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doesn t take risk into account | based largely on historic dataexpected return examplethe expected return does not just apply to a single security or asset it can also be expanded to analyze a portfolio containing many investments if the expected return for each investment is known the portfolio s overall expected return is a weighted average of the expected returns of its components for example let s assume we have an investor interested in the tech sector their portfolio contains the following stocks with a total portfolio value of 1 million the weights of alphabet apple and amazon in the portfolio are 50 20 and 30 respectively thus the expected return of the total portfolio is | |
how is expected return used in finance | expected return calculations are a key piece of both business operations and financial theory including in the well known models of modern portfolio theory mpt or the black scholes options pricing model it is a tool used to determine whether an investment has a positive or negative average net outcome the calculation is usually based on historical data and therefore cannot be guaranteed for future results however it can set reasonable expectations 12 | |
what are historical returns | historical returns are the past performance of a security or index such as the s p 500 analysts review historical return data when trying to predict future returns or to estimate how a security might react to a particular economic situation such as a drop in consumer spending historical returns can also be useful when estimating where future points of data may fall in terms of standard deviations | |
how does expected return differ from standard deviation | 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 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 bottom lineexpected return is an estimate of the average return that an investment or portfolio investments should generate over a certain period of time in general riskier assets or securities demand a higher expected return to compensate for the additional risk expected return is not a guarantee but rather a prediction based on historical data and other relevant factors it can be used by investors to compare different investment options and make informed decisions about their portfolios and is a key input for various financial models such as modern portfolio theory mpt and the capital asset pricing model capm | |
what is expected utility | expected utility is an economic term summarizing the utility that an entity or aggregate economy is expected to reach under any number of circumstances the expected utility is calculated by taking the weighted average of all possible outcomes under certain circumstances with the weights being assigned by the likelihood or probability any particular event will occur understanding expected utilitythe expected utility of an entity is derived from the expected utility hypothesis this hypothesis states that under uncertainty the weighted average of all possible levels of utility will best represent the utility at any given point in time expected utility theory is used as a tool for analyzing situations in which individuals must make a decision without knowing the outcomes that may result from that decision i e decision making under uncertainty these individuals will choose the action that will result in the highest expected utility which is the sum of the products of probability and utility over all possible outcomes the decision made will also depend on the agent s risk aversion and the utility of other agents this theory also notes that the utility of money does not necessarily equate to the total value of money this theory helps explain why people may take out insurance policies to cover themselves for various risks the expected value from paying for insurance would be to lose out monetarily the possibility of large scale losses could lead to a serious decline in utility because of the diminishing marginal utility of wealth history of the expected utility conceptthe concept of expected utility was first posited by daniel bernoulli who used it to solve the st petersburg paradox the st petersburg paradox can be illustrated as a game of chance in which a coin is tossed at each game s play for instance if the stakes start at 2 and double every time heads appear once the first time tails appear the game ends and the player wins whatever is in the pot under such game rules the player wins 2 if tails appear on the first toss 4 if heads appear on the first toss and tails on the second 8 if heads appear on the first two tosses and tails on the third and so on mathematically the player wins 2k dollars where k equals the number of tosses k must be a whole number and greater than zero assuming the game can continue as long as the coin toss results in heads and in particular that the casino has unlimited resources in theory the sum is limitless thus the expected win for repeated play is an infinite amount of money bernoulli solved the st petersburg paradox by distinguishing between the expected value and expected utility as the latter uses weighted utility multiplied by probabilities instead of using weighted outcomes expected utility vs marginal utilityexpected utility is also related to the concept of marginal utility the expected utility of a reward or wealth decreases when a person is rich or has sufficient wealth in such cases a person may choose the safer option as opposed to a riskier one for example consider the case of a lottery ticket with expected winnings of 1 million suppose a person with comparatively fewer resources buys the ticket for 1 a wealthy person offers to buy the ticket off them for 500 000 logically the lottery holder has a 50 50 chance of profiting from the transaction it is likely that they will opt for the safer option of selling the ticket and pocketing the 500 000 this is due to the diminishing marginal utility of amounts over 500 000 for the ticket holder in other words it is much more profitable for them to get from 0 500 000 than from 500 000 1 million now consider the same offer made to a very wealthy person possibly a millionaire likely the millionaire will not sell the ticket because they hope to make another million from it a 1999 paper by economist matthew rabin argued that the expected utility theory is implausible over modest stakes 1 this means that the expected utility theory fails when the incremental marginal utility amounts are insignificant example of expected utilitydecisions involving expected utility are decisions involving uncertain outcomes an individual calculates the probability of expected outcomes in such events and weighs them against the expected utility before making a decision for example purchasing a lottery ticket represents two possible outcomes for the buyer they could end up losing the amount they invested in buying the ticket or they could end up making a smart profit by winning either a portion of the entire lottery assigning probability values to the costs involved in this case the nominal purchase price of a lottery ticket it is not difficult to see that the expected utility to be gained from purchasing a lottery ticket is greater than not buying it expected utility is also used to evaluate situations without immediate payback such as purchasing insurance when one weighs the expected utility to be gained from making payments in an insurance product possible tax breaks and guaranteed income at the end of a predetermined period versus the expected utility of retaining the investment amount and spending it on other opportunities and products insurance seems like a better option | |
what is expected utility | expected utility is an economic term summarizing the utility that an entity or aggregate economy is expected to reach under any number of circumstances the expected utility is calculated by taking the weighted average of all possible outcomes under certain circumstances with the weights being assigned by the likelihood or probability any particular event will occur understanding expected utilitythe expected utility of an entity is derived from the expected utility hypothesis this hypothesis states that under uncertainty the weighted average of all possible levels of utility will best represent the utility at any given point in time expected utility theory is used as a tool for analyzing situations in which individuals must make a decision without knowing the outcomes that may result from that decision i e decision making under uncertainty these individuals will choose the action that will result in the highest expected utility which is the sum of the products of probability and utility over all possible outcomes the decision made will also depend on the agent s risk aversion and the utility of other agents this theory also notes that the utility of money does not necessarily equate to the total value of money this theory helps explain why people may take out insurance policies to cover themselves for various risks the expected value from paying for insurance would be to lose out monetarily the possibility of large scale losses could lead to a serious decline in utility because of the diminishing marginal utility of wealth history of the expected utility conceptthe concept of expected utility was first posited by daniel bernoulli who used it to solve the st petersburg paradox the st petersburg paradox can be illustrated as a game of chance in which a coin is tossed at each game s play for instance if the stakes start at 2 and double every time heads appear once the first time tails appear the game ends and the player wins whatever is in the pot under such game rules the player wins 2 if tails appear on the first toss 4 if heads appear on the first toss and tails on the second 8 if heads appear on the first two tosses and tails on the third and so on mathematically the player wins 2k dollars where k equals the number of tosses k must be a whole number and greater than zero assuming the game can continue as long as the coin toss results in heads and in particular that the casino has unlimited resources in theory the sum is limitless thus the expected win for repeated play is an infinite amount of money bernoulli solved the st petersburg paradox by distinguishing between the expected value and expected utility as the latter uses weighted utility multiplied by probabilities instead of using weighted outcomes expected utility vs marginal utilityexpected utility is also related to the concept of marginal utility the expected utility of a reward or wealth decreases when a person is rich or has sufficient wealth in such cases a person may choose the safer option as opposed to a riskier one for example consider the case of a lottery ticket with expected winnings of 1 million suppose a person with comparatively fewer resources buys the ticket for 1 a wealthy person offers to buy the ticket off them for 500 000 logically the lottery holder has a 50 50 chance of profiting from the transaction it is likely that they will opt for the safer option of selling the ticket and pocketing the 500 000 this is due to the diminishing marginal utility of amounts over 500 000 for the ticket holder in other words it is much more profitable for them to get from 0 500 000 than from 500 000 1 million now consider the same offer made to a very wealthy person possibly a millionaire likely the millionaire will not sell the ticket because they hope to make another million from it a 1999 paper by economist matthew rabin argued that the expected utility theory is implausible over modest stakes 1 this means that the expected utility theory fails when the incremental marginal utility amounts are insignificant example of expected utilitydecisions involving expected utility are decisions involving uncertain outcomes an individual calculates the probability of expected outcomes in such events and weighs them against the expected utility before making a decision for example purchasing a lottery ticket represents two possible outcomes for the buyer they could end up losing the amount they invested in buying the ticket or they could end up making a smart profit by winning either a portion of the entire lottery assigning probability values to the costs involved in this case the nominal purchase price of a lottery ticket it is not difficult to see that the expected utility to be gained from purchasing a lottery ticket is greater than not buying it expected utility is also used to evaluate situations without immediate payback such as purchasing insurance when one weighs the expected utility to be gained from making payments in an insurance product possible tax breaks and guaranteed income at the end of a predetermined period versus the expected utility of retaining the investment amount and spending it on other opportunities and products insurance seems like a better option | |
what is the expenditure method | the expenditure method is a system for calculating gross domestic product gdp that combines consumption investment government spending and net exports it is the most common way to estimate gdp it says everything that the private sector including consumers and private firms and government spend within the borders of a particular country must add up to the total value of all finished goods and services produced over a certain period of time this method produces nominal gdp which must then be adjusted for inflation to result in the real gdp the expenditure method may be contrasted with the income approach for calculated gdp | |
how the expenditure method works | expenditure is a reference to spending in economics another term for consumer spending is demand the total spending or demand in the economy is known as aggregate demand this is why the gdp formula is actually the same as the formula for calculating aggregate demand because of this aggregate demand and expenditure gdp must fall or rise in tandem however this similarity isn t technically always present in the real world especially when looking at gdp over the long run short run aggregate demand only measures total output for a single nominal price level or the average of current prices across the entire spectrum of goods and services produced in the economy aggregate demand only equals gdp in the long run after adjusting for price level the expenditure method is the most widely used approach for estimating gdp which is a measure of the economy s output produced within a country s borders irrespective of who owns the means to production the gdp under this method is calculated by summing up all of the expenditures made on final goods and services there are four main aggregate expenditures that go into calculating gdp consumption by households investment by businesses government spending on goods and services and net exports which are equal to exports minus imports of goods and services the formula for expenditure gdp is g d p c i g x m where c consumer spending on goods and services i investor spending on business capital goods g government spending on public goods and services x exports m imports begin aligned gdp c i g x m textbf where c text consumer spending on goods and services i text investor spending on business capital goods g text government spending on public goods and services x text exports m text imports end aligned gdp c i g x m where c consumer spending on goods and servicesi investor spending on business capital goodsg government spending on public goods and servicesx exportsm imports in the united states the most dominant component in the calculations of gdp under the expenditure method is consumer spending which accounts for the majority of u s gdp consumption is typically broken down into purchases of durable goods such as cars and computers nondurable goods such as clothing and food and services the second component is government spending which represents expenditures by state local and federal authorities on defense and nondefense goods and services such as weaponry health care and education business investment is one of the most volatile components that goes into calculating gdp it includes capital expenditures by firms on assets with useful lives of more than one year each such as real estate equipment production facilities and plants the last component included in the expenditure approach is net exports which represents the effect of foreign trade of goods and service on the economy expenditure method vs income methodthe income approach to measuring gross domestic product is based on the accounting reality that all expenditures in an economy should equal the total income generated by the production of all economic goods and services it also assumes that there are four major factors of production in an economy and that all revenues must go to one of these four sources therefore by adding all of the sources of income together a quick estimate can be made of the total productive value of economic activity over a period adjustments must then be made for taxes depreciation and foreign factor payments the major distinction between each approach is its starting point the expenditure approach begins with the money spent on goods and services conversely the income approach starts with the income earned wages rents interest profits from the production of goods and services limitation of gdp measurementsgdp which can be calculated using numerous methods including the expenditure approach is supposed to measure a country s standard of living and economic health critics such as the nobel prize winning economist joseph stiglitz caution that gdp should not be taken as an all encompassing indicator of a society s well being since it ignores important factors that make people happy for example while gdp includes monetary spending by private and government sectors it does not consider work life balance or the quality of interpersonal relationships in a given country | |
what is an expense | an expense is the cost of operations that a company incurs to generate revenue it is simply defined as the cost one is required to spend on obtaining something as the popular saying goes it costs money to make money common expenses include payments to suppliers employee wages factory leases and equipment depreciation businesses are allowed to write off tax deductible expenses on their income tax returns to lower their taxable income and thus their tax liability 1 however the internal revenue service irs has strict rules on which expenses businesses are allowed to claim as a deduction investopedia jake shiunderstanding expensesone of the main goals of company management teams is to maximize profits this is achieved by boosting revenues while keeping expenses in check slashing costs can help companies to make even more money from sales however if expenses are cut too much it could also have a detrimental effect for example paying less on advertising reduces costs but also lowers the company s visibility and ability to reach out to potential customers | |
how expenses are recorded | companies break down their revenues and expenses in their income statements accountants record expenses through one of two accounting methods cash basis or accrual basis under cash basis accounting expenses are recorded when they are paid in contrast under the accrual method expenses are recorded when they are incurred for example if a business owner schedules a carpet cleaner to clean the carpets in the office a company using the cash basis records the expense when it pays the invoice under the accrual method the business accountant would record the carpet cleaning expense when the company receives the service expenses are generally recorded on an accrual basis ensuring that they match up with the revenues reported in accounting periods expenses are used to calculate net income the equation to calculate net income is revenues minus expenses types of business expensesthere are two main categories of business expenses in accounting operating expenses are the expenses related to the company s main activities such as the cost of goods sold administrative fees office supplies direct labor and rent these are the expenses that are incurred from normal day to day activities operating expense is deducted from revenue to arrive at operating income the amount of profit a company earns from its direct business activities companies need to manage their operating expenses to ensure that they are maximizing profits this is usually done by keeping expenses at a minimum however reducing expenses too much can reduce the company s productivity non operating expenses are not directly related to the business s core operations common examples include interest charges and other costs associated with borrowing money these are expenses that occur outside of a company s day to day activities these costs may occur from restructuring reorganizing interest charges on debt or on obsolete inventory non operating expenses are separate from operating expenses from an accounting perspective so as to be able to determine how much a company earns from its core activities special considerationscapital expenditures commonly known as capex are funds used by a company to acquire upgrade and maintain physical assets such as property buildings an industrial plant technology or equipment the irs treats capital expenses differently than most other business expenses while most costs of doing business can be expensed or written off against business income the year they are incurred capital expenses must be capitalized or written off slowly over time 2the irs has a schedule that dictates the portion of a capital asset a business may write off each year until the entire expense is claimed the number of years over which a business writes off a capital expense varies based on the type of asset according to the irs to be deductible a business expense must be both ordinary and necessary ordinary means the expense is common or accepted in that industry while necessary means the expense is helpful in the pursuit of earning income business owners are not allowed to claim their personal non business expenses as business deductions they also cannot claim lobbying expenses penalties and fines 3 | |
what are examples of expenses | examples of expenses include rent utilities wages salaries maintenance depreciation insurance and the cost of goods sold expenses are usually recurring payments needed to operate a business | |
what are the types of expenses | expenses can be categorized in a variety of ways expenses can be defined as fixed expenses such as rent or mortgage those that do not change with the change in production expenses can also be defined as variable expenses those that change with the change in production these include utilities and the cost of goods sold expenses can also be categorized as operating and non operating expenses the former are the expenses directly related to operating the company and the latter is indirectly related | |
is salary considered an expense | yes salary is considered an expense and is reported as such on a company s income statement the bottom linean expense is a cost that businesses incur in running their operations expenses include wages salaries maintenance rent and depreciation expenses are deducted from revenue to arrive at profits businesses are allowed to deduct certain expenses from taxes to help alleviate the tax burden and bulk up profits | |
what is an expense ratio | the expense ratio is how much you pay a mutual fund or etf per year expressed as a percent of your investments so if you have 5 000 invested in an etf with an expense ratio of 04 you ll pay the fund 2 annually an expense ratio is determined by dividing a fund s operating expenses by its net assets operating expenses reduce the fund s assets thereby reducing the return to investors because the expense ratio is deducted from the fund s gross return and paid to the fund manager investopedia theresa chiechicalculating the expense ratioit s very rare to need to calculate a fund s expense ratio as it is required to state it in its prospectus 1 additionally because it is an important metric for investors expense ratios are almost always found on a fund s website but if you need to calculate it this is the formula er total fund costs total fund assets begin aligned text er frac text total fund costs text total fund assets end aligned er total fund assetstotal fund costs | |
where | you ll need to locate the fund s operating expenses in its financial statements and net assets on its webpage or financial statements generally the lower the expense ratio the better it is for most investors 2components of an expense ratiomost expenses within a fund are variable however the variable expenses are fixed within the fund because of how it is calculated for example a fee consuming 0 5 of the fund s assets will always consume 0 5 regardless of how it varies in addition to the management fees associated with a fund some funds have an advertising and promotion expense referred to as a 12b 1 fee which is included in operating expenses notably 12b 1 fees within a fund cannot exceed 1 0 75 allocated to distribution and 0 25 allocated to shareholder servicing according to finra rules a fund s trading activity the buying and selling of portfolio securities is not included in the calculation of the expense ratio costs not included in operating expenses are loads contingent deferred sales charges cdsc and redemption fees which if applicable are paid directly by fund investors 3the expense ratio is often concerned with total net expenses but investors sometimes want to use gross vs net expenses expense ratios of passive vs active fundsthe expense ratios of passively managed funds and actively managed funds depend on how they are structured and managed the vanguard s p 500 etf voo a passively managed index fund that replicates the standard poor s s p 500 index has one of the lowest expense ratios in the industry at 0 03 annually this fund does not use asset weighting but the vanguard consumer staples etf vdc does and it has a much higher 0 10 expense ratio vdc mimics the msci us imi consumer staples 25 50 index but weighs three sectors differently than the index 45the fidelity contrafund fcntx is one of the largest actively managed funds in the marketplace with an expense ratio of 0 39 or 39 per 10 000 invested this fund is much more highly weighted toward communication services than its benchmark the s p 500 6in general exchange traded funds etfs have lower expense ratios than comparable mutual funds 7 | |
what does expense ratio mean | the expense ratio is how much of a fund s assets are used towards administrative and other operating expenses because an expense ratio reduces a fund s assets it reduces the returns investors receive | |
why is expense ratio important | the expense ratio of a fund or etf is important because it lets an investor know how much they pay to invest in a specific fund and how much their returns will be reduced the lower the expense ratio the better because an investor receives higher returns on their invested capital 3 | |
how is expense ratio calculated | the expense ratio is calculated by dividing a fund s net expenses by its net assets the bottom lineexpense ratios are taken from mutual fund and etf returns to help pay for operations and fund management the expense ratio charged to investors will vary depending on the fund s investment strategy and level of trading activity in general expense ratios have declined steadily as competition for investor dollars has heightened actively managed funds and those in less liquid asset classes tend to have higher expense ratios while passively managed index funds feature the lowest expense ratios | |
what is an experience rating | an experience rating is the amount of loss that an insured party experiences compared to the amount of loss that similar insured parties have experience rating is most commonly associated with workers compensation insurance it is used to calculate the experience modification factor 1understanding experience ratingsinsurance companies closely monitor the claims and losses that come from the policies that they underwrite this evaluation includes determining whether certain classes of policyholders are more prone to claims and are thus more risky for the company to insure the experience rating helps an insurance company determine the likelihood that a particular policyholder will file a claim in this sense the past loss experience of a policyholder is used to determine future changes to the premium charged for the policy in general it is easier for an insurance company to determine the risk associated with an entire class of policyholders but harder to determine how risky an individual policyholder is for example an insurance company will look at whether a large sized construction services company has produced more workers compensation claims than similar sized companies if the claims occur more often than expected the insurance company may increase premiums in order to cover the increased expectation of payouts by charging higher premiums for more risky policyholders an insurance company can incentivize its policyholders to improve its risk management practices for example a business that is considered high risk for a workers compensation claim will have to pay more than a low risk policyholder however the high risk policyholder can improve its safety procedures and workplace conditions to lower its premium experience rating is typically based on the three years prior to the most recent expired policy period | |
how an experience rating is used | an experience modifier is the adjustment of annual premium based on previous loss experience 1 for instance three years of loss experience are typically used to determine the experience modifier for a workers compensation policy an experience modifier is calculated every year a modifier may be less than greater than or equal to one a modifier of one means that your loss experience is average for your industry group that is your loss history is no better or worse than other businesses similar to yours in such a case your premium will likely remain unchanged if your modifier is greater than one your loss experience is worse than average for your industry group a modifier that is greater than one will increase your premium for the upcoming policy period likewise a modifier of less than one signifies a loss history that is better than average a modifier of less than one will achieve a premium reduction | |
what is an expiration date | an expiration date is the last day that a consumable product such as food or medicine will be at its best quality according to the manufacturer there are important differences between expiration dates on food and those on medicine understanding an expiration datea product may have a sell by date a use by date a best by date or a do not use after date stamped on the package or the container they all have different meanings but only the do not use after date is a warning that the product should be discarded at that date because it may be unsafe ineffective or both the sell by date is meant to tell store clerks when to remove the product from the store s shelves the use by date tells consumers when the product s quality may have deteriorated the best by date merely suggests that the product s taste or texture may deteriorate after that date federal law does not require food producers to provide any of these dates on food with the sole exception of infant formula nor does the u s department of agriculture usda provide much guidance on the proper date labeling of food except for the sole exception of infant formula 2in fact the usda notes that about 30 of the american food supply is lost or wasted in part because many consumers toss out food that is still wholesome it suggests that a smell test or a taste test are more accurate indicators of edibility than a label 2expiration date stamps on food began to emerge in the 1970s when consumer advocates complained about the lack of assurances that packaged foods were still safe and edible at the time they were purchased more recently there have been complaints that the date stamps are intentionally inaccurate to persuade buyers to toss out and replace products that are still good to eat many states have adopted their own requirements so food producers now routinely mark their products regardless of their destinations so expiration dates on food can be ambiguous but expiration dates on medicine are straightforward federal regulations require prescription medicines to be date stamped over the counter medicines like aspirin cough syrup and herbal products have an expiration date often abbreviated exp followed by a month and year this indicates the date after which the manufacturer does not guarantee the potency or effectiveness of the product 5in most cases this indicates the length of time that the manufacturer is certain that the drug is safe and stable based on its own product testing that is the manufacturer does not accept liability for the product beyond that date in fact the manufacturer accepts liability for the product only until the package is opened not until its contents are used up 6 food tends to look smell or taste bad when it s no longer edible however the expiration date is the only indication that a prescription drug is still safe and effective in the late 1970s the u s food and drug administration fda mandated that all prescription and over the counter otc medical products be marked with an expiration date expiration dates for medicines are often marked exp and may be printed on the label stamped onto the packaging or both 3even small amounts of certain medications can be fatal to children or pets they should be disposed of once they pass their expiration dates it is especially important to adhere to the expiration dates of pharmaceuticals because their chemical composition can change over time making them less potent ineffective or even harmful in some cases the fda may extend the expiration date of a drug if there is a shortage of it the extended expiration date is based on stability data for the medication that has been reviewed by the fda 7dumping expired medications in the trash is not a good idea there may be disposal instructions on the drug s packaging you also can check for drug take back programs in your state or municipality in the absence of specific instructions or take back programs u s federal guidelines recommend disposing of expired or unwanted medicines by putting them in a bag or container and mixing them with coffee grounds or kitty litter some medications can be flushed 8expiration dates for foodexpiration dates on food are a different story food manufacturers date their products to notify store clerks or consumers or both when the product may no longer be at its best quality infant formula is the only food product that must carry a true expiration date under federal law the food safety and inspection service fsis an agency of the usda is the public health regulatory agency responsible for ensuring that america s supply of meat poultry and eggs is safe wholesome and correctly labeled and packaged 9manufacturers are not required to mark their products with expiration dates but if they do the labels must be truthful and not misleading a calendar date must indicate both the month and day of the month shelf stable and frozen products also must display the year in any case the date must be explained with a phrase such as best if used by 4webmd notes that eggs for example are good for three to five weeks after their sell by date 1there are no uniform or universally accepted descriptions used on food labels for open dating in the united states producers use a variety of phrases on their labels to describe quality dates | |
when determining the date by which a product will be of the best quality producers and retailers consider factors like the length of time and the temperature at which a food is stored while it s in transit and while it s being offered for sale | other factors such as the particular characteristics of the food and its type of packaging will affect how long a product will be of optimum quality the date on perishable food is a good indicator of how long it has been sitting around in a warehouse or on the store shelves it also suggests that the product may or may not be at its best after the date on the label nevertheless these products still have some shelf life left in them if they re stored and handled properly a wise consumer will look smell taste or touch food to check whether it shows any signs of spoilage before throwing it out the usda maintains a food storage safety chart listing foods from sauerkraut to egg whites 10expiration dates for prescription drug patentsfor prescription drugs expiration dates have another unrelated meaning the u s patent and trademark office awards medical patents to pharmaceutical companies when a new brand name drug is released to the market the patent protects the drugmaker from having its drug copied by competitors for a certain time typically 20 years the patent exclusivity for orphan drugs lasts for seven years a patent for a new chemical lasts for five years 11the orange book a list of drugs that the fda has approved as both safe and effective cites the patents for new drugs along with their expiration dates 12under the hatch waxman act for a generic drug manufacturer to win approval for a drug the manufacturer must certify that it will not launch its generic product until after the original drug s patent has expired unless the patent is found to be invalid or unenforceable or the generic product will not infringe upon the listed patent 13 | |
is it okay to use some medicines after their expiration dates | it is a bad idea to use any medicine after its expiration date it is no longer guaranteed to be safe or effective according to the food drug administration fda for that matter the fda warns that medicines should be stored properly to remain good until their expiration dates if they don t need to be refrigerated store them in a cool dry place not the bathroom cabinet 14 | |
how long can you eat food past its expiration date | here s some advice from the u s department of agriculture the usda also has a chart indicating the shelf life of many food products 10can you eat expired food if it hasn t been opened the use by sell by and best by stamps all suggest an end date for the product in its unopened state most products are good for some time after the dates marked on the package if the package remains unopened whether it s opened or sealed look at it sniff it or taste it before you throw it out in general nonperishable foods like canned goods pasta and rice have a long shelf life and are good well past any expiration dates marked on them meat dairy and eggs are perishable but a sniff test is more reliable than a sell by date the bottom lineexpiration dates are placed on food and prescription items to ensure the benefit and safety of the consumer food expiration dates tend to focus on quality rather than safety whereas expiration dates on prescriptions tend to focus on effectiveness and safety it s always good to check the expiration date for both food and drugs and when in doubt discard if an item doesn t appear safe after its expiration date | |
what is expiration time | the expiration time of an options contract or other derivative is the exact date and time when it is rendered null and void derivatives contracts that finish out of the money otm at the time of expiration will become worthless while in the money itm contracts will be evaluated based on the settlement price upon expiry the expiration time is more specific than the expiration date and should not be confused with the last time to trade that option understanding expiration timeexpiration time differs from the expiration date in that the former is when the option actually expires while the latter is the deadline for the holder of the option to make their intentions known most option traders need only be concerned with the expiration date but it is useful to know the expiration time as well according to nasdaq the expiration time is since many public holders of options deal with brokers they face different expiration times in the u s the last day to trade an option is typically the third friday of the expiration month while the expiration date is the saturday immediately afterwards if friday is a public holiday the last trading day with be on thursday 2a public holder of an option usually must declare their notice to exercise by 5 30 p m on friday this time frame will allow the broker to notify the exchange of the holders intent by the actual expiration time on saturday 1notification limits depend on the exchange where the product trades for example the chicago board options exchange cboe limits trading on expiring options to 3 00 p m central time on the last trading day 3derivatives contract expirationan expiration date in derivatives is the last day that an options or futures contract is valid when investors buy options the contracts give them the right but not the obligation to buy or sell the assets at a predetermined price known as the strike price the exercising of the option must be within a given period which is on or before the expiration date if an investor chooses not to exercise that right the option expires and becomes worthless and the investor loses the money paid to buy it the expiration date for listed stock options in the united states is usually the third friday of the contract month which is the month when the contract expires however when that friday falls on a holiday the expiration date is on the thursday immediately before the third friday once an options or futures contract passes the expiration date the contract is invalid the last day to trade equity options is the friday before expiry 4caveats at expirationwhile the majority of options never reach their expiration dates due to traders offsetting or closing their positions before that time some options do live on until their actual expiration times this delay can create interesting dynamics because the last time for trading can be before the expiration time this time difference is not a problem when the underlying security also closes for trading at the same time however if the underlying security does trade beyond the close of trading for the option both buyers and sellers might find that the exercise of their contract is automatic if they were itm conversely they may expect the automatic exercise but after hours trading in the underlying asset may push them otm rules covering these possibilities especially at what time the final price of the underlying is recorded can change so traders should check with both the exchange where their options trade as well as the brokerage handling their account example spxw weekly optionsspxw are weekly expiration cycle options on the s p 500 index listed by the cboe spxw weeklys are settled on the last trading day typically a friday for spxw eow weeklys as with other afternoon settled index options the exercise settlement value is calculated using the last closing reported sales price in the primary market of each component stock on the last trading day trading in expiring spxw weeklys closes at 3 00 p m central standard time cst all non expiring spxw weeklys meanwhile continue to trade until 3 15 p m cst 5 | |
an option s expiration is the specific date and time when the option contract becomes invalid the expiration date is critical for both the option s buyer and seller for american options the buyer can exercise the option at any point up to and including the expiration date for european options the holder can only exercise the option on the expiration date itself 1 | the expiration date is crucial for an investor when dealing with options since it significantly affects the option s value and the strategies an investor may employ the date is almost always clearly stated in the option contract options can have various expiration periods ranging from as short as one day to several months or even years most equity options are american style while index options like those for the s p 500 are european style option types based on their expiration dateoptions expiration dates take several forms european style options can only be exercised on their expiration date while american style options can be exercised any time before their expiration date here are some different lengths of time available each type of expiration caters to different trading strategies and risk appetites making it essential to understand their characteristics monthly contract expirationone of the most commonly traded types of options has monthly expirations these contracts expire on the third friday of each month and are considered the standard for many individual investors and traders here are the monthly contract s key features weekly contract expirationweeklys offer a faster pace of trading unlike the standard monthly options that expire on the third friday of each month weeklys typically expire every friday providing four or five opportunities to trade in a single month here are some of the weeklys key features daily expiring optionsdaily expiring options also called zero days to expiration options 0dte offer the ultimate in short term trading opportunities generally expiring at the end of each trading day these are the go to for traders looking to profit from intraday and overnight market movements here are some of their key features | |
how options are valued at expiration | the expiration date affects the option s price or premium generally options with later expiration dates are more expensive because of the increased time value this gives the holder a longer period to benefit from favorable price movements in the underlying asset the value of an option is generally derived from its intrinsic value and time value the intrinsic value of an option is the present value of the derivative it is the difference between the option s strike or exercise price and the current market price for the underlying asset the intrinsic value is calculated for a call option by taking the underlying asset s current price and subtracting the strike price the intrinsic value of a put option is the strike price minus the underlying asset s current price if the result is negative the option s intrinsic value is zero the other component of an option s value is time value this represents the extra premium that traders and investors are willing to pay for the option based on its potential to make a profit before the option expires as the option approaches its expiration date the time value normally decreases a phenomenon known as time decay time value accounts for the risk or uncertainty associated with holding the option over a period the expiration time of an options contract is the date and time when it becomes void it is more specific than the expiration date and should not be confused with the last time to trade that option the value of an option at expiration is discussed in terms of its moneyness which is the relationship between the underlying asset s market price and the option s strike price three common terms used for the moneyness of options at expiration are in the money itm at the money atm and out of the money otm other names used for the value of options at expiration describe them as near the money is either slightly itm or otm and deep in the money is highly profitable while deep out of the money can only be exercised at a significant loss understanding these outcomes is essential for traders and investors to effectively manage their positions and expectations whether you re holding an itm option with intrinsic value or an otm option that is likely to expire worthless knowing what to expect can help you make better informed decisions as you navigate the complexities of options trading | |
when an atm option expires it normally has no intrinsic value and is not automatically exercised since the option s strike price is equal to the underlying asset s value often traders holding atm options sell them before expiration to capture any remaining extrinsic value or time premium however given that the time value diminishes as the option approaches its expiration date the opportunity to do so is quite limited | otm options have a strike price not favorable given the current market price of the underlying asset hence they usually expire worthless unlike itm options otm options will not be automatically exercised holders of these options often let them expire though they could try to sell them to recoup some of the initial premium paid which is likely to be minimal as the expiration date approaches | |
how to pick the best options expiry date | choosing the best option expiry date is a decision that depends on your trading and investment strategy market conditions and your risk tolerance selecting the optimal expiry date for an options contract is critical for your strategy s success here s what s often considered in choosing an expiry date by carefully considering these factors you can choose the expiry date best suited to your objectives risk profile and market outlook 2expiration dates and volatilityan option s expiration date and its volatility are closely connected each influencing the other in ways that significantly affect an option s premium thus understanding the complex relationship between an option s expiration date and its volatility is crucial for effective risk management and options investment strategy knowing how these factors interact can provide an edge if you re looking to capitalize on market volatility or hedge against it | |
when you buy an option the following are the knowable factors that affect its price the current price of the underlying asset the strike price the interest rate if borrowing the type of option call or put the time to expiration of the option and any dividends on the underlying asset volatility is the one left out as the main unknown | volatility is therefore crucial for option prices in essence volatility measures how much the underlying asset s price varies during a specific period two types of volatility are important when considering options and their contract expiration historical volatility this is the record of fluctuations in the underlying asset s price giving you a context to assess future volatility suppose you re looking at the stock of company a and you calculate that over the past 30 days the stock has been between 40 and 50 after further calculations you determine that the historical volatility for this period is 20 checking further you find that the volatility for the past week is 30 meaning it s more volatile than usual this could indicate future prices but since it s based on past behavior it may tell you only where it s been not where the stock s volatility is going implied volatility this is a forward looking estimate of how much the market thinks the underlying asset price will move in the future options with high implied volatility have higher premiums and low implied volatility goes with lower premiums of course an option s price is not guaranteed to follow the predicted pattern nevertheless evaluating what other investors are doing with the option is helpful since implied volatility is directly correlated with the market s view which affects the option price 3the higher the volatility the greater the price swings of the asset and the higher the price for the associated options when an option s underlying asset has a more volatile price the potential payoff from owning the option increases the greater the risk the greater the reward thus option buyers are often willing to pay a higher premium for options on volatile assets short term options are generally more sensitive to immediate market events causing higher volatility and premiums alternatively long term options like leaps are less susceptible to short term market fluctuations but have greater long term volatility strategies like buying options ahead of earnings announcements or during market uncertainty try to profit from volatility conversely selling options in a low volatility environment should offer lower risk though it also likely has a lower return suppose company a is scheduled to release its quarterly earnings report next week since this will likely impact its stock price the market expects more volatility in the near future which is then reflected in the options you can get on its stock looking up a call option for company a you see a strike price of 50 and an expiration one month away making the option premium relatively high using an options prices model you calculate the implied volatility at 40 which is much higher than the 20 historical volatility and even higher than the previous week s bump in volatility the increased implied volatility reflects anticipation in the market for increased stock price fluctuations surrounding the earnings report for this reason other investors are willing to pay a premium for this option given the higher likelihood that company a s stock price will move significantly thus offering the potential for a more substantial payoff investors often use options with different expiration dates to strategically hedge against volatility understanding how it affects options prices can help you manage risks better and potentially improve your options strategy expiration dates and options greeksoptions greeks or simply greeks are tools each known by a greek letter that help calculate how the price of an option is likely to change in response to different financial variables they re part of a well known method the black scholes model for calculating the value of an option and each greek focuses on a different factor influencing that value 4understanding the greeks allows traders and investors to make more exacting decisions from selecting the correct expiry date to managing risk and optimizing potential returns suppose a trader wants to buy a call option on company a s stock anticipating that it will increase in the next month the current stock price is 50 the option s strike price is 55 and the option expires in 30 days the trader uses the delta to gauge the likelihood of the option expiring itm the option has a delta of 0 4 suggesting that for every 1 increase in the stock price the option will increase by 0 40 a delta of 0 4 also implies a 40 chance that the option will expire itm the trader keeps an eye on gamma to anticipate changes in delta the option s gamma is 0 1 indicating how much the delta will change for every 1 change in the stock price if the stock moves up by 1 the new delta would be 0 5 theta is calculated as 0 05 meaning the option will lose 0 05 in value each day in time decay traders know that holding the option too long will erode its value so they should plan to reassess the position before the option s expiration the vega is 0 2 for every 1 increase in implied volatility the option price will increase by 0 20 if the trader expects volatility to increase this could add value to the option since interest rates are relatively stable the trader might not focus on rho for such a short term option given these greeks the trader decides to buy the call option the trader will closely monitor delta and gamma for price changes and theta to reevaluate time decay vega will be watched in case of changes in volatility the expiration date of an option has a significant impact on the greeks which in turn affects the option s price behavior can an option s expiration date be extended in the standardized world of exchange traded options the expiration date is a fixed term and cannot be extended once an option reaches its expiration date it either gets exercised if it is itm or expires worthless if it is atm or otm there are no provisions for extending the expiration date for these types of options | |
where can you find options prices and their expiration dates | options prices and their respective dates can be accessed through brokerage platforms financial websites and trading apps they frequently have detailed quotes for options on stocks and other underlying assets the quote will typically include the current price or premium for the option the strike price the expiration date and other details like the option s greeks you should only use trustworthy and up to date sources when weighing options trading since prices and available options can fluctuate rapidly because of market conditions | |
what are the valuation models for options | several valuation models are used to calculate an option s theoretical value including the black scholes model the binomial option pricing model monte carlo simulations and risk neutral probability these models account for factors such as stock price strike price time until expiration implied volatility and interest rates to help investment professionals make informed decisions | |
what is a calendar spread | a calendar spread is an options trading strategy that involves buying and selling options on the same underlying asset with the same strike price but with different expiration dates this strategy is also known as a time spread or horizontal spread the typical setup involves selling a short term option front month and buying a longer term option next expiry period or further out the bottom linein options trading the expiration date is pivotal influencing intrinsic and time value andthereby affecting the option s overall prices options come in various expiration cycles monthly weekly daily and even long term leaps to suit different trading goals and risk tolerances the fate of an option at expiration is categorized as atm itm or otm each with distinct outcomes ranging from expiring as worthless to being exercised in addition option greeks like delta gamma theta and vega are critical risk assessment tools deciphering how an option s price is expected to react to factors like stock price movements time decay and volatility understanding these concepts is essential for making informed trading decisions | |
what is explicit cost | explicit costs are normal business costs that appear in a company s general ledger and directly affect its profitability they have clearly defined dollar amounts that flow through to the income statement examples of explicit costs include wages lease payments utilities raw materials and other direct costs 1understanding explicit costsexplicit costs also known as accounting costs are easy to identify and link to a company s business activities to which the expenses are attributed they are recorded in a company s general ledger and flow through to the expenses listed on the income statement the net income ni of a business reflects the residual income that remains after all explicit costs have been paid 1explicit costs are the only accounting costs that are necessary to calculate a profit as they have a clear impact on a company s bottom line the explicit cost metric is especially helpful for companies long term strategic planning 1michela buttignol investopediaexplicit costs vs implicit costsexplicit costs involve tangible assets and monetary transactions and result in real business opportunities explicit costs are easy to identify record and audit because of their paper trail expenses relating to advertising supplies utilities inventory and purchased equipment are examples of explicit costs although the depreciation of an asset is not an activity that can be tangibly traced depreciation expense is an explicit cost because it relates to the cost of the underlying asset owned by the company 1in contrast implicit costs are not clearly defined identified or reported as expenses they often deal with intangibles and are described as opportunity costs the value of the best alternative not accepted an example of an implicit cost is time spent on one activity of a business that could better be spent on a different pursuit management will utilize explicit costs when reviewing a business operations including profits but will calculate implicit costs only for decision making or choosing among a variety of alternatives 1an explicit cost is a defined dollar amount that appears in the general ledger while an implicit cost is not initially shown or reported as a separate cost companies use both explicit and implicit costs when calculating a company s economic profit which is defined as the total return a company receives based on all costs incurred to attain that revenue as opposed to accounting profit which is the amount of money left over after costs and expenses are deducted from total revenue specifically economic profit shows whether a company is earning more than the competitive norm 2 it can be used to determine if a business should enter or exit a market or an industry in a perfectly competitive market economic profit is zero | |
what are explicit costs | explicit costs are tangible expenses that appear in a company s general ledger and are used to determine profitability examples include wages lease payments utilities and raw materials | |
what are implicit costs | implicit costs are not clearly defined and don t get reported as expenses when a company allocates its resources it forgoes the ability to earn money off the use of those resources elsewhere it is the cost of the use of an asset | |
what is accounting profit | accounting profit is the money left over in a business after deducting explicit costs from total revenue | |
what is economic profit | economic profit measures how a company is faring compared with its competition it uses both explicit and implicit costs a company can have a positive accounting profit while maintaining a zero economic profit the bottom lineexplicit costs are the out of pocket expenses incurred by a business in the production of goods or services these costs are easily identifiable and can be directly attributed to a specific activity or business function by accurately tracking explicit costs businesses can make informed decisions about pricing production and resource allocation overall businesses should carefully monitor their explicit costs to ensure that they are managing their resources effectively and making sound financial decisions | |
what is exploration production e p | exploration production e p is a specific sector within the oil and gas industry linked to the early stage of energy production which generally involves searching for and extracting oil and gas an e p company finds and extracts the raw materials used in the energy business typically they do not refine or produce energy but merely find and extract raw materials to be shipped to other oil companies within the production process understanding exploration production e p e p is known as the upstream segment of the oil and gas industry which consists of the search exploration drilling and extraction phases the e p segment is the earliest portion of the oil and gas production process companies within this segment are primarily focused on locating and extracting commodities from the earth 1the resource owners and operators of e p work with a variety of contractors such as engineering procurement and construction epc contractors joint venture partners and oil field service companies in locating and extracting oil and gas e p companies also build infrastructure and collect massive amounts of analytical data exploration production e p phasesthe process of oil and gas exploration and production typically consists of four stages which are outlined below the search and exploration stage involves the search for hydrocarbons which are the primary components of petroleum and natural gas land surveys are performed to help identify the areas that are the most promising the goal is to locate specific minerals underground to estimate the amount of oil and gas reserves before drilling geologists study rock formations and layers of sediment within the soil to identify if oil or natural gas is present the process can involve seismology which uses substantial vibrations as a result of machinery or explosives to create seismic waves how the seismic waves interact with a reservoir containing oil and gas helps to pinpoint the reservoir s location once it has been determined that there appear to be reserves beneath the ground the test drilling process can begin after identifying potentially viable fields a well is drilled to test the findings and determine whether there are enough reserves to be commercially viable for sale the process involves making a hole by drilling or grinding through the rock beneath the surface a steel pipe is inserted into the hole so that the drill can be inserted into the pipe allowing for exploration at a deeper level core samples are taken and studied by geologists engineers and paleontologists to determine if there is the proper quality of natural gas or petroleum in the underground reserve if the process shows that there are both the quality and quantity needed to produce and sell commercially the production of oil wells begins engineers will typically estimate how many wells will be needed and the best method of extraction the estimated cost of the number of wells is determined next the construction of the platform begins which could be on land or offshore the necessary environmental protections are also implemented at this stage there have been significant advances in drilling technologies over the years companies can drill horizontally tapping into vertical wells to search for natural gas pockets which can produce far more natural gas than a typical vertical well 2the oil and gas deposits are extracted from the wells sometimes natural gas can be processed at the same site as the well however petroleum is usually extracted on site stored temporarily and eventually shipped via a pipeline to a refinery 3once a site is no longer productive meaning all reserves have been extracted and all opportunities have been exhausted the wells are plugged or sealed attempts are made to restore the area in an effort to help the environment the midstream and downstream phasesonce the crude oil and natural gas reserves have been extracted the midstream oil and gas production process begins midstream companies focus on the storage and transportation of oil and natural gas through pipelines they deliver the reserves to companies involved in the final stage of production called downstream the downstream process involves refineries that process the oil into usable products such as gasoline once finished products are created from the crude oil and natural gas they are sent to distributors and retail outlets such as energy providers and gas stations | |
what does e p stand for in oil and gas | e p is short for exploration and production which is the early stage of energy production that consists of looking for oil and gas and then extracting it | |
what is the difference between exploration and production | exploration is the process of examining places where abundant oil and natural gas resources potentially exist under the earth s surface once these places have been identified production commences to collect and extract | |
what are the 3 stages of oil and gas | the oil and gas industry is generally broken down into three segments upstream midstream and downstream the first phase is upstream which is when companies initially explore and then start drilling and extracting oil and natural gas it is then followed by midstream which refers to the transportation of crude or refined petroleum products and finally downstream which is the final stage and consists of processing the oil into usable products and marketing them 4 | |
is exploration and production e p upstream | yes exploration and production e p is considered part of the upstream phase which is the initial part of the oil and gas process that consists of exploration drilling and extraction the bottom linefinding and extracting oil and natural gas from the earth s surface is a deeply controversial and complex process that requires lots of money patience and hard work it s necessary though without these resources which are used to power vehicles heat buildings produce electricity and even to make products such as deodorant mri machines and pacemakers the economy and life as we know it would grind to a standstill | |
what is exponential growth | exponential growth is a pattern of data that shows greater increases with passing time creating the curve of an exponential function the formula for exponential growth is v s x 1 r t the starting value is s r is the interest rate and t is the number of periods that have elapsed the formula calculates v which is the current value to demonstrate exponential growth suppose a population of mice rises exponentially by a factor of two every year starting with two in the first year then four in the second year eight in the third year 16 in the fourth year and so on in this case the population is growing by a factor of 2 each year if mice instead give birth to four pups you would have four then 16 then 64 then 256 exponential growth which is multiplicative can be contrasted with linear growth which is additive and with geometric growth which is raised to a power understanding exponential growthin finance compound returns cause exponential growth the power of compounding is one of the most powerful forces in finance this concept allows investors to create large sums with little initial capital savings accounts that carry a compound interest rate are common examples of exponential growth assume you deposit 1 000 in an account that earns a guaranteed 10 rate of interest if the account carries a simple interest rate you will earn 100 per year the amount of interest paid will not change as long as no additional deposits are made if the account carries a compound interest rate however you will earn interest on the cumulative account total each year the lender will apply the interest rate to the sum of the initial deposit along with any interest previously paid in the first year the interest earned is still 10 or 100 in the second year however the 10 rate is applied to the new total of 1 100 yielding 110 with each subsequent year the amount of interest paid grows creating rapidly accelerating or exponential growth after 30 years with no other deposits required your account would be worth 17 449 40 the formula for exponential growthon a chart this curve starts slowly and remains nearly flat for a time before increasing swiftly to appear almost vertical it follows the formula v s 1 r t v s times 1 r t v s 1 r tthe current value v of an initial starting point subject to exponential growth can be determined by multiplying the starting value s by the sum of one plus the rate of interest r raised to the power of t or the number of periods that have elapsed special considerationswhile exponential growth is often used in financial modeling the reality is often more complicated the application of exponential growth works well in the example of a savings account because the rate of interest is guaranteed and does not change over time in most investments this is not the case for instance stock market returns do not smoothly follow long term averages each year other methods of predicting long term returns such as the monte carlo simulation which uses probability distributions to determine the likelihood of different potential outcomes have seen increasing popularity exponential growth models are more useful to predict investment returns when the rate of growth is steady | |
what are examples of exponential growth | common examples of exponential growth in real life scenarios include the growth of cells the returns from compounding interest from an investment and the spread of a disease during a pandemic | |
is exponential growth the fastest type of growth | no in math exponential growth is not the fastest growth there are faster growth models such as factorial growth which uses a larger number for multiplying with every new repetition exponential growth uses the same number for every new repetition | |
what is the difference between linear growth and exponential growth | linear growth is growth that happens at the same rate of change every increase in x would bring about the same increase in y it is constant with exponential growth there is a constant multiplier so the growth rate is changing the bottom linecompounding is considered one of the great miracles of investing because money grows faster over longer periods due to the returns being calculated not only on the principal but also on the previous returns this type of exponential growth underscores the idea that starting to invest early in your life has clear benefits | |
what is an exponential moving average ema | an exponential moving average ema is a type of moving average ma that places a greater weight and significance on the most recent data points 1 the exponential moving average is also referred to as the exponentially weighted moving average an exponentially weighted moving average reacts more significantly to recent price changes than a simple moving average simple moving average sma which applies an equal weight to all observations in the period investopedia daniel fishelformula for exponential moving average ema e m a today value today smoothing 1 days where begin aligned begin aligned ema text today left text value text today ast left frac text smoothing 1 text days right right ema text yesterday ast left 1 left frac text smoothing 1 text days right right end aligned textbf where ema text exponential moving average end aligned ematoday valuetoday 1 dayssmoothing where while there are many possible choices for the smoothing factor the most common choice is that gives the most recent observation more weight if the smoothing factor is increased more recent observations have more influence on the ema calculating the emacalculating the ema requires one more observation than the sma suppose that you want to use 20 days as the number of observations for the ema then you must wait until the 20th day to obtain the sma on the 21st day you can then use the sma from the previous day as the first ema for yesterday the calculation for the sma is straightforward it is simply the sum of the stock s closing prices during a time period divided by the number of observations for that period for example a 20 day sma is just the sum of the closing prices for the past 20 trading days divided by 20 2next you must calculate the multiplier for smoothing weighting the ema which typically follows the formula 2 number of observations 1 for a 20 day moving average the multiplier would be 2 20 1 0 0952 finally the following formula is used to calculate the current ema 3the ema gives a higher weight to recent prices while the sma assigns equal weight to all values the weighting given to the most recent price is greater for a shorter period ema than for a longer period ema 4 for example an 18 18 multiplier is applied to the most recent price data for a 10 period ema while the weight is only 9 52 for a 20 period ema there are also slight variations of the ema arrived at by using the open high low or median price instead of using the closing price | |
what does the ema tell you | the 12 and 26 day exponential moving averages emas are often the most quoted and analyzed short term averages the 12 and 26 day are used to create indicators like the moving average convergence divergence macd and the percentage price oscillator ppo 56 in general the 50 and 200 day emas are used as indicators for long term trends 3 when a stock price crosses its 200 day moving average it is a technical signal that a reversal has occurred traders who employ technical analysis find moving averages very useful and insightful when applied correctly however they also realize that these signals can create havoc when used improperly or misinterpreted all the moving averages commonly used in technical analysis are lagging indicators consequently the conclusions drawn from applying a moving average to a particular market chart should be to confirm a market move or indicate its strength the optimal time to enter the market often passes before a moving average shows that the trend has changed an ema does serve to alleviate the negative impact of lags to some extent because the ema calculation places more weight on the latest data it hugs the price action a bit more tightly and reacts more quickly this is desirable when an ema is used to derive a trading entry signal like all moving average indicators emas are much better suited for trending markets when the market is in a strong and sustained uptrend the ema indicator line will also show an uptrend and vice versa for a downtrend a vigilant trader will pay attention to both the direction of the ema line and the relation of the rate of change from one bar to the next for example suppose the price action of a strong uptrend begins to flatten and reverse from an opportunity cost point of view it might be time to switch to a more bullish investment examples of how to use the emaemas are commonly used in conjunction with other indicators to confirm significant market moves and to gauge their validity for traders who trade intraday and fast moving markets the ema is more applicable quite often traders use emas to determine a trading bias if an ema on a daily chart shows a strong upward trend an intraday trader s strategy may be to trade only on the long side the difference between ema and smathe major difference between an ema and an sma is the sensitivity each one shows to changes in the data used in its calculation more specifically the ema gives higher weights to recent prices while the sma assigns equal weights to all values the two averages are similar because they are interpreted in the same manner and are both commonly used by technical traders to smooth out price fluctuations since emas place a higher weighting on recent data than on older data they are more responsive to the latest price changes than smas that makes the results from emas more timely and explains why they are preferred by many traders 7limitations of the emait is unclear whether or not more emphasis should be placed on the most recent days in the time period many traders believe that new data better reflects the current trend of the security at the same time others feel that overweighting recent dates creates a bias that leads to more false alarms similarly the ema relies wholly on historical data many economists believe that markets are efficient which means that current market prices already reflect all available information if markets are indeed efficient using historical data should tell us nothing about the future direction of asset prices | |
what is a good exponential moving average | the longer day emas i e 50 and 200 day tend to be used more by long term investors while short term investors tend to use 8 and 20 day emas | |
is exponential moving average better than simple moving average | the ema focused more on recent price moves which means it tends to respond more quickly to price changes than the sma 7 | |
how do you read exponential moving averages | investors tend to interpret a rising ema as a support to price action and a falling ema as a resistance with that interpretation investors look to buy when the price is near the rising ema and sell when the price is near the falling ema 8 | |
what is an export credit agency eca | an export credit agency offers trade finance and other services to facilitate domestic companies international exports most countries have ecas that provide loans loan guarantees and insurance to eliminate the uncertainty of exporting to other countries ecas support the domestic economy and employment by helping companies find overseas product markets ecas can be government agencies quasi governmental agencies or even commercial financial institutions global ecasecas provide the necessary support if risk wary private lenders pull back from export finance as of 2023 thirty nine official global ecas offer funding to support efforts to sell goods and services abroad ecas are critical to national industrial strategies they can arrange government backed loans guarantees and insurance in some of the world s riskiest and most volatile markets the export import bank of the united states exim is the official eca in the u s eca offeringsecas play a role in world trade the export credit guarantees a lower risk than private lending ecas can be a leading player in international project financing and exports ecas such as exim help fill the funding gap that private sector lenders create with their inability or unwillingness to provide financing governments provide officially supported export credits through export credit agencies ecas to support national exporters competing for overseas sales support can be official financing refinancing interest rate support insurance or guarantee cover for credits provided by private financial institutions | |
what is the role of exim in the united states | the export import bank of the united states exim is an independent executive branch agency backed by the full faith and credit of the u s whose mission is to support american jobs by supporting the export of u s goods and services | |
what is an export trading company | an export trading company is an independent company that provides support services for firms engaged in exporting this may include warehousing shipping insuring and billing on behalf of the client additionally export trading companies may help manufacturers find overseas buyers and provide them with other pertinent market information a group of producers can also form their own etc understanding export trading companies etc the export company trading act of 1982 allows commercial banks to operate in the export trading company arena and own etcs 1 investors can learn more about etcs through the u s department of commerce s international trade administration export trading companies are not as prominent as they once were due to chinese conglomerate e commerce companies such as alibaba that allow business owners to dropship products directly from their supplier to the customer an export trading company can function like the export trading division of a company that doesn t have such a division helping the firm fulfill any legal obligations in order to clear the way for exporting its goods reasons to use an export trading companyan etc provides valuable information about the local laws and regulations in a foreign country for example an etc may inform a company about a country s local taxation and copyright laws etcs also have contacts in international markets such as relationships with manufacturers and distributors if a company is trying to enter a new overseas market an etc can facilitate communication between the parties although etcs charge a fee for their service it is often cheaper than training or recruiting staff in a foreign market etcs allow a company to hit the ground running and talk to individuals that already have the expertise to answer complex questions etcs also advise about currency hedging strategies to help minimize exchange rate risk for instance an etc may recommend that a company that earns a significant amount of its revenue in europe should use currency forwards and lock in an exchange rate for the purchase or sale of euros on a future date export trading companies charge the companies that hire them either a fee or a commission for the services that they provide limitations of using an export trading companya company may lose control of its operations if an etc handles critical functions such as logistics billing and communicating with foreign suppliers and manufacturers if key personnel at the etc resign or the etc goes into receivership the company that has hired their services may be unaware of the procedures and processes in place if an etc handles the marketing functions of a company operating in a foreign market the brand that the company is trying to convey may get distorted for example if an etc runs low quality print advertisements customers may associate the company s brand with cheap products | |
what is an export | exports are goods and services that are produced in one country and sold to buyers in another exports along with imports make up international trade instead of confining themselves within their geographical borders countries often intentionally seek external markets around the world for commerce achieving greater revenue and transactional opportunities investopedia eliana rodgersunderstanding exportsexports are incredibly important to modern economies because they offer people and firms many more markets for their goods one of the core functions of diplomacy and foreign policy between governments is to foster economic trade encouraging exports and imports for the benefit of all trading parties export agreements are often heavily strategic with countries exchanging agreements to ensure their own country can not only receive the goods they need via imports but can distribute goods for more domestic revenue via exports also consider how governments may use exports as leverage over political situations in response to the war in ukraine the white house issued an executive order prohibiting both the importation and exportation of certain goods to and from russia 2companies often measure their net exports which is their total exports minus their total imports because net exports are a component of a country s gross domestic product gdp exports play a factor in determining a country s financial and economic well being goods may be sent via direct exporting or indirect exporting direct exporting entails working directly with an importer the exporting company handles all of the client communication as a result they do not pay a middleman fee because the direct export method may require teams with specialized knowledge many companies opt to contract out a third party to facilitate an indirect export in 2022 latest information the world exported almost 31 34 trillion worth of goods 3 7 trillion of this activity came from china the world s largest exporter 1the export processin many cases a country will partner with another country to understand the demand needs for certain products instead of blindly manufacturing goods and hoping for an international buyer the export process often starts with the manufacturing country receiving an order the exporting country must often receive proper clearance from their home country to export goods this is often done by obtaining an export license or meeting other country specific requirements the export process usually entails settling several financial matters upfront first the exporter may seek out a letter of credit from the importer if applicable this ensures the exporter can have greater faith in the transaction and will receive compensation for the goods once exported the exporter and importer also fix the exchange rate at which the exported goods will be exchanged at from the foreign currency to the home currency at this point an invoice is most often issued and paid for finalizing the sale as the order is prepared formal documents are gathered including a permit issued by the importer s country financial documents such as a bill of lading and shipping documents these documents are remitted to the seller of primary importance is the shipment advance which notifies the importer how goods will be transmitted trade barriers and other limitationsa trade barrier includes any government law regulation policy or practice that is designed to protect domestic products from foreign competition or to artificially stimulate exports of particular domestic products the most common foreign trade barriers are government imposed measures and policies that restrict prevent or impede the international exchange of goods and services trade barriers present exporting companies with a unique set of challenges extra costs are likely to be realized because companies must allocate considerable resources to researching foreign markets and modifying products to meet local demand and regulations exports facilitate international trade and stimulate domestic economic activity by creating employment production and revenue companies that export are typically exposed to a higher degree of financial risk payment collection methods such as open accounts letters of credit prepayment and consignment are inherently complex and take longer to process than payments from domestic customers advantages and disadvantages of exportscompanies export products and services for a variety of reasons exports can increase sales and profits if the goods create new markets or expand existing ones they may even present an opportunity to capture significant global market share companies that export spread business risk by diversifying into multiple markets exporting into foreign markets can often reduce per unit costs by taking advantage of economies of scale finally companies that export to foreign markets gain new knowledge and experience that may allow the discovery of new technologies marketing practices and insights into foreign competitors to export goods countries may need to incur high transportation costs and the risk of loss due to the transportation of goods if ownership of the goods does not pass to the buyer until the goods are received this may make the exportation unduly risky for the exporter because of logistic and economic constraints small and medium sized businesses or governments may find difficulty in exporting goods in addition smaller companies often do not have the in house personnel needed to potentially navigate international trade regulations exporting of goods is much more common for larger bodies with greater resources to seek out these outside markets last exporting to foreign countries may result in currency risk depending on exchange rate agreements at the time of contract a foreign currency s worth may deteriorate negatively affecting an exporter consider when one currency strengthens against another if the exporter is to be paid in the currency whose value has depreciated their export may be devalued this devaluation may also occur based on extenuating tariffs or lower export prices often allows for greater economic activity leading to higher revenuemay result in production efficiencies due to scaling manufacturingmay result in greater innovation and r d through working with foreign partnersmay reduce operational risk in some areas as revenue streams become more diversifiedmay result in high transportation chargesmay not be achievable by smaller entities due to lack of knowledge and resourcesmay result in currency exchange risk due to devaluing currenciesmay increase operational risk in some areas due to unknown political or geographical risksexample of exportsthe united states is one of the top exporters of automotive vehicles as domestic companies manufacture cars trucks and other vehicles these are shipped around the world and used by non u s entities in 2022 latest information the observatory of economic complexity reported that the u s was the world s third largest exporter of cars distributing 57 5 billion of vehicles around the world the u s distributed over 16 9 billion worth of vehicles to canada making up 29 3 of car exports the largest percentage other top countries receiving u s made vehicles are germany china south korea and mexico 3alternatively the u s was also the top importer of vehicles in 2022 it imported 159 billion of cars most of which came from mexico japan and canada 3of the u s manufacturers that distribute goods around the world bmw manufacturing led domestic companies by the value of cars exported in 2022 latest information the group s south carolina plant alone exported over 227 000 vehicles to roughly 120 countries an export total of nearly 9 6 billion 42022 was the ninth consecutive year that bmw manufacturing led automotive exports by value and more than 15 5 of the company s exports were delivered to germany the top export market in 2023 the plant s value of exports increased to 10 1 billion 54 | |
what is export policy | export policy refers to government legislation that dictates how what when and with whom a country exports goods export policy defines the tariffs customs requirements and limitations on international trade for each country | |
is it better to export goods than import goods | for each country this answer will be different in many cases it is better to import some goods and export others each country is often more proficient in manufacturing certain goods based on its climate citizen skillset or access to raw materials therefore it s arguably best for a company to manufacture and export what it is more efficient at doing so and revert to importing other goods where it may be economically challenging to produce on its own a great example is produce where certain countries simply have better arable lands and climate conditions to grow certain food | |
what are the largest u s exports | the u s s largest exports by value in 2023 were crude oil civilian aircraft refined petroleum oils petroleum gases and cars 6who is the world s largest exporter based on the most recent export information available 2022 china is the world s largest exporter followed by the united states germany the united kingdom and france 1the bottom linean export is a good that is produced domestically but sold to a consumer overseas exporting goods can have advantages and disadvantages for both the producer and the countries in which they do business due to resource constraints economic policy and manufacturing strategies of each country it sometimes makes more sense for countries to make goods to sell for revenue as opposed to retaining them for consumption | |
exposure at default ead is the total value a bank is exposed to when a loan defaults using the internal ratings based irb approach financial institutions calculate their risk banks often use internal risk management default models to estimate respective ead systems outside of the banking industry ead is known as credit exposure | understanding exposure at defaultead is the predicted amount of loss a bank may be exposed to when a debtor defaults on a loan banks often calculate an ead value for each loan and then use these figures to determine their overall default risk ead is a dynamic number that changes as a borrower repays a lender there are two methods to determine exposure at default regulators use the first approach which is called foundation internal ratings based f irb this approach to determining exposure at risk includes forward valuations and commitment detail though it omits the value of any guarantees collateral or security the second method called advanced internal ratings based a irb is more flexible and is used by banking institutions banks must disclose their risk exposure a bank will base this figure on data and internal analysis such as borrower characteristics and product type ead along with loss given default lgd and the probability of default pd are used to calculate the credit risk capital of financial institutions banks often calculate an ead value for each loan and then use these figures to determine their overall default risk special considerationspd analysis is a method used by larger institutions to calculate their expected loss a pd is assigned to each risk measure and represents as a percentage the likelihood of default a pd is typically measured by assessing past due loans it is calculated by running a migration analysis of similarly rated loans the calculation is for a specific time frame and measures the percentage of loans that default the pd is then assigned to the risk level and each risk level has one pd percentage lgd unique to the banking industry or segment measures the expected loss and is shown as a percentage lgd represents the amount unrecovered by the lender after selling the underlying asset if a borrower defaults on a loan an accurate lgd variable may be difficult to determine if portfolio losses differ from what was expected an inaccurate lgd may also be due to the segment being statistically small industry lgds are typically available from third party lenders also pd and lgd numbers are usually valid throughout an economic cycle however lenders will re evaluate with changes to the market or portfolio composition changes that may trigger reevaluation include economic recovery recession and mergers a bank may calculate its expected loss by multiplying the variable ead with the pd and the lgd ead x pd x lgd expected lossexposure at risk examplemodern economies have become increasingly intertwined what happens in one country is more likely to financially impact others especially when a wide scale calamity is experienced consider the impact of lehman brothers bankruptcy filing in 2008 as a result of subprime mortgage loans that heightened the company s exposure at default lehman brothers credit rating was downgraded forcing the federal reserve to summon several banks to negotiate the financing for its reorganization congress also passed a 700 billion rescue bill in response to the widespread financial risk the collapse of the firm could have 1in response to the credit crisis of 2007 2008 the banking sector adopted international regulations to lessen its exposure to default the basel committee on banking supervision s goal is to improve the banking sector s ability to deal with financial stress 2 through improving risk management and bank transparency the international accord hopes to avoid a domino effect of failing financial institutions | |
what is exposure at default | exposure at default is the predicted amount of loss a lender may incur if a debtor defaults on their loan it is the realized value of what the bank may lose if one of its borrowers is unable to satisfy their debt obligation | |
how do you calculate exposure at default | there are two main approaches to calculating exposure at default the foundation approach and the advanced approach the foundation approach is guided by regulators and is calculated by considering the asset forward valuation and commitments details the foundation approach does not consider the value of any guarantees collateral or security the advanced approach lets banks determine how ead is calculated based on each individual exposure these types of calculations may vary across loan types or borrower characteristics as the lender is able to assess value as it sees fit | |
what does exposure on a loan mean | exposure is the maximum potential loss a lender may incur if the borrower defaults it s a risk measurement technique to assess the position of the lender the characteristics of the borrower and the possibility of loss exposure is a natural part of lending in return for being exposed to risk lenders charge interest to be compensated for their willingness to take on risk | |
how can i reduce my credit exposure | if you re a lender and want to reduce your credit exposure consider the types of loans you re offering and who you are loaning to riskier longer term loans will increase your credit exposure as there is often a greater chance of default to minimize your exposure at default consider shorter term loans loans substantiated by operating cash flow loans to higher creditworthy customers and conduct more thorough due diligence prior to issuing a loan the bottom linelending is an inherently risky undertaking banking institutions use metrics like ead to make wise choices about who they lend to since they ultimately must answer to their investors credit exposure is an issue in most industries and ead is one of the banking world s primary tools to combat loan loss | |
what is an express warranty | an express warranty is an agreement by a seller to provide repairs or a replacement for a faulty product component or service within a specified time period after it was purchased buyers rely on these promises or guarantees and sometimes purchase items because of them | |
how an express warranty works | a warranty is an assurance that an item will live up to the promises of the seller under the magnuson moss warranty act passed by congress in 1975 a company that provides a written express warranty is subject to federal guidelines and must comply with the act 1 the act provides consumer protections in the case that a company does not adhere to its written warranty an express warranty can be worded in many different ways it may say something like we guarantee all furniture against defects in construction for one year when a structural defect is brought to our attention we will repair or replace it most express warranties come from the manufacturer or are included in the seller s contract they can also be created by a simple statement on an advertisement or a sign in a store special considerationsdetails about a product or service that are outlined in an advertisement can set the precedent for an express warranty claims made in advertisements about the quality functionality lifespan and efficacy of a product can constitute an express warranty if the product does not meet the standards set forth in the advertising or suffers a breakdown within a set timeframe the customer may be entitled to free repair service or when possible a full replacement not every claim a seller makes is enshrined in warranty law though exaggerated statements that sometimes appear in advertising do not necessarily constitute express warranties for example if an automaker makes a claim that its car is the best in the world and the purchaser after several road trips disagrees with this statement they are not necessarily eligible for a refund unless specifically stated express warranty examplese commerce companies typically include express warranties on the goods they sell in part because of the nature of how online shopping is conducted the customer cannot try on or physically examine merchandise they are about to purchase | |
how the product functions and looks when it is received can dramatically differ from what the customer envisioned while browsing online the inclusion of an express warranty gives them some sense of surety that issues with the purchase will be rectified in some manner | for example if a consumer buys a business jacket online but when it arrives the item is the wrong size wrong color or is missing buttons an express warranty might entitle the consumer to a refund or replacement in such cases the online seller is usually responsible for footing the bill for any additional shipping charges auto dealers tend to advertise express warranty terms for repairs on the vehicles they sell this can include stipulations on mileage and length of ownership that limit the extent of that coverage after the vehicle is owned for a certain amount of time or driven beyond the mileage limit the express warranty would no longer be applicable express warranty vs implied warrantyexpress warranties are specific promises made by a seller to a buyer either orally or in writing in the absence of communicated guarantees an implied warranty may come into force implied warranties are unwritten guarantees that a product or service should work as expected for example if you buy a set of headphones you would expect them to function when you first use them unless you were told otherwise when you agreed to purchase them the uniform commercial code ucc makes reference to an implied warranty of merchantability stating that any good sold in a transaction must be fit for the ordinary purposes for which it is typically used 2correction march 8 2022 a previous version of this article incorrectly stated that the magnuson moss warranty act required companies to issue warranties the law does not mandate warranties but rather sets federal rules for when warranties are offered | |
what is expropriation | expropriation is the act of a government claiming privately owned property against the wishes of the owners ostensibly to be used for the benefit of the overall public in the united states properties are most often expropriated in order to build highways railroads airports or other infrastructure projects the property owner must be paid for the seizure since the fifth amendment to the constitution states that private property cannot be expropriated for public use without just compensation 1understanding expropriationin the united states a doctrine known as eminent domain provides the legal foundation for expropriation u s courts have accepted the doctrine as a government power suggesting it is implied by the fifth amendment clause covering compensation under this rationale the amendment s statement that property cannot be expropriated without proper compensation implies that property can in fact be taken 1governments have the power to take private property for fair market value compensation through the doctrine of eminent domain some fees and interest may be payable to the former owner s in some jurisdictions governments are required to extend an offer to purchase the subject property before resorting to the use of eminent domain if and when it is expropriated property is seized through condemnation proceedings a use of the term that is not to be confused with property that is in disrepair owners can challenge the legality of the seizure and settle the matter of fair market value used for compensation 1another main justification for expropriation comes from the area of public health it is generally recognized that events that threaten public health such as toxic environmental contamination of an area justify the government acting to relocate the affected population in the area and part of that action may logically entail the government expropriating the property of the relocated residents government expropriation is widely found around the world generally accompanied by agreement that owners should receive appropriate compensation for the property they lose the few exceptions to agreement on just compensation are primarily in communist or socialist countries where a government may expropriate not just land but domestic or foreign businesses that have a presence in the country expropriation raises justifiable concerns ranging from the acceptable reasons for expropriation to the process for recourse and the scope and amount of fair compensation with regard to compensation there is debate as to what constitutes fair recompense for owners of expropriated property in cases spanning five decades from the 1930s to the 1980s the u s supreme court has repeatedly acknowledged that the definition of fair market value can fall short of what sellers may demand and possibly receive in voluntary transactions 2consequently in eminent domain cases the standard is often not the most probable price but the highest price obtainable in a voluntary sale transaction involving the subject property since the condemnation deprives the owner of the opportunity to take their time to obtain the optimal price the market might yield the law provides it by defining fair market value as the highest price the property would bring in the open market inconsistency and controversy also prevail over property owners who are compensated for their property the inconvenience of being required to relocate and the expense and possible business loss of doing so these costs are not included in the concept of fair market value but some are compensable in part by statutes such as the federal uniform relocation assistance and real property acquisition policies act code of federal regulations 49 and its state counterparts 3attorneys and appraisers fees the property owner incurs may also be recoverable by statute and in california and new york an award of such fees is at the court s discretion under certain conditions | |
when payment of just compensation is delayed the owner is entitled to receive interest on the amount of the late payment | a federal supreme court decision in the early 2000s and subsequent reactions to the decision have shaped the ability of governments to seize property under eminent domain for the sole reason of increasing tax revenue kelo v city of new london 545 u s 469 2005 affirmed the authority of new london conn to take non blighted private property by eminent domain and then transfer it for a dollar a year to a private developer solely for the purpose of increasing municipal revenues 4the decision spurred outcry about overly broad expropriation powers and prompted further action at both the state and federal levels the supreme courts of ill mich county of wayne v hathcock 2004 ohio norwood ohio v horney 2006 okla and s c subsequently ruled to disallow such takings under their state constitutions 56 there was also federal action despite relatively few expropriations being carried out by that level of government on the first anniversary of the kelo decision president george w bush issued an executive order stating that eminent domain may not be used by the federal government for the purpose of advancing the economic interest of private parties to be given ownership or use of the property taken 7 | |
what is extended trading | extended trading is conducted by electronic networks either before or after the regular trading hours of the listing exchange such as the new york stock exchange nyse the u s stock exchanges are open from 9 30 a m to 4 00 p m est 1pre market stock trading in the united states commonly runs between 4 00 a m and 9 30 a m est and after hours trading occurs from 4 00 p m to 8 00 p m est understanding extended tradingelectronic communication networks ecns have democratized extended hours for trading outside of regular exchange hours an ecn is a computerized system that automatically matches buy and sell orders for securities in the market extended trading lets investors act quickly on news and events when the exchange is closed and these transactions can predict the open market direction extended trades commonly occur around the beginning or end of regular trading hours the majority of extended trading happens between 8 00 a m and 9 30 a m est similarly investors may trade until 8 00 p m but most extended trading occurs before 6 30 p m 2most brokers require traders to enter limit orders during extended trading sessions some brokers only permit extended trading on reg nms securities over the counter securities many types of funds some options and other markets may not be allowed during extended trading hours 1brokerage firms commonly determine the rules that apply during extended trading rules governing the various markets and venues that conduct extended trading vary and may differ significantly from policies that apply during regular trading hours 1extended trading risksthe u s securities and exchange commission sec highlights several risks associated with extended trading including example of extended trading in the stock marketthe following chart shows the extended trading session for abc company on a typical day with no company announcements the stock closes for trading on the exchange at 4 00 p m before 4 00 p m the one minute chart is active with price movement every minute of the trading day there is also volume associated with each one of those one minute price bars after 4 00 p m the volume drops off some price bars appear as dots because there was a transaction at only one price level during that one minute there are gaps between the dots because the price may change even though transactions haven t taken place fewer bids and offers may entice or scare an investor into transacting at the new bid or offer the last transaction of the evening occurs at 7 55 p m in this example the first transaction is posted at 7 28 a m the following morning the price trades higher than the prior close price but is quickly adjusted as the price falls more than 0 75 in minutes the price oscillates on the low volume before the official exchange opening occurs and volume escalates | |
when can investors benefit from extended trading | the ability to trade during extended hours can allow investors and traders to react instantly to the news which comes out when the exchange is closed if a company reports poor earnings the stock will likely drop and the trader can exit their position sooner rather than wait for the exchange to open | |
where can investors trade during extended trading hours | extended trading may take place on alternative trading systems operated by broker dealers exchanges and other trading centers however all markets are not available for extended hours of trading 1 | |
what is an unlinked market and the risk during extended trading | extended hours trading systems are not linked and the price of a stock displayed on one trading system may not reflect the price of the same stock displayed on another trading system 1the bottom lineextended trading on the exchanges occurs on electronic marketplaces outside of the official trading hours stock exchanges in the u s trade from 9 30 a m to 4 00 p m est and extended trading occurs outside these hours risks for investors who trade during extended hours include price volatility and larger quote spreads most brokers require traders to enter limit orders during extended trading sessions | |
what is external debt | external debt is the portion of a country s debt that is borrowed from foreign lenders including commercial banks governments or international financial institutions these loans including interest must usually be paid in the currency in which the loan was made to earn the needed currency the borrowing country may sell and export goods to the lending country understanding external debtexternal debt or foreign debt as it is sometimes called factors in both principal and interest and does not include contingent liabilities which are debts that may be incurred at a later date based on the outcome of an uncertain future event it is defined by the international monetary fund imf as debt liabilities owed by a resident to a nonresident with residence being determined by where the creditors and debtors are ordinarily located rather than by their nationality in some cases external debt takes the form of a tied loan which means that the funds secured through the financing must be spent in the nation that is providing the financing for instance the loan might allow one nation to buy resources it needs from the country that provided the loan external debt can take the form of a tied loan obligating the borrower to spend the funds it s lent in the nation that s providing the financing external debt particularly tied loans might be set for specific purposes that are defined by the borrower and the lender such financial aid could be used to address humanitarian or disaster needs for example if a nation faces severe famine and cannot secure emergency food through its own resources it might use external debt to procure food from the nation providing the tied loan likewise if a country needs to build up its energy infrastructure it might leverage external debt as part of an agreement to buy resources such as the materials to construct power plants in underserved areas defaulting on external debta debt crisis can occur if a country with a weak economy is not able to repay the external debt due to an inability to produce and sell goods and make a profitable return the imf is one of the agencies that keeps track of countries external debt together with the world bank it publishes a quarterly report on external debt statistics the imf and the world bank produce an online database of external debt statistics for 55 countries that is updated every three months if a nation is unable or refuses to repay its external debt it is said to be in sovereign default this can lead to the lenders withholding future releases of assets that might be needed by the borrowing nation such instances can have a rolling effect the borrower s currency may collapse and the nation s overall economic growth will stall the conditions of default can make it challenging for a country to repay what it owes plus any penalties that the lender has brought against the delinquent nation defaults and bankruptcies in the case of countries are handled differently from defaults and bankruptcies in the consumer market it is possible that countries that default on external debt may potentially avoid having to repay it | |
what are external debt and internal debt | external debt is the portion of a country s debt that is borrowed from foreign lenders internal debt is the opposite referring to the portion of a country s debt incurred within its borders | |
what are the types of external debt | external debt is money borrowed by a government or corporation from a foreign source it can include | |
what are the effects of external debt | high levels of external debt can be risky especially for developing economies among other things it could increase the risk of default and being in another country s pocket ruin credit ratings leave little funds to invest and spur growth and expose the borrower to exchange rate risk the bottom linelike any form of debt borrowing money from foreign sources can be good or bad it may be a useful cost effective way to access much needed capital or trigger a vicious cycle of debt if it means procuring money for important investments at a cheaper rate than can be found domestically then it can ultimately be viewed as a good thing however the same cannot be said when struggling economies are effectively forced to borrow from other countries on ridiculous terms just to stay afloat | |
what are external economies of scale | in economics economies of scale dictate that the more units a business produces the less it costs to produce each unit external economies of scale describe the same phenomenon except as applied to an entire industry rather than within a single company for example if a city creates a better transportation network to service a particular industry then all companies in that industry will benefit from the new transportation network and experience decreased production costs as an industry grows larger or becomes clustered in one location as with say the banking and financial services in new york or london than the average costs of doing business within that industry over the long run become lower this is an example of external economies of scale with external economies of scale costs also may fall because of increased specialization better training of workers faster innovation or shared supplier relationships these factors are typically referred to as positive externalities industry level negative externalities are called external diseconomies the basics of external economies of scalebusinesses in the same industry tend to cluster in together for example a film studio might determine that california is a particularly good location for year round film making so it moves to hollywood new movie producers also move to hollywood because there are more camera operators actors costume designers and screenwriters in the area then more studios might decide to move to hollywood to take advantage of the specialized labor and infrastructure already in place thanks to the success of the first firm as more and more firms succeed in the same area new industry entrants can take advantage of even more localized benefits it makes sense for industries to concentrate in areas where they are already strong an agglomeration economy or synergy is when businesses in different industries are beneficial to each other and can share resources and opportunities agglomeration economyif two or more separate industries are incidentally beneficial to one another there can be external economies of scale across the entire group this phenomenon is sometimes called an agglomeration economy in which businesses are located close to one another and can share resources and efficiencies it is similar to the business governance concept of synergy scale economies that occur outside of a company but from which all companies in an industry benefit could include the following pros and cons of external economies of scaleexternal economies of scale have several advantages they include but external economies of scale are not without drawbacks disadvantages include real life example of external economies of scalefrom the late 1960s to the early 1990s the arguable epicenter of the u s high tech sector was a region just outside of boston it was known as route 128 named for the freeway that ringed the city and around which a cluster of technology companies grew including those in the burgeoning computer business a variety of factors enticed entrepreneurs there including proximity to corporations and educational institutions with their research centers and talent financial services and venture capital firms and military bases the more businesses that came the more external economies of scale developed making it easier for more ventures to find facilities skilled labor suppliers sub contractors and support services and to markets themselves staging conventions and conferences interestingly toward the end of the 20th century route 128 was eclipsed as the center of the high tech industry by silicon valley in the san francisco bay area where the external economies of the scale grew bigger and faster | |
what is the difference between external and internal economies of scale | internal and external economies of scale both refer to downward pressure on production costs the central difference between the two concepts is that internal economies of scale are specific to a single company whereas external economies of scale apply across an industry | |
what are economies of scale internationally | just as economies of scale can exist on a municpal state or national level they can also manifest on an international level consider the rise of air travel as more consumer choose to fly internationally demand spurs the creation of new routes and more flight options this may open up new revenue paths for airlines simulataneously increased competition among airlines to meet consumer demand may push down costs for certain itineraries as such both consumers and firms in multiple markets across the globe may benefit from economies of scale | |
how do you achieve external economies of scale | external economies of scale can be achieved a number of different ways technological advancements may drive down production costs for an entire industry as can government support in the form of infrastructure investments or tax subsidies the bottom lineexternal economies of scale refer to the phenomenon in which production costs fall for all firms in a certain sector this is different from economies of scale as the idea is commonly understood in which production costs decline for a single company external economies of scale can encourage widespread and egalitarian economic growth but they can also be geographically limited and dull competition among firms | |
what is an externality | an externality is a cost or benefit that is caused by one party but financially incurred or received by another externalities can be negative or positive a negative externality is the indirect imposition of a cost by one party onto another a positive externality on the other hand is when one party receives an indirect benefit as a result of actions taken by another externalities can stem from either the production or consumption of a good or service the costs and benefits can be both private to an individual or an organization or social meaning it can affect society as a whole investopedia madelyn goodnightunderstanding externalitiesexternalities occur in an economy when the production or consumption of a specific good or service impacts a third party that is not directly related to the production or consumption of that good or service almost all externalities are considered to be technical externalities technical externalities have an impact on the consumption and production opportunities of unrelated third parties but the price of consumption does not include the externalities this exclusion creates a gap between the gain or loss of private individuals and the aggregate gain or loss of society as a whole the action of an individual or organization often results in positive private gains but detracts from the overall economy many economists consider technical externalities to be market deficiencies and this is the reason people advocate for government intervention to curb negative externalities through taxation and regulation externalities were once the responsibility of local governments and those affected by them so for instance municipalities were responsible for paying for the effects of pollution from a factory in the area while the residents were responsible for their healthcare costs as a result of the pollution after the late 1990s governments enacted legislation imposing the cost of externalities on the producer many corporations pass the cost of externalities on to the consumer by making their goods and services more expensive types of externalitiesexternalities can be broken into two different categories first externalities can be measured as good or bad as the side effects may enhance or be detrimental to an external party these are referred to as positive or negative externalities second externalities can be defined by how they are created most often these are defined as a production or consumption externality most externalities are negative pollution is a well known negative externality a corporation may decide to cut costs and increase profits by implementing new operations that are more harmful to the environment the corporation realizes costs in the form of expanding operations but also generates returns that are higher than the costs however the externality also increases the aggregate cost to the economy and society making it a negative externality externalities are negative when the social costs outweigh the private costs some externalities are positive positive externalities occur when there is a positive gain on both the private level and social level research and development r d conducted by a company can be a positive externality r d increases the private profits of a company but also has the added benefit of increasing the general level of knowledge within a society similarly the emphasis on education is also a positive externality investment in education leads to a smarter and more intelligent workforce companies benefit from hiring employees who are educated because they are knowledgeable this benefits employers because a better educated workforce requires less investment in employee training and development costs a production externality is an instance where an industrial operation has a side effect this is often the type of externality used as example as it is easy to envision an environmental catastrophe caused by improperly stored chemicals by a chemical company because of how the company produced its goods or protected its waste an externality occurred externalities may also occur based on when or how a consumer base utilizes resources consider the example of how you get to work those who choose to drive are creating a pollution externality by driving their own car those who choose to take public transit or walk are not causing the same externality instead of a side effect occurring because something is being produced an externality is caused because of an item being consumed these four types of externalities above are often combined to define a single externality for example an externality may be a positive production negative production positive consumption or negative consumption externality externality solutionsthere are solutions that exist to overcome the negative effects of externalities these can include those from both the public and private sectors taxes are one solution to overcoming externalities to help reduce the negative effects of certain externalities such as pollution governments can impose a tax on the goods causing the externalities the tax called a pigovian tax named after economist arthur c pigou is considered to be equal to the value of the negative externality this tax is meant to discourage activities that impose a net cost to an unrelated third party that means that the imposition of this type of tax will reduce the market outcome of the externality to an amount that is considered efficient subsidies can also overcome negative externalities by encouraging the consumption of a positive externality one example would be to subsidize orchards that plant fruit trees to provide positive externalities to beekeepers this nudge has the potential to influence behavioral economics as additional incentives one way or another way dictate the choices that are made the subsidy is often placed on an opposing item to detract from a specific activity as well for example government incentives to upgrade to more energy efficient renovations subtly discourages consumers against options with more externalities governments can also implement regulations to offset the effects of externalities regulation is considered the most common solution the public often turns to governments to pass and enact legislation and regulation to curb the negative effects of externalities several examples include environmental regulations or health related legislation the primary issue with government regulation of externalities is the need for consistent and reliable information to track the externality is being managed or overcome consider regulation against pollution the government put forth resources to ensure that the legislation put in place is actually being followed including holding bad actors accountable for not properly addressing their externality real world examples of externalitiesmany countries around the world enact carbon credits that may be purchased to offset emissions these carbon credit prices are market based that may often fluctuate in cost depending on the demand of these credits to other market participants one program within the united states is the regional greenhouse gas initiative rggi the rggi is made up of 12 states california and 11 northeast states rggi is a mandatory cap and trade program that limits carbon dioxide emissions from the power sector 1different agencies are imposed a cap on externalities though they can trade resources to change what their cap is agencies that struggle managing their externality i e pollution may need to purchase additional credits to have their cap increased other agencies that conquer their externality may sell part of their cap space to recover capital likely used to overcome their externalities | |
how do externalities affect the economy | externalities may positively or negatively affect the economy although it is usually the latter externalities create situations where public policy or government intervention is needed to detract resources from one area to address the cost or exposure of another consider the example of an oil spill instead of those funds going to support innovation public programs or economic development resources may be inefficiently put towards fixing negative externalities | |
what is the most common type of externality | most externalities are negative as the production process often entails byproducts waste and other consequential outcomes that do not have further benefits this may be pollution garbage or negative implications for worker health many externalities are also related to the environment as the mechanical nature of manufacturing and product distribution has many detrimental impacts on the environment | |
how can you identify an externality | companies must be mindful of their entire production process when assessing production externalities this includes not only implications of the final product but residual impacts of byproducts disposal of items not used and how antiquated equipment is handled this also includes projecting outcomes of items yet to occur such as waste yet to be properly disposed of consumers can identify consumption externalities by being mindful of the inputs and outputs that go beyond what they are attempting to achieve consider an example of an individual consuming alcohol a consumer must be mindful that excessive drinking may lead to noise pollution an unsafe environment or adverse health effects | |
how do economists measure externalities | economists use two measures to evaluate an externality first economists use a cost of damages approach to evaluate what the expense would be to rectify the externality as we may be seeing with greenhouse gas emissions some externalities may extend beyond the point of repair another method of measuring externalities is the cost of control method instead of fixing the externality economists measure what preemptive and preventative steps can be taken to stop the externality from occurring similar to how an actuary assesses a financial value to an event economists may assign multiple financial measurements to an externality the bottom linean externality is a byproduct of a primary process this side effect may be good or bad and may be caused by a production process or consumption process many externalities relate to the environment due to the nature of company and individual actions though there are many ways governments companies and people can take responsibility to both prevent and rectify externalities | |
what are production externalities | production externality refers to a side effect from an industrial operation such as a paper mill producing waste that is dumped into a river production externalities are usually unintended and their impacts are typically unrelated to and unsolicited by anyone they can have economic social or environmental side effects production externalities can be measured in terms of the difference between the actual cost of production of the good and the real cost of this production to society at large the impact of production externalities can be positive or negative or a combination of both understanding production externalitiesthere are many examples of production externalities such as pollution and depletion of natural resources a logging company can pay for the cost of a tree that they remove but the cost of replacing an entire forest once it is gone is exponentially more than the sum of its lost trees freeway traffic jams and health problems that arise from breathing secondhand smoke are further examples of externalities in production a notable example of a large ecosystem of negative production externality is the flint water crisis in 2019 1the british economist a c pigou was the first to call out production externalities as a systemic phenomenon pigou argued that in the presence of externalities we do not achieve pareto optimality even under perfect competition if the externalities are present the resulting social benefit or cost becomes a combination of private and external benefits or costs examples of positive production externalitiesa positive production externality also called external benefit or external economy or beneficial externality is the positive effect an activity imposes on an unrelated third party similar to a negative externality going back to the example of the farmer who keeps the bees for their honey a side effect or externality associated with such activity is the pollination of surrounding crops by the bees the value generated by the pollination may be more important than the actual value of the harvested honey examples of negative production externalitiessimilarly a negative production externality is the negative effect an activity imposes on an unrelated third party | |
what is an extraordinary general meeting | an extraordinary general meeting egm is a company shareholder meeting that s not its scheduled annual general meeting agm an egm is also called a special general meeting or emergency general meeting understanding an extraordinary general meeting egm in most cases the only time shareholders and executives meet is during a company s annual general meeting which usually occurs at a fixed date and time however certain events may require shareholders to come together on short notice to deal with an urgent matter often concerning company management the extraordinary general meeting is used as a way to meet and deal with urgent matters that arise in between the annual shareholders meetings an egm might be called to deal with any of the following another difference between an annual general meeting and an extraordinary general meeting is that an annual general meeting can only be held during business hours and not on a national holiday while an egm can be carried out on any day including holidays also while a company s board can only call an agm an egm can also be called by the board on the requisition of shareholders requisitionist or tribunal an example of an extraordinary general meetingextraordinary general meetings occur for a variety of reasons but the meeting is usually called to discuss the potential removal of an executive in december 2017 the london stock exchange lse held an extraordinary general meeting regarding claims that its chair donald brydon pushed out former chief executive xavier rolet rolet stepped down early in november 2017 1although some egms occur outside of normal business hours the london stock exchange s egm took place on a non holiday tuesday the motion was sparked by activist investor the children s investment fund management tci which had gotten 20 9 votes in favor of removing brydon however the result of the egm was that brydon remain in his position 1the annual general meeting agm an annual general meeting agm is a mandatory yearly gathering of a company s interested shareholders at an agm the directors of the company present an annual report containing information for shareholders about the company s performance and strategy shareholders with voting rights vote on current issues such as appointments to the company s board of directors executive compensation dividend payments and the selection of auditors the exact rules governing an agm vary according to jurisdiction as outlined by many states in their laws of incorporation both public and private companies must hold agms though the rules tend to be more stringent for publicly traded companies public companies must file annual proxy statements known as form def 14a with the securities and exchange commission sec 2 the filing will specify the date time and location of the annual meeting as well as executive compensation and any material matters of the company concerning shareholder voting and nominated directors | |
what is an extraordinary item | extraordinary items consisted of gains or losses from events that were unusual and infrequent in nature that were separately classified presented and disclosed on companies financial statements extraordinary items were usually explained further in the notes to the financial statements companies showed an extraordinary item separately from their operating earnings because it was typically a one time gain or loss and was not expected to recur in the future in january 2015 the financial accounting standards board fasb which issues the accounting standards that u s companies must comply with eliminated the concept of extraordinary items however companies must still report nonrecurring items such as income received from the sale of land 1 understanding extraordinary itemthe accounting standards established and updated by fasb are called the generally accepted accounting principles gaap fasb discontinued the accounting treatment for extraordinary items and removed the reporting requirement from u s gaap in order to reduce the cost and complexity of preparing financial statements 1 before 2015 companies put a lot of effort into determining if a particular event should be deemed extraordinary gains and losses net of taxes from extraordinary items had to be shown separately on the income statement after income from continuing operations the update by fasb to remove extraordinary items only eliminated the need for companies and their auditors to identify whether an event was so rare as to qualify as an extraordinary item starting in fiscal year 2015 companies must still disclose infrequent and unusual events but now without designating them as extraordinary also companies are no longer required to evaluate the income tax effect of extraordinary items and present the effect on earnings per share eps which is a company s profit as a proportion of its outstanding equity shares 1 this accounting update left reporting and disclosure requirements for unusual and infrequent events or transactions intact while companies no longer must describe events and their effects as extraordinary they still have to disclose infrequent and unusual events on the income statement and their effect before income taxes also gaap allows companies to give these events more specific names such as effects from fire at production facility 1 the international financial reporting standards ifrs do not include extraordinary items in their accounting standards requirements for an extraordinary iteman event or transaction was deemed extraordinary if it was both unusual and infrequent an unusual event must be highly abnormal and unrelated to the typical operating activities of a company and it should be reasonably expected not to recur going forward it was common for some businesses to not have this line item presented for years 1 besides segregating the effect of extraordinary items on the income statement companies were required to estimate income taxes from these items and disclose their earnings per share eps impact examples of extraordinary items are losses from various catastrophic events such as earthquakes tsunamis and wildfires while designating and estimating the effect from certain extraordinary events e g fires was easy other events with an indirect effect on companies operations were much more difficult to assess 1 | |
what is extrinsic value | extrinsic value measures the difference between the market price of an option called the premium and its intrinsic value extrinsic value is also the portion of the worth that has been assigned to an option by factors other than the underlying asset s price the opposite of extrinsic value is intrinsic value which is the inherent worth of an option basics of extrinsic valueextrinsic value and intrinsic value comprise the cost or premium of an option intrinsic value is the difference between the underlying security s price and the option s strike price when the option is in the money for example if a call option has a strike price of 20 and the underlying stock is trading at 22 that option has 2 of intrinsic value the actual option may trade at 2 50 so the extra 0 50 is extrinsic value if a call option has value when the underlying security s price is trading below the strike price the option s premium only stems from extrinsic value conversely if a put option has value when the underlying security s price is trading above the strike price the option s premium is only comprised of its extrinsic value factors affecting extrinsic valueextrinsic value is also known as time value because the time left until the option contract expires is one of the primary factors affecting the option premium under normal circumstances a contract loses value as it approaches its expiration date because there is less time for the underlying security to move favorably for example an option with one month to expiration that is out of the money will have more extrinsic value than that of an out of the money option with one week to expiration another factor that affects extrinsic value is implied volatility implied volatility measures the amount an underlying asset may move over a specified period if the implied volatility increases the extrinsic value will increase for example if an investor purchases a call option with an annualized implied volatility of 20 and the implied volatility increases to 30 the following day the extrinsic value would increase extrinsic value exampleassume a trader buys a put option on xyz stock the stock is trading at 50 and the trader buys a put option with a strike price of 45 for 3 it expires in five months at the time of purchase that option has no intrinsic value because the stock price is above the strike price of the put option assuming implied volatility and the price of the stock stay the same as the expiration date approaches the option premium will move toward 0 if the stock falls below the put strike price of 45 then the option will have intrinsic value for example if the stock falls to 40 the option has 5 in intrinsic value if there is still time until the option expires that option may trade for 5 50 6 or more because there is still extrinsic value as well intrinsic value does not mean profit if the stock drops to 40 and the option expires the option is worth 5 because of its intrinsic value the trader paid 3 for the option so the profit is 2 per share not 5 | |
what is the 1913 federal reserve act | the 1913 federal reserve act is legislation in the united states that created the federal reserve system 1 congress passed the federal reserve act to establish economic stability in the u s by introducing a central bank to oversee monetary policy the federal reserve is the culmination of several periods of economic tumult in american history earlier in its history the united states formed centralized national banks much to the consternation of its more rural citizens the national banks were typically controlled by large eastern banking powers making them untrustworthy to those outside the area state chartered or free banks took over issuing their own currency backed by gold in 1863 the national banking act was passed allowing for nationally chartered banks again which offered a way of providing a standardized currency backed by united states securities but unstable financial markets in 1893 and 1907 resulted in market crashes and depressions alleviated only by private infusions from j p morgan banking reform became a priority to reassure the populace of the safety of their money in 1912 president woodrow wilson asked for a solution from the house committee on banking and finance a decentralized bank was the answer and was established in the 1913 federal reserve act 2understanding the 1913 federal reserve actthe law sets out the purpose structure and function of the federal reserve system congress can amend the federal reserve act and has done so several times 1before 1913 financial panics were common occurrences because investors were unsure of the safety of their bank deposits private financiers such as j p morgan who bailed out the government in 1895 often provided lines of credit to provide stability in the financial sector the 1913 federal reserve act signed into law by president woodrow wilson gave the fed the ability to print money and policy tools to ensure economic stability 34the federal reserve system created the dual mandate to maximize employment and keep prices stable 5the federal reserve act is perhaps one of the most influential laws concerning the u s financial system the fed systemthe 12 federal reserve banks each in charge of a regional district are in boston new york philadelphia cleveland richmond st louis atlanta chicago minneapolis kansas city dallas and san francisco 6the seven members of the board of governors are nominated by the president and approved by the u s senate each governor serves a maximum of 14 years and each governor s appointment is staggered by two years to limit the power of the president in addition the law dictates that appointments be representative of all broad sectors of the u s economy 7here is the current list of federal reserve board members as of august 29 2022 8910here is the current list of federal reserve bank presidents 6fed powersin addition to printing money the fed received the power to adjust the discount rate and the fed funds rate and to buy and sell u s treasuries 11 the federal funds rate the interest rate at which depository institutions lend funds maintained at the federal reserve to one another overnight has a major influence on the available credit and the interest rates in the united states and is a measure to ensure that the largest banking institutions do not find themselves short on liquidity through the monetary tools at its disposal the federal reserve attempts to smooth the booms and busts of the economic cycle and maintain adequate bases of money and credit for current production levels central banks across the globe use a tool known as quantitative easing to expand private credit lower interest rates and increase investment and commercial activity quantitative easing is mainly used to stimulate economies during recessions when credit is scarce such as during and following the 2008 financial crisis | |
what did the federal reserve act do | the federal reserve act created the federal reserve system after it was passed by congress in 1913 the fed was originally created to combat banking panics that were causing havoc on the u s banking system at the time 12 | |
does the federal reserve set interest rates | not directly the prime rate which is used by many lenders is based on the federal funds rate individual lenders use the prime rate as a base for how much to charge in interest but they typically add more as a way to make profit | |
how many federal reserve districts are there | there are 12 districts with alaska and hawaii included in district 12 13 | |
what are faang stocks | in finance faang is an acronym that refers to the stocks of five prominent american technology companies meta meta formerly known as facebook amazon amzn apple aapl netflix nflx and alphabet goog formerly known as google the term was popularized by jim cramer the television host of cnbc s mad money in 2013 who praised these companies for being totally dominant in their markets originally the term fang was used with apple the second a in the acronym added in 2017 understanding faang stocksin addition to being widely known among consumers the five faang stocks are among the largest companies in the world with a combined market capitalization of around 9 trillion as of q2 2024 12345their substantial growth has been buoyed recently by high profile purchases made by large and influential investors such as berkshire hathaway brk soros fund management and renaissance technologies these are just a few of the many large investors who have added faang stocks to their portfolios because of their perceived strength growth or momentum each of the faang stocks trades on the nasdaq exchange and is included in the s p 500 index since the s p 500 is a broad representation of the market the movement of the market mirrors the index s movement as of august 2021 the faangs make up about 19 of the s p 500 a staggering figure considering the s p 500 is generally viewed as a proxy for the united states economy as a whole this large influence over the index means that volatility in the stock price of the faang stocks can have a substantial effect on the performance of the s p 500 in general in august 2018 for example faang stocks were responsible for nearly 40 of the index s gain from the lows reached in february 2018 example of faang stocksthe extraordinary size and influence of the faang stocks have prompted concerns about a potential bubble in faang stocks these concerns started gaining prominence in 2018 when technology stocks which had been driving consistent gains in the stock market began losing their former strength in november 2018 several faang stocks lost more than 20 of their valuations and were declared to be in bear territory by some estimates faang stocks lost more than a trillion dollars from their peak valuations as a result of the steep drop in the markets in november 2018 6although their valuations have since recovered the level of volatility sometimes shown by faang stocks and the oversized influence these stocks can have on the market overall is a source of concern for some investors on the other hand those who believe in the fundamental strength of the faang stocks have abundant evidence for this claim for example facebook is the world s largest social network with approximately 2 9 billion users 7 in its 2023 annual report meta posted revenues of 36 5 billion and net income of 12 4 billion 8amazon meanwhile has become a seemingly insurmountable force in business to consumer b2c e commerce with over 120 million products for sale it has over 300 million active customers in the united states of whom more than half pay for monthly amazon prime memberships 910 with 2023 ttm revenues of 575 billion and a net income of 36 9 billion it is not hard to understand why investors believe amazon s vast market capitalization is justified 11overall it is through strong financial performance such as this that the faang stocks have prospered recently over the past five years for instance meta and amazon have seen stock price increases of 185 and 500 respectively for their part apple and alphabet saw price increases of about 175 over that same timeframe whereas netflix saw its value rise by nearly 450 12 | |
what makes faang stocks so popular | the five stocks that make up the faang acronym meta meta amazon amzn apple aapl netflix nflx and alphabet goog are all well known brands among consumers but they are also famous for their remarkable growth in recent years with market capitalizations ranging from 276 41 billion in the case of netflix to 3 trillion in the case of apple as of q1 2024 32 from an investment perspective these five stocks are generally praised for their stellar historical track records and clear leadership positions within their industries | |
are faang stocks overvalued | investors disagree about whether the faang stocks are overvalued their proponents will argue that their valuations are justified based on their fundamental strength as businesses but critics argue that even with impressive business performance the faang stocks prices have become so expensive that it may be difficult to realize attractive long term profits from investing in them ultimately this debate between investors is best captured by the buying and selling patterns in the faang stocks themselves | |
are faang stocks hard to acquire | no the faang stocks are all easy to acquire in the sense that they are publicly traded companies with substantial daily trading volumes they are also routinely included in popular exchange traded funds etfs however investors who believe that the faang stocks may be overvalued would argue that they are difficult to acquire at an economical price these investors may be tempted to delay purchasing faang stocks waiting for their valuations to decline who coined the term fang stocks while jim cramer certainly popularized the term he himself credits bob lang a real money and the street colleague of cramer s with identifying these four stocks and inventing the acronym 13 | |
is microsoft a faang stock | no microsoft is not a faang stock which is why there is no m in the acronym faang stocks were meant to describe hot new high growth tech companies of the 2010s by then microsoft was already a mature older company | |
what is face value | face value is a financial term used to describe a security s nominal or dollar value as given by its issuer for bonds it s the amount paid to the holder at maturity the face value of bonds is often called par value or simply par 1for stocks the face value is the stock s original cost as listed on the certificate in reality the par value of a stock is unimportant it can be set at a low arbitrary amount especially in countries like the u s many u s companies deliberately issue stocks with very low par values due to specific state regulations these rules tie the cost of incorporating a company to the par value of the registered shares by assigning low par values to their stocks companies can decrease their incorporation fees below we review what else you need to know about par or face value investopedia paige mclaughlinunderstanding face valuein bond investing face value par value is the amount paid to a bondholder at the maturity date as long as the bond issuer doesn t default however bonds sold on the secondary market fluctuate with interest rates for example if interest rates are higher than the bond s coupon rate then the bond is sold at a discount below par conversely if interest rates are lower than the bond s coupon rate the bond is sold at a premium above par while the face value of a bond provides a guaranteed return the face value of a stock is not an indicator of its actual worth 1face value and bondsa bond s face value is the amount the issuer provides to the bondholder once maturity is reached a bond may either have an additional interest rate or the profit may be based solely on the increase from a below par original issue price and the face value at maturity while bond par values are generally static a notable exception is inflation linked bonds whose par values are adjusted by inflation rates for preset periods face value and stock sharesthe sum face value of the entirety of a company s shares establishes the legal capital a corporation is obligated to maintain only the above and beyond capital may be released to investors through dividends in essence the funds that cover the face value function as a type of default reserve however there is no requirement dictating the face value businesses must list upon issue this gives companies the leeway to use very low values to determine the size of the reserve for example the par value of at t inc t shares is listed as 1 per common share while shares of apple inc aapl have a par value of 0 00001 23face value vs market valuethe face value of a stock or bond does not equal its actual market value market value is determined based on principles of supply and demand which are governed by the dollar figure where investors are willing to buy and sell the security at a given time depending on market conditions the face value and market value may have very little correlation in the bond market interest rates compared with the bond s coupon rate may determine if a bond sells above or below par zero coupon bonds or those where investors receive no interest aside from that associated with purchasing the bond below face value are generally only sold below par because that s the only feasible way an investor can receive a profit |
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