binary options to trade foreign currencies such as the euro eur and the canadian dollar cad or commodities such as crude oil and natural gas binary options can also be based on the outcomes of events such as the level of the consumer price index cpi or the value of the gross domestic product gdp early exercise may not be possible with binaries if the underlying conditions have not been met bermuda options can be exercised at preset dates as well as the expiry date bermuda options might allow an investor to exercise the option only on the first of the month for example bermuda options provide investors with more control over when the option is exercised this added flexibility translates to a higher premium as compared to european style options which can only be exercised on their expiration dates however bermuda options are a cheaper alternative than american style options which allow exercising at any time quantity adjusting options called quanto options for short expose the buyer to foreign assets but provide the safety of a fixed exchange rate in the buyer s home currency this option is great for an investor looking to gain exposure in foreign markets but who may be worried about how exchange rates will trade when it comes time to settle the option for example a french investor looking at brazil may find a favorable economic situation on the horizon and decide to put some portion of allocated capital in the bovespa index which is the largest stock exchange in brazil however the investor is concerned about how the exchange rate for the euro and brazilian real brl might trade in the interim typically the investor would need to convert euros to brazilian real to invest in the bovespa also withdrawing the investment from brazil would require converting back to euros as a result any gain in the index might be wiped out should the exchange rate move adversely the investor could purchase a quantity adjusting call option on the bovespa denominated in euros this solution provides the investor with exposure to the bovespa and lets the payout remain denominated in euros as a two in one package this option will inherently demand an additional premium that is above and beyond what a traditional call option would require look back options do not have a fixed exercise price at the beginning instead the strike price resets to the best price of the underlying asset as it changes the holder of a look back option can choose the most favorable exercise price retrospectively for the period of the option look backs eliminate the risk associated with timing market entry and are typically more expensive than plain vanilla options for example say an investor buys a one month look back call option on a stock at the beginning of the month the exercise price is decided at maturity by taking the lowest price achieved during the life of the option if the underlying is at 106 at expiration and the lowest price during the life of the option was 71 the payoff is 35 106 71 35 the risk to look backs is when an investor pays the more expensive premium than a traditional option and the stock price does not move enough to generate a profit asian options take the average price of the underlying asset to determine if there is a profit as compared to the strike price for example an asian call option might take the average price for 30 days if the average is less than the strike price at expiration the option expires worthless basket options are similar to plain vanilla options except that they are based on more than one underlying for example an option that pays out based on the price movement of not one but three underlying assets is a type of basket option the underlying assets can have equal weights in the basket or different weights based on the characteristics of the option a drawback to basket options can be that the price of the option might not correlate or trade in the same manner as the individual components would to price fluctuations or the time remaining until expiration extendible options allow the investor to extend the expiration date of the option as the option reaches its expiration date extendable options have a specific period that the option can be extended the feature is available for both buyers or sellers of extendable options and can be helpful if the option is not yet profitable or out of the money otm at its expiry the underlying asset for spread options is the spread or difference between the prices of two underlying assets as an example say a one month spread call option has a strike price of 3 and utilizes the price difference between stocks abc and xyz as the underlying at expiry if stocks abc and xyz are trading at 106 and 98 respectively the option will pay 5 106 98 3 5 a shout option allows the holder to lock in a certain amount in profit while retaining future upside potential on the position if a trader buys a shout call option with a strike price of 100 on stock abc for one month when the stock price goes to 118 the holder of the shout option can lock in this price and have a guaranteed profit of 18 at expiry if the underlying stock goes to 125 the option pays 25 meanwhile if the stock ends at 106 at expiry the holder still receives 18 on the position range options have a payoff based on the difference between the maximum and minimum price of the underlying asset during the life of the option these options eliminate the risks associated with the entry and exit timing making them more expensive than plain vanilla and look back options | |
why trade exotic options | exotic options have unique underlying conditions that make them a good fit for high level active portfolio management and situation specific solutions complex pricing of these derivatives may give rise to arbitrage which can provide great opportunities for sophisticated quantitative investors arbitrage is the simultaneous purchase and sale of an asset to exploit the price differences of financial instruments in many cases an exotic option can be purchased for a smaller premium than a comparable vanilla option the lower costs are often due to the additional features that increase the chances of the option expiring worthless however there are exotic style options that are more expensive than their traditional counterparts such as for example chooser options here the choice increases the chances of the option closing itm although the chooser may be more expensive than a single vanilla option it could be cheaper than buying both a vanilla call and put if a big move is expected but the trader is unsure of the direction exotic options may also be suitable for companies that need to hedge up to or down to specific price levels in the underlying asset hedging involves placing an offsetting position or investment to offset adverse price movements in a security or portfolio for example barrier options can be an effective hedging tool because they come into existence or go out of existence at specific barrier price levels exotic option examplesay an investor owns equity shares in apple inc the investor purchased the stock at 150 per share and wants to protect the position in case the stock s price falls the investor buys a bermuda style put option that expires in three months with a strike price of 150 the option premium costs 2 or 200 since one option contract equals 100 shares the option protects the stock position from a decrease in price below 150 for the next three months however this bermuda option has an exotic feature allowing the investor to exercise early on the first of each month until expiry the stock price declines to 100 in month one and by the first day of the option s second month the investor exercises the put option the investor sells the shares of apple at 100 per share however the strike price of 150 for the put option pays the investor a 50 gain the investor has exited the overall position including the stock position and put option for 150 minus the 2 premium paid for the put if apple s stock price rose after the option was exercised in month two say to 200 by the option s expiration date the investor would have missed out on the profits by selling the position in month two although exotic options provide flexibility and customization they don t guarantee that the investor s choices and decisions of which strike price expiration date or whether to exercise early or not will be correct or profitable 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 the expanded accounting equation | the expanded accounting equation is derived from the common accounting equation and illustrates in greater detail the different components of stockholders equity in a company by decomposing equity into component parts analysts can get a better idea of how profits are being used as dividends reinvested into the company or retained as cash the formula for the expanded accounting equationthe expanded version of the accounting equation details the equity role in the basic accounting equation the common form of the accounting equation is the expanded accounting equation decomposes equity into component parts | |
how the expanded accounting equation works | sometimes analysts want to better understand the composition of a company s shareholders equity besides assets and liabilities which are part of the general accounting equation stockholders equity is expanded into the following elements contributed capital and dividends show the effect of transactions with the stockholders the difference between the revenue and profit generated and expenses and losses incurred reflects the effect of net income ni on stockholders equity overall then the expanded accounting equation is useful in identifying at a basic level how stockholders equity in a firm changes from period to period some terminology may vary depending on the type of entity structure members capital and owners capital are commonly used for partnerships and sole proprietorships respectively while distributions and withdrawals are substitute nomenclature for dividends revenues and expenses are often reported on the balance sheet as net income real world examples of the expanded accounting equationlet s look at an actual historical example below is a portion of exxon mobil corporation s xom balance sheet as of september 30 2018 the accounting equation whereby assets liabilities shareholders equity is calculated as follows we could also use the expanded accounting equation to see the effect of reinvested earnings 419 155 other comprehensive income 18 370 and treasury stock 225 674 we could also look to xom s income statement to identify the amount of revenues and dividends the company earned and paid out for another example consider the balance sheet for apple inc as published in the company s quarterly report on july 28 2021 2for the quarter that ended on june 26 2021 the company reported the following balances in usd millions the components of shareholder s equity are further divided on the consolidated financial statement in millions substituting for the appropriate terms of the expanded accounting equation these figures add up to the total declared assets for apple inc which are worth 329 840 million u s dollars | |
what is the expanded accounting equation | the expanded accounting equation is a form of the basic accounting equation that includes the distinct components of owner s equity such as dividends shareholder capital revenue and expenses the expanded equation is used to compare a company s assets with greater granularity than provided by the basic equation | |
what is the basic accounting equation | the basic accounting equation is used to calculate how much a company is worth based on the amount of money that has already been invested and the cost of any obligations the formula for the basic accounting equation is as follows | |
what is expansion | expansion is the phase of the business cycle where real gross domestic product gdp grows for two or more consecutive quarters moving from a trough to a peak expansion is typically accompanied by a rise in employment consumer confidence and equity markets and is also referred to as an economic recovery understanding expansionthe rise and fall of economic growth is not a completely random unexplainable phenomenon like the weather the economy is believed to follow a cyclical path that continues to repeat itself over time this process is called the business cycle and is broken down into four distinct identifiable phases economists policymakers and investors closely study business cycles learning about economic expansion and contraction patterns of the past can assist in forecasting potential future trends and identifying investment opportunities expansions last on average about four to five years but have been known to go on anywhere from 10 months to more than 10 years 1 the national bureau of economic research nber determines the dates for business cycles in the united states the longest u s expansion on record lasted 128 months or just over 10 and a half years according to the nber ending in february 2020 1special considerationsleading indicators such as average weekly hours worked by manufacturing employees unemployment claims new orders for consumer goods and building permits all give clues as to whether an expansion or contraction is occurring in the near future however economists and analysts generally agree that there are two main forces that best determine corporate profits and the state of the general economy capital expenditure capex the money companies spend on maintaining improving and buying new assets and interest rates | |
when the economy needs a lift policymakers try to lower borrowing costs encouraging businesses and consumers to spend more when the federal reserve fed cuts interest rates saving is no longer favorable and the expansion phase begins money flows freely through the economy companies take on loans to fund expansion job prospects improve and consumer spending rockets | eventually the cheap flow of money and subsequent increase in spending will cause inflation to rise leading central banks to hike interest rates suddenly the onus is on encouraging people to rein in on spending and moderating economic growth company revenues fall share prices decline and the economy contracts again several economists including irving fisher note that cycles move in tandem with company attempts to match ever changing consumer demand when the economy is growing customers are buying and borrowing costs are cheap management teams regularly seek to capitalize by ramping up production at first this leads to higher sales and decent returns on invested capital roic later the competition gets fiercer and greed takes its toll eventually supply outstrips demand prices fall early debt binges become more difficult to service and companies are left with no choice but to lay off staff | |
what is an expansionary policy | expansionary policy is a form of macroeconomic policy that seeks to encourage economic growth by increasing aggregate demand it can consist of either monetary policy or fiscal policy or a combination of the two it is part of the general policy prescription of keynesian economics to be used during economic slowdowns and recessions in order to moderate the downside of economic cycles expansionary policy is also known as loose policy investopedia jiaqi zhouunderstanding expansionary policythe basic objective of expansionary policy is to boost aggregate demand to make up for shortfalls in private demand it is based on the ideas of keynesian economics particularly the idea that the main cause of recessions is a deficiency in aggregate demand expansionary policy is intended to boost business investment and consumer spending by injecting money into the economy either through direct government deficit spending or increased lending to businesses and consumers from a fiscal policy perspective the government enacts expansionary policies through budgeting tools that provide people with more money increasing spending and cutting taxes to produce budget deficits means that the government is putting more money into the economy than it is taking out expansionary fiscal policy includes tax cuts transfer payments rebates and increased government spending on projects such as infrastructure improvements for example it can increase discretionary government spending infusing the economy with more money through government contracts additionally it can cut taxes and leave a greater amount of money in the hands of the people who then go on to spend and invest types of expansionary policyexpansionary fiscal policy are policies enacted by a government that often increases or decreases the money supply to make changes to the economy in other words governments can directly give money to individuals businesses or taxpayers alternatively to slow the economy it can take it away during expansionary periods governments can increase spending on infrastructure projects social programs and other initiatives to boost demand and stimulate economic growth they may also enact tax cuts to reduce taxes which puts more money in consumers pockets and stimulates spending governments can also increase transfer payments such as welfare unemployment or other benefits to increase household income expansionary monetary policy works by expanding the money supply faster than usual or lowering short term interest rates it is enacted by central banks and comes about through open market operations reserve requirements and setting interest rates the u s federal reserve employs expansionary policies whenever it lowers the benchmark federal funds rate or discount rate decreases required reserves for banks or buys treasury bonds on the open market quantitative easing or qe is another form of expansionary monetary policy for example when the benchmark federal funds rate is lowered the cost of borrowing from the central bank decreases giving banks greater access to cash that can be lent in the market when reserve requirements decline it allows banks to lend a higher proportion of their capital to consumers and businesses when the central bank purchases debt instruments it injects capital directly into the economy on august 27 2020 the federal reserve announced that it would no longer raise interest rates due to unemployment falling below a certain level if inflation remained low it also changed its inflation target to an average meaning that it will allow inflation to rise somewhat above its 2 target to make up for periods when it was below 2 the federal reserve kept interest rates at 0 until march 2022 it then decided to pivot and begin combatting inflation by raising the rate as of april 2024 the effective fed funds rate is at 5 33 1 | |
how expansionary policy is implemented | expansionary monetary policy is implemented by central banks to stimulate economic growth and combat economic slowdown for the united states the federal reserve is overseen by a collection of individuals this board of governors that oversees the federal reserve system proposes reviews and votes on proposed regulation these economic experts monitor macroeconomic conditions implement changes and review implications of those changes in other cases measures are voted on my members of the government such as the house of representative or senate these bills may include changes to tax policies for example this type of policy must be approved by all appropriate levels of government before implemented once measures have passed by the federal reserve the policies are communicated and implemented by the appropriate entities for example the irs is then tasked with integrated tax breaks into internal revenue codification in another example monetary rates are communicated through branches of lending starting with the federal reserve branches and extending to other institutions the risks of expansionary monetary policyexpansionary policy is a popular tool for managing low growth periods in the business cycle but it also comes with risks these risks include macroeconomic microeconomic and political economy issues gauging when to engage in expansionary policy how much to do and when to stop requires sophisticated analysis and involves substantial uncertainties expanding too much can cause side effects such as high inflation or an overheated economy there is a time lag between when a policy move is made and when it works its way through the economy this makes up to the minute analysis nearly impossible even for the most seasoned economists prudent central bankers and legislators must know when to halt money supply growth or even reverse course and switch to a contractionary policy which would involve taking the opposite steps of expansionary policy such as raising interest rates even under ideal conditions expansionary fiscal and monetary policy risk creating microeconomic distortions through the economy simple economic models often portray the effects of expansionary policy as neutral to the structure of the economy as if the money injected into the economy were distributed uniformly and instantaneously across the economy in actual practice monetary and fiscal policy both operate by distributing new money to specific individuals businesses and industries who then spend and circulate the new money to the rest of the economy rather than uniformly boosting aggregate demand this means that expansionary policy always involves an effective transfer of purchasing power and wealth from the earlier recipients to the later recipients of the new money in addition like any government policy an expansionary policy is potentially vulnerable to information and incentive problems the distribution of the money injected by expansionary policy into the economy can obviously involve political considerations problems such as rent seeking and principal agent problems easily crop up whenever large sums of public money are up for grabs and by definition expansionary policy whether fiscal or monetary involves the distribution of large sums of public money there is no clear signal whether a government should expand or contract an economy all it can do is evaluate all available data and decide what may be the best course of action for this reason expansionary policy is often controversial as it is driven by opinion effects of expansionary policy | |
when interest rates are lowered the availability of credit is increased this leads to an increase in consumer spending driving economic growth after all the end goal of expansionary policy is to heat up the economy the primary effect or intended effect of expansionary policy is to make people acquire and spend more money | this effect also translates into business activity expansionary policy can also stimulate business investment by making it cheaper to borrow money for capital expenditures leading to increased job creation and economic growth for this reason it s common for jobs to have more job openings or job creations during expansionary policy since capital is easier to come by because consumers have more money and companies are hiring more expansionary policy results in an increase in demand for goods and services this often leads to more favorable manufacturing information especially for firms that also invest in expansion using low cost of capital this also creates a more balanced system of trades as companies undergoing expansionary policy may be cheaper to export all of this activity is meant to stimulate an economy unfortunately in order to reduce unemployment the primary negative effect of expansionary policy is inflation an increase in the money supply can lead to inflation if it outpaces the growth of the economy this means that prices wages and input costs increase though people have more money or better access to money the prices they pay will be higher examples of expansionary policya major example of expansionary policy is the response following the 2008 financial crisis when central banks around the world lowered interest rates to near zero and conducted major stimulus spending programs in the united states this included the american recovery and reinvestment act and multiple rounds of quantitative easing by the u s federal reserve u s policy makers spent and lent trillions of dollars into the u s economy in order to support domestic aggregate demand and prop up the financial system in a more recent example declining oil prices from 2014 through the second quarter of 2016 caused many economies to slow down canada was hit especially hard in the first half of 2016 with almost one third of its entire economy based in the energy sector this caused bank profits to decline making canadian banks vulnerable to failure to combat these low oil prices canada enacted an expansionary monetary policy by reducing interest rates within the country the expansionary policy was targeted to boost economic growth domestically however the policy also meant a decrease in net interest margins for canadian banks squeezing bank profits expansionary policy during covid 19a more recent and extreme example of expansionary policy occurred during the covid 19 pandemic in response to temporary business closures and an immediately halted economy the federal government lowered interest rates from 1 5 1 75 to 0 0 25 around march 2020 1 in seemingly overnight governments tried to make it as easy as possible for consumers and businesses to receive low cost debt in an example of fiscal policy the irs issued three economic impact payments during the pandemic taxpayers assuming they did not exceed income thresholds could receive three different payments 1 200 in april 2020 600 in december 2020 and 1 400 in march 2021 there were also additional child tax credit opportunities 2one last example of expansionary policy during covid 19 was the federal reserve s open market operations the treasury raised trillions of dollars by issuing treasury bills and the treasury also held a historically high operating cash amount of 1 6 trillion on hand 3 it also increased its purchase of treasury securities and other debt instruments to inject capital into the market it was not until 2022 that the federal reserve began easing these purchases 4 | |
what are some examples of expansionary monetary policy | the federal reserve often tweaks the federal funds reserve rate as its primary tool of expansionary monetary policy increasing the fed rate contracts the economy while decreasing the fed rate increases the economy | |
how does expansionary policy affect inflation | expansionary policy often has the unintended consequence of creating or increasing inflation the federal reserve usually has to choose between combatting unemployment and inflation any policies set forth to battle one usually increases the other this is because expansionary policy usually means people have more money at their disposal due to greater demand for products more consumers are able to purchase goods at higher prices | |
what monetary policy reduces inflation | opposite of expansionary policy the federal reserve may also enact contractionary policies these policies are meant to slow the economy make debt more expensive to come by and shrink the money supply by slowing the economy reducing consumer demand and slowing business growth inflation often slows though unemployment is put at risk to increase the bottom lineexpansionary policy is a set of economic measures taken by a government or central bank to stimulate economic growth these policies are intended to increase demand and aggregate spending the goal of expansionary policy is to boost the economy during periods of slow growth or recession though it may unintentionally increase the rate of annual inflation | |
what is an expatriate | an expatriate or expat is an individual living and or working in a country other than their country of citizenship the arrangement is often temporary and for work reasons an expatriate can also be an individual who has relinquished citizenship in their home country to become a citizen of another understanding expatriatesan expatriate is a migrant worker who is a professional or skilled in their profession the worker takes a position outside their home country either independently or as a work assignment the employer assigning the work can be a company university government or non governmental organization you would be considered an expatriate or expat after you arrive in toronto if your employer sends you from your job in its silicon valley office to work for an extended period in its toronto office expats usually earn more than they would at home and more than local employees businesses also sometimes give their expatriate employees benefits such as relocation assistance and housing allowances the expat will have to open a local bank account that will allow them to function in their new home living as an expatriate can be exciting it can present an excellent opportunity for career advancement and global business exposure but it can also be an emotionally difficult transition it involves separation from friends and family while adjusting to an unfamiliar culture and work environment this is typically the reason behind the higher compensation offered to these migrant workers special considerations retiring abroadmuch expatriation occurs during retirement most americans spend their retirement in the u s but a growing number are opting to retire overseas 1 people are motivated to relocate abroad at an older age for several reasons including lower cost of living better climate access to beaches or other reasons but it can be tricky to navigate taxes long stay visas and the language and cultural differences experienced when settling down in other countries popular retirement destinations include countries in central and south america the mediterranean and parts of europe 23a common choice a retiree expat must deal with is between permanent residency and dual citizenship neither dual citizenship nor residency will get you out of filing a u s tax return every year it s both surprising and burdensome but americans still have to pay income taxes wherever they live and they owe it no matter where their income was earned 4you may also have to file an income tax return in your country of residence although most deduct the amount american residents pay to the u s via treaties that minimize double taxation 5you face a tough decision that will require some soul searching and research if you re a retiree or near retiree who s on the fence you might consider a trip abroad or maybe several to test the waters before you make a decision some social security benefits might travel abroad with you but you may have to forego benefits like supplemental security income ssi foreign earned income exclusioncomplying with united states income tax regulations is an added challenge and financial burden for americans working abroad as expatriates because the u s taxes its citizens on income that s earned abroad but the u s tax code contains provisions that help to reduce tax liability and avoid double taxation taxes paid in a foreign country can be used as a tax credit in the u s which reduces the expat s tax bill when applied against it the foreign earned income exclusion feie allows expats to exclude a certain amount of their foreign income from their tax returns the amount is indexed to inflation it was 120 000 in 2023 and it increased to 126 500 in 2024 an expat who earns 180 000 in 2024 from their job in a foreign country that s tax free would only have to pay u s federal income tax on 53 500 180 000 minus 126 500 67foreign tax creditthe feie doesn t apply to rental or investment income any income earned from interest or capital gains from investments must be reported to the irs the foreign tax credit ftc is a provision that ensures that expats aren t double taxed on their capital gains 89assume an expat falls in the 35 income tax bracket in the u s their long term capital gain on any investment is taxed at 15 610 the ftc provides a dollar for dollar credit against taxes paid to a foreign country so the expat would only have to pay 5 tax to the u s if they paid 10 tax to the country where they work they d owe the full 15 tax to the u s government if they paid no tax to the foreign country 11the expat would forfeit that amount if the income tax paid to a foreign government far exceeds the amount of the credit because the foreign tax rate far exceeded the u s rate the credit can be carried to future years however 12expatriation taxan individual who has renounced their citizenship in their home country and moved to another is also referred to as an expatriate for tax purposes they re subject to an exit tax known as an expatriation tax the expatriation tax provisions apply to u s citizens who have renounced their citizenship and long term residents who have ended their u s residency if one of the principal purposes of the action is the avoidance of u s taxes according to the internal revenue service irs 13this emigration tax applies to individuals who advantages and disadvantages of becoming an expatriateliving and working in another country for an extended period can have its benefits they can range from new experiences and adventure to more practical considerations like a lower cost of living or being closer to extended family abroad you may also get government perks like free healthcare and education and more favorable taxation depending on where you settle there are also some potential drawbacks you ll still have to file tax returns each year and may have to pay taxes to uncle sam even on income earned in your new country unless you fully relinquish your american citizenship 13you might also be a long way from home this can make seeing friends and family more costly and difficult and time zone differences can also interfere with finding a good time to link up by phone or video chat learning a new language and customs can also be difficult for some and certain items or products that you like may not be available in the country to which you move and not all countries enjoy the same level of political and economic stability that the u s does new experiences and maybe a better climatepotentially lower cost of living | |
what is expectations theory | expectations theory attempts to predict what short term interest rates will be in the future based on current long term interest rates the theory suggests that an investor earns the same interest by investing in two consecutive one year bond investments versus investing in one two year bond today the theory is also known as the unbiased expectations theory investopedia jessica olahunderstanding expectations theorythe expectations theory aims to help investors make decisions based upon a forecast of future interest rates the theory uses long term rates typically from government bonds to forecast the rate for short term bonds in theory long term rates can be used to indicate where rates of short term bonds will trade in the future let s say that the present bond market provides investors with a two year bond that pays an interest rate of 20 while a one year bond pays an interest rate of 18 the expectations theory can be used to forecast the interest rate of a future one year bond in this example the investor is earning an equivalent return to the present interest rate of a two year bond if the investor chooses to invest in a one year bond at 18 the bond yield for the following year s bond would need to increase to 22 for this investment to be advantageous expectations theory aims to help investors make decisions by using long term rates typically from government bonds to forecast the rate for short term bonds disadvantages of expectations theoryinvestors should be aware that the expectations theory is not always a reliable tool a common problem with using the expectations theory is that it sometimes overestimates future short term rates making it easy for investors to end up with an inaccurate prediction of a bond s yield curve another limitation of the theory is that many factors impact short term and long term bond yields the federal reserve adjusts interest rates up or down which impacts bond yields including short term bonds 1 however long term yields might be less affected because many other factors impact long term yields including inflation and economic growth expectations as a result the expectations theory does not consider the outside forces and fundamental macroeconomic factors that drive interest rates and ultimately bond yields expectations theory versus preferred habitat theorythe preferred habitat theory takes the expectations theory one step further the theory states that investors have a preference for short term bonds over long term bonds unless the latter pay a risk premium in other words if investors are going to hold onto a long term bond they want to be compensated with a higher yield to justify the risk of holding the investment until maturity the preferred habitat theory can help explain in part why longer term bonds typically pay out a higher interest rate than two shorter term bonds that when added together result in the same maturity | |
what is the expected loss ratio elr method | expected loss ratio elr method is a technique used to determine the projected amount of claims relative to earned premiums the expected loss ratio elr method is used when an insurer lacks the appropriate past claims occurrence data to provide because of changes to its product offerings and when it lacks a large enough sample of data for long tail product lines the formula for the elr method is e l r m e t h o d e p e l r p a i d l o s s e s where ep earned premiums begin aligned elr method ep elr paid losses textbf where text ep earned premiums end aligned elr method ep elr paid losseswhere ep earned premiums | |
how to calculate expected loss ratio elr method | to calculate the expected loss ratio method multiply earned premiums by the expected loss ratio and then subtract paid losses | |
what does the elr method tell you | insurers set aside a portion of their premiums from underwriting new policies in order to pay for future claims the expected loss ratio is used to determine how much they set aside it s also important to note that the frequency and severity of the claims they expect to experience also plays a role insurers use a variety of forecasting methods in order to determine claims reserves in certain instances such as new lines of business the elr method may be the only possible way to figure out the appropriate level of loss reserves required the elr method can also be used to set the loss reserve for particular business lines and policy periods the expected loss ratio multiplied by the appropriate earned premium figure will produce the estimated ultimate losses paid or incurred however for certain lines of business government regulations may dictate the minimum levels of loss reserves required example of how to use expected loss ratio elr methodinsurers can also use expected loss ratio to calculate the incurred but not reported ibnr reserve and total reserve the expected loss ratio is the ratio of ultimate losses to earned premiums the ultimate losses can be calculated as the earned premium multiplied by the expected loss ratio the total reserve is calculated as the ultimate losses less paid losses the ibnr reserve is calculated as the total reserve less the cash reserve for example an insurer has earned premiums of 10 000 000 and an expected loss ratio of 0 60 over the course of the year it has paid losses of 750 000 and cash reserves of 900 000 the insurer s total reserve would be 5 250 000 10 000 000 0 60 750 000 and its ibnr reserve would be 4 350 000 5 250 000 900 000 the difference between the elr method and the chain ladder method clm both the elr and the chain ladder method clm measure claim reserves where the clm uses past data to predict what happens in the future while the expected loss ratio elr is used when there s little past data to go off of clm is used for stable businesses and business lines limitations of using the elr methodthe amount of claims reserves that an insurer should set aside is determined by actuarial models and forecasting methods insurers often use the expected loss ratio on the amount and quality of data that is available it is often useful in the early stages of forecasting because it does not take into account actual paid losses but in later stages this lack of sensitivity to changes in reported and paid losses makes it less accurate and thus less useful learn more about the expected loss ratio elr methodsee more about calculating the profitability of insurance companies with loss and combined ratios | |
what is expected value | expected value ev is a term used by those in the investment industry to denote the anticipated average value of an investment at some point in the future investors use expected value to estimate the worth of investments often relative to their risk by calculating evs investors can choose the scenario most likely to produce the outcome they seek in statistics and probability analysis the ev is calculated by multiplying each of the possible outcomes by the likelihood that each outcome will occur and then summing all of those values understanding expected valueexpected value refers to the anticipated value of an asset in the future the ev of a random variable gives a measure of the center of the distribution of the variable the ev is essentially the long term average value of the variable because of the law of large numbers the average value of the variable converges to the ev as the number of repetitions approaches infinity ev is also known as expectation the mean or the first moment ev can be calculated for single discrete variables single continuous variables multiple discrete variables and multiple continuous variables for continuous variable situations integrals must be used scenario analysis is one technique for calculating the ev of an investment opportunity it uses estimated probabilities with multivariate models to examine possible outcomes for a proposed investment scenario analysis also helps investors determine whether they are taking on an appropriate level of risk given the likely outcome of the investment the difference between expected value and arithmetic mean is that the first involves a distribution of probability and the second involves a distribution of occurrence formula for expected valuethe formula for expected value is e v p x i x i begin aligned ev sum p x i times x i end aligned ev p xi xi | |
where | thus the ev of a random variable x is taken as each value of the random variable multiplied by its probability and each of those products is summed expected value in portfolio constructioninvestors need to understand several key factors when they want to construct their investment or financial portfolios these include how assets work and their associated risks investors should also have a firm grasp on their financial situation investment goals and investment time horizon once they thoroughly understand these factors investors and their financial advisors can employ ev to build a portfolio that maximizes their returns while minimizing their risks you can use ev to determine the potential return of an investment and therefore which assets to add to your portfolio based on your preference for return so to calculate expected value first multiply the probability of a positive outcome by the potential return say an investment has a 60 chance of increasing in value by 10 000 the calculation would be 0 6 x 10 000 6 000 then multiply the probability of a negative outcome by the potential loss for instance the investment also has a 40 chance of decreasing in value by 5 000 the calculation would be 0 4 x 5 000 2 000 finally subtract the second result from the first 6 000 2 000 4 000 that s the ev for this investment next you may wish to compare two or more investments in which you re interested follow the same steps and compare the expected returns this can help you make selections as you build your portfolio also bear in mind that different assets have different evs that is a stock comes with a different expected value and risk profile than a bond or an exchange traded fund etf it s useful to calculate evs for the various assets that you re interested in and compare those results you can also use ev to adjust your portfolio once it s built for instance compare evs to determine whether selling an underperforming asset with no expectation of a rise in value and replacing it with another with a higher ev makes sense example of expected valueto calculate the ev for a single discrete random variable you must multiply each value of the variable by the probability of that value occurring take for example a normal six sided die once you roll the die it has an equal one sixth probability of landing on the values of either one two three four five or six given this information the calculation is 1 6 1 1 6 2 1 6 3 1 6 4 1 6 5 1 6 6 3 5 begin aligned left frac 1 6 times1 right left frac 1 6 times2 right left frac 1 6 times3 right left frac 1 6 times4 right left frac 1 6 times5 right left frac 1 6 times6 right 3 5 end aligned 61 1 61 2 61 3 61 4 61 5 61 6 3 5 if you were to roll a six sided die an infinite amount of times you would find that the average value equals 3 5 | |
what is a dividend stock s expected value | the expected value of a stock is estimated as the net present value npv of all future dividends that the stock pays if you can estimate the growth rate of the dividends you can predict how much investors should willingly pay for the stock using a dividend discount model such as the gordon growth model ggm however it should be noted this is a different formula than the statistical expected value presented in this article | |
how do i find the expected value of a stock that doesn t pay dividends | for non dividend stocks analysts often use a multiples approach to come up with expected value for example the price to earnings p e ratio is often used and compared to industry peers so if the tech industry has an average p e of 25x a tech stock s ev would be 25 times its earnings per share again this is different than the statistical expected value presented in this article however it is another commonly used method for examining a stock s value | |
how is the expected value of a stock used in portfolio theory | modern portfolio theory and related models use mean variance optimization to come up with the best portfolio allocation on a risk adjusted basis risk is measured as the portfolio s standard deviation and the mean is the expected value expected return of the portfolio this does utilize the concepts presented in this article the bottom lineunderstanding the concept of expected value is important for investors it can aid them in determining the level of return that they might expect from an investment expected value and scenario analysis can provide insight into the risk of an investment versus its return and help an investor decide whether or not to include it in their portfolio | |
what is expected return | the expected return is the profit or loss that an investor anticipates on an investment that has known historical rates of return ror it is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these results investopedia paige mclaughlinunderstanding expected returnexpected return calculations are a key piece of both business operations and financial theory including in the well known models of the modern portfolio theory mpt or the black scholes options pricing model 12 for example if an investment has a 50 chance of gaining 20 and a 50 chance of losing 10 the expected return would be 5 50 x 20 50 x 10 5 the expected return is a tool used to determine whether an investment has a positive or negative average net outcome the sum is calculated as the expected value ev of an investment given its potential returns in different scenarios as illustrated by the following formula | |
where i indicates each known return and its respective probability in the series | the expected return is usually based on historical data and is therefore not guaranteed into the future however it does often set reasonable expectations therefore the expected return figure can be thought of as a long term weighted average of historical returns in the formulation above for instance the 5 expected return may never be realized in the future as the investment is inherently subject to systematic and unsystematic risks systematic risk is the danger to a market sector or the entire market whereas unsystematic risk applies to a specific company or industry calculating expected return | |
where | in essence this formula states that the expected return in excess of the risk free rate of return depends on the investment s beta or relative volatility compared to the broader market the expected return and standard deviation are two statistical measures that can be used to analyze a portfolio the expected return of a portfolio is the anticipated amount of returns that a portfolio may generate making it the mean average of the portfolio s possible return distribution the standard deviation of a portfolio on the other hand measures the amount that the returns deviate from its mean making it a proxy for the portfolio s risk the expected return is not absolute as it is a projection and not a realized return limitations of the expected returnto make investment decisions solely on expected return calculations can be quite na ve and dangerous before making any investment decisions one should always review the risk characteristics of investment opportunities to determine if the investments align with their portfolio goals for example assume two hypothetical investments exist their annual performance results for the last five years are both of these investments have expected returns of exactly 8 however when analyzing the risk of each as defined by the standard deviation investment a is approximately five times riskier than investment b that is investment a has a standard deviation of 11 26 and investment b has a standard deviation of 2 28 standard deviation is a common statistical metric used by analysts to measure an investment s historical volatility or risk in addition to expected returns investors should also consider the likelihood of that return after all one can find instances where certain lotteries offer a positive expected return despite the very low chances of realizing that return gauges the performance of an assetweighs different scenarios |
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