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what is an example of financial exposure | financial exposure is the potential loss of the total amount invested for example if an individual invests 2 000 into a stock their financial exposure is 2 000 and if the stock drops they could lose the entire 2 000 value | |
how do you limit your financial exposure | one of the best ways to limit your financial exposure is to diversify your portfolio rather than having your investments concentrated in one stock invest in multiple stocks rather than having your investments in one sector invest in multiple sectors and rather than having your investments be in only one type of security invest in multiple securities such as stocks bonds real estate and art | |
what is hedging | hedging is a strategy used to reduce financial exposure by taking the opposite position in a security one has invested in for example if you expect the price of oil to rise you will purchase oil futures go long however just in case oil prices fall you hedge your financial exposure by selling oil futures go short so if oil prices do fall and you were wrong you will lose money on your long oil futures but make money on your short oil futures reducing the money you lost the bottom lineinvestors must consistently manage risk and reward the higher the risk generally the upside potential is greater but so are the chances for losses understanding one s financial exposure when picking investments is critical to success investors can take actions to mitigate financial exposure such as through diversification and hedging ensuring that their losses are minimal | |
what is a financial guarantee | a financial guarantee is an agreement that guarantees a debt will be repaid to a lender by another party if the borrower defaults essentially a third party acting as a guarantor promises to assume responsibility for a debt should the borrower be unable to keep up on its payments to the creditor guarantees can also come in the form of a security deposit or collateral the types vary ranging from corporate guarantees to personal ones understanding financial guaranteessome financial agreements may require the use of a financial guarantee before they can be executed in many cases a guarantee is a legal contract that promises repayment of a debt to a lender this agreement takes place when a guarantor agrees to take on the financial responsibility if the original debtor defaults on their financial obligation or goes insolvent all three parties must sign the agreement in order for it to go into effect 1guarantees may take on the form of a security deposit common in the banking and lending industries this is a form of collateral provided by the debtor that can be liquidated if the debtor defaults 2 for instance a secured credit card requires the borrower usually someone with no credit history to put down a cash deposit for the amount of the credit line financial guarantees act just like insurance and are very important in the financial industry they allow certain financial transactions especially those that wouldn t normally take place to go through permitting for instance high risk borrowers to take out loans and other forms of credit in short they mitigate the risk associated with lending to high risk borrowers and extending credit during times of financial uncertainty guarantees are important because they make lending more affordable lenders can offer their borrowers better interest rates and can get a better credit rating in the market they also put investors at ease making them feel more comfortable because they know their investments and returns are safe 1special considerationsa financial guarantee doesn t always cover the entire liability for instance a guarantor may only guarantee the repayment of interest or principal but not both sometimes multiple companies sign on as a party to a financial guarantee in these cases each guarantor is usually responsible for only a pro rata portion of the issue in other cases however guarantors may be responsible for the other guarantors portions if they default on their responsibilities financial guarantees may cut down the risk of default in most cases but that doesn t mean they re fool proof we saw this during the fallout after the financial crisis of 2007 2008 most bonds are backed by a financial guarantee firm also referred to as a monoline insurer against default the global financial crisis hit financial guarantee firms particularly hard it left numerous financial guarantors with billions of dollars of obligations to repay on mortgage backed securities mbss that defaulted causing financial guarantee firms to have their credit ratings slashed types of financial guaranteesas noted above guarantees may come in the form of a contract or may require the debtor to put up some form of collateral in order to access credit this acts as an insurance policy which guarantees payment for both corporations and personal lending here are some of the most common types of both a financial guarantee in the corporate world is a non cancellable indemnity this is a bond backed by an insurer or other secure financial institution it gives investors a guarantee that principal and interest payments will be made many insurance companies specialize in financial guarantees and similar products used by debt issuers as a way of attracting investors as noted above the guarantee gives investors comfort that the investment will be repaid if the securities issuer can t fulfill the contractual obligation to make timely payments it also can result in a better credit rating due to the outside insurance which lowers the cost of financing for issuers a letter of intent loi is also a financial guarantee this is a commitment that states that one party will do business with another it clearly lays out the financial obligations of each party but may not necessarily be a binding agreement 3lois are commonly used in the shipping industry where the recipient s bank provides a guarantee that it will pay the shipping company once the goods are received lenders may require financial guarantees from certain borrowers before they can access credit for example lenders may require college students to get a guarantee from their parents or another party before they issue student loans other banks require a cash security deposit or form of collateral before they give out any credit | |
don t confuse a guarantor with a cosigner a cosigner s responsibility for a debt occurs at the same time as the original borrower while the guarantor s obligation only kicks in when the borrower defaults | example of a financial guaranteehere s a hypothetical example to show how financial guarantees work let s assume that xyz company has a subsidiary named abc company abc company wants to build a new manufacturing facility and needs to borrow 20 million to proceed if banks determine that company abc has potential credit deficiencies they may ask xyz company to become a guarantor for the loan that means that if abc defaults xyz company must repay the loan using funds from other lines of business | |
what is financial health | financial health is a term used to describe the state of one s personal monetary affairs there are many dimensions to financial health including the amount of savings you have how much you re putting away for retirement and how much of your income you are spending on fixed or non discretionary expenses understanding financial healthfinancial experts have devised rough guidelines for each indicator of financial health but each person s situation is different for this reason it is worthwhile to spend time developing your own financial plan to ensure that you are on track to reach your goals and that you re not putting yourself at undue financial risk if the unexpected occurs measure your financial healthto get a better grasp of your financial health it might help to ask yourself a few key questions consider this a self assessment of your financial health | |
how financial health is determined | an individual s financial health can be measured in a number of ways a person s savings and overall net worth represent the monetary resources at their disposal for current or future use these can be affected by debt such as credit cards mortgages and auto and student loans 1 financial health is not a static figure it changes based on an individual s liquidity and assets as well as the fluctuation of the price of goods and services for example an individual s salary might remain constant while the costs for gasoline food mortgages and college tuition increase despite the good state of their initial financial health the person may lose ground and lapse into decline if they do not keep pace with rising costs of goods typical signs of strong financial health include a steady flow of income rare changes in expenses strong returns on investments that have been made and a cash balance that is growing and is on track to continue to grow 2improving your financial healthto improve your financial health you must first take a hard realistic look at where you re currently at calculate your net worth and figure out where you stand this includes taking everything you own such as retirement accounts vehicles and other assets and subtracting any and all debts 3then you need to create a budget with your budget it s not enough just to plan for where you ll be spending but it s also important to take a hard and close look at where you already spend are there areas where you could cut back recurring subscriptions that you don t really need such as cable it s fortuitous to understand what your needs are versus what your wants are use spreadsheets or mobile apps to help set up a budget or use the time tested envelope method which has you create an envelope for each budget item such as groceries and keeping the allocated cash in the respective envelope 4one of the major keys to a budget and maintaining your financial health is to stick to your budget regardless of whether you start making more money or bringing in more income lifestyle creep which includes spending more money as you make more money is detrimental to your financial health building an emergency fund can materially boost your financial health the fund is meant to be money that is saved and readily available for emergencies such as car repairs or job loss the goal should be to have three to six months worth of living expenses in your energy fund 5pay down your debt use either the avalanche or snowball methods the avalanche method suggests paying as much as possible toward the highest interest debt while paying the minimum on all others the snowball meanwhile suggests taking the smallest debt balance first and then work your way up to the largest debt 6 there are pros and cons of each pick the one that works the best for your debt load and your money handling preferences rules and tips for financial health | |
when it comes to effective personal finance keeping your financial health in tip top shape isn t always easy we get caught up with living life however here are a few quick rules and tips that you can follow to either improve or keep you in good financial health | business financial healththe financial health of businesses can be gauged by comparable factors to assess the viability of a company as a going concern for instance if a company has revenue coming in and cash in the bank yet is spending its resources on new investments in production equipment office space new hires and other business services it may raise questions about the long term financial health and survivability of the company if more money is spent that does not contribute to the overall stability and potential growth of the business it can lead to a decline that makes it difficult to pay regular expenses such as utilities and employee salaries this may force businesses to freeze or cut salaries in order to give the company the ability to continue operations | |
what is financial inclusion | financial inclusion refers to efforts to make financial products and services accessible and affordable to all individuals and businesses regardless of their personal net worth or company size financial inclusion strives to remove the barriers that exclude people from participating in the financial sector and using these services to improve their lives it is also called inclusive finance | |
how financial inclusion works | as the world bank notes on its website financial inclusion facilitates day to day living and helps families and businesses plan for everything from long term goals to unexpected emergencies what s more it adds as accountholders people are more likely to use other financial services such as savings credit and insurance start and expand businesses invest in education or health manage risk and weather financial shocks which can improve the overall quality of their lives while the barriers to financial inclusion have been a longtime problem a number of forces are now helping broaden access to the kinds of financial services that many affluent consumers take for granted for its part the financial industry is continually coming up with new ways to provide products and services to the global population and often turn a profit in the process the increasing use of financial technology or fintech for example has provided innovative tools to address the problem of inaccessibility to financial services and devised new ways for individuals and organizations to obtain the services they need at reasonable costs financial inclusion can incorporate accessibility across a plethora of social constructs such as age gender race geographical region disability or socioeconomic standing areas of financial inclusionfinancial inclusion can mean a lot of things in general financial inclusion may refer to but isn t necessarily limited to the following financial economic or entrepreneurial concepts financial education and financial literacy refers to providing financial education and programs that equip individuals with essential financial knowledge and skills this empowers them to make informed decisions budget effectively and understand the benefits of using formal financial services instead of relying on informal or potentially exploitative alternatives in some cases individuals simply did not have appropriate educational access to learn basic financial literacy concepts offering affordable and accessible banking services ensures that unbanked and underbanked individuals can participate in the formal financial system offering no frills savings accounts and low cost transaction accounts enables financial inclusion at the grassroots level this promotes financial saving and enforces financial security both conceptually and physically according to women s world banking 31 of women are more likely than men to have an inactive bank account by focusing on gender specific financial inclusion initiatives financial inclusion can help empower women economically and close the gender gap in financial services these efforts involve tailored financial products financial literacy programs and initiatives to promote women s entrepreneurship traditional credit scoring metrics may alienate or discriminate against those with limited credit history financial inclusion strives to explore alternative credit scoring methods that consider non traditional data sources can extend credit access to those with limited credit history including factors like utility bill payments or rental history in credit assessments enables more individuals to access credit and other financial services further promoting financial and economic opportunities financial inclusion also entails protecting customers within business financial inclusion strives to implement protection regulations safeguards to uphold the interests of financially vulnerable individuals strong consumer protection frameworks ensure fair treatment transparent pricing and ethical conduct by financial institutions fostering trust and confidence in formal financial services financial inclusion aims to ensure those who may be uneducated or uninformed about financial matters may still have confidence in the financial system importance of financial inclusionthere are very broad and general reasons why financial inclusion is important some of the key reasons include be mindful that financial inclusion often requires an upfront investment the true return on investment may be complicated to calculate financial inclusion and technologythere are countless ways technology can and is playing a major role in enhancing financial inclusion here are some ways we can use modern innovations to better serve the world with financial services mobile banking applications offer a wide range of services including checking account balances transferring funds paying bills and even applying for loans these apps are user friendly and accessible 24 7 enabling individuals to conduct financial transactions conveniently from their smartphones without the need to visit physical bank branches in 2021 the fdic found 46 4 of all u s households were using nonbank online payment services online payment systems provide various options for making cashless transactions mobile wallets allow users to store funds digitally and make payments using their mobile phones while contactless payment methods such as near field communication nfcs and qr codes enable swift and secure payments in physical retail settings both solutions reduce the risk of theft or loss associated with carrying cash agent banking models use technology to equip banking agents with mobile devices and software agents act as intermediaries representing financial institutions in remote areas where brick and mortar branches are impractical they offer services such as account opening deposits withdrawals and fund transfers to individuals who may not have easy access to traditional banks fintech lending platforms connect borrowers and lenders directly through online platforms borrowers can apply for loans and lenders can assess their creditworthiness based on data analytics and alternative credit scoring this streamlines the lending process and extends credit access to individuals and businesses underserved by traditional banks or those who would have otherwise been excluded from securing traditional credit for example lendingclub boasts that more than 4 8 million members have used their services to achieve their financial goals blockchain technology provides a decentralized and immutable ledger for secure financial transactions cryptocurrencies enable individuals without traditional bank accounts to participate in the digital economy offering potential alternatives to traditional banking systems consider developing country implementations of these solutions to promote transaction speed counter weak national currencies and promote financial system accessibility financial education apps and online platforms offer interactive and engaging content to improve financial literacy users can access educational modules budgeting tools and investment insights to enhance their understanding of financial concepts and make better financial decisions similar to peer to peer lending crowdfunding allows geographically separated individuals to still commune and support a single cause through donation or equity contributions crowdfunding platforms allow individuals startups and social impact projects to raise funds from a diverse pool of investors this democratized fundraising approach expands access to capital for underserved entrepreneurs and impactful initiatives as of july 2023 gofundme has helped raise over 9 billion peer to peer lending has become particularly important in developing countries where people may not have access to traditional bank financing challenges of financial inclusionthere are perpetual and significant headwinds when striving for financial inclusion first there is a major hurdle regarding a lack of awareness and knowledge about formal financial services rural and marginalized areas may simply not know what services or concepts exist while some communities may have distrust in formal financial systems plus cultural and social norms and traditions may influence financial behaviors and decisions policy and regulatory barriers can deter financial institutions from serving low income customers and entering underserved markets socioeconomic disparities and gender inequalities can hinder financial inclusion with women and marginalized groups potentially facing greater barriers to access and control over financial resources it can be very difficult to solve a problem that can t be appropriately measured inadequate data and market information on unbanked and underbanked populations can hinder the development of targeted and effective financial inclusion strategies in addition geopolitical and conflict related challenges can disrupt financial infrastructure and stability further limiting access to financial services in specific physical regions last data privacy and security concerns may deter individuals from adopting digital financial services especially in regions with inadequate data protection frameworks in some cases consumers may knowingly or unknowingly elect to financially exclude themselves based on the choices they decide for example those not trusting in digital services financially exclude themselves from many opportunities in exchange for greater control and comfort over their personal information | |
how does financial inclusion benefit the economy | financial inclusion contributes to economic growth by stimulating entrepreneurship increasing savings and expanding investment opportunities it boosts consumer spending and business development leading to job creation and improved productivity a financially inclusive economy also attracts more foreign investment and helps achieve sustainable development goals | |
what role do governments play in promoting financial inclusion | governments play a pivotal role in promoting financial inclusion through policy and regulatory frameworks they can implement measures to reduce barriers encourage financial institutions to serve underserved populations and invest in financial literacy programs and digital infrastructure | |
what are the risks associated with financial inclusion | some risks associated with financial inclusion include over indebtedness potential exploitation by unscrupulous lenders and data privacy concerns with the use of digital financial services | |
what are the future trends and innovations in financial inclusion | the future of financial inclusion is likely to be shaped by advancements in fintech such as artificial intelligence blockchain and digital currencies additionally greater emphasis on data privacy and security along with regulatory developments will influence the trajectory of financial inclusion initiatives worldwidthe bottom linefinancial inclusion refers to the process of ensuring that all individuals especially the underserved and marginalized populations have access to affordable and appropriate financial services it aims to empower people with tools like savings accounts credit insurance and digital payment options enabling them to participate in the formal financial system manage their finances and build economic resilience | |
what is financial independence retire early fire | financial independence retire early fire is a movement of people devoted to a program of extreme savings and investment that aims to allow them to retire far earlier than traditional budgets and retirement plans would permit the 1992 best selling book your money or your life by vicki robin and joe dominguez popularized many of the concepts used by people who are part of this movement the origins of the term and acronym fire are unknown but the term came to embody a core premise of the book people should evaluate every expense in terms of the number of working hours it took to pay for it katie kerpel investopedia | |
what is the purpose of fire | the fire movement takes direct aim at the conventional retirement age of 65 and the industry that has grown up to encourage people to plan for it by dedicating a majority of their income to savings followers of the fire movement hope to be able to quit their jobs and live solely off small withdrawals from their portfolios decades before they reach age 65 in recent years many people millennials in particular have embraced pursuing a fire retirement proponents of the extreme saving lifestyle remain in the workforce for several years saving up to 70 of their yearly income when their savings reach approximately 30 times their yearly expenses or roughly 1 million they may quit their day jobs or retire from work altogether to cover their living expenses after retiring at a young age fire devotees make small withdrawals from their savings typically around 3 to 4 of the balance yearly depending on the size of their savings and their desired lifestyle this requires extreme diligence to monitor expenses and dedication to the maintenance and reallocation of their investments 1there are several fire retirement variations who is fire designed for most people think that fire is meant for people who can pull in a substantial income generally in the six figures and indeed if your goal is to retire in your 30s or 40s that probably is the case that said a lot of people can learn from the movement these principles can help people save for their retirement and even achieve an early one if not quite as early as 40 and remember the first part of fire stands for financial independence something that if achieved can allow you to instead of retire work at something you love rather than something you have to do in your money or your life author vicki robin says that fire is not just about retiring early instead it teaches you how to consume less while living better 2detailed planningit s important for everyone to plan for their retirement yet according to a 2023 report the latest available from the board of governors of the federal reserve system only 31 of people who weren t retired felt that their retirement savings plans were on track 3 the fire movement stresses the importance of having a detailed plan and sticking to it principles that will aid anyone in saving for retirement and maintaining a decent emergency fund economic disciplineto achieve a fire retirement you have to maximize your income while minimizing your expenses retiring by age 40 requires you to go to extremes to succeed but everyone can benefit from making and sticking to a budget while doing all they can to earn as much money as possible whether it s by getting a better job adding a second one or creating additional revenue streams through side businesses or owning rental property wise investmentit is difficult to achieve a secure retirement without investing in a retirement savings plan fire adherents invest larger portions of their income than the average person will want to but the principle of setting aside a set percentage of your income every month for investment and starting to do that as early as possible will allow you to grow your retirement savings to a point where you are more likely to enjoy financial stability in your later years | |
what does fire really mean | the acronym fire stands for financial independence retire early it s a concept and method that can be used to fund an early retirement | |
how does fire work | followers of fire plan to retire much earlier than the traditional retirement age of 65 by dedicating up to 70 of their income to savings while still in the full time workforce when their savings reach approximately 30 times their yearly expenses or roughly 1 million they may quit their day jobs or completely retire from any form of employment | |
what are some fire variations | within the fire movement are several variations fat fire is a more easygoing attempt to save more while giving up less lean fire requires devotion to minimalist living barista fire is for those who want to quit the nine to five rat race and are willing to cut back their spending while working only part time to do so | |
what is the financial industry regulatory authority finra | the financial industry regulatory authority finra is an independent nongovernmental organization that writes and enforces the rules governing registered brokers and broker dealer firms in the united states its stated mission is to safeguard the investing public against fraud and bad practices it is considered a self regulatory organization 12finra was created as the result of the consolidation of the national association of securities dealers nasd and the member regulation enforcement and arbitration operations of the new york stock exchange nyse in 2007 the consolidation was meant to do away with overlapping or redundant regulation and reduce the cost and complexity of compliance 3understanding finrathe financial industry regulatory authority finra is the single largest independent regulatory body for securities firms operating in the united states it oversees more than 3 400 brokerage firms 152 000 branch offices and nearly 617 550 registered securities representatives as of 2020 4 finra has 19 offices across the united states and approximately 3 600 employees 5finra regulates the trading of equities corporate bonds securities futures and options it has also been authorized by congress to protect the interests of investors 6in addition to overseeing securities firms and their brokers finra administers the qualifying exams that securities professionals must pass to sell securities or supervise others who do those include for example the series 7 general securities representative qualification examination and the series 3 national commodities futures examination 7in its enforcement capacity finra has the power to take disciplinary actions against registered individuals or firms that violate its rules in 2020 it initiated 808 disciplinary actions levied fines totaling 57 million and ordered restitution of 25 2 million to investors it also expelled two member firms and suspended another two while barring 246 individuals from the securities business and suspending another 375 4also in 2020 it referred 970 fraud and insider trading cases to the securities and exchange commission sec and other government agencies for prosecution 4for investors who are shopping for a broker or want to check up on their current one finra maintains brokercheck a searchable database of brokers investment advisors and financial advisors brokercheck includes certifications education and any enforcement actions 8 it draws from finra s central registration depository crd database which contains the records of individuals and firms in the securities business in the united states 9the financial industry regulatory authority finra has the power to fine or ban brokers and brokerage firms that violate its rules 2benefits of finrafinra s main benefit for investors is protection from potential abuses and unethical conduct within the financial industry finra resources such as the aforementioned brokercheck allow investors to determine if someone claiming to be a broker is actually a member in good standing by banning brokers who violate its rules of conduct finra stops many financial crimes from taking place finra s commitment to and responsibility for these functions was made clear by the combining of the nasd and the nyse s regulation operations into one organization the sec approved the consolidation of these two organizations in july 2007 in announcing its formation finra described a broad mandate that included responsibility for rule writing firm examination enforcement and arbitration and mediation functions along with all functions that were previously overseen solely by nasd including market regulation under contract for nasdaq the american stock exchange the international securities exchange and the chicago climate exchange 10the american stock exchange was acquired by the nyse in 2008 the nyse was acquired five years later by the intercontinental exchange ice the chicago climate exchange a market for trading greenhouse gas emissions allowances was shut down after the purchase by ice of its parent company climate exchange plc in 2010 1112while finra is a private not for profit regulatory organization its creation was approved by the sec in 2007 criticism of finrafinra faces much of the same type of criticism that is often applied to any self regulatory organization critics such as senator warren of massachusetts and senator cotton of arkansas claim that finra does not do enough to protect investors 13in particular an academic study by egan matvos and seru showed that there were issues with repeat offenders it found that financial advisors with past histories of misconduct were several times more likely to commit offenses in the future 14 finra may have been too restrained in exercising its powers the general criticism of self regulatory agencies such as finra is that they do just enough to maintain the public s trust in this view self regulatory agencies have an inherent conflict of interest while members are interested in keeping the public s trust that interest only goes so far members need to weed out the worst offenders but they don t want the spotlight on themselves for example it might be possible to rank all members for integrity yet that would necessarily result in about half of all members being ranked as below average unsurprisingly self regulatory agencies rarely rank their members | |
what s finra | finra is the independent financial industry regulatory association it creates and enforces the rules that govern u s registered brokers and broker dealers it was formed in 2007 | |
how does finra discipline offenders | a disciplinary action can be formal or informal formal actions can involve a fine a fine and order for restitution suspension or expulsion from the industry informal actions can include cautionary letters and orders to fix a particular problem 15 | |
does finra provide services to investors | yes beyond its regulatory services finra s investor education foundation provides investors with a variety of personal finance and investment information courses research and tools like brokercheck and fund analyzer 16 these can help investors better understand the roles that finance and investing can play in their lives | |
what is the financial information exchange fix | the financial information exchange fix is a vendor neutral electronic communications protocol for the international real time exchange of securities transaction information the protocol is used by the fix community which includes nearly 300 member firms including all major investment banks 1the fix has become the de facto messaging standard for pre trade trade and post trade communication as well as for u s regulatory reporting it is compatible with almost every commonly used network technology fix protocol ltd owns and maintains the fix system the company was formed entirely to fulfill that purpose and to ensure the system remains in the public domain understanding the financial information exchange fix the fix s communications include texting and email securities trade allocations news order submissions and changes trade advertising and execution reporting mostly used for business to business b2b interactions it is designed to improve business messages and transaction flow the fix achieves this goal by minimizing redundancy and reducing time spent on telephone communications written messages transactions and documentation the benefits are particularly obvious to funds investment managers and investment banking firms fix systems transfer accurate and timely financial information concerning securities trades through and across security exchange houses introduced in 1992 for equity trading between salomon brothers and fidelity investments the fix protocol was implemented to provide for more efficient and accountable transactions and record keeping replacing a system that was handled mostly over the phone under the old system indications of interest were often lost on hold or routed to the wrong trader 2the fix has since gone on to become the standard electronic protocol for pre trade trade and post trade communication in equity markets and is increasingly being used in other markets too 2the society for worldwide interbank financial telecommunication swift is the standard for back office messaging while the fix is the standard for front office messaging financial information exchange fix usersthe fix is popular among both the buy side institutions as well as the sell side brokers dealers of the financial markets users include mutual funds investment banks brokers stock and futures exchanges and other electronic communication networks ecns it is mainly used for equity transactions although it can handle bond foreign exchange and derivatives transactions 2the fix trading community member firms maintain and continue to develop the fix messaging standard community members include several leading financial institutions around the globe work done by these member firms ensures the standard continues to evolve to meet new and emerging trading requirements 2their actions also promote the adoption of fix use worldwide the fix protocol itself is a non proprietary free and open standard that is constantly being developed by its member firms 2 | |
what s next for the fix | the fix is an ever changing entity and seeks to stay current with changes in the industry and in technology in recent years members have been discussing current issues and challenges which include cybersecurity digital currencies and blockchain execution transparency and performance improvements 1any firm considering using the fix may wish to download the fix implementation guide from the fix trading community website | |
what is a financial institution fi | a financial institution fi is a company engaged in the business of dealing with financial and monetary transactions such as deposits loans investments and currency exchange financial institutions include a broad range of business operations within the financial services sector including banks insurance companies brokerage firms and investment dealers virtually everyone living in a developed economy has an ongoing or at least periodic need for a financial institution s services investopedia nono floresunderstanding financial institutions fis financial institutions often match savers or investors funds with those seeking funds such as borrowers or businesses seeking to trade shares of ownership for funds typically this leads to future payments from the borrower or business to the saver or investor the tools for matching all of these parties up include products such as loans and markets such as a stock exchange 1at the most basic level financial institutions allow people to access the money they need for example although banks do many things their primary role is to take in funds called deposits from those with money pool the deposits and lend the money to others who need funds banks are intermediaries between depositors who lend money to the bank and borrowers who the bank lends money to this works well because while some depositors need their money at any given moment most do not so banks can use deposits to make long term loans this applies to almost every entity and individual in a capitalist system individuals and households financial and nonfinancial firms and national and local governments 2without financial institutions businesses could not grow and households could only buy goods education and housing that the families have cash for today financial institutions serve most people in some way as a critical part of any economy whether in banking insurance or securities markets individuals and companies rely on financial institutions for transactions and investing for example the health of a nation s banking system is a linchpin of economic stability loss of confidence in a financial institution can easily lead to a bank run the function of financial institutions in capital marketscapital markets are important for functioning capitalist economies because they channel savings and investments between suppliers and those in need suppliers are people or institutions with capital to lend or invest suppliers typically include banks and investors those seeking capital are businesses governments and individuals financial institutions play an important role in capital markets directing capital to where it is most useful for example a bank takes in deposits from customers and lends the money to borrowers ensuring capital markets efficient function regulationgovernments oversee and regulate banks and financial institutions because the institutions play an integral economic role bankruptcies of financial institutions for instance can create panic federal and state agencies can regulate financial institutions sometimes multiple agencies regulate the same institution 3federal depository regulators oversee commercial banks thrifts savings associations and credit unions accepting customer deposits 1the fdic insures deposits in state chartered banks and federal savings associations if a bank fails the fdic insures regular deposit accounts of up to 250 000 per depositor per institution offering this insurance reassures individuals and businesses regarding the safety of their finances with financial institutions 4 like the fdic the ncua insures deposit amounts of up to 250 000 5two federal institutions regulate products markets and market participants for securities such as stocks bonds and derivatives 1these dedicated regulators exclusively oversee government sponsored enterprises which are quasi governmental entities established to enhance the flow of credit to specific sectors of the u s economy 3currently the consumer financial protection bureau cfpb is the only national consumer entity tasked with exclusively regulating consumer products cfpb s purview includes nonbank mortgage related firms private student lenders payday lenders and other large consumer financial entities as determined by the cfpb cfpb is the rulemaking consumer protection authority for all banks and has supervisory authority for banks with more than 10 billion in assets 1states may regulate financial institutions in addition to or instead of federal regulators for example there is minimal federal oversight of the insurance industry each state government has a department that licenses and regulates insurance companies and any company selling insurance products states may also regulate banking securities and consumer protections in addition to federal regulators who work in those areas 8types of financial institutionsfinancial institutions offer various products and services for individual and commercial clients the specific services offered vary widely between different types of financial institutions here are some of the types consumers are most likely to use these financial institutions accept deposits and offers checking and savings account services make business personal and mortgage loans and provides basic financial products like certificates of deposit cds they may also act as payment agents via credit cards wire transfers and currency exchange these types of financial institution can include investment companies issue and invest in securities stocks bonds mutual funds and etfs or exchange traded funds 9 mutual funds are one example of a product offered by an investment company where many investors money is pooled and invested in stocks bonds money market instruments other securities or even cash in an ongoing manner other examples of investment related financial institutions include investment advisors and brokers brokers accept and carry out orders to buy and sell investments such as securities for customers 10among the most familiar non bank financial institutions are insurance companies providing insurance for individuals or corporations is one of the oldest financial services protection of assets and protection against financial risk secured through insurance products is an essential service that facilitates individual and corporate investments that fuel economic growth insurance is primarily regulated at the state level but the u s treasury s federal insurance office fio does monitor the industry and plays an advisory role 2 | |
why are financial institutions important | financial institutions are essential because they provide a marketplace for money and assets so that capital can be efficiently allocated to where it is most useful for example a bank takes in customer deposits and lends the money to borrowers without the bank as an intermediary any individual is unlikely to find a qualified borrower or know how to service the loan via the bank the depositor can earn interest as a result likewise investment banks find investors to market a company s shares or bonds to | |
what are the different types of financial institutions | the most common types of financial institutions include banks credit unions insurance companies and investment companies these entities offer various products and services for individual and commercial clients such as deposits loans investments and currency exchange | |
which agency oversees banking operations in the united states | several agencies oversee banking operations in the u s including the federal reserve office of the comptroller of the currency occ federal deposit insurance corporation fdic and the national credit union administration ncua 1 | |
what s the difference between a commercial and investment bank | a commercial bank where most people do their banking is a type of financial institution that accepts deposits offers checking account services makes business personal and mortgage loans and offers basic financial products like certificates of deposit cds and savings accounts to individuals and small businesses investment banks specialize in providing services designed to facilitate business operations this might include raising money through financing and equity offerings including initial public offerings ipos they also commonly offer brokerage services for investors act as market makers for trading exchanges and manage mergers acquisitions and other corporate restructurings 11 | |
which agency regulates investment banking firms | the securities and exchange commission sec oversees the operations of investment banks as these banks deal with securities 12the bottom linefinancial institutions help keep capitalist economies running by matching people who need funds with those who can lend or invest it they offer a wide range of business operations within the financial services sector including banks credit unions insurance companies and brokerage firms regulatory agencies such as the occ the sec the fdic and the federal reserve oversee the operations of financial institutions in the united states | |
what is a financial instrument | financial instruments are assets that can be traded or exchanged some examples of financial instruments include stock shares exchange traded funds etfs bonds certificates of deposit cds mutual funds loans and derivatives contracts financial instruments provide efficient flow and transfer of capital among the world s investors they are assets that may be in the form of cash a contractual right to deliver or receive cash or another type of financial instrument or evidence of ownership in some entity madelyn goodnight investopediaunderstanding financial instrumentsfinancial instruments can be real or virtual documents representing a legal agreement involving any kind of monetary value equity based financial instruments represent ownership of an asset debt based financial instruments represent a loan made by an investor to the owner of the asset foreign exchange instruments comprise a third unique type of financial instrument different subcategories of each instrument type exist such as preferred share equity and common share equity international accounting standards ias define financial instruments as any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity 1types of financial instrumentsfinancial instruments may be divided into two types cash instruments and derivative instruments types of asset classes of financial instrumentsfinancial instruments may also be divided according to an asset class which depends on whether they are debt based or equity based debt based instruments are essentially loans made by an investor to the issuer in return for a payment of interest short term debt based financial instruments last for one year or less securities of this kind come in the form of treasury bills t bills and commercial paper bank deposits and certificates of deposit cds are technically debt based instruments because they earn depositors interest payments exchange traded derivatives are traded for short term debt based financial instruments such as short dated interest rate futures there also are otc derivatives such as forward rate agreements fras long term debt instrumentslong term debt based financial instruments last for more than a year long term debt securities are typically issued as bonds or mortgage backed securities mbs exchange traded derivatives on these instruments are traded in the form of fixed income futures and options otc derivatives on long term debts include interest rate swaps interest rate caps and floors and long dated interest rate options equity based instruments represent ownership of an asset stocks are equity based instruments as are etfs and mutual funds that are invested in stocks exchange traded derivatives in this category include stock options and equity futures foreign exchange forex or f x instruments include derivatives such as forwards futures and options on currency pairs as well as contracts for difference cfds currency swaps are another common form of forex instrument in addition forex traders may engage in spot transactions for the immediate conversion of one currency into another | |
what are some examples of financial instruments | a financial instrument is any document real or virtual that confers a financial obligation or right to the holder examples of financial instruments include stocks exchange traded funds etfs mutual funds real estate investment trusts reits bonds derivatives contracts such as options futures and swaps checks certificates of deposit cds bank deposits and loans | |
are commodities financial instruments | commodities such as precious metals energy products raw materials and agricultural products are traded on global markets but they do not typically meet the definition of a financial instrument that s because they do not confer a claim or obligation however commodities derivatives are financial instruments they include futures forwards and options contracts that use a commodity as the underlying asset | |
is an insurance policy a financial instruments | insurance policies are not considered securities but they could be viewed as an alternative type of financial instrument because they confer a claim and certain rights to the policyholder and obligations to the insurer an insurance policy is a legally binding contract established with the insurance company and policy owner that provides monetary benefits if certain conditions are met such as death in the case of life insurance if the insurer is a mutual company the policy may also confer ownership and a claim to dividends insurance policies also have a specified value in terms of both the death benefit and living benefits e g cash value for permanent policies the bottom linea financial instrument is effectively a monetary contract real or virtual that confers a right or claim against some counterparty in the form of a payment checks bearer instruments equity ownership or dividends stocks debt bonds loans deposit accounts currency forex or derivatives futures forwards options and swaps financial instruments can be categorized by asset class and as cash based securities or derivatives depending on their type financial instruments may be exchangeable on listed or over the counter markets | |
what is a financial intermediary | a financial intermediary is an entity that acts as the middleman between two parties in a financial transaction such as a commercial bank investment bank mutual fund or pension fund financial intermediaries offer a number of benefits to the average consumer including safety liquidity and economies of scale involved in banking and asset management although in certain areas such as investing advances in technology threaten to eliminate the financial intermediary disintermediation is much less of a threat in other areas of finance including banking and insurance | |
how a financial intermediary works | a non bank financial intermediary does not accept deposits from the general public the intermediary may provide factoring leasing insurance plans or other financial services many intermediaries take part in securities exchanges and utilize long term plans for managing and growing their funds the overall economic stability of a country may be shown through the activities of financial intermediaries and the growth of the financial services industry financial intermediaries move funds from parties with excess capital to parties needing funds the process creates efficient markets and lowers the cost of conducting business for example a financial advisor connects with clients through purchasing insurance stocks bonds real estate and other assets banks connect borrowers and lenders by providing capital from other financial institutions and from the federal reserve insurance companies collect premiums for policies and provide policy benefits a pension fund collects funds on behalf of members and distributes payments to pensioners types of financial intermediariesmutual funds provide active management of capital pooled by shareholders the fund manager connects with shareholders through purchasing stock in companies he anticipates may outperform the market by doing so the manager provides shareholders with assets companies with capital and the market with liquidity benefits of financial intermediariesthrough a financial intermediary savers can pool their funds enabling them to make large investments which in turn benefits the entity in which they are investing at the same time financial intermediaries pool risk by spreading funds across a diverse range of investments and loans loans benefit households and countries by enabling them to spend more money than they have at the current time financial intermediaries also provide the benefit of reducing costs on several fronts for instance they have access to economies of scale to expertly evaluate the credit profile of potential borrowers and keep records and profiles cost effectively last they reduce the costs of the many financial transactions an individual investor would otherwise have to make if the financial intermediary did not exist example of a financial intermediaryin july 2016 the european commission took on two new financial instruments for european structural and investment esi fund investments the goal was to create easier access to funding for startups and urban development project promoters loans equity guarantees and other financial instruments attract greater public and private funding sources that may be reinvested over many cycles as compared to receiving grants one of the instruments a co investment facility was to provide funding for startups to develop their business models and attract additional financial support through a collective investment plan managed by one main financial intermediary the european commission projected the total public and private resource investment at approximately 15 million approximately 17 75 million per small and medium sized enterprise 1 | |
what is financial literacy | financial literacy is the ability to understand and effectively use various financial skills including personal financial management budgeting and investing | |
when you are financially literate you have the essential foundation for a smart relationship with money this can help start a lifelong journey of learning about the financial aspects of your life the earlier you start to become financially literate the better off you ll be because education is the key to a successful financial future | investopedia paige mclaughlinunderstanding financial literacysince about 2000 financial products and services have become increasingly widespread throughout society whereas earlier generations of u s residents may have purchased goods primarily in cash various credit products are popular today such as credit and debit cards and electronic transfers a 2021 survey by the federal reserve bank of san francisco revealed that 28 of all payments were made via credit card with only 20 being made in cash 1given the importance of finance in modern society a lack of financial literacy can be very damaging to an individual s long term financial success being financially illiterate can lead to many pitfalls such as being more likely to accumulate unsustainable debt burdens either through poor spending decisions or a lack of long term preparation this in turn can lead to poor credit bankruptcy housing foreclosure and other negative consequences thankfully there are now more resources than ever for those wishing to educate themselves about financial topics one such resource is the u s government sponsored financial literacy and education commission which offers a range of free learning opportunities 2financial literacy can help protect individuals from becoming victims of financial fraud a type of crime that is becoming more commonplace scope of financial literacyalthough many skills might fall under the umbrella of financial literacy popular examples include household budgeting learning how to manage and pay off debts and evaluating the tradeoffs between different credit and investment products these skills often require at least a working knowledge of key financial concepts such as compound interest and the time value of money financial literacy can cover short and long term financial strategies the strategy you use will depend on several factors such as your age investment time horizon and risk tolerance financial literacy also encompasses knowing how investment decisions made today will impact your tax liabilities in the future financial products such as mortgages student loans health insurance and self directed investment accounts have grown in importance it is imperative for individuals to understand how to use them responsibly it s also important to know which investment vehicles are best to use when saving whether for a financial goal like buying a home or for retirement other developments in finance such as e wallets digital money and p2p lending can be convenient and cost effective but require that consumers be educated adequately to use them to their advantage | |
why financial literacy matters | day to day living expenses living within your means short term borrowing long term budget forecasting to manage these and other essential financial realities properly as you go through life you must be financially literate it is important to plan and save enough to provide adequate income in retirement while avoiding high levels of debt that might result in bankruptcy defaults and foreclosures in its economic well being of u s households in 2022 report the u s federal reserve system board of governors found that many americans are not prepared for retirement twenty eight percent indicated that they have no retirement savings while about 31 of those not yet retired felt that their retirement savings were on track among those who have self directed retirement savings about 63 admitted to feeling low levels of confidence in making retirement decisions 3lack of financial literacy has left millennials the largest share of the american workforce unprepared for a severe financial crisis according to research by the tiaa institute even among those who reported having a high knowledge of personal finance only 19 answered questions about fundamental financial concepts correctly 4forty three percent reported using expensive alternative financial services such as payday loans and pawnshops more than half lacked an emergency fund to cover three months of expenses and 37 were financially fragile defined as unable or unlikely to be able to come up with 2 000 within a month in the event of an emergency 4millennials also carry large amounts of student loan and mortgage debt in fact 44 of them said they have too much debt 5though these may seem like individual problems they have a wider effect on the entire population than previously believed the lack of knowledge of mortgage products prior to the 2008 financial crisis created widespread vulnerability to predatory lending the financial impact of that crisis affected the entire economy financial literacy is an issue with broad implications for economic health if you are a younger individual retirement may seem years away yet it is one of the best goals to begin saving for that s because the earlier you start the longer your invested savings will have to compound and the more money you ll end up with an employer sponsored retirement account such as a 401 k can help benefits of financial literacybroadly speaking the benefit of financial literacy is that it empowers individuals to make smarter decisions about their finances in addition strategies to improve financial literacy skillsdeveloping financial literacy involves learning and practicing skills related to budgeting managing and paying off debts and more it means understanding and using credit and investment products wisely the good news is that no matter where you are in life and financially it s never too late to start practicing good financial habits here are several practical strategies to consider track how much money you receive each month and how much you spend you can use an excel spreadsheet paper or a budgeting app your budget should include income paychecks investments alimony fixed expenses rent mortgage payments utilities loan payments discretionary spending nonessentials such as eating out shopping and travel and savings to build savings this reverse budgeting strategy involves choosing a savings goal such as paying for higher education deciding how much you want to contribute toward it each month and setting that amount aside before you divvy up the rest of your expenses stay on top of monthly bills making sure that your payments are always sent to arrive on time consider taking advantage of automatic debits from a checking account or bill pay apps and sign up for payment reminders by email phone or text once a year consumers can request a free credit report from each of the three major credit bureaus equifax experian and transunion through the federally created website annualcreditreport com 6review these reports and dispute any errors by informing the credit bureau of inaccuracies because you can get three of them consider spacing out your requests throughout the year to monitor your credit regularly in a 2022 survey by the federal reserve 27 of adults in the u s reported not doing okay financially the number who reported not living comfortably increased from 2021 7a good credit score enables you to obtain the best interest rates on loans and credit cards among other benefits monitor your score via a free credit monitoring service or if you can afford to and want to add an extra layer of protection for your personal information use a credit monitoring service in addition be aware of what can raise or lower your scores such as credit inquiries and credit utilization ratios use your budget to stay on top of debt by reducing spending and increasing repayment develop a debt reduction plan such as paying down the loan with the highest interest rate first if your debt is excessive contact lenders to renegotiate repayment consolidate loans or find a debt counseling program if your employer offers a 401 k retirement savings account be sure to sign up and contribute the maximum to receive the employer match consider opening an ira and creating a diversified investment portfolio of stocks fixed income and commodities if necessary seek financial advice from professional advisors to help you determine how much money you will need to retire comfortably and develop strategies to reach your goal example of financial literacyemma is a high school teacher who tries to inform her students about financial literacy through her curriculum she educates them on the basics of a variety of financial topics such as personal budgeting debt management saving for college and retirement insurance investing and even tax planning emma s students can and will use these concepts for things like renting an apartment getting a first job or even just paying for fun activities such as going to the movies understanding concepts such as credit cards bank accounts interest rates opportunity costs debt management compound interest and budgets for example could help her students start saving and manage the student loans that they might rely on to fund their college education it could keep them from amassing dangerous levels of debt and threatening their credit scores similarly she expects that certain topics such as income taxes and retirement planning will eventually prove useful to all students no matter what they end up doing after high school | |
why is financial literacy important | financial literacy gives an individual the tools and resources they need to be financially secure throughout their life the lack of financial literacy can lead to many pitfalls such as overspending and accumulating unsustainable debt burdens this in turn can lead to poor credit bankruptcy housing foreclosure or other negative consequences | |
how do i become financially literate | becoming financially literate involves learning and practicing a variety of skills related to budgeting managing and paying off debts and understanding credit and investment products basic steps to improve your personal finances include creating a budget keeping track of expenses making timely payments being prudent about saving money periodically checking your credit report and investing for your future | |
what are some popular personal budget rules | two commonly used personal budgeting methods are the 50 20 30 and 70 20 10 rules and their simplicity is what makes them popular the first entails dividing your after tax take home pay into three areas needs 50 savings 20 and wants 30 the 70 20 10 rule also follows a similar blueprint recommending that your after tax take home income be divided into segments that cater to expenses 70 savings or reducing debt 20 and investments and charitable donations 10 | |
what are the principles of financial literacy | there are five broad principles of financial literacy though other models may list different key components the overarching goal of financial literacy is to teach individuals about earning spending saving borrowing and protecting their money 8the bottom linefinancial literacy is the knowledge of various aspects of personal finance and the ability to make smart decisions about money it includes preparing a budget knowing how much to save recognizing favorable loan terms understanding what impacts credit and distinguishing different investment options that can be used to save for retirement the financial skills that come from financial literacy can help individuals handle their personal finances responsibly which in turn can help them protect the well being of their financial futures | |
what are financial markets | financial markets refer broadly to any marketplace where securities trading occurs including the stock market bond market forex market and derivatives market financial markets are vital to the smooth operation of capitalist economies investopedia theresa chiechiunderstanding the financial marketsfinancial markets play a vital role in facilitating the smooth operation of capitalist economies by allocating resources and creating liquidity for businesses and entrepreneurs the markets make it easy for buyers and sellers to trade their financial holdings financial markets create securities products that provide a return for those with excess funds investors lenders and make these funds available to those needing additional money borrowers the stock market is just one type of financial market financial markets are created when people buy and sell financial instruments including equities bonds currencies and derivatives financial markets rely heavily on informational transparency to ensure that the markets set prices that are efficient and appropriate some financial markets are small with little activity and others like the new york stock exchange nyse trade trillions of dollars in securities daily the equities stock market is a financial market that enables investors to buy and sell shares of publicly traded companies the primary stock market is where new issues of stocks are sold any subsequent trading of stocks occurs in the secondary market where investors buy and sell securities they already own prices of securities traded in the financial markets may not necessarily reflect their intrinsic value types of financial marketsthere are several different types of markets each one focuses on the types and classes of instruments available on it perhaps the most ubiquitous of financial markets are stock markets these are venues where companies list their shares which are bought and sold by traders and investors stock markets or equities markets are used by companies to raise capital and by investors to search for returns stocks may be traded on listed exchanges such as the new york stock exchange nyse nasdaq or the over the counter otc market most stock trading is done via regulated exchanges which plays an important economic role because it is another way for money to flow through the economy typical participants in a stock market include both retail and institutional investors traders market makers mms and specialists who maintain liquidity and provide two sided markets brokers are third parties that facilitate trades between buyers and sellers but who do not take an actual position in a stock an over the counter otc market is a decentralized market meaning it does not have physical locations and trading is conducted electronically in which market participants trade securities directly meaning without a broker while otc markets may handle trading in certain stocks e g smaller or riskier companies that do not meet the listing criteria of exchanges most stock trading is done via exchanges certain derivatives markets however are exclusively otc making up an essential segment of the financial markets broadly speaking otc markets and the transactions that occur in them are far less regulated less liquid and more opaque a bond is a security in which an investor loans money for a defined period at a pre established interest rate you may think of a bond as an agreement between the lender and borrower containing the loan s details and its payments bonds are issued by corporations as well as by municipalities states and sovereign governments to finance projects and operations for example the bond market sells securities such as notes and bills issued by the united states treasury the bond market is also called the debt credit or fixed income market typically the money markets trade in products with highly liquid short term maturities less than one year and are characterized by a high degree of safety and a relatively lower interest return than other markets at the wholesale level the money markets involve large volume trades between institutions and traders at the retail level they include money market mutual funds bought by individual investors and money market accounts opened by bank customers individuals may also invest in the money markets by purchasing short term certificates of deposit cds municipal notes or u s treasury bills among other examples a derivative is a contract between two or more parties whose value is based on an agreed upon underlying financial asset like a security or set of assets like an index rather than trading stocks directly a derivatives market trades in futures and options contracts and other advanced financial products that derive their value from underlying instruments like bonds commodities currencies interest rates market indexes and stocks futures markets are where futures contracts are listed and traded unlike forwards which trade otc futures markets utilize standardized contract specifications are well regulated and use clearinghouses to settle and confirm trades options markets such as the chicago board options exchange cboe similarly list and regulate options contracts both futures and options exchanges may list contracts on various asset classes such as equities fixed income securities commodities and so on the forex foreign exchange market is where participants can buy sell hedge and speculate on the exchange rates between currency pairs the forex market is the most liquid market in the world as cash is the most liquid of assets the currency market handles more than 7 5 trillion in daily transactions more than the futures and equity markets combined 1as with the otc markets the forex market is also decentralized and consists of a global network of computers and brokers worldwide the forex market is made up of banks commercial companies central banks investment management firms hedge funds and retail forex brokers and investors commodities markets are venues where producers and consumers meet to exchange physical commodities such as agricultural products e g corn livestock soybeans energy products oil gas carbon credits precious metals gold silver platinum or soft commodities such as cotton coffee and sugar these are known as spot commodity markets where physical goods are exchanged for money however the bulk of trading in these commodities takes place on derivatives markets that utilize spot commodities as the underlying assets forwards futures and options on commodities are exchanged both otc and on listed exchanges around the world such as the chicago mercantile exchange cme and the intercontinental exchange ice thousands of cryptocurrency tokens are available and traded globally across a patchwork of independent online crypto exchanges these exchanges host digital wallets for traders to swap one cryptocurrency for another or for fiat monies such as dollars or euros because most crypto exchanges are centralized platforms users are susceptible to hacks or fraudulent activity decentralized exchanges are also available that operate without any central authority these exchanges allow direct peer to peer p2p trading without an actual exchange authority to facilitate the transactions futures and options trading are also available on major cryptocurrencies examples of financial marketsthe above sections make clear that the financial markets are broad in scope and scale to give two more concrete examples we will consider the role of stock markets in bringing a company to ipo and the role of the otc derivatives market in the 2008 09 financial crisis as a company establishes itself over time and grows it needs access to additional capital it will often find itself in need of much larger amounts of capital than it can get from ongoing operations traditional bank loans or venture and angel funding firms can raise the amount of capital they need by selling shares of itself to the public through an initial public offering ipo this changes the company s status from a private firm whose shares are held by a few shareholders to a publicly traded company whose shares will be subsequently held by public investors the ipo also offers early investors in the company an opportunity to cash out part of their stake often reaping very handsome rewards in the process initially the underwriters usually set the ipo price through their pre marketing process once the company s shares are listed on a stock exchange and trading commences the price of these shares will fluctuate as investors and traders assess and reassess their intrinsic value and the supply and demand for those shares at any given moment while the 2008 09 financial crisis was caused and made worse by several factors one factor that has been widely identified is the market for mortgage backed securities mbs 2 these are otc derivatives where cash flows from individual mortgages are bundled sliced up and sold to investors the crisis resulted from a sequence of events each with its own trigger these events culminated in the banking system s near collapse 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 the amount of subprime mortgage debt 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 3 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 in the meantime the investment banks looking for easy profits in the wake of the dotcom bust and the 2001 recession created a type of mbs called 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 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 | |
what are the different types of financial markets | some examples of financial markets and their roles include the stock market the bond market forex commodities and the real estate market among others financial markets can also be broken down into capital markets money markets primary vs secondary markets and listed vs otc markets | |
how do financial markets work | despite covering many different asset classes and having various structures and regulations all financial markets work essentially by bringing together buyers and sellers in some asset or contract and allowing them to trade with one another this is often done through an auction or price discovery mechanism | |
what are the main functions of financial markets | financial markets exist for several reasons but the most fundamental function is to allow for the efficient allocation of capital and assets in a financial economy by allowing a free market for the flow of capital financial obligations and money the financial markets make the global economy run more smoothly while allowing investors to participate in capital gains over time the bottom linefinancial markets provide liquidity capital and participation that are essential for economic growth and stability without financial markets capital could not be allocated efficiently and economic activity such as commerce and trade investments and growth opportunities would be greatly diminished many players make markets an essential part of the economy firms use stock and bond markets to raise capital from investors speculators look to various asset classes to make directional bets on future prices at the same time hedgers use derivatives markets to mitigate various risks and arbitrageurs seek to take advantage of mispricings or anomalies observed across various markets brokers often act as mediators that bring buyers and sellers together earning a commission or fee for their services | |
what is financial modeling | financial modeling is the process of creating a summary of a company s expenses and earnings in the form of a spreadsheet that can be used to calculate the impact of a future event or decision a financial model has many uses for company executives financial analysts most often use it to analyze and anticipate how a company s stock performance might be affected by future events or executive decisions investopedia michela buttignolunderstanding financial modelingfinancial modeling is a representation in numbers of a company s operations in the past present and forecasted future such models are intended to be used as decision making tools company executives might use them to estimate the costs and project the profits of a proposed new project financial analysts use them to explain or anticipate the impact of events on a company s stock from internal factors such as a change of strategy or business model to external factors such as a change in economic policy or regulation financial models are used to estimate the valuation of a business or to compare businesses to their peers in the industry they are also used in strategic planning to test various scenarios calculate the cost of new projects decide on budgets and allocate corporate resources 1examples of financial models may include discounted cash flow analysis sensitivity analysis or in depth appraisal one of the most frequently used models is the discount cash flow model which uses estimates of future cash flows to project the future value of an investment example of financial modelingthe best financial models provide users with a set of basic assumptions for example one commonly forecasted line item is sales growth sales growth is recorded as the increase or decrease in gross sales in the most recent quarter compared to the previous quarter these are the only two inputs a financial model needs to calculate sales growth the financial modeler creates one cell for the prior year s sales cell a and one cell for the current year s sales cell b the third cell cell c is used for a formula that divides the difference between cells a and b by cell a this is the growth formula cell c the formula is hard coded into the model cells a and b are input cells that can be changed by the user in this case the purpose of the model is to estimate sales growth if a certain action is taken or a possible event occurs of course this is just one real world example of financial modeling ultimately a stock analyst is interested in potential growth any factor that affects or might affect that growth can be modeled also comparisons among companies are important in concluding a stock purchase multiple models help an investor decide among various competitors in an industry | |
what is financial modeling used for | a financial model is used for decision making and financial analysis by people inside and outside of companies some of the reasons a firm might create a financial model include the need to raise capital grow the business organically sell or divest business units allocate capital budget forecast or value a business | |
what information should be included in a financial model | to create a useful model that s easy to understand you should include sections on assumptions and drivers an income statement a balance sheet a cash flow statement supporting schedules valuations sensitivity analysis charts and graphs | |
what types of businesses use financial modeling | professionals in a variety of businesses rely on financial modeling here are just a few examples bankers use it in sales and trading equity research and both commercial and investment banking public accountants use it for due diligence and valuations and institutions apply financial models in private equity portfolio management and research | |
how is a financial model validated | errors in financial modeling can cause expensive mistakes for this reason a financial model may be sent to an outside party to validate the information it contains banks and other financial institutions project promoters corporations seeking funds equity houses and others may request model validation to reassure the end user that the calculations and assumptions within the model are correct and that the results produced by the model are reliable the bottom linefinancial modeling is a set of numerical techniques used to forecast a company s future growth based on the information in a company s income statement balance sheet and estimates of future economic conditions analysts can create sophisticated projections of an investment s future performance | |
what is financial performance | financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues the term is also used as a general measure of a firm s overall financial health over a given period analysts and investors use financial performance to compare similar firms across the same industry or to compare industries or sectors in aggregate investopedia madelyn goodnightunderstanding financial performancethere are many stakeholders in a company including trade creditors bondholders investors employees and management each group has an interest in tracking the financial performance of a company the financial performance identifies how well a company generates revenues and manages its assets liabilities and the financial interests of its stakeholders and stockholders there are many ways to measure financial performance but all measures should be taken in aggregate line items such as revenue from operations operating income or cash flow from operations can be used as well as total unit sales furthermore the analyst or investor may wish to look deeper into financial statements and seek out margin growth rates or any declining debt six sigma methods focus on this aspect recording financial performancea key document in reporting corporate financial performance one heavily relied on by research analysts is form 10 k the securities and exchange commission sec requires all public companies to file and publish this annual document 1 its purpose is to provide stakeholders with accurate and reliable data and information that provide an overview of the company s financial health independent accountants audit the information in a 10 k and company management signs it and other disclosure documents as a result the 10k represents the most comprehensive source of information on financial performance made available to investors annually a company s form 10 k has to be accessible to the public anyone who wishes to examine one can go to the sec s electronic data gathering analysis and retrieval edgar database you can search by company name ticker symbol or sec central index key cik 2 many companies also post their 10 ks on their websites in an investor relations section although the terms are sometimes used interchangeably a company s form 10 k is not the same as its annual report both include information about the company and its financial performance over the last year but the annual report is more of a polished publication lavishly illustrated and describing various projects and initiatives the company undertakes the 10 k lacks such photos and graphics but generally goes into more financial details and calculations | |
what is a financial plan | a financial plan is a document that details a person s current financial circumstances and their short and long term monetary goals it includes strategies to achieve those goals a financial plan can help you to establish and plan for fundamental needs such as managing life s risks e g those involving health or disability income and spending and debt reduction it can provide financial guidance so that you re prepared to meet your obligations and objectives it can also help you track your progress throughout the years toward financial well being financial planning involves a thorough evaluation of one s money situation income spending debt and saving and expectations for the future it can be created independently or with the help of a certified financial planner understanding a financial planwhether you re going it alone or with a financial planner the first step in creating a financial plan is to understand how important it can be to your financial future it can provide the guidance that assures your financial success start your planning effort by gathering information from your various financial accounts into a document or spreadsheet then make some basic calculations that establish where you stand financially you may complete the following steps as an individual or a couple to calculate your current net worth subtract the total for your liabilities from the total for your assets begin by listing and adding up all of the following cash flow is the money you take in measured against the money you spend to create a financial plan you must know your income as well as how and when your money is spent documenting your personal cash flow will help you determine how much you need every month for necessities how much is available for saving and investing and where you can cut back on spending one way to get this done is to review your checking account and credit card statements collectively they should provide a fairly complete history of your income and spending in a wide range of spending categories for example document how much you ve paid during the year for housing expenses like rent or mortgage payments utilities and credit card interest other categories include food household including clothing transportation medical insurance and non covered medical expenses still others can include your spending on miscellaneous entertainment dining out and vacation travel once you add up all these numbers for a year and divide by 12 you ll know what your monthly cash flow has been and where you can improve it | |
when establishing your cash flow history don t overlook cash withdrawals that may have been used on sundries from take out to shampoo to sodas atm withdrawals can also highlight where you might cut unnecessary spending | a major part of a financial plan is a person s clearly defined goals these may include funding a college education for the children buying a larger home starting a business retiring on time or leaving a legacy no one can tell you how to prioritize these goals however a professional financial planner should be able to help finalize a detailed savings plan and specific investing that can help you reach them one by one the main elements of a financial plan include a retirement strategy a risk management plan a long term investment plan a tax reduction strategy and an estate plan benefits of a financial planfinancial planning is a smart way to keep your financial house in order it s a money tool for everyone regardless of age earnings net worth or financial dreams it offers individuals a way to document their personal goals and corresponding financial goals it can keep people on track to meet ongoing financial needs and major financial goals | |
when to create a financial plan | a financial plan is always an advantage for those who want to make sure that they manage their finances in ways that are best suited for them you can create one at any time whether you ve just joined the workforce or have been working for years beyond that here are some particular instances that call for the creation and use of a financial plan they can also serve as signals to adjust existing plans | |
how to create a financial plan | certain steps are needed to create a financial plan in addition to calculating your net worth determining your cash flow and establishing financial goals as outlined above here are additional plan elements steps to include decide whether you ll create your financial plan on your own or with the help of a licensed financial planner while you can certainly build a financial plan a financial pro can help ensure that your plan covers all the essentials based on what your cash flow allows start setting aside enough money in a liquid account to cover all your expenses for at least 6 months preferably for twelve if you find yourself without income due to unexpected events if you have debt the faster and more effectively that you can eliminate it the better for the growth of your savings your standard of living and the achievement of specific financial objectives make it a habit to cut expenses whenever possible so that you can add to your savings in addition stay on top of expenses that you know you ll have such as taxes so you always meet those obligations on time your financial well being can be affected when accidents health problems or the death of loved ones strike plan to put into place the appropriate insurance coverage that will protect your financial security at such times this coverage can include home property health auto disability personal liability and life insurance take part in a retirement plan at work that automatically deducts contributions from your paycheck and plan to maximize your tax advantaged investing with a personal ira if and when your income allows also consider how you might allocate any other available income to a taxable investment account that can add to your net worth over time your plan for investing should take into account your investment risk tolerance and future income needs address the goal of reducing your income taxes with tax deductions tax credits tax loss harvesting and any other opportunities that are legally available to taxpayers it s important to make arrangements for the benefit and protection of your heirs with an estate plan the details will depend on your stage in life and whether you re married have children or have other legacy goals revisit your plan at least yearly on your own or with a financial professional and more often if a change in circumstances affects your financial situation keep it working efficiently and effectively by adjusting it as needed | |
what is the purpose of a financial plan | a financial plan should help you make the best use of your money and achieve long term financial goals such as sending your children to college buying a bigger home leaving a legacy or enjoying a comfortable retirement | |
how do i write a financial plan | you can write a financial plan yourself or enlist the help of a professional financial planner the first step is to calculate your net worth and identify your spending habits once this has been documented you need to consider longer term objectives and decide on the ways to achieve them | |
what are the key components of a financial plan | financial plans aren t one size fits all although the good ones tend to focus on the same things after calculating your net worth and spending habits you ll explore your financial goals and ways to achieve them usually this involves some form of budgeting saving and investing each month to ensure that you live comfortably and financially stress free for the rest of your life the areas to focus on include an emergency savings plan a retirement plan risk management a long term investment strategy and a tax minimization plan the bottom linea financial plan is an essential planning tool for your financial well being now and into the future it involves setting down the current state of your finances your various financial goals and methods that can help you achieve them it s never too early or late to create a financial plan and no matter the amount of money that you have a financial plan can help you to determine the best way to put it to work so that you can meet your financial needs through all of your life stages | |
what is a financial planner | a financial planner works with clients to help them manage their money and reach their long term financial goals they advise and assist clients on a variety of matters from investing and saving for retirement to funding a college education or a new business while preserving wealth financial planners must have a thorough knowledge of personal finance taxes budgeting and investing they may specialize in tax planning asset allocation risk management retirement planning or estate planning many financial planners draw their clients from a particular population such as young professionals or retirees | |
what is financial risk | financial risk is the possibility of losing money on an investment or a business venture some more common and distinct financial risks include credit risk liquidity risk and operational risk financial risk is a type of danger that can result in the loss of capital to interested parties this can mean that governments are unable to control monetary policy and will default on bonds or other debt issues corporations also face the possibility of default on debt they undertake but they might also experience failure in an undertaking that causes a financial burden on the business understanding financial risks for businessesfinancial markets face risk due to various macroeconomic forces changes to the market interest rate and the possibility of default by sectors or large corporations individuals face financial risk when they make decisions that might jeopardize their incomes or ability to pay a debt they ve assumed financial risks are everywhere and they come in many shapes and sizes affecting nearly everyone knowing the dangers and how to protect yourself won t eliminate the risk but it can mitigate the harm and reduce the chances of a negative outcome it s expensive to build a business from the ground up the company might have to seek outside capital to grow and this need for funding creates a financial risk to both the business and to any investors or stakeholders invested in the company credit risk also known as default risk is the danger associated with borrowing money the borrower will likely default should they become unable to repay the loan investors affected by credit risk suffer from decreased income from loan repayments as well as lost principal and interest creditors may also experience a rise in costs for the collection of debt it s referred to as a specific risk when only one or a handful of companies are struggling this danger related to a company or small group of companies includes issues related to capital structure financial transactions and exposure to default the term is typically used to reflect an investor s uncertainty about collecting returns and the accompanying potential for monetary loss businesses can experience operational risk when they have poor management or flawed financial reasoning this is the risk of failing to succeed in its undertakings and it s based on internal factors many analyses identify at least five types of financial risk market risk credit risk liquidity risk operational risk and legal risk | |
how governments offset financial risk | financial risk also refers to the possibility of a government losing control of its monetary policy and being unable or unwilling to control inflation and ultimately defaulting on its bonds or other debt issues governments issue debt in the form of bonds and notes to fund wars build bridges and other infrastructure and pay for their general day to day operations the u s government s debt is treasury bonds they re considered one of the safest investments in the world the list of governments that have defaulted on debt they ve issued includes russia argentina greece and venezuela sometimes these entities only delay debt payments or they pay less than the agreed upon amount it causes financial risk to investors and other stakeholders either way the impact of financial risks on marketsseveral types of financial risk are tied to financial markets many circumstances can impact the financial market it can impact the monetary well being of the entire marketplace when a critical sector of the market struggles as was demonstrated during the 2007 to 2008 global financial crisis businesses closed during this time investors lost fortunes and governments were forced to rethink their monetary policies many other events also impact the market however volatility brings uncertainty about the fair value of market assets it reflects the confidence of the stakeholders that market returns match the actual valuation of individual assets and the marketplace as a whole measured as implied volatility iv and represented by a percentage this statistical value indicates the bullish or bearish view of investments the market on the rise versus the market in decline volatility or equity risk can cause abrupt price swings in shares of stock 1defaults and changes in the market interest rate can also pose a financial risk defaults happen mainly in the debt or bond market as companies or other issuers fail to pay their debt obligations harming investors changes in the market interest rate can push individual securities into being unprofitable for investors forcing them into lower paying debt securities or facing negative returns asset backed securities are pools of various types of loans asset backed risk is the chance that these securities may become volatile if the underlying securities also change in value subcategories of asset backed risk involve the borrower paying off a debt early and ending the income stream from repayments and significant changes in interest rates fitch ratings forecast in december 2023 that the u s high yield default rate will range between 3 0 and 3 5 for 2023 when all figures are compiled fitch expects the rate to rise to between 3 5 to 4 0 in 2024 before dropping to 2 0 to 3 0 in 2025 2 | |
how financial risks impact individuals | individuals can face financial risk when they make poor decisions this hazard can have wide ranging causes from taking an unnecessary day off from work to investing in highly speculative investments every undertaking has exposure to pure risk some dangers can t be controlled but some undertakings are committed without fully realizing the consequences liquidity risk comes in two forms for investors to fear the first involves securities and assets that can t be purchased or sold quickly enough to cut losses in a volatile market this is known as market liquidity risk and it s a situation where there are few buyers but many sellers another risk is funding or cash flow liquidity risk funding liquidity risk is the possibility that a corporation won t have the capital to pay its debt forcing it to default and harming stakeholders speculative risk is one where a profit or gain has an uncertain chance of success perhaps the investor didn t conduct proper research before investing reached too far for gains or invested too large a portion of their net worth into a single investment investors holding foreign currencies are exposed to currency risk because factors such as interest rate changes and monetary policy changes can alter the calculated worth or the value of their money changes in prices because of market differences political changes natural calamities diplomatic changes or economic conflicts can cause volatile foreign investment conditions that might expose businesses and individuals to foreign investment risk pros and cons of financial riskfinancial risk isn t inherently good or bad in itself but it exists to different degrees risk has a negative connotation by its very nature and financial risk is no exception a risk can spread from one business to affect an entire sector market or even the world risk can stem from uncontrollable outside sources or forces and it s often difficult to overcome understanding the possibility of financial risk can lead to better more informed business or investment decisions assessing the degree of financial risk associated with a security or asset helps determine or set that investment s value risk is the flip side of the reward it can be argued that no progress or growth can occur in a business or a portfolio without assuming some degree of risk financial risk usually can t be controlled but exposure to it can be limited or managed encourages more informed decisionshelps assess value risk reward ratio can be identified using analysis toolscan arise from uncontrollable or unpredictable outside forcesrisks can be difficult to overcomeability to spread and affect entire sectors or marketstools to control financial riskmany tools are available to individuals businesses and governments that allow them to calculate the amount of financial risk they re taking on the most common methods that investment professionals use to analyze risks associated with long term investments or the stock market as a whole include the debt to capital ratio measures the proportion of debt used given the total capital structure of the company when evaluating a business a high proportion of debt indicates a risky investment the capital expenditure ratio divides cash flow from operations by capital expenditures to see how much money a company will have left to keep the business running after it services its debt professional money managers traders individual investors and corporate investment officers use hedging techniques to reduce their exposure to various risks hedging against investment risk means strategically using instruments such as options contracts to offset the chance of any adverse price movements you hedge one investment by making another statistical and numerical analysis are great tools for identifying potential risk but prior financial history isn t indicative of a company s future performance make sure to analyze trends over a long period to better understand whether fluctuations or the lack of them are progress toward a financial goal or they result from inconsistent operating activity real world example of financial riskbloomberg and other financial commentators point to the june 2018 closure of retailer toys r us as proof of the immense financial risk associated with debt heavy buyouts and capital structures that inherently heighten the risk for creditors and investors 3toys r us announced that it had voluntarily filed for chapter 11 bankruptcy in september 2017 the company s chair and ceo said in a statement released with the announcement that the company was working with debtholders and other creditors to restructure the 5 billion of long term debt on its balance sheet 4as reported in an article by cnn money much of this financial risk reportedly stemmed from a 2005 us 6 6 billion leveraged buyout lbo of toys r us by mammoth investment firms bain capital kkr co and vornado realty trust 5 the purchase took the company private and left it with 5 3 billion in debt secured by its assets it never really recovered saddled as it was by 400 million worth of interest payments annually 6the morgan led syndicate commitment didn t work toys r us announced in march 2018 after a disappointing holiday season that it would be liquidating all of its 735 u s locations to offset the strain of dwindling revenue and cash amid looming financial obligations 7 reports also noted that toys r us was having difficulty selling many of the properties this is an example of the liquidity risk that can be associated with real estate the hedge funds and toys r us debt holders solus alternative asset management and angelo gordon took control of the bankrupt company in november 2018 and talked about reviving the chain the associated press reported in february 2019 that tru kids brands a new company staffed with ex toys r us execs would relaunch the brand with new stores later that year 8in late 2019 tru kids brands opened two new stores in late 2019 one in paramus new jersey and the other in houston texas 9 macy s partnered with whp global to bring back the toys r us brand and announced in 2022 that it planned to bring toys r us to all its stores 10 | |
how do you identify financial risks | identifying financial risks involves considering the risk factors that a company faces this entails reviewing corporate balance sheets and statements of financial positions understanding weaknesses within the company s operating plan and comparing metrics to other companies within the same industry several statistical analysis techniques are used to identify the risk areas of a company | |
how do you handle financial risk | financial risk can often be mitigated but it may be difficult or unnecessarily expensive for some to completely eliminate the risk financial risk can be neutralized by holding the right amount of insurance diversifying your investments holding sufficient funds for emergencies and maintaining different income streams | |
why is financial risk important | understanding measuring and mitigating financial risk is critical for the long term success of an organization financial risk can prevent a company from successfully accomplishing its finance related objectives like paying loans on time carrying a healthy amount of debt or delivering goods on time a company will likely experience stronger operating performance and yield better returns by understanding what causes financial risk and putting measures in place to prevent it | |
is financial risk systematic or unsystematic | financial risk impacts every company but it depends heavily on the operations and capital structure of an organization financial risk is therefore an example of unsystematic risk because it s specific to each company the bottom linefinancial risk naturally occurs across businesses markets governments and individual finance these entities trade the opportunity to make profits and yield gains for the chance that they may lose money or face detrimental circumstances these entities can use fundamental technical and quantitative analysis to not only forecast risk but make plans to reduce or mitigate it | |
what is a financial risk manager frm | financial risk manager frm is a professional designation issued by the global association of risk professionals garp the garp frm accreditation is globally recognized as the premier certification for financial risk professionals dealing in financial markets to earn the frm certification candidates must pass two rigorous exams and also work two years in the field of risk management frms possess specialized knowledge in assessing risk and typically work for major banks insurance companies accounting firms regulatory agencies and asset management firms understanding financial risk managers frms an frm identifies threats to assets earning capacity or the success of an organization frms may work in financial services banking loan origination trading or marketing many specialize in areas like credit or market risk frms determine risk by analyzing financial markets and the global environment to predict changes or trends it is also the frm s role to develop strategies to counteract the effects of potential risks financial risk managers frms are required to be accredited by the global association of risk professionals garp the financial risk manager frm programthe frm exam covers the application of risk management tools and techniques to the investment management process to receive the frm designation candidates must successfully complete a comprehensive two part exam and complete two years of work in financial risk management professionals who hold the frm designation can participate in optional continued professional development the frm program follows the major strategic disciplines of risk management market risk credit risk operational risk and investment management the exam is recognized in over 90 countries and is designed to measure a financial risk manager s ability to manage risk in a global environment the questions are practical and related to real world work experiences candidates are expected to understand risk management concepts and approaches as they would apply to a risk manager s day to day activities part 1 of the frm exam is 100 questions that focus on the following four topics weighted as noted part 2 of the exam consists of 80 questions from the following topics weighted as follows the median annual salary of financial managers and frms in 2023 according to the u s bureau of labor statistics bls 1industry outlook for financial risk managers frms in 2023 the median pay for financial managers including frms was 156 100 per year according to the u s bureau of labor statistics bls 1employment of frms is expected to grow much faster than the average for all occupations at 16 from 2022 to 2032 the bls states that several specialties within financial management particularly cash management and risk management are expected to be in high demand over the decade 2naturally the vast majority of frms are employed in the financial services industry but the demand for good risk management teams is high in all areas of the economy from healthcare and engineering to technology and natural resources according to garp these are the top 10 companies employing the most frms 3frm vs cfathe chartered financial analyst cfa designation is one of the most recognized financial designations in the world frm is considered the gold standard of financial risk managers and the cfa has a similarly stellar reputation among financial analysts since both the cfa and frm seek to certify professionals in the financial industry they re often compared with each other the basic difference between the two is this frm is a more specialized designation than the cfa the cfa covers a wide range of topics related primarily to investment management including financial analysis corporate finance equities bonds derivatives and portfolio management the frm on the other hand focuses primarily on managing exposure to a variety of risks including operational risk credit risk market risk and liquidity risk the frm and cfa also have different requirements to earn your frm certification you must to become a cfa charterholder you must advantages of the frm designationthere are several advantages to earning the frm certification first there is the reputation that comes with the program it is widely regarded as the risk management industry s leading designation thus it is a strong indication of ability and experience within the field in other words the frm carries significant weight with employers and colleagues given how rapidly financial markets are changing the demand for risk management experts will likely only grow over time the second benefit is the obvious educational one as mentioned earlier the frm certification provides professionals with a thorough understanding of risk management in practical terms that means knowing how to anticipate respond and adapt to critical risks | |
which is better cfa or frm | that largely depends on your career path generally speaking frms are meant for managerial roles that focus specifically on risk i e credit risk manager regulatory risk manager operational risk manager and more by contrast cfa charterholders are primarily investment management professionals i e investment analyst portfolio manager financial adviser etc | |
is frm tougher than cfa | frm exams are tough but not as difficult as the cfa exams the pass rates for frm part 1 fall in the range of 40 to 50 in 2023 the pass rate was 45 for part 2 they range between 50 and 60 with a rate of 53 in 2023 4for the cfa exams historical pass rates for level 1 and level 2 are generally in the range of 35 to 50 level 3 pass rates are usually in the ballpark of 50 5 it s this combination of lower pass rates and the additional exam that makes the cfa tougher than the frm | |
how much does the frm cost | the frm charges a one time enrollment fee of 400 to first time frm candidates from there standard registration is 800 for part 1 and another 800 for part 2 candidates who register early however are able to get a discounted rate of 600 for part 1 and 600 for part 2 6the bottom linefrm is the leading professional certification for risk managers and widely recognized as the global standard for financial risk the current demand for expert financial risk managers is high and should only continue to grow over at least the next decade while the cfa is generally regarded as more prestigious and tougher to attain frm s big advantage lies in its highly specialized focus on risk for professionals looking to differentiate themselves boost job prospects and command better pay specifically within the risk management field the frm is second to none | |
what is the financial sector | the financial sector is a section of the economy made up of firms and institutions that provide financial services to commercial and retail customers this sector comprises a broad range of industries including banks investment companies insurance companies and real estate firms understanding the financial sectora large portion of this sector generates revenue from mortgages and loans which gain value as interest rates drop the health of the economy depends in large part on the strength of its financial sector the stronger it is the healthier the economy a weak financial sector typically means the economy is weakening many people equate the financial sector with wall street and the exchanges that operate on it but there s much more to it than that the financial sector is one of the most important parts of many developed economies it is made up of brokers financial institutions and money markets all of which provide the services needed to help keep main street functioning every day in order for an economy to remain stable it needs to have a healthy financial sector this sector advances loans for businesses so they can expand grants mortgages to homeowners and issues insurance policies to protect people companies and their assets it also helps build up savings for retirement and employs millions of people the financial sector generates a good portion of its revenue from loans and mortgages these gain value in an environment where interest rates drop when rates are low the economic conditions open up the doors for more capital projects and investment when this happens the financial sector benefits meaning more economic growth as mentioned above the financial sector is made up of many different industries ranging from banks investment houses insurance companies real estate brokers consumer finance companies mortgage lenders and real estate investment trusts reits the financial sector is one of the largest portions of the s p 500 the largest companies within the financial sector are some of the most recognizable banking institutions in the world including the following while these large companies dominate the sector there are other smaller companies that participate in the sector as well insurers are also a major industry within the financial sector being made up of such companies as american international group aig and chubb cb economists often tie the overall health of the economy with the health of the financial sector if financial companies are weak this is a detriment to the average consumer financial companies provide loans for businesses mortgages to homeowners and insurance to consumers if these activities are restricted it stunts growth in both small businesses and real estate financial stocks are very popular investments to own within a portfolio most companies within the sector issue dividends and are judged on the overall strength of their financial health during the financial crisis of 2007 2008 the financial sector was one of the hardest hit with companies like lehman brothers filing for bankruptcy after an influx of government regulation and restructuring the financial sector is considerably stronger financial etfs such as the financial select sector spdr fund xlf the largest financial etf can provide investors with broad exposure to the sector as of the close of trading on sept 29 2020 the financial sector had a combined market capitalization of 5 59 trillion 1 the sector has underperformed the s p 500 index in the trailing 12 months ttm where the s p 500 is up 14 3 while the s p 500 financials sector has fallen 13 7 special considerationssome of the positive factors that affect the financial sector include conversely investors should consider some of the negative factors that affect this sector as well | |
what is financial statement analysis | financial statement analysis is the process of analyzing a company s financial statements for decision making purposes external stakeholders use it to understand the overall health of an organization and to evaluate financial performance and business value internal constituents use it as a monitoring tool for managing the finances jiaqi zhou investopedia | |
how to analyze financial statements | the financial statements of a company record important financial data on every aspect of a business s activities as such they can be evaluated on the basis of past current and projected performance in general financial statements are centered around generally accepted accounting principles gaap in the united states these principles require a company to create and maintain three main financial statements the balance sheet the income statement and the cash flow statement public companies have stricter standards for financial statement reporting public companies must follow gaap which requires accrual accounting 1 private companies have greater flexibility in their financial statement preparation and have the option to use either accrual or cash accounting 2several techniques are commonly used as part of financial statement analysis three of the most important techniques are horizontal analysis vertical analysis and ratio analysis horizontal analysis compares data horizontally by analyzing values of line items across two or more years vertical analysis looks at the vertical effects that line items have on other parts of the business and the business s proportions ratio analysis uses important ratio metrics to calculate statistical relationships types of financial statementscompanies use the balance sheet income statement and cash flow statement to manage the operations of their business and to provide transparency to their stakeholders all three statements are interconnected and create different views of a company s activities and performance the balance sheet is a report of a company s financial worth in terms of book value it is broken into three parts to include a company s assets liabilities and shareholder equity short term assets such as cash and accounts receivable can tell a lot about a company s operational efficiency liabilities include the company s expense arrangements and the debt capital it is paying off and shareholder equity includes details on equity capital investments and retained earnings from periodic net income the balance sheet must balance assets and liabilities to equal shareholder equity this figure is considered a company s book value and serves as an important performance metric that increases or decreases with the financial activities of a company the income statement breaks down the revenue that a company earns against the expenses involved in its business to provide a bottom line meaning the net profit or loss the income statement is broken into three parts that help to analyze business efficiency at three different points it begins with revenue and the direct costs associated with revenue to identify gross profit it then moves to operating profit which subtracts indirect expenses like marketing costs general costs and depreciation finally after deducting interest and taxes the net income is reached basic analysis of the income statement usually involves the calculation of gross profit margin operating profit margin and net profit margin which each divide profit by revenue profit margin helps to show where company costs are low or high at different points of the operations the cash flow statement provides an overview of the company s cash flows from operating activities investing activities and financing activities net income is carried over to the cash flow statement where it is included as the top line item for operating activities like its title investing activities include cash flows involved with firm wide investments the financing activities section includes cash flow from both debt and equity financing the bottom line shows how much cash a company has available companies and analysts also use free cash flow statements and other valuation statements to analyze the value of a company free cash flow statements arrive at a net present value by discounting the free cash flow that a company is estimated to generate over time private companies may keep a valuation statement as they progress toward potentially going public financial performancefinancial statements are maintained by companies daily and used internally for business management in general both internal and external stakeholders use the same corporate finance methodologies for maintaining business activities and evaluating overall financial performance | |
when doing comprehensive financial statement analysis analysts typically use multiple years of data to facilitate horizontal analysis each financial statement is also analyzed with vertical analysis to understand how different categories of the statement are influencing results finally ratio analysis can be used to isolate some performance metrics in each statement and bring together data points across statements collectively | below is a breakdown of some of the most common ratio metrics | |
what are the advantages of financial statement analysis | the main point of financial statement analysis is to evaluate a company s performance or value through a company s balance sheet income statement or statement of cash flows by using a number of techniques such as horizontal vertical or ratio analysis investors may develop a more nuanced picture of a company s financial profile | |
what are the different types of financial statement analysis | most often analysts will use three main techniques for analyzing a company s financial statements first horizontal analysis involves comparing historical data usually the purpose of horizontal analysis is to detect growth trends across different time periods second vertical analysis compares items on a financial statement in relation to each other for instance an expense item could be expressed as a percentage of company sales finally ratio analysis a central part of fundamental equity analysis compares line item data price to earnings p e ratios earnings per share or dividend yield are examples of ratio analysis | |
what is an example of financial statement analysis | an analyst may first look at a number of ratios on a company s income statement to determine how efficiently it generates profits and shareholder value for instance gross profit margin will show the difference between revenues and the cost of goods sold if the company has a higher gross profit margin than its competitors this may indicate a positive sign for the company at the same time the analyst may observe that the gross profit margin has been increasing over nine fiscal periods applying a horizontal analysis to the company s operating trends | |
what are financial statements | financial statements are written records that convey the financial activities of a company financial statements are often audited by government agencies and accountants to ensure accuracy and for tax financing or investing purposes for profit primary financial statements include the balance sheet income statement statement of cash flow and statement of changes in equity nonprofit entities use a similar but different set of financial statements investopedia julie bangunderstanding financial statementsinvestors and financial analysts rely on financial data to analyze a company s performance and make predictions about the future direction of its stock price one of the most important resources of reliable and audited financial data is the annual report which contains the firm s financial statements the financial statements are used by investors market analysts and creditors to evaluate a company s financial health and earnings potential the three major financial statement reports are the balance sheet income statement and statement of cash flows not all financial statements are created equally the rules used by u s companies are called generally accepted accounting principles while the rules often used by international companies are international financial reporting standards ifrs in addition u s government agencies use a different set of financial reporting rules balance sheetthe balance sheet provides an overview of a company s assets liabilities and shareholders equity at a specific time and date the date at the top of the balance sheet tells you when this snapshot was taken this is generally the end of its annual reporting period below is a breakdown of the items in a balance sheet below is a portion of exxonmobil corporation s xom balance sheet for fiscal year 2021 reported as of dec 31 2021 exxonmobilincome statementunlike the balance sheet the income statement covers a range of time which is a year for annual financial statements and a quarter for quarterly financial statements the income statement provides an overview of revenues expenses net income and earnings per share operating revenue is the revenue earned by selling a company s products or services the operating revenue for an auto manufacturer would be realized through the production and sale of autos operating revenue is generated from the core business activities of a company non operating revenue is the income earned from non core business activities these revenues fall outside the primary function of the business some non operating revenue examples include other income is the revenue earned from other activities other income could include gains from the sale of long term assets such as land vehicles or a subsidiary primary expenses are incurred during the process of earning revenue from the primary activity of the business expenses include the cost of goods sold cogs selling general and administrative expenses sg a depreciation or amortization and research and development r d typical expenses include employee wages sales commissions and utilities such as electricity and transportation expenses that are linked to secondary activities include interest paid on loans or debt losses from the sale of an asset are also recorded as expenses the main purpose of the income statement is to convey details of profitability and the financial results of business activities however it can be very effective in showing whether sales or revenue is increasing when compared over multiple periods investors can also see how well a company s management is controlling expenses to determine whether a company s efforts in reducing the cost of sales might boost profits over time below is a portion of exxonmobil corporation s income statement for fiscal year 2021 reported as of dec 31 2021 exxonmobilcash flow statementthe cash flow statement cfs shows how cash flows throughout a company the cash flow statement complements the balance sheet and income statement the cfs allows investors to understand how a company s operations are running where its money is coming from and how money is being spent the cfs also provides insight as to whether a company is on a solid financial footing the cash flow statement contains three sections that report on the various activities for which a company uses its cash those three components of the cfs are listed below the operating activities on the cfs include any sources and uses of cash from running the business and selling its products or services cash from operations includes any changes made in cash accounts receivable depreciation inventory and accounts payable these transactions also include wages income tax payments interest payments rent and cash receipts from the sale of a product or service investing activities include any sources and uses of cash from a company s investments in its long term future a purchase or sale of an asset loans made to vendors or received from customers or any payments related to a merger or acquisition are included in this category also purchases of fixed assets such as property plant and equipment ppe are included in this section in short changes in equipment assets or investments relate to cash from investing cash from financing activities includes the cash from investors or banks and the cash paid to shareholders financing activities include debt issuance equity issuance stock repurchases loans dividends paid and debt repayments the cash flow statement reconciles the income statement with the balance sheet in three major business activities below is a portion of exxonmobil corporation s cash flow statement for fiscal year 2021 reported as of dec 31 2021 we can see the three areas of the cash flow statement and their results exxonmobilstatement of changes in shareholder equitythe statement of changes in equity tracks total equity over time this information ties back to a balance sheet for the same period the ending balance on the change of equity statement equals the total equity reported on the balance sheet the formula for changes to shareholder equity will vary from company to company in general there are a couple of components in exxonmobil s statement of changes in equity the company also records activity for acquisitions dispositions amortization of stock based awards and other financial activities this information is useful for analyzing how much money is being retained by the company for future growth as opposed to being distributed externally statement of comprehensive incomean often less utilized financial statement the statement of comprehensive income summarizes standard net income while also incorporating changes in other comprehensive income oci other comprehensive income includes all unrealized gains and losses that are not reported on the income statement this financial statement shows a company s total change in income even gains and losses that have yet to be recorded in accordance with accounting rules examples of transactions that are reported on the statement of comprehensive income include in the example below exxonmobil has over 2 billion of net unrecognized income instead of reporting just 23 5 billion of net income exxonmobil reports nearly 26 billion of total income when considering other comprehensive income 1nonprofit financial statementsnonprofit organizations record financial transactions across a similar set of financial statements however due to the differences between a for profit entity and a purely philanthropic entity there are differences in the financial statements used the standard set of financial statements used for a nonprofit entity includes the purpose of an external auditor is to assess whether an entity s financial statements have been prepared following prevailing accounting rules and whether any material misstatements are impacting the validity of results limitations of financial statementsalthough financial statements provide a wealth of information on a company they do have limitations the statements are often interpreted differently so investors often draw divergent conclusions about a company s financial performance for example some investors might want stock repurchases while others might prefer to see that money invested in long term assets a company s debt level might be fine for one investor while another might have concerns about the level of debt for the company | |
when analyzing financial statements it s important to compare multiple periods to determine any trends and compare the company s results to its peers in the same industry | lastly financial statements are only as reliable as the information fed into the reports too often it s been documented that fraudulent financial activity or poor control oversight have led to misstated financial statements intended to mislead users even when analyzing audited financial statements there is a level of trust that users must place in the validity of the report and the figures being shown | |
what are the main types of financial statements | the three main types of financial statements are the balance sheet the income statement and the cash flow statement these three statements together show the assets and liabilities of a business its revenues and costs as well as its cash flows from operating investing and financing activities | |
what are the benefits of financial statements | financial statements show how a business operates it provides insight into how much and how a business generates revenues what the cost of doing business is how efficiently it manages its cash and what its assets and liabilities are financial statements provide all the details on how well or poorly a company manages itself | |
how do you read financial statements | financial statements are read in several different ways first financial statements can be compared to prior periods to understand changes over time better financial statements are also read by comparing the results to competitors or other industry participants by comparing financial statements to other companies analysts can get a better sense of which companies are performing the best and which are lagging behind the rest of the industry | |
what is gaap | generally accepted accounting principles gaap are the rules by which publicly owned united states companies must prepare their financial statements it is the guideline that explains how to record transactions when to recognize revenue and when expenses must be recognized international companies may use a similar but different set of rules called international financial reporting standards ifrs the bottom linefinancial statements are the ticket to the external evaluation of a company s financial performance the balance sheet reports a company s financial health through its liquidity and solvency while the income statement reports its profitability a statement of cash flow ties these two together by tracking sources and uses of cash together these financial statements attempt to provide a more clear picture of a business s financial standing | |
what is financial structure | financial structure refers to the mix of debt and equity that a company uses to finance its operations this composition directly affects the risk and value of the associated business the financial managers of the business have the responsibility of deciding the best mixture of debt and equity for optimizing the financial structure in general the financial structure of a company can also be referred to as the capital structure in some cases evaluating the financial structure may also include the decision between managing a private or public business and the capital opportunities that come with each understanding financial structurecompanies have several choices when it comes to setting up the business structure of their business companies can be either private or public in each case the framework for managing the capital structure is primarily the same but the financing options differ greatly overall the financial structure of a business is centered around debt and equity debt capital is received from credit investors and paid back over time with some form of interest equity capital is raised from shareholders giving them ownership in the business for their investment and a return on their equity that can come in the form of market value gains or distributions each business has a different mix of debt and equity depending on its needs expenses and investor demand private versus publicprivate and public companies have the same framework for developing their structure but several differences that distinguish the two both types of companies can issue equity private equity is created and offered using the same concepts as public equity but private equity is only available to select investors rather than the public market on a stock exchange as such the equity fundraising process is much different than a formal initial public offering ipo private companies can also go through multiple rounds of equity financing over time which affects their market valuation companies that mature and choose to issue shares in the public market do so through the support of an investment bank that helps them to pre market the offering and value the initial shares all shareholders are converted to public shareholders after an ipo and the market capitalization of the company is then valued based on shares outstanding times market price debt capital follows similar processes in the credit market with private debt primarily only offered to select investors in general public companies are more closely followed by rating agencies with public ratings helping to classify debt investments for investors and the market at large the debt obligations of a company take priority over equity for both private and public companies even though this helps debt to come with lower risks private market companies can still usually expect to pay higher levels of interest because their businesses and cash flows are less established which increases risk debt versus equityin building the financial structure of a company financial managers can choose between either debt or equity investor demand for both classes of capital can heavily influence a company s financial structure ultimately financial management seeks to finance the company at the lowest rate possible reducing its capital obligations and allowing for greater capital investment in the business overall financial managers consider and evaluate the capital structure by seeking to optimize the weighted average cost of capital wacc wacc is a calculation that derives the average percentage of payout required by the company to its investors for all of its capital a simplified determination of wacc is calculated by using a weighted average methodology that combines the payout rates of all of the company s debt and equity capital metrics for analyzing financial structurethe key metrics for analyzing the financial structure are primarily the same for both private and public companies public companies are required to file public filings with the securities and exchange commission which provides transparency for investors in analyzing financial structure private companies typically only provide financial statement reporting to their investors which makes their financial reporting more difficult to analyze data for calculating capital structure metrics usually come from the balance sheet a primary metric used in evaluating financial structure is a debt to total capital this provides quick insight on how much of the company s capital is debt and how much is equity debt may include all of the liabilities on a company s balance sheet or just long term debt equity is found in the shareholders equity portion of the balance sheet overall the higher the debt to capital ratio the more a company is relying on debt debt to equity is also used to identify capital structuring the more debt a company has the higher this ratio will be and vice versa | |
what is a financial system | a financial system is a set of institutions such as banks insurance companies and stock exchanges that permit the exchange of funds financial systems exist on firm regional and global levels borrowers lenders and investors exchange current funds to finance projects either for consumption or productive investments and to pursue a return on their financial assets the financial system also includes sets of rules and practices that borrowers and lenders use to decide which projects get financed who finances projects and the terms of financial deals | |
how a financial system works | like any other industry the financial system can be organized using markets central planning or some mix of both financial markets involve borrowers lenders and investors negotiating loans and other transactions in these markets the economic goods traded on both sides are usually some form of money current money cash claims on future money credit or claims on the future income potential or value of real assets equity these also include derivative instruments derivative instruments such as commodity futures or stock options are financial instruments that are dependent on an underlying financial asset s performance in financial markets these are all traded among borrowers lenders and investors according to the normal laws of supply and demand the approximate total market capitalization of the u s stock market in 2024 1in a centrally planned financial system e g a single firm or a command economy the financing of consumption and investment plans is not decided by counterparties in a transaction but directly by a manager or central planner which projects receive funds whose projects receive funds and who funds them is determined by the planner whether that means a business manager or a party boss most financial systems contain elements of both give and take markets and top down central planning for example a business firm is a centrally planned financial system with respect to its internal financial decisions however it typically operates within a broader market interacting with external lenders and investors to carry out its long term plans at the same time all modern financial markets operate within some kind of government regulatory framework that sets limits on what types of transactions are allowed financial systems are often strictly regulated because they directly influence decisions over real assets economic performance and consumer protection financial market componentsmultiple components make up the financial system at different levels the firm s financial system is the set of implemented procedures that track the financial activities of the company within a firm the financial system encompasses all aspects of finances including accounting measures revenue and expense schedules wages and balance sheet verification on a regional scale the financial system is the system that enables lenders and borrowers to exchange funds regional financial systems include banks and other institutions such as securities exchanges and financial clearinghouses the global financial system is basically a broader regional system that encompasses all financial institutions borrowers and lenders within the global economy in a global view financial systems include the international monetary fund central banks government treasuries and monetary authorities the world bank and major private international banks who runs the u s financial system there s no single institution or individual that runs the u s financial system one of the most powerful agencies overseeing the financial system is the u s federal reserve which sets monetary policy to promote the health of the economy and general stability other notable agencies involved in overseeing the financial system include the federal deposit insurance corporation fdic which insures deposits at banking institutions and the securities and exchange commission sec which regulates the stock market | |
what are the factors affecting the stability of the financial system | stable financial systems are ideal because such conditions permit the most efficient allocations of resources steady unemployment and predictable assessment and management of risk the stability of financial systems depends on a diverse range of factors and can be disturbed by such events including political turmoil trade imbalances natural disasters health emergencies and rapid inflation among others | |
why is the financial system important | financial systems are critical as they are a foundation for most economic activity individuals and businesses alike rely on financial systems to borrow and lend money buy and sell assets and make investments with the aim of earning financial yields financial systems link all the bodies participants and practices that make such interactions possible the bottom linea financial system refers to all the institutions that facilitate the exchange of funds throughout an economy this includes lenders like banks and credit unions marketplaces like the stock exchange government agencies like the federal reserve and even international institutions like the world bank it is within the financial system that all interactions borrowing lending investing financing can be conducted | |
what is financial technology fintech | financial technology better known as fintech is used to describe new technology that seeks to improve and automate the delivery and use of financial services at its core fintech is utilized to help companies business owners and consumers better manage their financial operations processes and lives it is composed of specialized software and algorithms that are used on computers and smartphones fintech the word is a shortened combination of financial technology | |
when fintech emerged in the 21st century the term was initially applied to the technology employed at the backend systems of established financial institutions such as banks from 2018 or so to 2022 there was a shift to consumer oriented services fintech now includes different sectors and industries such as education retail banking fundraising and nonprofit and investment management to name a few | fintech also includes the development and use of cryptocurrencies such as bitcoin while that segment of fintech may see the most headlines the big money still lies in the traditional global banking industry and its multitrillion dollar market capitalization paige mclaughlin investopediaunderstanding fintechbroadly the term financial technology can apply to any innovation in how people transact business from the invention of digital money to double entry bookkeeping since the internet revolution financial technology has grown explosively you likely use some element of fintech on a daily basis some examples include transferring money from your debit account to your checking account via your iphone sending money to a friend through venmo or managing investments through an online broker according to ey s 2019 global fintech adoption index two thirds of consumers utilize at least two or more fintech services and those consumers are increasingly aware of fintech as a part of their daily lives 1fintech in practicethe most talked about and most funded fintech startups share the same characteristic they are designed to challenge and eventually take over traditional financial services providers by being more nimble serving an underserved segment of the population or providing faster or better service for example financial company affirm seeks to cut credit card companies out of the online shopping process by offering a way for consumers to secure immediate short term loans for purchases while rates can be high affirm claims to offer a way for consumers with poor or no credit a way to secure credit and build their credit history similarly better mortgage seeks to streamline the home mortgage process with a digital only offering that can reward users with a verified pre approval letter within 24 hours of applying greensky seeks to link home improvement borrowers with banks by helping consumers avoid lenders and save on interest by offering zero interest promotional periods for consumers with poor or no credit tala offers consumers in the developing world microloans by doing a deep data dig on their smartphones for their transaction history and seemingly unrelated things such as what mobile games they play tala seeks to give such consumers better options than local banks unregulated lenders and other microfinance institutions 2in short if you have ever wondered why some aspect of your financial life was so unpleasant such as applying for a mortgage with a traditional lender or felt like it wasn t quite the right fit fintech probably has or seeks to have a solution for you fintech s expanding horizonsin its most basic form fintech unbundles financial services into individual offerings that are often easier to use the combination of streamlined offerings with technology allows fintech companies to be more efficient and cut down on costs associated with each transaction if one word can describe how many fintech innovations have affected traditional trading banking financial advice and products it s disruption a word you have likely heard in commonplace conversations or the media financial products and services that were once the realm of branches salespeople and desktops are now more commonly found on mobile devices for example the mobile only stock trading app robinhood charges no fees for trades 3 and peer to peer p2p lending sites like prosper marketplace lendingclub and ondeck promise to reduce rates by opening up competition for loans to broad market forces business loan providers such as kabbage lendio accion and funding circle among others offer startup and established businesses easy fast platforms to secure working capital oscar an online insurance startup received 165 million in funding in march 2018 4 such significant funding rounds are not unusual and occur globally for fintech startups this shift to a digital first mindset has pushed several traditional institutions to invest heavily in similar products for example investment bank goldman sachs launched consumer lending platform marcus in 2016 in an effort to enter the fintech space 5that said many tech savvy industry watchers warn that keeping apace of fintech inspired innovations requires more than just ramped up tech spending rather competing with lighter on their feet startups requires a significant change in thinking processes decision making and even overall corporate structure fintech and new technologiesnew technologies such as machine learning artificial intelligence ai predictive behavioral analytics and data driven marketing will take the guesswork and habit out of financial decisions learning apps will not only learn the habits of users but also engage users in learning games to make their automatic unconscious spending and saving decisions better fintech is also a keen adapter of automated customer service technology utilizing chatbots and ai interfaces to assist customers with basic tasks and keep down staffing costs fintech is also being leveraged to fight fraud by leveraging information about payment history to flag transactions that are outside the norm fintech landscapesince the mid 2010s fintech has exploded with startups receiving billions in venture funding some of which have become unicorns and incumbent financial firms either snatching up new ventures or building out their own fintech offerings north america still produces most of the fintech startups with asia a relatively close second followed by europe some of the most active areas of fintech innovation include or revolve around the following areas among others fintech usersthere are four broad categories of users for fintech trends toward mobile banking increased information data more accurate analytics and decentralization of access will create opportunities for all four groups to interact in unprecedented ways as for consumers the younger you are the more likely it will be that you are aware of and can accurately describe what fintech is consumer oriented fintech is mostly targeted toward gen z and millennials given the huge size and rising earning potential of these generations | |
when it comes to businesses before the adoption of fintech a business owner or startup would have gone to a bank to secure financing or startup capital if they intended to accept credit card payments they would have to establish a relationship with a credit provider and even install infrastructure such as a landline connected card reader now with mobile technology those hurdles are a thing of the past | regulation and fintechfinancial services are among the most heavily regulated sectors in the world as such regulation has emerged as the number one concern among governments as fintech companies take off according to the u s department of the treasury while fintech firms create new opportunities and capabilities for companies and consumers they are also creating new risks to be aware of data privacy and regulatory arbitrage are the main concerns noted by the treasury in its most recent report in november 2022 the treasury called for enhanced oversight of consumer financial activities specifically when it comes to nonbank firms 6regulation is also a problem in the emerging world of cryptocurrencies initial coin offerings icos are a form of fundraising that allows startups to raise capital directly from lay investors in most countries they are unregulated and have become fertile ground for scams and frauds regulatory uncertainty for icos has also allowed entrepreneurs to slip security tokens disguised as utility tokens past the u s securities and exchange commission sec to avoid fees and compliance costs because of the diversity of offerings in fintech and the disparate industries it touches it is difficult to formulate a single and comprehensive approach to these problems for the most part governments have used existing regulations and in some cases customized them to regulate fintech | |
what are examples of fintech | fintech has been applied to many areas of finance here are just a few examples | |
does fintech apply only to banking | no while banks and startups have created useful fintech applications around basic banking e g checking and savings accounts bank transfers credit debit cards and loans many other fintech areas that have more to do with personal finance investing or payments among others have grown in popularity | |
how do fintech companies make money | fintechs make money in different ways depending on their specialty banking fintechs for example may generate revenue from fees loan interest and selling financial products investment apps may charge brokerage fees utilize payment for order flow pfof or collect a percentage of assets under management aum payment apps may earn interest on cash amounts and charge for features like earlier withdrawals or credit card use | |
what is the financial times stock exchange group ftse | the financial times stock exchange ftse now known as ftse russell group is a british financial organization that specializes in providing index offerings for the global financial markets the london stock exchange group lseg owns the ftse russell group in addition to the ftse russell group the lseg also owns borsa italiana millennium it and other financial brands 1the indexing division of the ftse is similar to that of standard poor s it specializes in creating index offerings that the global financial markets can use as benchmarks an index is comprised of a hypothetical portfolio of stock holdings so it can act as a representation of the performance of a particular market segment also called a benchmark although the ftse offers many indexes its two most well known indexes are the ftse 100 which is comprised of the most highly capitalized blue chip stocks listed on the london stock exchange and the russell 2000 index a small cap stock market index of the smallest 2 000 stocks in the russell 3000 index understanding the financial times stock exchange group ftse the ftse russell group established in 2015 after the merger of ftse and russell investments is a u k based global provider of benchmark financial indexes market data and analytics the ftse s indexes are available across asset classes styles and strategies and are designed to meet the needs of a wide variety of clients including buy side sell side custodians asset owners exchanges investment consultants and exchange traded fund etf providers 1the ftse 100 indexthe ftse 100 is very widely used in europe at its creation in jan 1984 the index had a base level of 1 000 it has since reached highs of over 7 000 many market analysts traders and investors look to the ftse 100 as a proxy for the performance of the wider u k stock market similar to the way that many u s investors look to the dow jones or the s p 500 indexes 2the level of the ftse 100 is calculated using the total market capitalization of the constituent companies and the index value total market capitalization changes alongside individual share prices of the indexed companies throughout the trading day so the index value also changes when the ftse 100 is quoted up or down it is measured against the previous day s market close it is calculated continuously on every trading day from 8 00 a m at the market opening until the 4 30 p m lse close a ftse 100 decline means the value of the largest u k listed companies has decreased when the ftse hits a new high it means the total worth of all the indexed companies has increased readjustment of the index constituents the companies that make up the ftse 100 happens every quarter usually the wednesday following the first friday in march june september and december any changes to the underlying index constituents and their weighting come from the values of the companies taken at the close of business the night before the review 3as of june 26 2023 the top five ftse 100 holdings by market cap were 4the ftse 100 is often considered a leading indicator of prosperity for companies in the u k and the u k economy in general as such it typically draws investors looking for exposure to big u k companies while several of its listings do include companies with homes outside of the u k it is most significantly made up of u k companies and impacted by u k daily developments other ftse group indicesas mentioned there are a prolific number of indexes attached to the ftse group and the ftse russell brand the ftse group s most popular indexes in addition to the ftse 100 are the ftse 250 the ftse 350 and the ftse all share some of the other popular ftse russell indices include investing in the ftsethough you cannot directly invest in an index you can invest in funds that replicate track or even short the ftse index many of these are exchange traded funds etfs that allow for easy access to the indices examples of funds that track these indices that you can invest in are the vanguard ftse 100 the vanguard ftse 250 the ishares 350 u k equity index fund the ishares core ftse 100 and the vanguard ftse u k all share index unit trust | |
what is the u s version of the ftse | the ftse is the financial times stock exchange in the u k that is a provider of different indices its most popular being the ftse 100 which tracks the top 100 companies by market cap in the u k the u s version of this would be the s p 500 which tracks the top 500 u s companies by market cap or the dow jones industrial average djia which tracks 30 prominent u s companies can americans invest in the ftse yes americans can invest in the ftse the easiest way to do this is by investing in exchange traded funds that track these indices such as the vanguard ftse 100 the vanguard ftse 250 the ishares 350 u k equity index fund and the ishares core ftse 100 | |
what is the difference between a stock market and a stock exchange | a stock exchange is a specific organization marketplace that facilitates equity trading for example the new york stock exchange and nasdaq a stock market is used as an umbrella term to refer to all of the stocks that trade in a particular country or region such as all of the companies that trade on both the new york stock exchange and the nasdaq the bottom linethe financial times stock exchange now known as the ftse russell group provides a variety of indices that track different segments of the u k financial markets its most popular index the ftse 100 tracks the top 100 companies by market cap in the united kingdom similarly to how the s p 500 works in the u s investors looking to gain exposure to these indices can invest in funds that track the indices such as the ishares core ftse 100 |
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