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what is a feed in tariff fit | a feed in tariff is a policy tool that provides renewable energy producers with an above market price for what they deliver to the grid these policies are usually designed to promote investment in renewable energy sources understanding feed in tariffs fits feed in tariffs are used to promote renewable energy sources in the early stages of their development when production is often not economically feasible feed in tariffs usually involve long term agreements and prices tied to the cost of production of the energy in question the long term contracts and guaranteed prices shelter producers from some of the risks inherent in renewable energy production encouraging investment and development that otherwise might not take place feed in tariffs and small energy producersanyone who produces renewable energy is eligible for a feed in tariff but those who take advantage of it are often not commercial energy producers they can include homeowners business owners farmers and private investors generally fits have three provisions one of the first feed in tariffs was implemented in the u s by the carter administration in 1978 but they are now used around the world history of feed in tariffsthe u s was a pioneer in feed in tariffs its first was implemented by the carter administration in 1978 in response to the energy crisis of the 1970s which famously created long lines at gas pumps known as the national energy act the fit was meant to promote energy conservation along with the development of renewable energy such as solar and wind power the growth in use of fitssince then fits have become widely used internationally japan germany and china have all used them successfully over the past decade or so and in total dozens of countries have used them to one degree or another to drive the development of renewable energy it is estimated that about three fourths of global solar energy is linked to feed in tariffs a shift away from fitsdespite the successful role feed in tariffs have played in promoting the development of renewable energy some countries are turning away from relying on them instead seeking more market driven sources of support as well as more control over the supply of renewable energy that is produced that includes germany and china two of the more prominent fit success stories nonetheless fits still play a vital role in the development of renewable energy resources around the globe | |
which states have a feed in tariff | as of 2024 three states have a feed in tariff according to the database of state incentives for renewables and efficiency those states are california new york and indiana in addition many other states have tax credits or other incentives to encourage small scale renewable energy production | |
how does a feed in tariff work | a feed in tariff provides a guaranteed long term price for renewable energy that is at or above current market rates this guaranteed price reduces the risk and uncertainty associated with new renewable energy installations thereby encouraging new producers to make initial investments | |
how do you qualify for solar energy credits | the irs offers a 30 credit on new clean energy facilities installed on residential homes between 2022 and 2032 after 2032 the credit falls to 26 this can apply to solar panels solar water heaters wind turbines fuel cells and certain other clean energy technologies and they must be installed in a residence where you live rather than an investment property to claim the credit file form 5695 with your annual taxes you may also qualify for state renewable energy credits the bottom linea feed in tariff is a policy measure intended to incentivize installation and adoption of solar or other clean energy sources it does this by guaranteeing a high price for renewable energy on the grid thereby allowing producers to reduce the risk of new installations | |
what is a feeder fund | a feeder fund is one of several sub funds that put all of their investment capital into an overarching umbrella fund known as a master fund for which a single investment advisor handles all portfolio investments and trading this two tiered investment structure of a feeder fund and a master fund is commonly used by hedge funds as a means of assembling a larger portfolio account by pooling investment capital profits from the master fund are then split or distributed proportionately to the feeder funds based on the percentage of investment capital they have contributed to the master fund understanding feeder fundsin a feeder fund arrangement all management fees and any performance fees due are paid by investors at the feeder fund level the primary purpose served by the feeder fund master fund structure is the reduction of trading costs and overall operating costs the master fund effectively achieves economies of scale through having access to the large pool of investment capital provided by a number of feeder funds which enables it to operate less expensively than would be possible for any of the feeder funds investing on their own the use of this two tiered fund structure can be very advantageous when the feeder funds share common investment goals and strategies but are not appropriate for a feeder fund with a unique investment strategy or aim since those unique characteristics would be lost in the combination with other funds within a master fund structure of feeder funds and master fundsthe feeder funds that invest capital in a master fund operate as separate legal entities from the master fund and may be invested in more than one master fund various feeder funds invested in a master fund often differ substantially from one another in terms of things such as expense fees or investment minimums and do not usually have identical net asset values nav in the same way that a feeder fund is free to invest in more than one master fund a master fund is likewise free to accept investments from a number of feeder funds in regard to feeder funds operating in the united states it is common for the master fund to be established as an offshore entity this frees up the master fund to accept investment capital from both tax exempt and u s taxable investors if however an offshore master fund elects to be taxed as a partnership or limited liability company llc for u s tax purposes then onshore feeder funds receive pass through treatment of their share of the master fund s gains or losses thus avoiding double taxation new rules on international feeder fundsin march 2017 the securities and exchange commission sec ruled to allow foreign regulated companies foreign feeder funds to invest in open end master funds u s master fund making it easier for global managers to market their investment products in different foreign jurisdictions employing a master fund the letter modified parts 12 d 1 a and b of the 1940 act which previously limited the use of foreign feeder funds into u s registered funds the sec regulated the practice for several reasons first it wanted to prevent master funds from exerting too much influence over an acquired fund it also aimed to protect investors in the funds from layered fees and the possibility of fund structures becoming so complex that they became difficult to understand | |
what is an fha 203 k loan | an fha 203 k loan is a type of government insured mortgage that allows the borrower to take out one loan for two purposes home purchase and home renovation an fha 203 k loan is wrapped around rehabilitation or repairs to a home that will become the mortgagor s primary residence an fha 203 k is effectively an fha construction loan understanding fha 203 k loansthe fha 203 k loan is meant to encourage families in low to moderate income brackets to purchase homes that are in dire need of repairs especially homes that are situated in old communities the program allows an individual to buy a home and renovate it under one fixed rate or adjustable rate mortgage the amount that is borrowed includes the purchase price of the home and the cost of renovation including materials and hired labor 1the loan may also cover temporary housing if needed which could be in the form of rent for the period that the house is under rehabilitation the dual purpose loan eliminates the need for a borrower to make two separate applications for a mortgage and a loan for home renovation either of which may not be approved by the bank or may come at a higher combined cost normally lenders are unwilling to offer a mortgage for a property in need of major repairs due to their safety and livability standards but fha 203 k loans which are backed by the government provide reassurance to lending institutions because the cost of renovating the home is included in the mortgage package the renovation fees are placed in an escrow account and disbursed as payment to the contractors as the work is completed 1 complete renovation of the home should not take more than six months as outlined by the fha guide for a 203 k loan 2types of 203 k loansthere are two types of 203 k loans limited 203 k and standard 203 k 3 the loans apply only to individuals and families who intend on making the property their primary residence this means that real estate investors and house flippers do not qualify the work carried out must be contracted to a licensed handyman if the mortgagor qualifies as one they may act as their own general contractor and do the repair work themselves using the money saved for cost overruns or additional improvements they cannot however be reimbursed for their labor 2a home that does not require much work would usually be paid for using a limited 203 k loan this option does not include structural work on the home such as adding new rooms or landscaping and the home must be habitable throughout the renovation period repairs under the limited 203 k are capped at 35 000 3the standard 203 k includes any extensive repairs and structural work that need to be done in the home with no capped repair cost the minimum amount that can be borrowed is 5 000 but the total value of the property must still fall within the fha mortgage limit for the area 1some of the repairs that an fha 203 k loan covers include plumbing flooring painting heat and air conditioning systems bathroom and kitchen remodeling improvement of health and safety standards landscape improvements implementing access tools for disabled persons the addition of energy conservation systems and window and door replacements 1 renovations that are considered extravagant or luxurious such as tennis courts gazebos and new swimming pools are not covered under an fha 203 k loan 2 | |
how do lenders use an fha 203 k loan | the federal housing administration fha was created in 1934 during the great depression which saw a high rate of foreclosures and defaults 4 the fha served to incentivize banks to give home loans to low and medium income earners individuals with low credit scores and first time homebuyers with no credit history this helped to stimulate the economy because people who would normally not be approved for a loan were issued mortgages the fha loan was created to insure these types of mortgages so that if a borrower defaults the fha will step in to cover the payments minimizing the lender s risk high income earners generally prefer to buy in newer and more developed areas of a city the fha introduced the 203 k loan specifically to encourage low income earners who do not qualify for a standard mortgage to choose to live in neglected neighborhoods and upgrade them 1getting an fha 203 k loanit is important to note that the fha is not a lender rather it is a mortgage insurer you get an fha 203 k loan by applying through your bank credit union or another lender not all lenders offer these loans to find an approved lender see hud s approved lender directory 5the fha is also not a home insurer or warranty provider homebuyers still need to purchase home insurance and warranties for their home and property pros and cons of fha 203 k loansas with other fha loans an individual can make a down payment of only 3 5 on a 203 k loan 6 because the loan is insured by the fha lenders may offer lower interest rates for a 203 k loan compared to what borrowers may be quoted elsewhere interest rates will vary for each borrower depending on their credit history however the fha 203 k loan is not without its costs an upfront mortgage insurance premium has to be paid every month by the borrower 7 a supplemental origination fee may also be charged by the lending institution in addition to the financial costs to the borrower the rigorous paperwork required and the lengthy time it takes to hear back from the fha and lender are factors to consider when applying for this program overall an individual with a low credit score seeking to own a home that may need to be fixed and modernized may decide that the fha 203 k has great benefits that outweigh its costs fha 203 k vs construction loansthough an fha 203 k loan is a type of fha construction loan it s possible to get construction loans outside of the fha program a construction loan is typically a short term loan that provides funding to cover the cost of building or rehabbing a home 8construction loans may have higher interest rates than conventional mortgage loans the money may be paid out in installments as construction gets underway and continues rather than as a lump sum the balance due on a construction loan may be paid in a lump sum at the end of the loan term alternatively homeowners may choose to convert a construction loan to a conventional mortgage 8if your lender doesn t allow for automatic conversion of a construction loan to a conventional mortgage you may need to apply for a brand new loan to avoid having to make one large balloon payment fha 203 k loan qualificationsif you re interested in an fha 203 k loan it s important to understand what you ll need to qualify the first step is finding an eligible lender if you haven t done so already 1 next you ll need to ensure that your purpose for getting the loan meets fha 203 k guidelines again these types of loans can cover if the property satisfies those guidelines you can move forward with the application process the qualification requirements for an fha 203 k loan are similar to the requirements for a regular fha loan in terms of credit score income down payment and loan limits that means you ll need a credit score of at least 580 to purchase a home with a down payment of 3 5 9 the typical score needed to get a standard mortgage is 620 though some lenders require a score as high as 740 it s possible to qualify for an fha 203 k loan with a credit score as low as 500 though that will require you to increase your down payment to 10 9 | |
how does an fha 203 k loan work and what are the types | an fha 203 k loan is for home purchase and home renovation there are two types limited and standard the amount borrowed accounts for both the purchase price of the home and its renovation costs which include materials and labor it is intended to help rehabilitate poorer communities and aid lower income people | |
does the fha make the loan | no the fha insures the loan you must get the loan through a financial institution such as a bank or credit union can you use a 203 k loan for all improvements no anything considered extravagant or luxurious such as a tennis court gazebo or a new swimming pool is not allowed however most repairs and upgrades do qualify including rehabbing an existing swimming pool the bottom linefha 203 k loans are government backed mortgages that work as construction loans to finance both the purchase of a property and the cost of renovating it including materials and labor the fha is not a lender but a mortgage insurer to get an fha 203 k loan borrowers need to apply through a bank credit union or another lender not all lenders offer this type of loan fha 203 k loans are an excellent solution for borrowers with a low credit score seeking to own a home in need of repairs varying from minimal to extensive work a low down payment and low interest rates fixed or adjustable also make this option attractive however borrowers need to consider the drawbacks when applying for this program like an upfront mortgage insurance premium to be paid every month a supplemental origination fee the extensive paperwork required and the lengthy time it takes to get approved | |
what is fiat money | fiat money is a government issued currency that s not backed by a physical commodity such as gold or silver it s backed by the government that issues it the value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government rather than the worth of a commodity backing it most modern paper currencies are fiat currencies including the u s dollar the euro and other major global currencies investopedia ryan oakleyunderstanding fiat moneythe term fiat is a latin word that s often translated as it shall be or let it be done fiat currencies only have value because the government maintains that value there s no utility to fiat money in itself governments would mint coins out of a valuable physical commodity such as gold or silver before fiat currency came about they might have printed paper money that could be redeemed for a set amount of a physical commodity fiat is inconvertible however it can t be redeemed because there s no underlying commodity backing it fiat money isn t linked to physical reserves such as a national stockpile of gold or silver so it risks losing value due to inflation it might even become worthless in the event of hyperinflation the rate of inflation can double in a single day in some of the worst cases of hyperinflation such as in hungary immediately after wwii 1the money will no longer hold value if people lose faith in a nation s currency unlike a currency backed by gold this type of currency has intrinsic value because of the demand for gold in jewelry and decoration as well as in the manufacturing of electronic devices computers and aerospace vehicles history of fiat money in the u s the u s dollar is considered to be both fiat money and legal tender it s accepted for private and public debts legal tender is any currency that a government declares to be legal many governments issue a fiat currency and then make it legal tender by setting it as the standard for debt repayment the country s currency was backed by gold and in some cases silver earlier in u s history the federal government stopped allowing citizens to exchange currency for government gold with the passage of the emergency banking act of 1933 the gold standard backed u s currency with federal gold but it ended completely in 1971 when the u s also stopped issuing gold to foreign governments in exchange for u s currency 23u s dollars have been backed by the full faith and credit of the u s government since that time they re legal tender for all debts public and private but not redeemable in lawful money at the united states treasury or at any federal reserve bank as the printing on u s dollar bills used to claim u s dollars are legal tender rather than lawful money in this sense which can be exchanged for gold silver or any other commodity 4advantages and disadvantages of fiat moneygives central banks greater control over the economy | |
is cost efficient to produce | provides governments with flexibility | |
isn t a foolproof way to protect the economy | creates an opportunity for a bubbleprovides risk of inflationfiat currencies gained prominence in the 20th century in part because governments and central banks sought to insulate their economies from the worst effects of the natural booms and busts of the business cycle fiat money isn t a scarce or fixed resource like gold so central banks have much greater control over its supply this gives them the power to manage economic variables such as credit supply liquidity interest rates and money velocity the u s federal reserve has the dual mandate to keep unemployment and inflation low and using fiat money can help it meet those goals 5fiat money serves as a good currency if it can handle the roles that a nation s economy requires of its monetary unit storing value providing a numerical account and facilitating exchange it also has excellent seigniorage it s more cost efficient to produce than a currency that s directly tied to a commodity the mortgage crisis of 2007 and subsequent financial meltdown tempered the belief that central banks could necessarily prevent depressions or serious recessions by regulating the money supply a currency tied to gold is generally more stable than fiat money because of the limited supply of gold there are also more opportunities for the creation of bubbles with fiat money because of its unlimited supply examples of fiat moneythe u s dollar the euro the british pound the japanese yen the albanian lek and the indian rupee are all examples of fiat money it s a currency that s backed by an issuing government so fiat money usually provides some economic stability but not always the african nation of zimbabwe provided an example of the worst case scenario in the early 2000s the country s central bank began to print money at a staggering pace in response to serious economic problems resulting in hyperinflation experts suggest that the currency lost 99 9 of its value during this time prices rose rapidly and consumers carried bags full of money just to purchase basic staples the government of zimbabwe was forced to issue a 100 trillion zimbabwean dollar note at the height of the crisis foreign currencies were eventually used more widely than the zimbabwean dollar 6 | |
why is fiat money valuable | fiat money is backed entirely by the full faith and trust in the government that issued it in contrast to commodity based money such as gold coins or paper bills redeemable for precious metals this has merit because governments demand that you pay taxes in the fiat money it issues everybody must pay taxes or face stiff penalties or prison so people will accept it in exchange this is known as chartalism other theories of money such as the credit theory suggest that all money has a credit debt relation so it doesn t matter if money is backed by anything to maintain value | |
why do modern economies favor fiat money | most countries used some sort of gold standard or backing by a commodity before the 20th century the limited amount of gold coming out of mines and in central bank vaults couldn t keep up with the value that was being created however as international trade and finance grew in scale and scope this caused serious disruptions to global markets and commerce fiat money gives governments greater flexibility to manage their currency set monetary policy and stabilize global markets it also allows for fractional reserve banking which lets commercial banks multiply the amount of money on hand to meet demand from borrowers | |
what are some alternatives to fiat money | virtually every country has legal tender that s fiat money you can buy and sell gold and gold coins but these are rarely used in exchange or for everyday purchases they tend to be more of a collectible or speculative asset cryptocurrencies such as bitcoin have emerged as a challenge to the inflationary nature of fiat currencies these virtual assets don t seem to approach being money in the traditional sense however despite increased interest and adoption | |
does fiat money lead to hyperinflation | there s always the possibility of hyperinflation when a country prints its own currency but most developed countries have experienced only moderate bouts of inflation a low level of inflation is seen as a positive driver of economic growth and investment because it encourages people to put their money to work rather than have it sit idle and lose purchasing power over time having a relatively strong and stable currency isn t only a mandate of most modern central banks a rapidly devalued currency is harmful to trade and in obtaining financing it s unclear whether hyperinflation is caused by the runaway printing of money it s occurred throughout history even when money was based on precious metals all contemporary hyperinflation has begun with a fundamental breakdown in the real production economy and or political instability in the country the bottom linefiat money derives its value from supply and demand not from an underlying physical commodity governments use fiat money to create economic stability and help protect against the booms and busts that are natural parts of the business cycle the overproduction of fiat money risks inflation or even hyperinflation by increasing supply beyond demand however | |
what are fibonacci extensions | fibonacci extensions are a tool that traders can use to establish profit targets or estimate how far a price may travel after a pullback is finished extension levels are also possible areas where the price may reverse drawn as connections to points on a chart these levels are based on fibonacci ratios as percentages common fibonacci extension levels are 61 8 100 161 8 200 and 261 8 1creating fibonacci extensionsfibonacci ratios are common in everyday life and nature seen in galaxy formations architecture shells hurricanes and some plants therefore some traders believe these common ratios may also have significance in the financial markets 2fibonacci extensions don t have a formula when the indicator is applied to a chart the trader chooses three points the first point chosen is the start of a move the second point is the end of a move and the third point is the end of the retracement against that move the extensions then help project where the price could go next once the three points are chosen the lines are drawn at percentages of that move extensions are drawn on a chart marking price levels of possible importance these levels are based on fibonacci ratios as percentages and the size of the price move the indicator is being applied to investopedia sabrina jiang | |
how to calculate fibonacci retracement levels | you can calculate fibonacci retracement levels by completing the following steps for example if the price moves from 10 to 20 back to 15 10 could be point one 20 point two and 15 point three the fibonacci levels will then be projected out above 15 providing levels to the upside of where the price could go next if instead the price drops the indicator would need to be redrawn to accommodate the lower price at point three if the price rises from 10 to 20 and these two price levels are points one and two used on the indicator then the 61 8 level will be 6 18 0 618 x 10 above the price chosen for point three in this case point three is 15 so the 61 8 extension level is 21 18 15 6 18 the 100 level is 10 above point three for an extension level of 25 1 0 x 10 15 the ratios themselves are based on something called the golden mean or ratio 3 to learn about this ratio start a sequence of numbers with zero and one and then add the prior two numbers to end up with a number string like this the fibonacci extension levels are derived from this number string excluding the first few numbers as the sequence gets going if you divide one number by the prior number you get a ratio approaching 1 618 such as dividing 233 by 144 divide a number by two places to the left and the ratio approaches 2 618 divide a number by three to the left and the ratio is 4 236 the key fibonacci extension levels include 23 6 38 2 50 61 8 and 78 6 45 also common are 100 161 8 200 and 261 8 5 the 100 and 200 levels are not official fibonacci numbers but they are useful since they project a similar move or a multiple of that move to what just happened on the price chart | |
what do fibonacci extensions tell you | fibonacci extensions are a way to establish price targets or find projected areas of support or resistance when the price is moving into an area where other methods of finding support or resistance are not applicable or evident if the price moves through one extension level it may continue moving toward the next that said fibonacci extensions are areas of possible interest the price may not stop or reverse right at the level but the area around it may be important for example the price may move just past the 1 618 level or pull up just shy of it before changing directions if a trader is long on a stock and a new high occurs the trader can use the fibonacci extension levels for an idea of where the stock may go the same is true for a trader who is short fibonacci extension levels can be calculated to give the trader ideas on profit target placement the trader then has the option to decide whether to cover the position at that level fibonacci extensions can be used for any timeframe or in any market typically clusters of fibonacci levels indicate a price area that will be significant for the stock and also for traders in their decision making since extension levels can be drawn on different price waves over time when multiple levels from these different waves converge at one price that could be a very important area the difference between fibonacci extensions and fibonacci retracementswhile extensions show where the price will go following a retracement fibonacci retracement levels indicate how deep a retracement could be in other words fibonacci retracements measure the pullbacks within a trend while fibonacci extensions measure the impulse waves in the direction of the trend limitations of using fibonacci extensionsfibonacci extensions are not meant to be the sole determinant of whether to buy or sell a stock investors should use extensions along with other indicators or patterns when looking to determine one or multiple price targets candlestick patterns and price action are especially informative when trying to determine whether a stock is likely to reverse at the target price there is no assurance price will reach or reverse at a given extension level even if it does it is not evident before a trade is taken which fibonacci extension level will be important the price could move through many of the levels with ease or not reach any of them | |
what is the fibonacci sequence | the fibonacci sequence was developed by the italian mathematician leonardo fibonacci in the 13th century the sequence of numbers starting with zero and one is a steadily increasing series where each number is equal to the sum of the preceding two numbers some traders believe that the fibonacci numbers and ratios created by the sequence play an important role in finance that traders can apply using technical analysis understanding the fibonacci sequencethe numbers in the fibonacci sequence don t equate to a specific formula however the numbers tend to have certain relationships with each other each number is equal to the sum of the preceding two numbers for example 0 1 1 2 3 5 8 13 21 34 55 89 144 233 377 xn xn 1 xn 2 | |
where | xn is term number n xn 1 is the previous term n 1 xn 2 is the term before that n 2 the golden ratio of 1 618 important to mathematicians scientists and naturalists for centuries is derived from the fibonacci sequence the quotient between each successive pair of fibonacci numbers in the sequence approximates 1 618 or its inverse 0 618 the golden ratio is derived by dividing each number of the fibonacci series by its immediate predecessor where f n is the nth fibonacci number the quotient f n f n 1 will approach the limit 1 618 known as the golden ratio many things in nature have dimensional properties that adhere to the ratio of 1 618 like the honeybee if you divide the female bees by the male bees in any given hive you will get a number near 1 618 the golden ratio also appears in the arts and rectangles whose dimensions are based on the golden ratio appear at the parthenon in athens and the great pyramid in giza 1 | |
how to use the fibonacci sequence | the fibonacci sequence can be applied to finance by using four techniques including retracements arcs fans and time zones fibonacci retracements require two price points chosen on a chart usually a swing high and a swing low once two points are chosen the fibonacci numbers and lines are drawn at percentages of that move if a stock rises from 15 to 20 then the 23 6 level is 18 82 or 20 5 x 0 236 18 82 the 50 level is 17 50 or 15 5 x 0 5 17 50 image by sabrina jiang investopedia 2021fibonacci retracements are the most common form of technical analysis based on the fibonacci sequence during a trend fibonacci retracements can be used to determine how deep a pullback may be traders tend to watch the fibonacci ratios between 23 6 and 78 6 during these times if the price stalls near one of the fibonacci levels and then start to move back in the trending direction an investor may trade in the trending direction arcs fans and time zones are similar concepts but are applied to charts in different ways each one shows potential areas of support or resistance based on fibonacci numbers applied to prior price moves these supportive or resistance levels can be used to forecast where prices may fall or rise in the future | |
what is the fibonacci spiral | the limits of the squares of successive fibonacci numbers create a spiral known as the fibonacci spiral it follows turns by a constant angle close to the golden ratio and is commonly called the golden spiral the numbers of spirals in pinecones are fibonacci numbers as is the number of petals in each layer of certain flowers in spiral shaped plants each leaf grows at an angle compared to its predecessor and sunflower seeds are packed in a spiral formation in the center of their flower in a geometry governed by the golden ratio 2 | |
where is the fibonacci sequence evident | in almost all flowering plants the number of petals on the flower is a fibonacci number it is extremely rare for the number of petals not to be so and examples of this phenomenon include corn marigold cineraria and daisies with 13 petals and asters and chicory with 21 petals 3 | |
how can the fibonacci sequence affect trading behavior | humans tend to identify patterns and traders easily equate patterns in charts through the fibonacci sequence it s unproven that fibonacci numbers relate to fundamental market forces however markets by design react to the beliefs of their players consequently if investors buy or sell because of fibonacci analysis they tend to create a self fulfilling prophecy that affects the market trends 2the bottom linethe fibonacci sequence is a set of steadily increasing numbers where each number is equal to the sum of the preceding two numbers many things in nature have dimensional properties that adhere to the golden ratio of 1 618 a quotient derived from the fibonacci sequence when applied to finance and trading investors apply the fibonacci sequence through four techniques including retracements arcs fans and time zones | |
what are fibonacci retracement levels | fibonacci retracement levels stemming from the fibonacci sequence are horizontal lines that indicate where support and resistance are likely to occur each level is associated with a percentage the percentage is how much of a prior move the price has retraced the fibonacci retracement levels are 23 6 38 2 61 8 and 78 6 while not officially a fibonacci ratio 50 is also used the indicator is useful because it can be drawn between any two significant price points such as a high and a low the indicator will then create the levels between those two points suppose the price of a stock rises 10 and then drops 2 36 in that case it has retraced 23 6 which is a fibonacci number fibonacci numbers are found throughout nature therefore many traders believe that these numbers also have relevance in financial markets fibonacci retracement levels were named after italian mathematician leonardo pisano bigollo who was famously known as leonardo fibonacci however fibonacci did not create the fibonacci sequence instead fibonacci introduced these numbers to western europe after learning about them from indian merchants some scholars suggest fibonacci retracement levels were formulated in ancient india between 700 bce and 100 ad while others estimate between 480 410 bce numbers first formulated in ancient indiadespite its name the fibonacci sequence was not developed by its namesake instead centuries before leonardo fibonacci shared it with western europe it was developed and used by indian mathematicians most notably indian mathematician acarya virahanka is known to have developed fibonacci numbers and the method of their sequencing around 600 800 a d following virahanka s discovery other subsequent generations of indian mathematicians gopala hemacandra and narayana pandita referenced the numbers and method pandita expanded its use by drawing a correlation between the fibonacci numbers and multinomial co efficients it is estimated that fibonacci numbers existed in indian society as early as 100 b c to 350 ad the formula for fibonacci retracement levelsfibonacci retracement levels do not have formulas when these indicators are applied to a chart the user chooses two points once those two points are chosen the lines are drawn at percentages of that move suppose the price rises from 10 to 15 and these two price levels are the points used to draw the retracement indicator then the 23 6 level will be at 13 82 15 5 0 236 13 82 the 50 level will be at 12 50 15 5 0 5 12 50 image by sabrina jiang investopedia 2021 | |
how to calculate fibonacci retracement levels | as discussed above fibonacci retracement levels do not require calculation they are simply percentages of whatever price range is chosen however the origin of the fibonacci numbers is fascinating they are based on something called the golden ratio start a sequence of numbers with zero and one then keep adding the prior two numbers to get a number string like this the fibonacci retracement levels are all derived from this number string after the sequence gets going dividing one number by the next number yields 0 618 or 61 8 divide a number by the second number to its right the result is 0 382 or 38 2 all the ratios except for 50 since it is not an official fibonacci number are based on some mathematical calculation involving this number string the golden ratio known as the divine proportion can be found in various spaces from geometry to human dna interestingly the golden ratio of 0 618 or 1 618 is found in sunflowers galaxy formations shells historical artifacts and architecture | |
what do fibonacci retracement levels tell you | fibonacci retracements can be used to place entry orders determine stop loss levels or set price targets for example a trader may see a stock moving higher after a move up it retraces to the 61 8 level then it starts to go up again since the bounce occurred at a fibonacci level during an uptrend the trader decides to buy the trader might set a stop loss at the 61 8 level as a return below that level could indicate that the rally has failed fibonacci levels also arise in other ways within technical analysis for example they are prevalent in gartley patterns and elliott wave theory after a significant price movement up or down these forms of technical analysis find that reversals tend to occur close to certain fibonacci levels market trends are more accurately identified when other analysis tools are used with the fibonacci approach fibonacci retracement levels are static unlike moving averages the static nature of the price levels allows for quick and easy identification that helps traders and investors to anticipate and react prudently when the price levels are tested these levels are inflection points where some type of price action is expected either a reversal or a break fibonacci retracements vs fibonacci extensionswhile fibonacci retracements apply percentages to a pullback fibonacci extensions apply percentages to a move in the trending direction for example a stock goes from 5 to 10 then back to 7 50 the move from 10 to 7 50 is a retracement if the price starts rallying again and goes to 16 that is an extension limitations of using fibonacci retracement levelswhile the retracement levels indicate where the price might find support or resistance there are no assurances that the price will actually stop there this is why other confirmation signals are often used such as the price starting to bounce off the level the other argument against fibonacci retracement levels is that there are so many of them that the price is likely to reverse near one of them quite often the problem is that traders struggle to know which one will be useful at any particular time when it doesn t work out it can always be claimed that the trader should have been looking at another fibonacci retracement level instead | |
why are fibonacci retracements important | in technical analysis fibonacci retracement levels indicate key areas where a stock may reverse or stall common ratios include 23 6 38 2 and 50 among others usually these will occur between a high point and a low point for a security designed to predict the future direction of its price movement | |
what are the fibonacci ratios | the fibonacci ratios are derived from the fibonacci sequence 0 1 1 2 3 5 8 13 21 34 55 89 144 233 and so on here each number is equal to the sum of the two preceding numbers fibonacci ratios are informed by mathematical relationships found in this formula as a result they produce the following ratios 23 6 38 2 50 61 8 78 6 100 161 8 261 8 and 423 6 although 50 is not a pure fibonacci ratio it is still used as a support and resistance indicator | |
how do you apply fibonacci retracement levels in a chart | as one of the most common technical trading strategies a trader could use a fibonacci retracement level to indicate where they would enter a trade for instance a trader notices that after significant momentum a stock has declined 38 2 as the stock begins to face an upward trend they decide to enter the trade because the stock reached a fibonacci level it is deemed a good time to buy with the trader speculating that the stock will then retrace or recover its recent losses | |
how do you draw a fibonacci retracement | fibonacci retracements are trend lines drawn between two significant points usually between absolute lows and absolute highs plotted on a chart intersecting horizontal lines are placed at the fibonacci levels the bottom linefibonacci retracements are useful tools that help traders identify support and resistance levels with the information gathered traders can place orders identify stop loss levels and set price targets although fibonacci retracements are useful traders often use other indicators to make more accurate assessments of trends and make better trading decisions | |
what is a fico score | a fico score is a credit score created by the fair isaac corporation fico lenders use borrowers fico scores along with other details on borrowers credit reports to assess credit risk and determine whether to extend credit fico scores take into account data in five areas to determine a borrower s credit worthiness payment history the current level of indebtedness types of credit used length of credit history and new credit accounts | |
how fico scores work | fico is a major analytics software company that provides products and services to both businesses and consumers the company is best known for producing the most widely used consumer credit scores that financial institutions use in deciding whether to lend money or issue credit fico scores are used in many credit decisions made in the u s although borrowers can explain negative items in their credit report many lenders will deny loans to people with low fico scores many lenders maintain strict fico minimums for approval particularly in the mortgage industry one point below this threshold can result in a denial fico score rangesthe overall fico score range is between 300 and 850 in general scores in the 670 to 739 range indicate a good credit history and most lenders will consider this score favorable in contrast borrowers in the 580 to 669 range may find it difficult to get financing at attractive rates to determine creditworthiness lenders take a borrower s fico score into account but they also consider other details such as income how long the borrower has been at their job and the type of credit requested | |
how to improve your fico score | achieving a high fico score requires having a mix of credit accounts and maintaining an excellent payment history staying well below your credit limits also helps your score the ideal credit utilization ratio is below 30 maxing out credit cards paying late and applying for new credit frequently are all things that lower fico scores you can check your credit regularly to ensure your credit report is free of errors by law you are entitled to one free credit report each year from major credit bureaus calculating fico scoresto determine credit scores the fico weighs each category differently for each individual however in general payment history is 35 of the score accounts owed is 30 length of credit history is 15 new credit is 10 and credit mix is 10 payment history refers to whether an individual pays their credit accounts on time credit reports show the payments submitted for each line of credit and the reports detail bankruptcy or collection items along with any late or missed payments accounts owed refers to the amount of money an individual owes having a lot of debt does not necessarily equate to low credit scores rather fico considers the ratio of money owed to the amount of credit available to illustrate an individual who owes 10 000 but has all of their lines of credit fully extended and all of their credit cards maxed out may have a lower credit score than an individual who owes 100 000 but is not close to the limit on any of their accounts as a general rule of thumb the longer an individual has had credit the better their score however with favorable scores in the other categories even someone with a short credit history can have a good score fico scores take into account how long the oldest account has been open the age of the newest account and the overall average credit mix is the variety of accounts to obtain high credit scores individuals need a strong mix of retail accounts credit cards installment loans such as signature loans or vehicle loans and mortgages new credit refers to recently opened accounts if a borrower has opened a bunch of new accounts in a short period of time that indicates risk and lowers their score fico score vs vantagescorethe main alternative to the fico score is vantagescore a credit scoring method jointly developed by the three main credit bureaus in 2006 like fico scores the vantagescore rates an individual s creditworthiness on a scale of 300 to 850 based on factors like payment history credit mix and credit utilization however the vantagescore attaches different weights to those factors so your vantagescore may be slightly different from your fico score they also have different scoring criteria fico requires at least one tradeline older than six months in order to calculate a score and at least one tradeline with activity over the last six months in contrast vantagescore requires only one tradeline with no age requirement fico versionsvarious versions of fico exist because the company has periodically updated its calculation methods since introducing its first scoring methodology in 1989 each new version is made available to lenders but it is up to them to determine if and when to implement the upgrade the most widely used version is still fico score 8 even though it has been followed by fico score 9 and fico score 10 suite fico score 9 was introduced in 2016 with adjustments to the treatment of medical collection accounts increased sensitivity to rental history and a more forgiving approach to fully paid third party collections it did not surpass fico score 8 in popularity however the incorporation of trended credit bureau data in fico score 10t part of fico score 10 suite announced on jan 23 2020 might cause it to supplant fico score 8 in the future fico score 5 is one alternative to fico score 8 that is still prevalent in auto lending credit cards and mortgages according to fico score 8 is consistent with previous versions but there are several specific features that make it a more predictive score than prior versions like all prior fico score systems fico score 8 attempts to convey how responsibly a borrower manages debt scores tend to be higher for those who pay their bills on time keep low credit card balances and only open new accounts for targeted purchases conversely lower scores are attributed to those who are frequently delinquent or who use a significant amount of their credit scores do not include collection accounts in which the original balance is less than 100 the change with fico score 8 included increased sensitivity to highly utilized credit cards meaning that low credit card balances on active cards can more positively influence a borrower s score it also treats isolated late payments more judiciously than past versions fico score 8 is more forgiving if a late payment is an isolated event and other accounts are in good standing and it divides consumers into more categories to provide a better statistical representation of risk the primary purpose of this change was to keep borrowers with little to no credit history from being graded on the same curve as those with longer credit histories | |
what is a good fico score | a fico score above 670 is better than average while scores above 740 indicate that the borrower is extremely responsible with credit a fico score above 800 is considered exceptional | |
which fico score do mortgage lenders use | according to experian the most commonly used fico scores in mortgage lending decisions are the fico score 2 fico score 5 or fico score 4 however the credit score is only part of a mortgage application and lenders will also consider factors like the borrower s income assets and payment history | |
how often does the fico score update | every lender has its own schedule for reporting payment information to the credit bureaus your credit score can change roughly once a month but it may change more often depending on how many different loans you have active the bottom linethe fico score is one of the leading tools for measuring the creditworthiness of a borrower most lenders in the u s use fico scores when making a decision on mortgage applications while a low score can be discouraging you can improve your fico score by borrowing responsibly and making payments on time | |
what is a fidelity bond | a fidelity bond is a form of business insurance that offers an employer protection against losses that are caused by its employees fraudulent or dishonest actions also known as an honesty bond this form of insurance can protect against monetary or physical losses in australia a fidelity bond is called employee dishonesty insurance and in the united kingdom it s called fidelity guarantee insurance understanding fidelity bondsif a company has employees who commit fraudulent acts the company itself may be exposed to legal or financial penalty in addition to the individual employee or employees who committed the act as a result companies are at risk of being exposed to such penalties especially firms with a large number of employees fidelity bonds cover firms for such damages although they are called bonds fidelity bonds are actually a form of insurance policy they are typically designated as either first party or third party a fidelity bond should not be confused with a regular bond it is an insurance policy that is neither tradable nor can accrue interest fidelity bonds are most often held by insurance companies banks and brokerage firms which are specifically required to carry protection proportional to their net capital when employed by a bank the bond is called a banker s blanket bond bbb and provides security against an employee s criminal acts among the possible forms of loss that a fidelity bond covers include fraudulent trading theft and forgery 2 | |
why fidelity bonds are used | fidelity bonds can be considered part of a business s approach to enterprise risk management these insurance policies function as a sort of protection should the company suffer losses caused by fraudulent or criminal employee actions taken against the company or its clientele this can include cash thefts from the business as well as if the employee steals from a customer of the company acts of forgery by an employee that affect the business may also be covered by this type of policy robbery and burglary of the company safe destruction of company property and the illicit transfer of funds are covered by fidelity bonds too 3types of fidelity bondsfidelity bonds are broken down into various types each covering specific things the most common forms of fidelity bond are another type of fidelity bond is used by certain states such as alaska michigan and texas to encourage employers to provide job opportunities to applicants who have backgrounds that make them high risk potentially untrustworthy workers with these fidelity bonds the employer would be reimbursed should the employee behave dishonestly 567 | |
how does a fidelity bond work | fidelity bonds are insurance products that offer employers protection against losses caused by employees fraudulent or dishonest actions should an event covered by the policy transpire the company would file a claim and get reimbursed according to what it agreed to with the insurer | |
what are examples of fidelity bonds | the most common type of fidelity bond is the so called business services bond which is designed to protect against losses when an employee is on a customer s premises for example if a window repair worker is sent to a home that was damaged by a storm and steals jewelry from the residence the company may have exposure concerning their employee s actions likewise if a dog sitter were to use their access to a client s home to steal money or if a home health provider took clothes or a laptop from a client then a fidelity bond tailored for such circumstances could provide the company with the coverage it needs | |
what are two main types of fidelity bonds | two popular types of fidelity bonds are business services bonds which are specifically designed to protect clients when employees enter their home or place of business and employee dishonesty bonds which protect companies from financial loss should an employee or group of employees engage in fraudulent activities another common type of fidelity bond is the erisa employee retirement income security act bond which protects retirement plan beneficiaries should trustees steal from them the bottom linefidelity bonds are something that many businesses need either out of choice or because their state or municipality demands it sadly not everybody is honest and it s often worth paying the premium for peace of mind and to reassure customers | |
fiduciaries are persons or organizations that act on behalf of others and are required to put the clients interests ahead of their own with a duty to preserve good faith and trust fiduciaries are thus legally and ethically bound to act in the other s best interests | a fiduciary may be responsible for the general well being of another e g a child s legal guardian but the task usually involves finances for example managing the assets of another person or a group of people money managers financial advisors bankers insurance agents accountants executors board members and corporate officers all have fiduciary responsibilities joules garcia investopediaunderstanding fiduciariesa fiduciary s responsibilities and duties are ethical and legal when a party knowingly accepts a fiduciary duty on behalf of another they are required to act in the best interest of the principal i e the client or party whose assets they are managing this is what is known as a prudent person standard of care which stems from an 1830 court ruling harvard college vs armory and is found in many state laws via the american law institute s uniform prudent investor act from 1994 12the prudent person rule requires a fiduciary to act first and foremost with the needs of beneficiaries in mind strict care must be taken to ensure that no conflict of interest arises between the fiduciary and the principal in many cases no profit is to be made from the relationship unless explicit consent is granted when the relationship begins for example in the united kingdom fiduciaries cannot profit from their position according to an english high court ruling keech vs sandford 1726 3 if the principal provides consent then the fiduciary can keep whatever benefit they have received these benefits can be either monetary or defined more broadly as an opportunity want more advice for saving money toward your financial goals order a copy of investopedia s what to do with 10 000 fiduciary duties appear in a wide variety of common business relationships including the following fiduciary negligence is a form of professional malpractice when a person fails to honor their fiduciary obligations and responsibilities fiduciary relationship between trustee and beneficiaryestate arrangements and trusts involve both a trustee and a beneficiary an individual named as a trust or estate trustee is the fiduciary and the beneficiary is the principal under a trustee beneficiary duty the fiduciary has legal ownership of the property or assets and holds the power necessary to handle assets held in the name of the trust in estate law the trustee may also be known as the estate s executor trustees must make decisions that are in the best interest of the beneficiary as the latter holds equitable title to the property the trustee beneficiary relationship is an important aspect of estate planning and special care should be taken to determine who is to be the trustee 4politicians often set up blind trusts to avoid real or perceived conflict of interest scandals a blind trust is a relationship in which a trustee is in charge of all investments of a beneficiary s assets without the beneficiary knowing how the assets are being invested even though the beneficiary has no knowledge the trustee has a fiduciary duty to invest according to the prudent person standard of conduct 56fiduciary relationship between board members and shareholdersa similar fiduciary duty can be held by corporate directors as they can be considered trustees for stockholders if on the board of a corporation or trustees of depositors if they serve as the director of a bank 7 specific duties include the following duty of care applies to how the board makes decisions that affect the future of the business the board has the duty to thoroughly investigate all possible decisions and how they might affect the business 8 if the board is voting to elect a new chief executive officer for example the decision should not be based solely on the board s knowledge or opinion of one possible candidate it is the board s responsibility to investigate all viable applicants to ensure that the best person for the job is chosen even after the board reasonably investigates all the options before it it has the responsibility to choose the option it believes best serves the interests of the business and its shareholders 9duty of loyaltyduty of loyalty means the board is required to put no other cause interest or affiliation above its allegiance to the company and the company s investors board members must refrain from personal or professional dealings that might put their own self interest or that of another person or business above the interests of the company 10if a member of a board of directors is found to be in breach of their fiduciary duty they can be held liable in a court of law by the company or its shareholders 11contrary to popular belief there is no legal mandate that a corporation is required to maximize shareholder returns more examples of fiduciariesfiduciary responsibilities can also apply to specific or one time transactions for example a fiduciary deed is used to transfer property rights in a sale when a fiduciary must act as an executor of the sale on behalf of the property owner a fiduciary deed is useful when a property owner wishes to sell but can t handle their affairs due to illness incompetence or other circumstances and needs someone to do so for them a fiduciary is required by law to disclose to the potential buyer the true condition of the property being sold and they cannot receive any financial benefits from the sale a fiduciary deed is also useful when the property owner has died and their property is part of an estate that needs oversight or management under a guardian ward relationship the legal guardianship of a minor is transferred to an appointed adult as the fiduciary the guardian is tasked with ensuring the minor child or ward has appropriate care which can include deciding where the minor attends school that the minor has suitable medical care that they are disciplined in a reasonable manner and that their daily welfare remains intact a guardian is appointed by the state court when the natural guardian of a minor child can t care for the child in most states a guardian ward relationship remains intact until the minor child reaches the age of majority the attorney client fiduciary relationship is one of the most stringent and well known the u s supreme court states that the highest level of trust and confidence must exist between an attorney and a client and that an attorney as a fiduciary must act with complete fairness loyalty and fidelity when dealing with and representing their clients attorneys are held liable for breaches of their fiduciary duties to the client and are accountable to the court where that client is represented when a breach occurs 11a more generic example of fiduciary duty lies in the principal agent relationship any person corporation partnership or government agency can act as a principal or agent as long as the person or business has the legal capacity to do so under a principal agent duty an agent is legally appointed to act on behalf of the principal without conflict of interest a common example of a principal agent relationship with a fiduciary duty is a group of shareholders acting as principals and electing management to act as agents similarly investors act as principals when selecting investment fund managers as agents to manage assets an investment fiduciary need not be a financial professional money manager banker and so on but is any person with the legal responsibility for managing somebody else s money that means you have a fiduciary responsibility if you volunteered to sit on the investment committee of the board of your local charity or other organization you have been placed in a position of trust and there may be consequences for betraying that trust also hiring a financial or investment expert does not relieve the committee members of all their duties they still have an obligation to prudently choose and monitor the activities of the expert regulation best interest and the suitability rulebroker dealers were once allowed to adhere to a less stringent suitability standard but are now subject to a heightened standard of conduct when recommending investments to retail customers in 2019 the sec adopted regulation best interest bi which requires broker dealers to act in the best interest of the retail customer at the time a recommendation is made this goes beyond the previous suitability standard which required that recommendations be suitable given the customer s financial situation 12under regulation bi broker dealers must disclose material conflicts of interest exercise reasonable diligence care and skill when making a recommendation and establish policies and procedures to mitigate conflicts of interest they are prohibited from putting their financial interests ahead of the customer s interests this establishes a best interest standard like the fiduciary duty investment advisors owe their clients broker dealers can still be compensated through commissions however regulation bi requires them to consider cost and other factors in the recommendation process not just suitability recommendations importantly cannot place the broker dealer s interests ahead of the client s 13regulation bi raises the standard of conduct for broker dealers when recommendations are made to retail investors while not a fiduciary duty it goes beyond the old suitability standard to require broker dealers to act in their customers best interest investment advisors who are usually paid through fees are bound to a fiduciary standard that was established in the investment advisers act of 1940 the act defines what a fiduciary means and stipulates a duty of loyalty and care which means that the advisor must put the client s interests above their own 13regulation bi and the fiduciary standard are two codes of conduct that apply to financial professionals providing investment advice to clients regulation bi mostly applies to broker dealers compensated by commission while the fiduciary standard applies to investment advisors paid a fee for their services the main difference between the two standards is the level of duty and loyalty the financial professional owes to the client regulation bi requires broker dealers to act in the client s best interest at the time of the recommendation without placing their own interest ahead of the client s interest however this does not mean that broker dealers must eliminate all conflicts of interest or always recommend the lowest cost or best performing product broker dealers can still receive commissions incentives or other benefits from their recommendations as long as they disclose them to the client and mitigate any material conflicts of interest regulation bi also does not impose a continuous duty of care or loyalty to the client meaning that broker dealers are not required to monitor the client s account or update their recommendations 13the fiduciary standard meanwhile requires investment advisors to act with the highest level of duty and loyalty to the client putting the client s interest above their own at all times this means that investment advisors have to avoid or eliminate any conflicts of interest that could compromise their objectivity or impartiality and they cannot receive any compensation or benefit that is contrary to the client s best interest investment advisors must also review and update their recommendations based on the client s changing needs and circumstances here are the main points clients should be aware of the differences between the two standards and the potential conflicts arising from the financial professional s compensation structure clients should also read the form crs relationship summary that the financial professional is required to provide which summarizes the nature and scope of the relationship the services offered the fees and costs the conflicts of interest the standard of conduct and the disciplinary history of the financial professional and their firm 15the short lived fiduciary rulewhile suitability was the standard for transactional accounts or brokerage accounts the u s department of labor fiduciary rule proposed to toughen things up for brokers anyone with retirement money under management who made recommendations or solicitations for an individual retirement account or other tax advantaged retirement accounts would be considered a fiduciary required to adhere to that standard rather than to the suitability standard that was otherwise in effect 16the fiduciary rule had a long and yet unclear implementation originally proposed in 2010 it was scheduled to go into effect between april 10 2017 and jan 1 2018 after then president donald trump took office its effective date was postponed to june 9 2017 including a transition period for certain exemptions extending through jan 1 2018 17later the implementation of all elements of the rule was pushed back to july 1 2019 before that could happen the rule was vacated following a june 2018 decision by the fifth u s circuit court 18 in june 2020 a new proposal proposal 3 0 was released by the department of labor which reinstated the investment advice fiduciary definition in effect since 1975 accompanied by new interpretations that extended its reach in the rollover setting and proposed a new exemption for conflicted investment advice and principal transactions 19after taking office in 2021 the biden administration didn t revive the defunct fiduciary rule while president biden has expressed support for holding wall street to higher standards of accountability his administration has not pursued new rulemaking on reinstating the fiduciary rule more recently the department of labor under president biden proposed a new fiduciary rule aimed at strengthening standards for retirement plan advice however this would be the fourth attempt to do so since the obama administration and there will likely be legal challenges like those of the previous efforts 20risks of being a fiduciarythe possibility of a trustee agent not optimally performing in the beneficiary s best interests is called fiduciary risk this does not necessarily mean that the trustee is using the beneficiary s resources for their own benefit this could be the risk that the trustee is not achieving the best value for the beneficiary for example a fund manager agent making more trades than necessary for a client s portfolio is a fiduciary risk because the fund manager is slowly eroding the client s gains by incurring higher transaction costs than needed in contrast when an individual or entity legally appointed to manage another party s assets uses their power in an unethical or illegal fashion to benefit financially or to serve their self interest in some other way this is called fiduciary abuse or fiduciary fraud fiduciary insurancea business can insure the fiduciaries of a qualified retirement plan such as the company s directors officers employees and other natural person trustees fiduciary liability insurance is meant to fill in the gaps in traditional coverage offered through employee benefits liability or director s and officer s policies it provides financial protection when liability litigation arises due to purported mismanagement of funds or investments administrative errors or delays in transfers or distributions a change or reduction in benefits or erroneous advice surrounding investment allocations investment fiduciary guidelinesresponding to the need for better guidance for investment fiduciaries the nonprofit foundation for fiduciary studies was established to define the following prudent investment practices 21the process begins with fiduciaries educating themselves on the laws and rules that will apply to their situations once fiduciaries identify their governing rules they then need to define the roles and responsibilities of all parties involved in the process if investment service providers are used then any service agreements should be in writing the investment process starts by creating the investment program s goals and objectives fiduciaries should identify the investment horizon an acceptable level of risk and expected return by identifying these factors fiduciaries create a framework for evaluating investment options fiduciaries then need to select the appropriate asset classes that will enable them to create a diversified portfolio through some justifiable method most fiduciaries go about this by employing modern portfolio theory because it s one of the most accepted methods for creating investment portfolios that target a desired risk return profile finally the fiduciary should formalize these steps by creating an investment policy statement that provides the necessary details for implementing a specific investment strategy now the fiduciary is ready to proceed with the implementation of the investment program as identified in the first two steps specific investments or investment managers can now be selected to fulfill the investment policy statement a due diligence process must be designed to evaluate potential investments the due diligence process should identify criteria and filter potential investment options the implementation phase is usually performed with the assistance of an investment advisor because many fiduciaries lack the skill or resources to perform this step when an advisor assists in the implementation phase fiduciaries and advisors must communicate to ensure that an agreed upon due diligence process is used while selecting investments or managers a u s department of the treasury agency the office of the comptroller of the currency regulates federal savings associations and their fiduciary activities in the u s fiduciary duties can at times conflict with one another a problem that often occurs with real estate agents and lawyers two opposing interests can at best be balanced however balancing interests is not the same as serving a client s best interest the final step can be the most time consuming and the most neglected part of the process fiduciaries should not neglect continuous monitoring since they could be equally liable for negligence here as elsewhere in these steps to properly monitor the investment process fiduciaries must periodically review reports that benchmark their investments performance against the appropriate index and peer group and determine whether the investment policy statement objectives are being met simply monitoring performance statistics is not enough fiduciaries must also monitor qualitative data such as changes in the organizational structure of investment managers used in the portfolio if the investment decision makers in an organization have left or if their level of authority has changed then investors must consider how this information may impact future performance in addition to performance reviews fiduciaries must review the expenses involved fiduciaries are responsible not only for how funds are invested but also for how funds are spent investment fees directly impact performance and fiduciaries must ensure that fees paid for investment management are fair and reasonable | |
what are the three fiduciary duties owed to shareholders | since corporate directors can be considered fiduciaries for shareholders they possess the following three fiduciary duties 7 | |
how can fiduciary duties influence investment strategies | fiduciary responsibilities can significantly shape investment strategies especially with the growing emphasis on ethical investing including environmental social and governance esg criteria fiduciaries such as financial advisors and fund managers must act in the best interests of their clients or beneficiaries this duty extends to considering long term risks and opportunities which increasingly involve ethical considerations for instance a fiduciary might assess a company s sustainability practices or the social impact of an investment to determine its alignment with a client s values or its potential for long term performance this approach not only seeks to align investments with ethical values but also to mitigate risks and identify prospects that could affect financial returns fulfilling their obligation to act in their clients best interests | |
why does someone need a fiduciary | working with a fiduciary means that you can be assured that a financial professional will always be putting your interests first and not their own this means that you don t have to worry about conflicts of interest misplaced incentives or aggressive sales tactics the bottom linea fiduciary is a person or other entity in a position of control and influence over another person s property or finances the concept of fiduciaries can be found in a wide array of legal contexts in the united states and throughout the world fiduciary relationships are most often found when individuals are entrusted with carrying out a particular act for another such as a trustee handling assets on behalf of a trust beneficiary the term fiduciary is widely used in the context of financial advising and brokerage relationships when the client s best interests must be put first because of the significance of these fiduciary relationships new legal challenges often arise concerning properly carrying out one s fiduciary responsibilities | |
what is filing status | filing status is a category that defines the type of tax return form a taxpayer must use when filing their taxes filing status is closely tied to marital status understanding filing statusthe filing status is important because an individual s tax bracket and therefore the amount they must pay is determined by marital status the number of children occupation and several other factors you must file your status honestly or it will be considered fraudulent and penalties will be assessed for federal income tax purposes a taxpayer falls into one of five categories single married filing jointly married filing separately head of household and qualifying widow er with dependent children 12a single filer is a taxpayer that is unmarried divorced a registered domestic partner or legally separated according to state law as of the last day of the tax year 3 the head of a household or a person who is widowed may not fall under the single category for tax purposes 4 single filers have lower income limits for most exemptions 5an individual that is married by the end of the tax year can file tax returns jointly with their spouse when filing under married filing jointly status couples can record their respective incomes exemptions and deductions on the same tax return 4 a joint tax return often provides a bigger tax refund or a lower tax liability 51married filing jointly is best if only one spouse has a significant income if both spouses work and the income and itemized deductions are large and very unequal it may be more advantageous to file separately a head of household is a single or unmarried taxpayer who pays at least 50 of the costs of supporting their household and lives with other qualifying family members for whom they provide support for more than half of the year this means that the taxpayer must have paid more than half of the total household bills including rent or mortgage utility bills insurance property taxes groceries repairs and other common household expenses some examples of qualifying family members include a dependent child grandchild sibling grandparent or anyone else you can claim as an exemption 4a head of household benefits from a lower tax rate 61during the year in which a spouse dies the surviving spouse can typically use the joint filing status for the two tax years following the year of a spouse s death the surviving spouse can file as a qualifying surviving spouse while the surviving spouse cannot continue to claim an exemption for the deceased spouse they may claim the standard deduction for a married couple filing jointly 4the tax bracket and income range for a surviving spouse is the same as that for married filing jointly 4 | |
what is fill or kill fok | fill or kill fok is a conditional type of time in force order used in securities trading that instructs a brokerage to execute a transaction immediately and completely or not at all this type of order is most often used by active traders and is usually for a large quantity of stock the order must be filled in its entirety or else canceled killed 1a fok is essentially an all or none aon and immediate or cancel order ioc combined understanding fill or killthe purpose of a fill or kill fok order is to ensure that an entire position is executed at prevailing prices in a timely manner without a fill or kill designation it might take a prolonged period of time to complete a large order because such orders are typically placed for large quantities prolonged execution of the order has the potential to cause significant changes to a stock s price and causing market disruption on some exchanges an fok should be executed within a few seconds of it being shown to the trading community in this context the market or limit order fok is treated similarly to an all or none order with the exception that it is immediately canceled if not completely filled on other exchanges an fok is executed by filling the order with the number of shares that the first bid or offer makes available then any unfilled balance of shares would be canceled in this context the fok is a way for a buyer or seller to fill what is possible then cancel the rest in reality however the fill or kill type of trade does not occur very often other methods of instructing a brokerage on the time frame in which a trade is to be executed include immediate or cancel ioc which means to fill all or part of the order immediately then cancel any part that cannot be filled and good til canceled gtc which keeps an order open until it is able to be filled at a specified price fill or kill exampleassume an investor wants to purchase 1 million shares of stock xyz at 15 per share if the investor wants to buy 1 million shares fairly immediately and no fewer at 15 or better an fok order should be placed assume the order is placed if a broker has more than a million shares in its inventory and would only like to sell 700 000 shares at the 15 price the order would be killed if the broker is willing to sell 1 million shares but only a price of 15 01 the order would be killed on the other hand if the broker is willing to sell the full 1 million shares at 15 the order would be filled instantly also if the broker is willing to sell the full 1 million shares at a better price say 14 99 the order would also be filled | |
what is finance | finance is a term that addresses matters regarding the management creation and study of money and investments it involves the use of credit and debt securities and investment to finance current projects using future income flows finance is closely linked to the time value of money interest rates and other related topics because of this temporal aspect finance can be broadly divided into three categories other specific categories include behavioral finance which seeks to identify the cognitive emotional social and psychological reasons behind financial decisions mira norian investopediaunderstanding financefinance is typically broken down into three broad categories public finance corporate finance and personal finance public finance includes tax systems government expenditures budget procedures stabilization policies and instruments debt issues and other government concerns corporate finance involves managing assets liabilities revenues and debts for businesses personal finance defines all financial decisions and activities of an individual or household including budgeting insurance mortgage planning savings and retirement planning key finance termsasset an asset is something of value such as cash real estate or property a business may have current assets or fixed assets balance sheet a balance sheet is a document that shows a company s assets and liabilities subtract the liabilities from the assets to find the firm s net worth cash flow cash flow is the movement of money into and out of a business or household compound interest compound interest is calculated and added periodically unlike simple interest which is interest added to the principal one time this results in interest being charged not only on the principal but also on the interest that s already accrued equity equity means ownership stocks are called equities because each share represents a portion of ownership in the underlying corporation or entity liability a liability is a financial obligation such as debt liabilities can be current or long term liquidity liquidity refers to how easily an asset can be converted to cash real estate isn t a very liquid investment because it can take weeks months or even longer to sell profit profit is the money that s left over after expenses a profit and loss statement shows how much a business has earned or lost for a particular period history of financefinance arose as a study of theory and practice distinct from the field of economics in the 1940s and 1950s it began with the works of harry markowitz william f sharpe fischer black and myron scholes 123 particular realms of finance such as banking lending and investing have been around in some form since the dawn of civilization the financial transactions of the early sumerians were formalized in the babylonian code of hammurabi around 1800 bce this set of rules regulated ownership or rental of land employment of agricultural labor and credit 4 yes there were loans back then and yes interest was charged on them rates varied depending on whether you were borrowing grain or silver cowrie shells were used as a form of money in china by 1200 bce coined money was introduced in the first millennium bce king croesus of lydia which is now turkey was one of the first to strike and circulate gold coins around 564 bce hence the expression rich as croesus 5coins were stored in the basement of temples in ancient rome because priests and temple workers were considered to be the most honest and devout to safeguard assets temples also loaned money acting as financial centers of major cities 6belgium claims to be home to the first exchange with one in antwerp dating back to 1531 7 east india co became the first publicly traded company in the 1600s as it issued stock and paid dividends on proceeds from its voyages 8 the london stock exchange was created in 1773 and was followed by the new york stock exchange less than 20 years later the london exchange had been around since the 1570s as the royal exchange 910the earliest recorded bond dates back to 2400 bce it was a stone tablet that recorded debt obligations that guaranteed repayment of grain 11 governments began issuing debts to fund war efforts during the middle ages the bank of england was created to finance the british navy in the 1600s 12 the united states began issuing treasury bonds to support the revolutionary war nearly a century later 13the early practice of options is outlined through an anecdote by the philosopher thales in aristotle s 4th century philosophical work politics thales preemptively acquired the rights to all olive presses in chios and miletus believing that a great harvest of olives was on the horizon in the coming year both forward and options contracts were integrated into amsterdam s sophisticated clearing process by the mid 17th century 14compound interest is interest that s calculated not just on principal but on previously accrued interest it was known to ancient civilizations the babylonians had a phrase for interest on interest which basically defines the concept but it wasn t until medieval times that mathematicians started to analyze to show how invested sums could mount up one of the earliest and most important sources is the arithmetical manuscript written by leonardo fibonacci of pisa known as liber abaci in 1201 it gives examples comparing compound and simple interest luca pacioli s summa de arithmetica geometria proportioni et proportionalita was the first comprehensive treatise on bookkeeping and accountancy it was published in venice in 1494 15a book on accountancy and arithmetic written by william colson appeared in 1612 containing the earliest tables of compound interest written in english richard witt published his arithmeticall questions in london a year later in 1613 and compound interest was thoroughly accepted interest calculations were combined with age dependent survival rates to create the first life annuities in england and the netherlands toward the end of the 17th century types of financethe federal government helps prevent market failure by overseeing the allocation of resources distribution of income and stabilization of the economy regular funding for these programs is secured mostly through taxation 16 borrowing from banks insurance companies and other governments and earning dividends from its companies also helps finance the federal government state and local governments receive grants and aid from the federal government other sources of public finance include businesses obtain financing through a variety of means from equity investments to credit arrangements a firm might take out a loan from a bank or arrange for a line of credit acquiring and managing debt properly can help a company expand and become more profitable startups may receive capital from angel investors or venture capitalists in exchange for a percentage of ownership a company will issue shares on a stock exchange if it thrives and goes public such initial public offerings ipos bring a great influx of cash into a firm established companies may sell additional shares or issue corporate bonds to raise money businesses might also purchase dividend paying stocks blue chip bonds or interest bearing bank certificates of deposit cds they may buy other companies in an effort to boost revenue some examples of corporate financing include personal financial planning generally involves analyzing an individual s or a family s current financial position predicting short and long term needs and executing a plan to fulfill those needs within individual financial constraints personal finance depends largely on one s earnings living requirements and goals and desires matters of personal finance include but aren t limited to the securing of financial products like credit cards life and home insurance mortgages and retirement products personal banking products such as checking and savings accounts individual retirement accounts iras and 401 k plans are also considered a part of personal finance the most important aspects of personal finance include personal finance is a specialized field although forms of it have been taught in universities and schools as home economics or consumer economics since the early 20th century the field was initially disregarded by male economists because home economics appeared to be the purview of housewives economists have repeatedly stressed widespread education in matters of personal finance as integral to the macro performance of the overall national economy social finance typically refers to investments made in social enterprises including charitable organizations and some cooperatives these investments take the form of equity or debt financing in which the investor seeks both a financial reward and a social gain forms of social finance also include some segments of microfinance specifically loans to small business owners and entrepreneurs in less developed countries to enable their enterprises to grow lenders earn a return on their loans while simultaneously helping to improve individuals standards of living and to benefit the local society and economy social impact bonds also known as pay for success bonds or social benefit bonds are a specific type of instrument that acts as a contract with the public sector or local government repayment and return on investment are contingent upon the achievement of certain social outcomes and achievements there was a time when theoretical and empirical evidence seemed to suggest that conventional financial theories were reasonably successful at predicting and explaining certain types of economic events academics in the financial and economic realms nonetheless detected anomalies and behaviors that occurred in the real world but couldn t be explained by any available theories it became increasingly clear that conventional theories could explain certain idealized events but the real world was a great deal messier and more disorganized market participants frequently behave in ways that are irrational and difficult to predict according to those models academics began to turn to cognitive psychology to account for irrational and illogical behaviors that can t be explained by modern financial theory the field of behavioral science was born out of these efforts it seeks to explain our actions whereas modern finance looks to explain the actions of the idealized economic man homo economicus behavioral finance is a subfield of behavioral economics it proposes psychology based theories to explain financial anomalies such as severe rises or falls in stock prices the purpose is to identify and understand why people make certain financial choices it s assumed within behavioral finance that the information structure and the characteristics of market participants systematically influence individuals investment decisions as well as market outcomes daniel kahneman and amos tversky began to collaborate in the late 1960s and are considered by many to be the fathers of behavioral finance richard thaler joined them later and combined economics and finance with elements of psychology to develop concepts like mental accounting the endowment effect and other biases that have an impact on people s behavior behavioral finance encompasses many concepts but four are key mental accounting refers to the propensity for people to allocate money for specific purposes based on miscellaneous subjective criteria such as the source of the money and the intended use for each account the theory of mental accounting suggests that individuals are likely to assign separate functions to each asset group or account the result can be an illogical and even detrimental set of behaviors some people keep a special money jar set aside for a vacation or a new home while carrying substantial credit card debt at the same time herd behavior states that people tend to mimic the financial behaviors of the majority whether they re rational or irrational herd behavior is a set of decisions and actions that an individual wouldn t necessarily make on their own in many cases but which seem to have legitimacy because everyone s doing it herd behavior is often considered a major cause of financial panics and stock market crashes anchoring refers to attaching spending to a certain reference point or level even though it may have no logical relevance to the decision at hand one common example of anchoring is the conventional wisdom that a diamond engagement ring should cost about two months worth of salary another might be buying a stock that briefly rose from trading around 65 to hit 80 and then fell back to 65 out of a sense that it s now a bargain that could be true but it s more likely that the 80 figure was an anomaly and 65 is the true value of the shares high self rating refers to a person s tendency to rank themself better than others or higher than an average person an investor might think that they re an investment guru when their investments perform optimally blocking out the investments that are performing poorly high self rating goes hand in hand with overconfidence which reflects the tendency to overestimate or exaggerate one s ability to successfully perform a given task overconfidence can be harmful to an investor s ability to pick stocks a 1998 study by researcher terrance odean found that overconfident investors typically conducted more trades compared with their less confident counterparts and these trades produced yields significantly lower than the market 20scholars have argued that the 2000s have witnessed an unparalleled expansion of financialization or the role of finance in everyday business or life finance vs economicseconomics and finance are interrelated informing and influencing each other investors care about economic data because they also influence the markets to a great degree investors should avoid either or arguments regarding economics and finance both are important and have valid applications the focus of economics and especially macroeconomics tends to be a bigger picture in nature such as how a country region or market is performing economics can also focus on public policy the focus of finance is more individual company or industry specific microeconomics explains what to expect if certain conditions change on the industry firm or individual level microeconomics says that consumers will tend to buy fewer cars than before if a manufacturer raises the prices of cars the price of copper increases if a major copper mine collapses in south america because supply is restricted finance also focuses on how companies and investors evaluate risk and return economics has historically been more theoretical and finance more practical but the distinction has become much less pronounced since 2000 | |
is finance an art or a science | as a field of study and an area of business finance has strong roots in related scientific areas such as statistics and mathematics many modern financial theories resemble scientific or mathematical formulas there s no denying however that the financial industry also includes nonscientific elements that liken it to an art it s been discovered that human emotions and decisions made because of them play a large role in many aspects of the financial world modern financial theories such as the black scholes model draw heavily on the laws of statistics and mathematics found in science their very creation would have been impossible if science hadn t laid the initial groundwork theoretical constructs such as the capital asset pricing model capm and the efficient market hypothesis emh attempt to explain the behavior of the stock market in an emotionless completely rational manner ignoring elements such as market and investor sentiment academic advancements have greatly improved the day to day operations of the financial markets but history is rife with examples that seem to contradict the notion that finance behaves according to rational scientific laws stock market disasters such as the october 1987 crash black monday that saw the dow jones industrial average djia fall 22 and the great 1929 stock market crash beginning on black thursday oct 24 1929 aren t suitably explained by scientific theories 2122 the human element of fear also played a part a dramatic fall in the stock market is often called a panic the track records of investors have shown that markets aren t entirely efficient and they re therefore not entirely scientific either studies have shown that investor sentiment appears to be mildly influenced by weather with the overall market generally becoming more bullish when it s predominantly sunny other phenomena include the january effect when stock prices fall near the end of one calendar year and rise at the beginning of the next careers in financemany career options are available for those interested in finance accountant an accountant manages a company s financial records tracks expenses and runs reports auditor an auditor is tasked with ensuring accuracy in financial records they may work in private practice auditing client companies be employed by a company to ensure internal propriety or they may work for the government banker a commercial banker works with businesses to provide banking services such as accounts and loans an investment banker focuses on companies looking to raise capital or conduct a sale or merger capital manager a capital management professional helps a company allocate its capital resources between investment options lender an individual who works in lending such as a loan officer manages the issuance of loans a mortgage lender would work contracts to secure a real estate loan market analyst market analysts evaluate trends and make forecasts that account for changing market conditions they prepare recommendations that can guide a company s financial decisions | |
how much do finance jobs pay | wages in the finance and insurance industry increased by 34 3 from 2006 through 2024 according to payscale 29 the recipient of a bachelor s degree in finance earns a median salary of 78 080 a year 30chief financial officers cfos have the highest salaried jobs in finance according to an indeed survey they earned an average of 144 563 before bonuses as of 2024 31 | |
how can i learn finance | undergraduate majors in finance will learn the ins and outs a master s degree in finance will hone those skills and expand your knowledge base an mba will also provide some basics for corporate finance and similar topics the chartered financial analyst cfa self study program is a rigorous series of three difficult exams that culminate in a globally recognized credential in finance it may be appropriate for those who have already graduated without a finance degree other more specific industry standards exist such as the certified financial planner cfp | |
what is the purpose of finance | finance involves borrowing and lending investing raising capital and selling and trading securities the purpose of these pursuits is to allow companies and individuals to fund certain activities or projects to be repaid in the future based on income streams generated from those activities people wouldn t be able to afford to buy homes entirely in cash without finance and companies wouldn t be able to grow and expand finance allows for the more efficient allocation of capital resources | |
what is the difference between accounting and finance | accounting is one aspect of finance that tracks day to day cash flows expenses and income accounting tasks include bookkeeping tax preparation and auditing the bottom linefinance is a broad term that describes a variety of activities but they all boil down to the practice of managing money getting spending and everything in between from borrowing to investing finance also refers to the tools and instruments people use in relation to money and the systems and institutions through which activities occur finance can involve something as large as a country s trade deficit or as small as the dollar bills in a person s wallet very little could function without it not an individual household a corporation or a society | |
what is a financial account | in macroeconomics a financial account is a component of a country s balance of payments that covers claims on or liabilities to nonresidents specifically concerning financial assets financial account components include direct investment portfolio investment and reserve assets broken down by sector | |
when recorded in a country s balance of payments nonresidents claims made on residents financial assets are liabilities while claims made against nonresidents by residents are assets 1 | understanding financial accountsthe financial account is a tracking mechanism for shifts in international asset ownership and it is composed of two subaccounts to compare how the financial account can increase or decrease let s analyze the following scenarios for the financial account of the united states 2capital account vs current accountthe financial account differs from the capital account in that the capital account records transfers of capital assets transactions in the capital account have no impact on a country s production levels rate of savings or overall income 3the current account reflects the country s current trade balance combined with net income and direct payments and measures the import and export of goods and services when combined with the financial and capital accounts the three accounts form a country s balance of payments transaction recordingthe financial account involves financial assets such as gold currency derivatives special drawing rights equities and bonds during a complex transaction containing capital assets and financial claims a country may record part of a transaction in its capital account and the other part in its current account in addition because entries in the financial account are net entries that offset credits with debits they may not appear in a country s balance of payments even if transactions occur between residents and nonresidents risks and benefits of increased accesseasing access to a country s capital is considered part of a broader movement toward economic liberalization and a more liberalized financial account opens a country up to capital markets however reducing restrictions on the financial account has risks the more a country s economy is integrated with other economies worldwide the greater the likelihood that economic troubles abroad will affect the domestic situation this potential outcome is weighed against the potential benefits lower funding costs access to global capital markets and increased efficiency | |
what makes up the balance of a financial account | the balance of a financial account is the sum of net direct investments net portfolio investments asset funding and errors omissions | |
what is a current account and financial account | the current account records imports and exports the movement of goods in and out of a country measuring the transfers between u s residents and foreign residents a financial account measures the change in a country s ownership of international assets | |
does the financial account always balance | the current account is offset by the capital account and the financial account meaning the sum of these accounts which is the balance of payments will balance to zero the bottom linefinancial accounts are a part of a nation s balance of payments that covers nonresident claims and liabilities which comprises assets such as gold equities bonds derivatives and special drawing rights the purpose of a financial account is to track the changes in international asset ownership | |
what is financial accounting | financial accounting is a specific branch of accounting involving a process of recording summarizing and reporting the myriad of transactions resulting from business operations over a period of time these transactions are summarized in the preparation of financial statements including the balance sheet income statement and cash flow statement that record a company s operating performance over a specified period work opportunities for a financial accountant can be found in both the public and private sectors a financial accountant s duties may differ from those of a self employed accountant who works for many clients preparing their accounts tax returns and possibly auditing other companies investopedia laura porter | |
how financial accounting works | financial accounting utilizes a series of established principles the accounting principles used depend on the business s regulatory and reporting requirements companies and organizations often have an accounting manual that details the pertinent accounting rules u s public companies are required to perform financial accounting in accordance with generally accepted accounting principles gaap their purpose is to provide consistent information to investors creditors regulators and tax authorities 1the statements used in financial accounting cover the five main classifications of financial data which are 2revenues and expenses are accounted for and reported on the income statement resulting in the determination of net income at the bottom of the statement assets liabilities and equity accounts are reported on the balance sheet which utilizes financial accounting to report ownership of the company s future economic benefits 2international public companies also frequently report financial statements in accordance with international financial reporting standards ifrs financial statementsa balance sheet reports a company s financial position as of a specific date it lists the company s assets liabilities and equity and the financial statement rolls over from one period to the next financial accounting guidance dictates how a company records cash values assets and reports debt 2a balance sheet is used by management lenders and investors to assess the liquidity and solvency of a company through financial ratio analysis financial accounting allows these parties to compare one balance sheet account with another for example the current ratio compares the amount of current assets with current liabilities to determine how likely a company is going to be able to meet short term debt obligations an income statement also known as a profit and loss statement reports a company s operating activity during a specific period of time usually issued on a monthly a quarterly or an annual basis the income statement lists revenue expenses and net income of a company for a given period financial accounting guidance dictates how a company recognizes revenue records expenses and classifies types of expenses 2an income statement can be useful to management but managerial accounting gives a company better insight into production and pricing strategies compared with financial accounting financial accounting rules regarding an income statement are more useful for investors seeking to gauge a company s profitability and external parties looking to assess the risk or consistency of operations 2a cash flow statement reports how a company used cash during a specific period it is broken into three sections 2financial accounting guidance dictates when transactions are to be recorded though there is often little to no flexibility in the amount of cash to be reported per transaction a cash flow statement is used by managed to better understand how cash is being spent and received it extracts only items that impact cash allowing for the clearest possible picture of how money is being used which can be somewhat cloudy if the business is using accrual accounting a shareholders equity statement reports how a company s equity changes from one period to another as opposed to a balance sheet which is a snapshot of equity at a single point in time it shows how the residual value of a company increases or decreases and why it changed it gives details about the following components of equity 2nonprofit entities and government agencies use similar financial statements however their financial statements are more specific to their entity types and will vary from the statements listed above accrual method vs cash methodthere are two primary types of financial accounting the accrual method and the cash method the main difference between them is the timing in which transactions are recorded the accrual method of financial accounting records transactions independently of cash usage revenue is recorded when it is earned when a bill is sent not when it actually arrives when the bill is paid expenses are recorded upon receiving an invoice not when paying it accrual accounting recognizes the impact of a transaction over a period of time 2for example imagine a company receives a 1 000 payment for a consulting job to be completed next month under accrual accounting the company is not allowed to recognize the 1 000 as revenue as it has technically not yet performed the work and earned the income the transaction is recorded as a debit to cash and a credit to unearned revenue a liability account when the company earns the revenue next month it clears the unearned revenue credit and records actual revenue erasing the debt to cash another example of the accrual method of accounting are expenses that have not yet been paid imagine a company received an invoice for 5 000 for july utility usage even though the company won t pay the bill until august accrual accounting calls for the company to record the transaction in july debiting utility expense the company records a credit to accounts payable when the invoice is paid the credit is cleared the cash method of financial accounting is an easier less strict method of preparing financial statements transactions are recorded only when cash is involved revenue and expenses are only recorded when the transaction has been completed via the facilitation of money 2in the example above the consulting firm would have recorded 1 000 of consulting revenue when it received the payment even though it won t actually perform the work until the next month the cash method calls for revenue to be recognized when cash is received when the company does the work in the following month no journal entry is recorded because the transaction will have been recorded in full the prior month in the other example the utility expense would have been recorded in august the period when the invoice was paid even though the charges relate to services incurred in july the cash method of financial accounting requires expenses to be recorded when they are paid not when they occur records transactions when benefit is received or liability is incurreda more accurate method of accounting that depicts more realistic business operationsrequired for larger public companies as part of external reportingrecords transactions when cash is received or distributedan easier method of accounting that simplifies a company down to what has already actually occurredprimarily used by smaller private companies with low to no reporting requirementsprinciples of financial accountingfinancial accounting is dictated by five general overarching principles that guide companies in how to prepare their financial statements the type of accounting method should be determined at the outset changes to this method can happen later but require specific actions the principles are the basis of all financial accounting technical guidance these five principles relate to the accrual method of accounting importance of financial accountingcompanies engage in financial accounting for a number of important reasons careers in financial accounting can include preparing financial statements analyzing financial statements auditing financial statements and supporting the technology systems that produce financial statements users of financial accounting financial statementsthe entire purpose of financial accounting is to prepare financial statements which are used by a variety of groups and often required as part of agreements with the preparing company in addition to management using financial accounting to gain information on operations the following groups use financial accounting reporting financial accounting vs managerial accountingthe key difference between financial and managerial accounting is that financial accounting provides information to external parties while managerial accounting helps managers within the organization make decisions managerial accounting assesses financial performance and hopes to drive smarter decision making through internal reports that analyze operations it is not an allowable basis for financial statements 2managerial accounting uses operational information in specific ways to glean information for example it may use cost accounting to track the variable costs fixed costs and overhead costs along a manufacturing process then using this cost information a company may decide to switch to a lower quality less expensive type of raw materials professional designations for financial accountingmembers of financial accounting can carry several different professional designations | |
what is an example of financial accounting | a public company s income statement is an example of financial accounting the company must follow specific guidance on what transactions to record in addition the format of the report is stipulated by governing bodies the end result is a financial report that communicates the amount of revenue recognized in a given period | |
what is the main purpose of financial accounting | financial accounting is intended to provide financial information on a company s operating performance though management can analyze reports generated using financial accounting they often find it more useful to use managerial accounting an internally geared method of calculating financial results that is not allowable for external reports financial accounting is the widely accepted method of preparing financial results for external use who uses financial accounting public companies are required to perform financial accounting as part of the preparation of their financial statement reporting small or private companies may also use financial accounting but they often operate with different reporting requirements financial statements generated through financial accounting are used by many parties outside of a company including lenders government agencies auditors insurance agencies and investors the bottom linefinancial accounting is the framework that sets the rules on how financial statements are prepared the u s follows different accounting rules than most other countries these guidelines dictate how a company translates its operations into a series of widely accepted and standardized financial reports financial accounting plays a critical part in keeping companies responsible for their performance and transparent regarding their operations | |
what is the financial accounting standards board fasb | the financial accounting standards board fasb is an independent nonprofit organization responsible for establishing accounting and financial reporting standards for companies and nonprofit organizations in the united states following generally accepted accounting principles gaap the fasb was formed in 1973 to succeed the accounting principles board and carry on its mission it is based in norwalk conn | |
how the financial accounting standards board fasb works | the financial accounting standards board has the authority to establish and interpret generally accepted accounting principles gaap in the united states for public and private companies and nonprofit organizations gaap is a set of standards that companies nonprofits and governments should follow when preparing and presenting their financial statements including any related party transactions the securities and exchange commission sec recognizes the fasb as the accounting standard setter for public companies it is also recognized by state accounting boards the american institute of certified public accountants aicpa and other organizations in the field the financial accounting standards board is part of a larger independent nonprofit group that also includes the financial accounting foundation faf the financial accounting standards advisory council fasac the governmental accounting standards board gasb and the governmental accounting standards advisory council gasac the gasb which is similar in function to the fasb was established in 1984 to set accounting and financial reporting standards for state and local governments across the united states the faf oversees both the fasb and the gasb the two advisory councils provide guidance in their respective areas collectively the organization s mission is to improve nonprofit financial accounting and reporting standards so that the information is useful to investors and other users of financial reports the organizations also educate stakeholders on how to understand and implement the standards most effectively the fasb is governed by seven full time board members who are required to sever their ties to the companies or organizations they work for before joining the board board members are appointed by the faf s board of trustees for five year terms and may serve for up to 10 years in 2009 the faf launched the fasb accounting standards codification an online research tool designed as a single source for authoritative nongovernmental generally accepted accounting principles in the united states according to the faf the tool reorganizes the thousands of u s gaap pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure the website also provides relevant securities and exchange commission sec guidance on those topics a basic view version is free while the more comprehensive professional view is available by paid subscription the london based international accounting standards board iasb founded in 2001 to replace an older standards organization is responsible for the international financial reporting standards ifrs which are now used in many countries throughout the world in recent years the fasb has been working with the iasb on an initiative to improve financial reporting and the comparability of financial reports globally | |
what is a financial advisor | a financial advisor provides financial advice or guidance to customers for compensation financial advisors sometimes spelled as advisers can provide many different services such as investment management tax planning and estate planning increasingly financial advisors are acting as a one stop shop by providing everything from portfolio management to insurance products registered advisors must carry the series 65 license to conduct business with the public a wide variety of other licenses and certifications may be required depending on the services provided by a given financial advisor 12understanding financial advisors financial advisor is a generic term with no precise industry definition as a result this title can describe many different types of financial professionals stockbrokers insurance agents tax preparers investment managers and financial planners can all be considered financial advisors estate planners and bankers may also fall under this umbrella still an important distinction can be made that is a financial advisor must provide guidance and advice a financial advisor can be distinguished from an execution stockbroker that simply places trades for clients or a tax accountant who simply prepares tax returns without providing advice on how to maximize tax advantages furthermore what may pass as a financial advisor in some instances may simply be a product salesperson such as a stockbroker or a life insurance agent a true financial advisor should be a well educated credentialed experienced financial professional who works on behalf of their clients as opposed to serving the interests of a financial institution by maximizing the sales of certain products or capitalizing on commissions from sales 34there were 330 300 professional financial advisors in the u s as of 2021 according to the bureau of labor statistics 5generally a financial advisor is an independent practitioner who operates in a fiduciary capacity in which a client s interests come before their own however only registered investment advisors rias who are governed by the investment advisers act of 1940 are held to a true fiduciary standard this fiduciary standard mandates that an ria must always unconditionally put the client s best interests ahead of their own regardless of all other circumstances 6there are some agents and brokers who elect to practice in this capacity as a fiduciary as a way of attracting clients however their compensation structure is such that they are bound by the contracts of the companies where they work financial advisors should work for the client and not the company that employs them if you feel uncomfortable with your advisor s responsiveness and accuracy or wonder if they have your best interest at heart you should look for a new advisor since the enactment of the investment adviser act of 1940 two types of relationships have existed between financial intermediaries and their clients these are the reasonableness standard and the stricter fiduciary standard these relationships characterize the nature of the transactions between registered representatives and clients in the broker dealer space there is a fiduciary relationship that requires advisors registered with the securities and exchange commission sec as registered investment advisors to exercise duties of loyalty care and full disclosure in their interactions with clients while the former is based on the principle of caveat emptor guided by self governed rules of suitability and reasonableness in recommending an investment product or strategy the latter is grounded in federal laws that impose the highest ethical standards at its core the fiduciary relationship relies on the necessity that a financial advisor must act on behalf of a client in a way the client would act for themself if they had the requisite knowledge and skills to do so 6financial advisors vs financial plannersthe financial planner is one particular type of financial advisor who specializes in helping companies and individuals create a program to meet long term financial goals a financial planner might have a specialty in investments taxes retirement and or estate planning further the financial planner may hold various licenses or designations such as the certified financial planner cfp designation financial planners may specialize in tax planning asset allocation risk management retirement planning and or estate planning 7 | |
how do you become a financial advisor | to become a financial advisor one first needs to complete a bachelor s degree a degree in finance or economics is not needed but this does help from there you would look to be hired by a financial institution most often joining through an internship it is recommended to work at an institution as it will sponsor you for the industry licenses you need to complete before being able to practice as a financial advisor you can do these on your own however it is easier to do through a company an internship or entry level job will also help you understand the industry and what is required for the career the licenses you will need to complete may include series 7 series 63 series 65 and series 6 once you obtain the licenses you can work as a financial advisor 31 | |
what do financial advisors do | financial advisors are tasked with managing every aspect of your financial life from retirement planning to estate planning to savings and investing they are responsible for more than just suggesting investment choices or selling financial products they assess your financial status and understand your financial goals and create a tailored financial plan to achieve those goals they can help reduce the taxes you pay and maximize the returns on any financial assets you may own 4 | |
how much does a financial advisor cost | the cost of a financial advisor depends on the services you hire them for generally the average fee a financial advisor charges is 1 on assets under management aum however many financial advisors operate on a sliding scale so the more business you do the lower this fee will be there are also different fees for the different tasks that a financial advisor will perform many financial advisors charge a flat annual fee between 2 000 and 7 500 between 1 000 and 3 000 for creating a tailored financial plan and depending on the agreement commissions of 3 to 6 on the account 8 | |
how much does a financial advisor make | the amount that a financial advisor makes depends on a variety of factors such as their experience the region in which they work their types of clients the types of products they sell and the type of financial advice they provide according to the bureau of labor statistics in 2021 the median pay of a financial advisor was 94 170 per year 45 27 an hour 5the bottom linefinancial advisors help their clients achieve financial independence and security they are instrumental during your annual financial review to help you determine if you are on track advisors can work independently or as part of a larger firm and generally pursue professional designations proving their knowledge their pay is based on a number of factors and the average starting salary is well above the national average | |
what is financial analysis | financial analysis is the process of evaluating businesses projects budgets and other finance related transactions to determine their performance and suitability typically financial analysis is used to analyze whether an entity is stable solvent liquid or profitable enough to warrant a monetary investment investopedia nez riazunderstanding financial analysisfinancial analysis is used to evaluate economic trends set financial policy build long term plans for business activity and identify projects or companies for investment this is done through the synthesis of financial numbers and data a financial analyst will thoroughly examine a company s financial statements the income statement balance sheet and cash flow statement financial analysis can be conducted in both corporate finance and investment finance settings one of the most common ways to analyze financial data is to calculate ratios from the data in the financial statements to compare against those of other companies or against the company s own historical performance for example return on assets roa is a common ratio used to determine how efficient a company is at using its assets and as a measure of profitability this ratio could be calculated for several companies in the same industry and compared to one another as part of a larger analysis there is no single best financial analytic ratio or calculation most often analysts use a combination of data to arrive at their conclusions corporate financial analysisin corporate finance the analysis is conducted internally by the accounting department and shared with management in order to improve business decision making this type of internal analysis may include ratios such as net present value npv and internal rate of return irr to find projects worth executing many companies extend credit to their customers as a result the cash receipt from sales may be delayed for a period of time for companies with large receivable balances it is useful to track days sales outstanding dso which helps the company identify the length of time it takes to turn a credit sale into cash the average collection period is an important aspect of a company s overall cash conversion cycle a key area of corporate financial analysis involves extrapolating a company s past performance such as net earnings or profit margin into an estimate of the company s future performance this type of historical trend analysis is beneficial to identify seasonal trends for example retailers may see a drastic upswing in sales in the few months leading up to christmas this allows the business to forecast budgets and make decisions such as necessary minimum inventory levels based on past trends investment financial analysisin investment finance an analyst external to the company conducts an analysis for investment purposes analysts can either conduct a top down or bottom up investment approach a top down approach first looks for macroeconomic opportunities such as high performing sectors and then drills down to find the best companies within that sector from this point they further analyze the stocks of specific companies to choose potentially successful ones as investments by looking last at a particular company s fundamentals a bottom up approach on the other hand looks at a specific company and conducts a similar ratio analysis to the ones used in corporate financial analysis looking at past performance and expected future performance as investment indicators bottom up investing forces investors to consider microeconomic factors first and foremost these factors include a company s overall financial health analysis of financial statements the products and services offered supply and demand and other individual indicators of corporate performance over time financial analysis is only useful as a comparative tool calculating a single instance of data is usually worthless comparing that data against prior periods other general ledger accounts or competitor financial information yields useful information types of financial analysisthere are two types of financial analysis as it relates to equity investments fundamental analysis and technical analysis fundamental analysis uses ratios gathered from data within the financial statements such as a company s earnings per share eps in order to determine the business s value using ratio analysis in addition to a thorough review of economic and financial situations surrounding the company the analyst is able to arrive at an intrinsic value for the security the end goal is to arrive at a number that an investor can compare with a security s current price in order to see whether the security is undervalued or overvalued technical analysis uses statistical trends gathered from trading activity such as moving averages ma essentially technical analysis assumes that a security s price already reflects all publicly available information and instead focuses on the statistical analysis of price movements technical analysis attempts to predict market movements by looking for patterns and trends in stock prices and volumes rather than analyzing a security s fundamental attributes horizontal vs vertical analysis | |
when reviewing a company s financial statements two common types of financial analysis are horizontal analysis and vertical analysis both use the same set of data though each analytical approach is different | horizontal analysis entails selecting several years of comparable financial data one year is selected as the baseline often the oldest then each account for each subsequent year is compared to this baseline creating a percentage that easily identifies which accounts are growing hopefully revenue and which accounts are shrinking hopefully expenses vertical analysis entails choosing a specific line item benchmark and then seeing how every other component on a financial statement compares to that benchmark most often net sales are used as the benchmark a company would then compare the cost of goods sold gross profit operating profit or net income as a percentage of this benchmark companies can then track how the percentage changes over time examples of financial analysisin q1 2024 amazon com reported a net income of 10 4 billion this was a substantial increase from one year ago when the company reported a net income of 3 2 billion in q1 2023 1analysts can use the information above to perform corporate financial analysis for example consider amazon s operating profit margins below which can be calculated by dividing operating income by net sales from q1 2023 to q1 2024 the company experienced an increase in operating margin allowing for financial analysis to reveal that the company earned more operating income for every dollar of sales | |
why is financial analysis useful | the financial analysis aims to analyze whether an entity is stable liquid solvent or profitable enough to warrant a monetary investment it is used to evaluate economic trends set financial policies build long term plans for business activity and identify projects or companies for investment | |
how is financial analysis done | financial analysis can be conducted in both corporate finance and investment finance settings a financial analyst will thoroughly examine a company s financial statements the income statement balance sheet and cash flow statement one of the most common ways to analyze financial data is to calculate ratios from the data in the financial statements to compare against those of other companies or against the company s own historical performance a key area of corporate financial analysis involves extrapolating a company s past performance such as net earnings or profit margin into an estimate of the company s future performance | |
what techniques are used in conducting financial analysis | analysts can use vertical analysis to compare each component of a financial statement as a percentage of a baseline such as each component as a percentage of total sales alternatively analysts can perform horizontal analysis by comparing one baseline year s financial results to other years many financial analysis techniques involve analyzing growth rates including regression analysis year over year growth top down analysis such as market share percentage or bottom up analysis such as revenue driver analysis lastly financial analysis often entails the use of financial metrics and ratios these techniques include quotients relating to the liquidity solvency profitability or efficiency turnover of resources of a company | |
what is fundamental analysis | fundamental analysis uses ratios gathered from data within the financial statements such as a company s earnings per share eps in order to determine the business s value using ratio analysis in addition to a thorough review of economic and financial situations surrounding the company the analyst is able to arrive at an intrinsic value for the security the end goal is to arrive at a number that an investor can compare with a security s current price in order to see whether the security is undervalued or overvalued | |
what is technical analysis | technical analysis uses statistical trends gathered from market activity such as moving averages ma essentially technical analysis assumes that a security s price already reflects all publicly available information and instead focuses on the statistical analysis of price movements technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends rather than analyzing a security s fundamental attributes the bottom linefinancial analysis is a cornerstone of making smarter more strategic decisions based on the underlying financial data of a company whether corporate investment or technical analysis analysts use data to explore trends understand growth seek areas of risk and support decision making financial analysis may include investigating financial statement changes calculating financial ratios or exploring operating variances | |
what is a financial asset | a financial asset is a liquid asset that gets its value from a contractual right or ownership claim cash stocks bonds mutual funds and bank deposits are all are examples of financial assets unlike land property commodities or other tangible physical assets financial assets do not necessarily have inherent physical worth or even a physical form rather their value reflects factors of supply and demand in the marketplace in which they trade as well as the degree of risk they carry investopedia mira norianunderstanding a financial assetmost assets are categorized as either real financial or intangible real assets are physical assets that draw their value from substances or properties such as precious metals land real estate and commodities like soybeans wheat oil and iron intangible assets are the valuable property that is not physical in nature they include patents trademarks and intellectual property financial assets are in between the other two assets financial assets may seem intangible non physical with only the stated value on a piece of paper such as a dollar bill or a listing on a computer screen what that paper or listing represents though is a claim of ownership of an entity like a public company or contractual rights to payments say the interest income from a bond financial assets derive their value from a contractual claim on an underlying asset this underlying asset may be either real or intangible commodities for example are the real underlying assets that are pinned to such financial assets as commodity futures contracts or some exchange traded funds etfs likewise real estate is the real asset associated with shares of real estate investment trusts reits reits are financial assets and are publicly traded entities that own a portfolio of properties the internal revenue service irs requires businesses to report financial and real assets together as tangible assets for tax purposes the grouping of tangible assets is separate from intangible assets 1common types of financial assetsaccording to the commonly cited definition from the international financial reporting standards ifrs financial assets include 2in addition to stocks and receivables the above definition comprises financial derivatives bonds money market or other account holdings and equity stakes 3 many of these financial assets do not have a set monetary value until they are converted into cash especially in the case of stocks where their value and price fluctuate aside from cash the more common types of financial assets that investors encounter are pros and cons of highly liquid financial assetsthe purest form of financial assets is cash and cash equivalents checking accounts savings accounts and money market accounts liquid accounts are easily turned into funds for paying bills and covering financial emergencies or pressing demands other varieties of financial assets might not be as liquid liquidity is the ability to change a financial asset into cash quickly for stocks it is the ability of an investor to buy or sell holdings from a ready market liquid markets are those where there are plenty of buyers and plenty of sellers and no extended lag time in trying to execute a trade in the case of equities like stocks and bonds an investor has to sell and wait for the settlement date to receive their money usually one business day 4maintaining funds in liquid financial assets can result in greater preservation of capital money in bank checking savings and cd accounts are insured against loss of up to 250 000 by the federal deposit insurance corporation fdic for credit union accounts if for some reason the bank fails your account has dollar for dollar coverage up to 250 000 however since fdic covers each financial institution individually an investor with brokered cds totaling over 250 000 in one bank faces losses if the bank becomes insolvent 5liquid assets like checking and savings accounts have a limited return on investment roi capability roi is the profit you receive from an asset divided by the cost of owning that asset in checking and savings accounts the roi is minimal they may provide modest interest income but unlike equities they offer little appreciation also cds and money market accounts restrict withdrawals for months or years when interest rates fall callable cds are often called and investors end up moving their money to potentially lower income investments liquid financial assets convert into cash easily some financial assets have the ability to appreciate in value the fdic and ncua insure accounts up to 250 000 highly liquid financial assets have little appreciationilliquid financial assets may be hard to convert to cash the value of a financial asset is only as strong as the underlying entity illiquid assets pros and consthe opposite of a liquid asset is an illiquid asset real estate and fine antiques are examples of illiquid financial assets these items have value but cannot convert into cash quickly another example of an illiquid financial asset are stocks that do not have a high volume of trading on the markets often these are investments like penny stocks or high yield speculative investments where there may not be a ready buyer when you are ready to sell keeping too much money tied up in illiquid investments has drawbacks even in ordinary situations doing so may result in an individual using a high interest credit card to cover bills increasing debt and negatively affecting retirement and other investment goals real world example of financial assetsbusinesses as well as individuals hold financial assets in the case of an investment or asset management company the financial assets include the money in the portfolios firm handles for clients called assets under management aum for example blackrock inc is the largest investment manager in the u s and in the world judging by its 10 trillion in aum as of dec 31 2023 67in the case of banks financial assets include the worth of the outstanding loans it has made to customers capital one the 9th largest bank in the u s reported 481 720 million in total assets on its first quarter 2024 financial statement of that 315 154 million were from real estate secured commercial and industrial loans 89 | |
what is a finance charge | a finance charge is a fee charged for the use of credit or the extension of existing credit it may be a flat fee or a percentage of borrowings with percentage based finance charges being the most common a finance charge is often an aggregated cost including the cost of carrying the debt along with any related transaction fees account maintenance fees or late fees charged by the lender understanding finance chargesfinance charges allow lenders to make a profit on the use of their money finance charges for commoditized credit services such as car loans mortgages and credit cards have known ranges and depend on the creditworthiness of the person looking to borrow regulations exist in many countries that limit the maximum finance charge assessed on a given type of credit but many of the limits still allow for predatory lending practices where finance charges can amount to 25 or more annually finance charges are a form of compensation to the lender for providing the funds or extending credit to a borrower these charges can include one time fees such as an origination fee on a loan or interest payments which can amortize on a monthly or daily basis finance charges can vary from product to product or lender to lender there is no single formula for the determination of what interest rate to charge a customer may qualify for two similar products from two different lenders that come with two different sets of finance charges finance charges and interest ratesone of the more common finance charges is the interest rate this allows the lender to make a profit expressed as a percentage based on the current amount that has been provided to the borrower interest rates can vary depending on the type of financing acquired and the borrower s creditworthiness secured financing which is most often backed by an asset such as a home or vehicle often carries lower interest rates than unsecured financings such as a credit card this is most often due to the lower risk associated with a loan backed by an asset for credit cards all finance charges are expressed in the currency from which the card is based including those that can be used internationally allowing the borrower to complete a transaction in a foreign currency finance charges and regulationfinance charges are subject to government regulation the federal truth in lending act requires that all interest rates standard fees and penalty fees must be disclosed to the consumer 1 additionally the credit card accountability responsibility and disclosure card act of 2009 required a minimum 21 day grace period before interest charges can be assessed on new purchases 2 | |
what is a financial crisis | in a financial crisis asset prices see a steep decline in value businesses and consumers are unable to pay their debts and financial institutions experience liquidity shortages a financial crisis is often associated with a panic or a bank run during which investors sell off assets or withdraw money from savings accounts because they fear that the value of those assets will drop if they remain in a financial institution other situations that may be labeled a financial crisis include the bursting of a speculative financial bubble a stock market crash a sovereign default or a currency crisis a financial crisis may be limited to banks or spread throughout a single economy the economy of a region or economies worldwide | |
what causes a financial crisis | a financial crisis may have multiple causes generally a crisis can occur if institutions or assets are overvalued and can be exacerbated by irrational or herd like investor behavior for example a rapid string of selloffs can result in lower asset prices prompting individuals to dump assets or make huge savings withdrawals when a bank failure is rumored contributing factors to a financial crisis include systemic failures unanticipated or uncontrollable human behavior incentives to take too much risk regulatory absence or failures or contagions that amount to a virus like spread of problems from one institution or country to the next if left unchecked a crisis can cause an economy to go into a recession or depression even when measures are taken to avert a financial crisis they can still happen accelerate or deepen financial crisis examplesfinancial crises are not uncommon they have happened for as long as the world has had currency some well known financial crises include the 2008 global financial crisisthe 2008 global financial crisis remains one of the deepest economic downturns in modern history and deserves special attention as its causes effects response and lessons are still relevant to the current financial landscape the crisis was the result of a sequence of events each with its own trigger and culminating in the near collapse of the banking system it has been argued that the seeds of the crisis were sown as far back as the 1970s with the community development act which required banks to loosen their credit requirements for lower income consumers creating a market for subprime mortgages 12the amount of subprime mortgage debt which was guaranteed by freddie mac and fannie mae continued to expand into the early 2000s when the federal reserve board began to cut interest rates drastically to avoid a recession 1314 the combination of loose credit requirements and cheap money spurred a housing boom which drove speculation pushing up housing prices and creating a real estate bubble a financial crisis can take many forms including a banking credit panic or a stock market crash but differs from a recession which is often the result of such a crisis in the meantime the investment banks looking for easy profits in the wake of the dot com bust and 2001 recession created collateralized debt obligations cdos from the mortgages purchased on the secondary market because subprime mortgages were bundled with prime mortgages there was no way for investors to understand the risks associated with the product when the market for cdos began to heat up the housing bubble that had been building for several years had finally burst as housing prices fell subprime borrowers began to default on loans that were worth more than their homes accelerating the decline in prices 15 | |
when investors realized the cdos were worthless due to the toxic debt they represented they attempted to unload the obligations however there was no market for the cdos the subsequent cascade of subprime lender failures created liquidity contagion that reached the upper tiers of the banking system two major investment banks lehman brothers and bear stearns collapsed under the weight of their exposure to subprime debt and more than 450 banks failed over the next five years several of the major banks were on the brink of failure and were rescued by a taxpayer funded bailout 1617 | the u s government responded to the financial crisis by lowering interest rates to nearly zero buying back mortgage and government debt and bailing out some struggling financial institutions 13 with rates so low bond yields became far less attractive to investors when compared to stocks the government response ignited the stock market by march 2013 the s p bounced back from the crisis and continued on its 10 year bull run from 2009 to 2019 to climb to about 200 18 the u s housing market recovered in most major cities and the unemployment rate fell as businesses began to hire and make more investments one big upshot of the crisis was the adoption of the dodd frank wall street reform and consumer protection act a massive piece of financial reform legislation passed by the obama administration in 2010 dodd frank brought wholesale changes to every aspect of the u s financial regulatory environment which touched every regulatory body and every financial services business notably dodd frank had the following effects 19the 2020 financial crisisin february of 2020 the covid19 virus was discovered in china the disease soon made its way around the world killing millions and stoking fear this in turn caused markets to fall and credit to the financial system to grind to a halt the pandemic resulted in strict lockdowns and travel restrictions which had a significant impact on global supply chains consumer demand and financial markets investors became increasingly concerned about the economic consequences of the pandemic leading to a rapid sell off in stock markets around the world the crash was particularly severe in march 2020 when the dow jones industrial average djia experienced its worst day since 1987 falling over 2 000 points in a single day other major stock indexes such as the s p 500 and the ftse 100 also experienced significant losses 202122 from february 12 through march 23 2020 the djia lost 37 of its value 23central banks and governments around the world responded with various measures to stabilize the financial system and support the economy including monetary stimulus and fiscal policies such as government spending and tax breaks despite the severity of the initial crash the markets rebounded somewhat in the following months and many investors saw significant gains toward the end of 2020 and into 2021 where markets hit new all time highs however the long term economic consequences of the pandemic are still unclear and many industries and countries are still struggling to recover fully | |
what is a financial crisis | a financial crisis is when financial instruments and assets decrease significantly in value as a result businesses have trouble meeting their financial obligations and financial institutions lack sufficient cash or convertible assets to fund projects and meet immediate needs investors lose confidence in the value of their assets and consumers incomes and assets are compromised making it difficult for them to pay their debts | |
what causes a financial crisis | a financial crisis can be caused by many factors maybe too many to name however often a financial crisis is caused by overvalued assets systemic and regulatory failures and resulting consumer panic such as a large number of customers withdrawing funds from a bank after learning of the institution s financial troubles some believe that financial crises are an inherent feature in how modern capitalist economies function where the business cycle fuels speculative growth during economic booms only to be met by contractions and recession during these contractions borrowers default on their loans and creditors tighten their lending criteria | |
what are the stages of a financial crisis | the financial crisis can be segmented into three stages beginning with the launch of the crisis financial systems fail generally caused by system and regulatory failures institutional mismanagement of finances and more the next stage involves the breakdown of the financial system with financial institutions businesses and consumers unable to meet obligations finally assets decrease in value and the overall level of debt increases | |
what was the cause of the 2008 financial crisis | although the crisis was attributed to many breakdowns it was largely due to the bountiful issuance of sub prime mortgages which were frequently sold to investors on the secondary market bad debt increased as sub prime mortgagors defaulted on their loans leaving secondary market investors scrambling investment firms insurance companies and financial institutions slaughtered by their involvement with these mortgages required government bailouts as they neared insolvency the bailouts adversely affected the market sending stocks plummeting other markets responded in tow creating global panic and an unstable market | |
what was the worst financial crisis ever | arguably the worst financial crisis in the last 90 years was the 2008 global financial crisis which sent stock markets crashing financial institutions into ruin and consumers scrambling the bottom linea financial crisis occurs when asset prices drop steeply businesses and consumers cannot pay their debts and financial institutions experience liquidity shortages various factors contribute to a financial crisis including systemic failures unanticipated or uncontrollable human behavior incentives to take excessive risks regulatory absence or failures or natural disasters such as pandemic viruses some of the historical examples of financial crises include tulip mania the credit crisis of 1772 the stock crash of 1929 the 1973 opec oil crisis the asian crisis of 1997 1998 and the 2008 global financial crisis | |
what is financial distress | financial distress is a condition in which a company or individual cannot generate sufficient revenues or income making it unable to meet or pay its financial obligations this is generally due to high fixed costs a large degree of illiquid assets or revenues sensitive to economic downturns for individuals financial distress can arise from poor budgeting overspending too high of a debt load lawsuit or loss of employment ignoring the signs of financial distress before it gets out of control can be devastating there may come a time when severe financial distress can no longer be remedied because the company or individual s obligations have grown too high and cannot be repaid if this happens bankruptcy may be the only option understanding financial distressif a company or individual experiences a period of time when it cannot pay its debts bills and other obligations by their due date they are likely experiencing financial distress examples of a firm s expenses that must be paid may include financing such as paying interest on debts opportunity costs of projects and employees who aren t productive employees of a distressed firm usually have lower morale and higher stress caused by the increased chance of bankruptcy which could force them out of their jobs companies under financial distress may find it difficult to secure new financing they may also find the market value of the firm falls significantly as customers cut back on new orders and suppliers change their terms of delivery looking at a company s financial statements can help investors and others determine its current and future financial health for example negative cash flows appearing in the company s cash flow statement is one red flag of financial distress this could be caused by a large disparity between cash payments and receivables high interest payments or a drop in working capital individuals who experience financial distress may find themselves in a situation where their debt servicing costs are much more than their monthly income these debts or obligations include items such as home or rent payments car payments credit cards and utility bills people who experience situations like these tend to go through it for an extended period of time and may ultimately be forced to relinquish assets secured by their debts and lose their home or car or face eviction individuals who experience financial distress may be subject to wage garnishments judgments or legal action from creditors signs of financial distressthere are multiple warning signs that could indicate a company is experiencing financial distress or is about to in the near term poor profits may point to a company that is financially unhealthy struggling to break even suggests a business that cannot sustain itself by generating internal funds and must instead raise capital externally this increases the company s business risk and lowers its creditworthiness with lenders suppliers investors and banks limiting access to funds typically results in a company or individual failing declining sales or poor sales growth indicates that demand is not there for a company s products or services based on its existing business model when expensive marketing campaigns result in no growth consumers may no longer be satisfied with their offerings and the company may be forced to close down likewise if a company offers poor quality products or services consumers will start buying from competitors eventually forcing a business to close its doors as well | |
how to remedy financial distress | as difficult as it may seem there are some ways to turn things around and remedy financial distress one of the first things many companies do is to review their business plans this should include both its operations and performance in the market as well as setting up a target date to accomplish all its goals another consideration is where to cut costs this may include cutting staff or even cutting back on management incentives which can often be costly to a business s bottom line some companies may consider restructuring their debts under this process companies that cannot meet their obligations can renegotiate their debts and change their repayment terms in order to improve their liquidity by restructuring they can continue operations for individuals who experience financial distress the tips to remedy the situation are similar to those listed above those affected may find it prudent to cut back on unnecessary or excessive spending habits such as dining out travel and other purchases that may be deemed a luxury another option may be credit counseling with credit counseling a counselor renegotiates a debtor s obligations allowing him or her to avoid bankruptcy debt consolidation is another method for reducing monthly debt obligations by rolling high interest debts such as credit cards into a single lower interest personal loan distress in large financial institutionsone factor contributing to the financial crisis of 2007 2008 was the government s history of providing emergency loans to distressed financial institutions in markets believed too big to fail this created an expectation for parts of the financial sector being protected against losses known as moral hazard the federal financial safety net is supposed to protect large financial institutions and their creditors from failure to reduce systemic risk to the financial system however these guarantees also encouraged imprudent risk taking that caused instability in the very system the safety net was supposed to protect because the government safety net subsidizes risk taking investors who feel protected by the government may be less likely to demand higher yields as compensation for assuming greater risks likewise creditors may feel less urgency for monitoring firms implicitly protected excessive risk taking means firms are more likely to experience distress and may require bailouts to stay solvent additional bailouts may erode market discipline further resolution plans or corporate living wills may be an important method of establishing credibility against bailouts the government safety net may then be a less attractive option in times of financial distress | |
what is financial economics | financial economics is a branch of economics that analyzes the use and distribution of resources in markets financial decisions must often take into account future events whether those be related to individual stocks portfolios or the market as a whole | |
how financial economics works | making financial decisions is not always a straightforward process time risk opportunity costs and information can create incentives and disincentives financial economics employs economic theory to evaluate how certain things impact decision making providing investors with the instruments to make the right calls financial economics usually involves the creation of sophisticated models to test the variables affecting a particular decision often these models assume that individuals or institutions making decisions act rationally though this is not necessarily the case the irrational behavior of parties has to be taken into account in financial economics as a potential risk factor this branch of economics builds heavily on microeconomics and basic accounting concepts it is a quantitative discipline that uses econometrics as well as other mathematical tools financial economics necessitates familiarity with basic probability and statistics since these are the standard tools used to measure and evaluate risk financial economics studies fair value risk and returns and the financing of securities and assets numerous monetary factors are taken into account including interest rates and inflation financial economics vs traditional economicstraditional economics focuses on exchanges in which money is one but only one of the items traded in contrast financial economics concentrates on exchanges in which money of one type or another is likely to appear on both sides of a trade the financial economist can be distinguished from traditional economists by their focus on monetary activities in which time uncertainty options and information play roles financial economics methodsthere are many angles to the concept of financial economics two of the most prominent are decision making over time recognizes the fact that the value of 1 in 10 years time is less than the value of 1 now therefore the 1 at 10 years must be discounted to allow for risk inflation and the simple fact that it is in the future failure to discount appropriately can lead to problems such as underfunded pension schemes advertisements for stock market based financial products must remind potential buyers that the value of investments may fall as well as rise financial institutions are always looking for ways of insuring or hedging this risk it is sometimes possible to hold two highly risky assets but for the overall risk to be low if share a only performs badly when share b performs well and vice versa then the two shares perform a perfect hedge an important part of finance is working out the total risk of a portfolio of risky assets since the total risk may be less than the risk of the individual components | |
what do financial economists do | financial economists analyze economic and monetary trends particularly as they relate to policy this work involves tracking and collecting data forecasting trends assessing the impact of fiscal and monetary policy and articulating business strategies to hedge against potential risks | |
what is the role of financial economics | financial economics as a field plays a key role in estimating the potential impacts of events and policy be they fiscal or monetary consider if a central bank increased interest rates or if congress passed legislation to issue stimulus payments to the general public financial economics would assess how such policies might affect the market | |
what is the difference between economics and finance | economics and finance are closely intertwined disciplines but there are key distinctions finance is centered primarily on the management of money and involves assessing different components of financial systems such as banking credit and investments economics is a broader and more theoretical realm of study one that focuses on the production and distribution of resources throughout a society the bottom linefinancial economics is a branch of economics that analyzes the use and distribution of resources in markets financial economists evaluate how variables like time risk and information should weigh in decision making the field considers critical factors including fiscal and monetary policy when calculating potential returns on investments and evaluating whether to invest in certain securities and assets | |
what is financial engineering | financial engineering is an area of the financial sector that utilizes computer science statistics economics and applied mathematics to solve quantitative financial problems financial engineering is used to analyze the financial markets address current financial issues and devise new and innovative financial products financial engineering is sometimes referred to as quantitative analysis and is used by regular commercial banks investment banks insurance agencies and hedge funds understanding financial engineeringthe financial industry is always coming up with new and innovative investment tools and products for investors and companies most of the products have been developed through techniques in the field of financial engineering using mathematical modeling and computer science financial engineers are able to test and issue new tools such as new methods of investment analysis new debt offerings new investments new trading strategies new financial models etc financial engineers run quantitative risk models to predict how an investment tool will perform whether a new offering in the financial sector would be viable and profitable in the long run and what types of risks are presented in each product offering given the volatility of the markets financial engineers work with insurance companies asset management firms hedge funds and banks within these companies financial engineers work in proprietary trading risk management portfolio management derivatives and options pricing structured products and corporate finance departments types of financial engineeringwhile financial engineering uses stochastics simulations and analytics to design and implement new financial processes to solve problems in finance the field also creates new strategies that companies can take advantage of to maximize corporate profits for example financial engineering has led to the explosion of derivative trading in the financial markets since the cboe options exchange was formed in 1973 and two of the first financial engineers fischer black and myron scholes published their option pricing model trading in options and other derivatives has grown dramatically 12through the regular options strategy where one can either buy a call or put depending on whether they are bullish or bearish financial engineering has created new strategies within the options spectrum providing more possibilities to hedge or make profits examples of options strategies born out of financial engineering efforts include married put protective collar long straddle short strangles butterfly spreads etc the field of financial engineering has also introduced speculative vehicles in the markets for example instruments such as the credit default swap cds were initially created in the late 90s to provide insurance against defaults on bond payments such as municipal bonds however these derivative products drew the attention of investment banks and speculators who realized they could make money from the monthly premium payments associated with a cds by betting with them in effect the seller or issuer of a cds usually a bank would receive monthly premium payments from the buyers of the swap the value of a cds is based on the survival of a company the swap buyers are betting on the company going bankrupt and the sellers are insuring the buyers against any negative event as long as the company remains in good financial standing the issuing bank will keep getting paid monthly if the company goes under the cds buyers will cash in on the credit event criticism of financial engineeringalthough financial engineering has revolutionized the financial markets it played a role in the 2008 financial crisis as the number of defaults on subprime mortgage payments increased more credit events were triggered credit default swap cds issuers that is banks could not make the payments on these swaps since the defaults were happening almost at the same time many corporate buyers that had taken out cdss on mortgage backed securities mbs that they were heavily invested in soon realized that the cdss they held were worthless to reflect the loss of value they reduced the value of assets on their balance sheets which led to more failures on a corporate level and a subsequent economic recession due to the 2008 global recession brought on by engineered structured products financial engineering is considered to be a controversial field however it is apparent that this quantitative study has greatly improved the financial markets and processes by introducing innovation rigor and efficiency to the markets and industry | |
do financial engineers make a lot of money | yes financial engineers make a lot of money the average total pay for a financial engineer is 140 000 the range of total pay is between 105 000 and 193 000 and will vary depending on the company location and level of experience 3 | |
does financial engineering require coding | generally financial engineering will require the knowledge of coding in at least one programming language each job is different and will require different sets of skills however to be competitive in the job market applicants for financial engineering jobs should be capable of coding | |
is financial engineering a major | some colleges and universities may provide financial engineering majors but it may not always be an option for a major students can still take courses that relate to financial engineering such as mathematics computer science statistics and finance the bottom linefinancial engineering is an integral part of the financial world using mathematics statistics computer science and other related fields financial engineering helps innovate the financial sector with new products better ways to model and make investments and improve the bottom line of financial institutions though it has generally revolutionized the financial field for the better there have been times when it has contributed to economic woes | |
what is financial exposure | financial exposure is the amount an investor stands to lose in an investment should the investment fail for example the financial exposure involved in purchasing a car would be the initial investment amount minus the insured portion knowing and understanding financial exposure which is an alternative name for risk is a crucial part of the investment process understanding financial exposureinvestors are always seeking to limit their financial exposure while trying to maximize profits which helps to maintain a balance of risk and reward for instance if 100 shares of stock purchased at 10 a share appreciated to 20 selling 50 shares would eliminate the financial exposure the original purchase cost the investor 1 000 as the shares appreciate selling 50 shares at 20 returns the investor s initial stake this method is what is meant by taking money off the table it is also sometimes colloquially referred to as playing with the house s money the only risk going forward would be for the profit made as the investor has already recouped the principal amount conversely if the stock decreased from the original purchase price of 10 to 5 per share the investor would have lost half the original principal amount financial exposure applies not only to investing in the stock market but exists whenever an individual stands to lose any of the principal value spent purchasing a home is an excellent example of financial exposure if the value of real estate declines and the homeowner sells at a lower price than the original purchase price the homeowner recognizes a loss on the investment reducing financial exposurethe simplest way to minimize financial exposure is to put money into principal protected investments with little to no risk certificates of deposit cds or savings accounts are two ways to reduce financial exposure drastically federal deposit insurance corporation fdic guarantees both the investment in cds and the savings account up to the qualified coverage amounts of 250 000 1however with no risk an investment provides little return also if there is little financial exposure this leaves a conservative investor vulnerable to other risks such as inflation another way to reduce financial exposure is to diversify among many investments and asset classes to build a less volatile portfolio an investor should have a combination of stocks bonds real estate and other various asset classes within equities there should be further diversification among sectors market capitalizations and exposure to domestic and international markets when an investor diversifies their portfolio successfully among many asset classes it should reduce overall volatility if the market turns bearish non correlating asset classes will minimize the downside hedging is another way to reduce financial exposure there are many ways to hedge a portfolio or an investment airlines purchase crude oil futures contracts at current prices in anticipation of future passenger load as a hedge later if oil prices skyrocket and cause the airline industry to raise ticket prices and shrink margins those hedged airlines may be able to maintain lower ticket prices and grab market share from the competition an investor can hedge in the stock market by using options inverse exchange traded funds or bear oriented funds gold is one of the most common hedges and it typically appreciates with an inflating dollar or volatile markets |
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