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what is the average pay for an investment banker in 2024 | the average total pay range for a front office investment banker is between 293 000 and 548 000 as of 2024 according to glassdoor this includes both base and additional pay the average salary in the u s is 173 105 of that total 3 | |
what is the front office in the sports industry | the front offices employ many sports industry professionals from the owners of the teams and general managers to ticket sales offices public relations sales and marketing 4 | |
how can i prepare for a front office job interview | it can depend a great deal on the specific role you re applying for and the industry in which you re applying some issues you might want to stress include why you enjoy working with the public and clients and why you re interested in working in this capacity you ll also want to address your abilities of course 5the bottom linethe front office of a business enterprise is typically made up of employees who deal directly with its customers or clients responsibility for a good deal of a firm s revenues rests on the shoulders of these employees the roles and associated pay can vary significantly by industry but it s a safe guess that you ll be well suited for one of them if you consider yourself a people person and depending on your education and other skills | |
what is front running | front running is trading stock or any other financial asset by a broker who has inside knowledge of a future transaction that is about to affect its price substantially a broker may also front run based on insider knowledge that their firm is about to issue a buy or sell recommendation to clients that will almost certainly affect the price of an asset this exploitation of information that is not yet public is illegal and unethical in almost all cases front running is also called tailgating | |
how front running works | here s a straightforward example of front running say a broker gets an order from a major client to buy 500 000 shares of xyz co such a huge purchase is bound to drive up the price of the stock immediately at least in the short term the broker sets aside the request for a minute and first buys some xyz stock for their own personal portfolio then the client s order is put through the broker immediately sells the xyz shares and pockets a profit this form of front running is illegal and unethical the broker has made a profit based on information that was not public knowledge the delay in execution may even have cost the client money front running is similar to insider trading with the minor difference in this case that the broker works for the client s brokerage rather than inside the client s business front running is commonly confused with insider trading but they are distinct insider trading refers to a company insider who trades on advanced knowledge of corporate activities for example using their insider knowledge to buy or sell shares ahead of a major announcement another tactic for front running is acting upon an analyst recommendation that has not yet been published the analysts work in a separate division from the broker and concentrate on evaluating the potential of individual companies in order to advise the company s clients they constantly issue buy sell or hold recommendations for specific stocks these go directly to clients first and then are picked up by the financial media and reported widely a broker who acts upon that recommendation for personal gain before it reaches the company s clients is front running there is some grey area here for example a professional short seller may accumulate a short position and then publicize the reasons for shorting the stock this seems perilously close to a short seller s version of a pump and dump scheme in which a speculator hypes or bashes an investment for personal gain there is a distinction however the short seller in this example reveals the personal financial stake at the time of the recommendation and the information conveyed by the short seller reflects a genuine fact based view of the outlook of the stock shorted rather than a falsehood intended to mislead most types of front running are prohibited by sec rule 17 j 1 which sets out the ethical requirements for portfolio managers and brokers this rule has been interpreted to prohibit these insiders from taking advantage of their knowledge of client trades for personal gain 1a form of front running in index funds is common and is not illegal index funds track a financial index by mirroring the index s portfolio the composition of the index changes periodically in order to balance it accurately as the stocks that make it up change dramatically in price or as stocks are added or removed from the index that forces the fund s managers to buy or sell some components of the index traders watch the prices of those stocks and they know when an index fund will update its components they will front run the trade by buying or selling shares to gain an edge this is not illegal because that information is available to all those who are paying attention example of front runningin 2020 the financial industry regulatory authority finra announced penalties against citadel securities arguing that the chicago based market maker had front run against its own clients between 2012 and 2014 according to the financial regulator citadel removed hundreds of thousands of large otc orders from its automatic trading processes requiring those trades to be executed manually by human traders at the same time citadel traded for its own account on the same side of the market at prices that would have satisfied the orders violating their obligations to their clients 2in a single sample month finra found that citadel had traded against their customers in nearly three quarters of the inactive orders citadel ultimately agreed to make their clients whole in addition to a 700 000 fine without admitting any wrongdoing 2 | |
is front running illegal | yes front running is often illegal most types of front running are prohibited by sec rule 17 j 1 | |
is payment for order flow front running | payment for order flow pfof is when a broker receives compensation for routing customer orders first to a particular market maker or trading firm this practice has been criticized for discouraging best execution for customers but it is not considered front running since the firm receiving the flow will trade with the customer not place trades going in the same direction in front of them | |
is trading ahead front running | trading ahead is when a broker or market maker uses their firm s account to make a trade instead of matching available bids and offers from others in the market trading ahead is illegal but it is not considered by regulators to be the same as front running | |
what is full costing | full costing is an accounting method used to determine the complete end to end cost of producing products or services understanding full costingalso known as full costs or absorption costing it is required in most common accounting methodologies including generally accepted accounting principles gaap international financial reporting standards ifrs and reporting standards for income tax purposes | |
when using the full costing method all direct fixed and variable overhead costs are assigned to the end product | in full costing accounting these various expenses move with the product or service through inventory accounts until the product is sold the income statement will then recognize these as expenses under costs of goods sold cogs full costing vs variable costingthe alternative to the full costing method is known as variable or direct costing the treatment of fixed manufacturing overhead costs such as salaries and building leases is the primary difference between these two different accounting styles companies that use variable costing separate these operating expenses from production costs in short they seek to establish the expenses incurred during the manufacturing process independent of the everyday costs of running a business under the variable costing method fixed manufacturing overhead costs are expensed during the period they are incurred in contrast the full costing approach recognizes fixed manufacturing overhead costs as an expense when goods or services are sold choosing one method over another can have sizable effects on the reporting of financial statements in practice neither costing method is right or wrong some organizations will find variable costing more effective while others will prefer full costing the usefulness of method selection boils down to managerial attitude behavior and organizational design as it relates to accurate input cost capture and valuation as more businesses move to just in time jit or related streamlined production procedures and inventory systems in many ways direct or full costing methods lose their significance because fewer costs and expenses are tied up in production processes advantages of full costingcompliant with reporting rules one of the biggest benefits of full costing is that it complies with gaap even if a company decides to use variable costing in house it is required by law to use full costing in any external financial statements it publishes full costing is also the method that a company is required to use for calculating and filing its taxes accounts for all production costs factoring in all expenses provides investors and management with a complete picture of how much it costs a company to manufacture its products establishing the total cost per unit helps businesses to determine suitable pricing for goods and services easier to track profits full costing presents a more accurate idea of profitability than variable costing if all of the products are not sold during the same accounting period when they are manufactured this can be especially important for a company that ramps up production well in advance of an anticipated seasonal increase in sales disadvantages of full costingdifficult to compare product lines full costing also has several drawbacks for example taking into account all expenses including those not directly associated with production may make it slightly harder for management to compare the profitability of different product lines impacts efforts to improve operational efficiency management teams using full costing will also find it more challenging to run cost volume profit cvp analysis which is used to determine how many products a company must manufacture and sell to reach the point of profitability and improve operational efficiency if fixed costs are an especially large part of total production costs it is difficult to determine variations in costs that occur at different production levels can skew profit another major flaw of full costing is that it can potentially mislead investors fixed costs are not deducted from revenues unless all of the company s manufactured products are sold meaning that a company s profit level can appear better than it actually is during a specified accounting period | |
what is full disclosure | full disclosure is the u s securities and exchange commission s sec requirement that publicly traded companies release and provide for the free exchange of all material facts that are relevant to their ongoing business operations full disclosure also refers to the general need in business transactions for both parties to tell the whole truth about any material issue about the transaction for example in real estate transactions there is typically a disclosure form signed by the seller that may result in legal penalties if it is later discovered that the seller knowingly lied about or concealed significant facts 1 | |
how full disclosure works | full disclosure laws began with the securities act of 1933 and the securities exchange act of 1934 the sec combines these acts and subsequent legislation by implementing related rules and regulations 2congress and the sec realize full disclosure laws should not increase the challenge of companies raising capital through offering stock and other securities to the public because registration requirements and ongoing reporting requirements are more burdensome for smaller companies and stock issues than for larger ones congress has raised the limit on the small issue exemption over the years in 1933 the exemption was 100 000 whereas in 1982 it became 5 million therefore securities issued up to 5 million are not subject to the sec s registration requirements 3publicly owned companies prepare a form 10 k annual report for the sec the report s content and form are strictly governed by federal statutes and contain detailed financial and operating information management typically provides a narrative response to questions about the company s operations public accountants prepare detailed financial statements 4due to sec regulations annual reports to stockholders contain certified financial statements including a two year audited balance sheet and a three year audited statement of income and cash flows annual reports also contain five years of selected financial data including net sales or operating revenue income or loss from continuing operations total assets long term obligations redeemable preferred stock and cash dividends declared per common share real life example of full disclosurea real estate contract often contains a full disclosure requirement the real estate agent or broker and the seller must be truthful and forthcoming about all material issues before completing the transaction if one or both parties falsifies or fails to disclose important information that party may be charged with perjury full disclosure typically means the real estate agent or broker and the seller disclose any property defects and other information that may cause a party to not enter into the deal the agent or broker must disclose whether the agent or broker has any interest in the property being sold or any personal relationship with the seller figures and estimates of the property value how long the property has been on the market and updates on offers or counteroffers placed on the property | |
what is full employment | full employment is an economic situation in which all available labor resources are being used in the most efficient way possible full employment embodies the highest amount of skilled and unskilled labor that can be employed within an economy at any given time true full employment is an ideal and probably unachievable situation in which anyone who is willing and able to work can find a job and unemployment is zero it is a theoretical goal for economic policymakers to aim for rather than an actually observed state of the economy in practical terms economists can define various levels of full employment that are associated with low but non zero rates of unemployment investopedia sydney saporitounderstanding full employmentfull employment is seen as the ideal employment rate within an economy at which no workers are involuntarily unemployed full employment of labor is one component of an economy that is operating at its full productive potential and producing at a point along its production possibilities frontier if there is any unemployment then the economy is not producing at full potential and some improvement in economic efficiency may be possible however because it may not be practically possible to eliminate all unemployment from all sources full employment may not actually be attainable for many economists newer understandings of full employment require some degree of unemployment to temper inflation and allow workers to move between jobs pursue their education or improve their skills an unemployment rate of 5 is often considered full employment this level of unemployment is enough to minimize inflation and allow workers to move between jobs but those wanting full time work should be able to find a full time job even if it is not their preferred occupation in terms of cyclical unemployment many macroeconomic theories present full employment as a goal that once attained often results in an inflationary period the link between inflation and unemployment is a prominent part of the monetarist and keynesian theories this inflation is a result of workers having more disposable income which would drive prices upward according to the concept of the phillips curve this poses a potential problem for economic policymakers such as the u s federal reserve that have a dual mandate to achieve and maintain both stable prices and full employment if there is in fact a trade off between employment and inflation per the phillips curve then simultaneous full employment and price stability may not be possible on the other hand some economists also argue against the overzealous pursuit of full employment especially via the over expansion of money and credit through monetary policy economists of the austrian school believe that this will result in damaging distortions to the financial and manufacturing sectors of the economy this might even result in more unemployment in the long run by precipitating a subsequent recession as real resource constraints come into conflict with artificially increased demand for various types of capital goods and complementary labor types of unemploymentunemployment can result from cyclical structural frictional or institutional causes policymakers can focus on reducing the underlying causes of each of these types of unemployment but in doing so they may face trade offs against other policy goals the desire to encourage technological progress can cause structural unemployment for example when workers find themselves obsolete due to the automation of factories or the use of artificial intelligence institutional unemployment arises from institutional policies that affect the economy these can include governmental programs promoting social equity and offering generous safety net benefits and labor market phenomena such as unionization and discriminatory hiring some unemployment may be unavoidable by policymakers entirely such as frictional unemployment which is caused by workers voluntarily changing jobs or first entering the workforce searching for a new job recruiting new employees and matching the right worker to the right job are all a part of it cyclical unemployment is the fluctuating type of unemployment that rises and falls within the normal course of the business cycle this unemployment rises when an economy is in a recession and falls when an economy is growing therefore for an economy to be at full employment it cannot be in a recession that s causing cyclical unemployment the phillips curve is cyclical it posits that full employment inevitably results in higher inflation which in turn leads to increasing unemployment for the most part macroeconomic policymakers focus on reducing cyclical unemployment to move the economy toward full employment in this case they may face trade offs against rising inflation or the risk of distorting other sectors of the economy cyclical unemployment which is driven by changes in economic cycles should not be confused with seasonal unemployment where there are changes in the workforce that predictably occur throughout the year for example jobs in the retail sector typically decrease after the traditional run up to the holiday shopping season ends after new year s unemployment rises when people hired for the holidays are no longer needed to meet demand types of full employmentdue to the difficulty and questionable desirability of achieving true full employment economists have developed other more pragmatic goals for economic policy the natural rate of unemployment represents only the amount of unemployment due to structural and frictional factors in labor markets the natural rate serves as an achievable approximation of full employment while accepting that technological change and the normal transaction costs of labor markets will always mean some modest unemployment at any given point in time the non accelerating inflation rate of unemployment nairu represents the rate of unemployment that is consistent with a low stable rate of price inflation the nairu is useful as a policy target for economic policymakers who operate under a dual mandate to balance full employment and stable prices this is not full employment but it is the closest the economy can be to full employment without excessive upward pressure on prices from increasing wages modern economists often mean the nairu when they refer to full employment note that the nairu only makes sense conceptually and as a policy target if and when there is indeed a stable trade off between unemployment and inflation as posited by the phillips curve benefits of full employmentfull employment can provide a number of benefits both to individuals and to the overall social and economic balance of a country as employment increases toward full employment benefits include examples of full employmentfull employment is an ideal condition as a result there are no real world examples of full employment countries work to increase employment towards full employment and lower the rate of unemployment however there are examples of what economists consider full employment which is when a country s unemployment is as close to zero as real world conditions allow without triggering inflation or other economic hardships in general full employment in the real world is often considered 95 employment or higher by the end of 2021 countries whose reported unemployment rates could be considered full employment included bahrain 1 9 benin 1 6 cuba 2 8 germany 3 5 japan 2 8 malta 3 5 mexico 4 4 the netherlands 4 norway 5 poland 3 4 and thailand 1 4 in the united states the unemployment rate was 3 4 in january 2023 one of the lowest historical rates since 1948 the lowest unemployment rate in the u s since 1948 was 2 7 in 1952 both of these rates would be considered full employment by economists unemployment numbers however do not take into account those who have dropped out of the workforce entirely because they have stopped looking for work even if they would prefer to have a job or those who are working part time but would prefer full time work under true full employment conditions anyone who wanted to find a full time job would be able to | |
what rate is considered full employment | many economists consider an unemployment rate of 5 or lower to be maximum employment or as close to full employment as is possible in the real world this means that the rate of full employment is 95 or above | |
how do you know if there is full employment | in the united states the bureau of labor statistics considers full employment to be happening when the unemployment rate is equal to the nairu there is no cyclical unemployment and the country s gdp is at its potential for many countries these conditions are met when the unemployment rate is at 5 or lower | |
why is there unemployment at full employment | full employment and zero unemployment are not the same thing in the real world some types of unemployment are unavoidable or even necessary to prevent inflation allow workers to move between jobs or give people the chance to improve their education or job skills industries and companies also change which changes the available jobs and this process is eventually beneficial to the economy even if it leaves some workers temporarily unemployed the bottom linefull employment is when all available labor resources are being used in the most efficient way possible without triggering inflation it is a theoretical state in which anyone who wants to find full time work can do so and unemployment is at 0 many modern economists agree that some unemployment is necessary to avoid inflation temporary unemployment can also allow workers time to move between jobs go to school or otherwise improve their skills in the real world an unemployment rate of 5 or lower is often considered full employment this level of unemployment prevents inflation and lets workers move between jobs but is low enough that those wanting full time work should be able to find some kind of full time job | |
what is a full ratchet | a full ratchet is a contractual provision designed to protect the interests of early investors specifically it is an anti dilution provision that applies for any shares of common stock sold by a company after the issuing of an option or convertible security the lowest sale price as the adjusted option price or conversion ratio for existing shareholders understanding full ratchetsa full ratchet protects early stage investors by ensuring that their percentage ownership is not diminished by future rounds of fundraising this provision also offers a level of cost protection should the pricing of future rounds be lower than that of the initial round there are some caveats though offering these assurances to early stage investors can be quite expensive from the perspective of company founders or investors participating in later rounds of fundraising essentially the existence of a full ratchet provision can make it difficult for the company to attract new rounds of investment for this reason full ratchet provisions are usually only kept in force for a limited period of time full ratchet exampleto illustrate consider a scenario in which a company sells 1 million convertible preferred shares at a price of 1 00 per share under terms that include a full ratchet provision suppose that the company then undertakes a second fundraising round this time selling 1 million common shares at a price of 0 50 per share due to the full ratchet provision the company would then be obliged to compensate the preferred shareholders by reducing the conversion price of their shares down to 0 50 effectively this means that the preferred shareholders would need to be given new shares at no additional cost in order to ensure that their overall ownership is not diminished by the sale of the new common shares this dynamic can lead to a series of adjustments in which new shares need to be created to satisfy the demands both of the original preferred shareholders who benefit from the full ratchet provision and of new investors who wish to purchase a fixed percentage of the company after all investors desire not just an abstract number of shares but a concrete percentage of ownership in this situation company founders can find their own ownership stakes quickly diminished by the back and forth adjustments benefiting old and new investors the full ratchet vs weighted average approachesan alternative provision which uses a weighted average approach is arguably fairer in balancing the interests of founders early investors and later investors this approach comes in two varieties the narrow based weighted average and the broad based weighted average | |
what is a fully amortizing payment | a fully amortizing payment refers to a type of periodic repayment on a debt if the borrower makes payments according to the loan s amortization schedule the debt is fully paid off by the end of its set term if the loan is a fixed rate loan each fully amortizing payment is an equal dollar amount if the loan is an adjustable rate loan the fully amortizing payment changes as the interest rate on the loan changes understanding a fully amortizing paymentloans for which fully amortizing payments are made are known as self amortizing loans mortgages are typical self amortizing loans and they usually carry fully amortizing payments homebuyers can see how much they can expect to pay in interest over the life of the loan using an amortization schedule provided by their lender an interest only payment is the opposite of a fully amortizing payment if our borrower is only covering the interest on each payment they are not on the schedule to pay the loan off by the end of its term if a loan allows the borrower to make initial payments that are less than the fully amortizing payment then the fully amortizing payments later in the life of the loan are significantly higher this is typical of many adjustable rate mortgages arms 1to illustrate imagine someone takes out a 250 000 mortgage with a 30 year term and a 4 5 interest rate however rather than being fixed the interest rate is adjustable and the lender only assures the 4 5 rate for the first five years of the loan after that point it adjusts automatically if the borrower were making fully amortizing payments they would pay 1 266 71 as indicated in the first example and that amount would increase or decrease when the loan s interest rate adjusts however if the loan is structured so the borrower only pays interest payments for the first five years his monthly payments are only 937 50 during that time but they are not fully amortizing as a result after the introductory interest rate expires his payments may increase up to 1 949 04 by making non fully amortizing payments early in the life of the loan the borrower essentially commits to making larger fully amortizing payments later in the loan s term if you have an interest only adjustable rate mortgage arm refinancing it before the rate adjusts could help to avoid a significant jump in monthly payments fully amortized loan payment exampleto illustrate a fully amortizing payment imagine a man takes out a 250 000 30 year fixed rate mortgage with a 4 5 interest rate and his monthly payments are 1 266 71 at the beginning of the loan s life the majority of these payments are devoted to interest and just a small part to the loan s principal near the end of the loan s term the majority of each payment covers principal and only a small portion is allocated to interest because these payments are fully amortizing if the borrower makes them each month they pay off the loan by the end of its term here s how the loan amortization schedule would look for years one through five of the loan now here s what the amortization schedule looks like for the last five years of the loan as you can see more of the borrower s monthly payments go toward the principal on the loan as the end of the mortgage term approaches your amortization schedule for a mortgage may also break down what goes toward homeowners insurance or property taxes if those are escrowed into your loan payments pros and cons of fully amortized loansthe main advantage of fully amortized loans is the ability to see how your payment is divided up each month on a mortgage or similar loan this can make planning your budget easier because you ll always know what your mortgage payments will be assuming you choose a fixed rate loan option the chief disadvantage of fully amortized loans is that they require you to pay the lion s share of interest charges up front going back to the fully amortized loan example offered previously you can see that the majority of what the borrower pays in the first five years of the loan goes toward interest if they were to sell the home after five years then they may have made only a very small dent in the loan balance if the home hasn t increased significantly in value they may have very little equity to show for their efforts making a sale of the home less profitable the lender is a winner however because they ve been able to collect those interest payments in the preceding five years if you have a mortgage and you re thinking of refinancing using an online calculator to find your breakeven point with a fully amortizing loan can help you decide if it s the right move other types of loan paymentsin some cases borrowers may choose to make fully amortizing payments or other types of payments on their loans in particular if a borrower takes out a payment option arm they receive four different monthly payment options a 30 year fully amortizing payment a 15 year fully amortizing payment an interest only payment and a minimum payment they must pay at least the minimum however if they want to stay on track to have the loan paid off in 15 or 30 years they must make the corresponding fully amortizing payment 2making minimum payments could result in a larger loan balance if you re not making a dent in what you owe toward the interest faqs | |
what is a fully amortizing loan | a fully amortizing loan has a set repayment period that will allow the borrower to repay the principal and interest due by a specified date fully amortizing loans assume that the borrower makes each scheduled payment in full and on time | |
what is an amortization schedule | an amortization schedule illustrates how a borrower s payments are applied to the principal and interest on a loan over time with fully amortized loans the bulk of interest payments are made earlier in the loan term with more of the payment going toward the principal as you get closer to the end of the loan can you pay off a fully amortized loan early yes if your lender allows it paying off a fully amortized loan ahead of schedule could save money on interest keep in mind however that your lender may apply a prepayment penalty to recoup any lost interest if you decide to pay a loan off early | |
what are fully diluted shares | fully diluted shares are the total number of common shares of a company that will be outstanding and available to trade on the open market after all possible sources of conversion such as convertible bonds and employee stock options are exercised fully diluted shares include not only those which are currently issued but also those that could be claimed through conversion this number of shares is needed for a company s earnings per share eps calculations because applying fully diluted shares increases the share basis in the calculation while reducing the dollars earned per share of common stock understanding fully diluted sharesfully diluted shares affect the eps of a company which is a common metric for assessing relative value and profitability eps represents net income minus preferred dividends divided by the weighted average of common shares outstanding in which the weighted average of common shares outstanding beginning period balance ending period balance 2 if a company can increase earnings per common share it is considered to be more valuable and the publicly traded share price may increase however the number of outstanding shares affects this metric and when the number increases it reduces the eps factoring in fully diluted sharesassume that abc corporation abc generates 10 million in net income and pays preferred shareholders a total of 2 million in dividends the net income available to common shareholders is 8 million if the firm s weighted average of common shares outstanding totals 1 million the eps will be 8 00 per share or 8 million 1 million shares this 8 00 eps is referred to as basic eps because the total is not adjusted for dilution full dilution means that every security that can be converted into common shares has been converted indicating there will be fewer earnings available per share of common stock since eps is a key measure of a company s value and profitability it is important for an investor to review basic eps as well as fully diluted eps example of fully diluted sharesseveral types of securities can be converted into common stock including convertible bonds convertible preferred stock employee stock options rights and warrants assume that abc issues 100 000 shares in stock options to employees to reward them for strong company performance the firm has convertible bonds outstanding that allow bondholders to convert their securities into a total of 200 000 shares of common stock abc also has convertible preferred stock outstanding and those shares can be converted into 200 000 shares of common stock as well full dilution assumes that all 500 000 additional common stock shares are issued which increases the common shares outstanding to 1 5 million applying the 8 million in earnings to common shareholders fully diluted eps will be 8 million 1 5 million shares or 5 33 per share which is lower than the basic eps of 8 00 per share | |
what is fully vested | being fully vested means a person has rights to the full amount of some benefit most commonly employee benefits such as stock options profit sharing or retirement benefits benefits that must be fully vested benefits often accrue to employees each year but they only become the employee s property according to a vesting schedule vesting may occur on a gradual schedule such as 25 per year or on a cliff schedule where 100 of benefits vest at a set time such as four years after the award date fully vested may be compared with partially vested understanding fully vestedto be fully vested an employee must meet a threshold as set by the employer this most common threshold is employment longevity with benefits released based on the amount of time the employee has been with the business while employee contributed funds to an investment vehicle such as a 401 k remain the property of the employee even if that employee leaves the business company contributed funds may not become the employee s property until a certain amount of time has elapsed an employee is considered fully vested when any and all agreed upon requirements the company has set forth to become the full owner of the associated benefit have been met thus when an employee becomes fully vested they become the official owner of all of the funds within their 401 k account regardless of whether the employee or the employer contributed them instituting a vesting scheduleto institute a vesting schedule the employee must agree to the conditions set forth often this requirement can be considered a condition of receiving the benefit if an employee chooses not to accept the vesting schedule they would surrender the rights to participate in employer sponsored retirement benefits until choosing to agree in those cases employees may have the option of investing for retirement independently such as through an individual retirement account ira instead business benefits of vesting scheduleswith vesting schedules companies seek to retain talent by providing lucrative benefits contingent upon the employees continued employment at the firm throughout the vesting period an employee who leaves employment often loses all benefits that have not yet vested at the time of departure this type of incentive can be done on such a scale that an employee stands to lose tens of thousands of dollars by switching employers this strategy can backfire when it promotes the retention of disgruntled employees who may hurt morale and do the minimum required until it is possible to collect previously un vested benefits the most commonly used vesting schedule is graded or graduated vesting which requires an employee to have worked for a certain number of years in order to be 100 vested in the employer funded benefits each year worked more money vests this schedule of vesting differs from cliff vesting in which employees become immediately 100 vested following an initial period of service and immediate vesting in which contributions are owned by the employee as soon as they start the job | |
what is a functional currency | popular with multinationals functional currency represents the primary economic environment in which an entity generates and expends cash it is the main currency used by a business in its business dealings understanding a functional currencyas the financial statements of a business are reported in only one currency the dealings or transactions that are done in another currency must be converted back to the principal currency used on the financial statements the international accounting standards ias and generally accepted accounting principles gaap offer guidance on the translation of foreign currency transactions the financial accounting standards board fasb was the first regulatory body to present the idea of a functional currency under their statement of financial accounting standards sfas no 52 1 choosing a functional currencythe world s economies have grown increasingly interdependent multinational corporations recognizing the integration of world markets including the trade of commodities and services and the flow of international capital are thinking global to remain competitive with international operations comes the tough choice of selecting a functional currency which must address several financial reporting issues including determining appropriate functional currencies accounting for foreign currency transactions and converting financial statements of foreign subsidiaries into a parent company s currency for consolidation factors may include finding the currency that most affects sales price for retail and manufacturing entities the currency in which inventory labor and expenses are incurred may be most relevant ultimately it s often management s judgment between a local currency that of a parent or the currency of a primary operational hub it can be difficult to ascertain overall business performance when a variety of currencies are involved therefore both u s gaap and ias outline procedures for how entities can convert foreign currency transactions into the functional currency for reporting purposes at times a company s functional currency may be the same currency as the country where it does most of its business other times the functional currency may be a separate currency from the currency in which a firm is headquartered | |
what is functional obsolescence | functional obsolescence is the reduction of an object s usefulness or desirability because of an outdated design feature that cannot be easily changed or updated the application of the term varies based on industry for example in real estate it refers to the loss of property value due to an obsolete feature such as an old house with one bathroom in a neighborhood filled with new homes that have at least three bathrooms it may also refer to outdated technologies such as an older version of a mobile phone or computer processor obsolescence risk is the risk that a process product or technology used or produced by a company for profit will become functionally obsolete and thus no longer competitive in the marketplace understanding functional obsolescenceconsumers can mitigate losses caused by functional obsolescence by considering the long term usefulness of purchased goods an item can be unattractive to consumers if its design prevents upgrades or connectivity with compatible devices many consumer electronics are known for their functional obsolescence due to the constant introduction of newer refreshed versions for example before the late 1990s most households had bulky heavy tube televisions with entertainment centers being constructed to accommodate their weight and size fast forward to today and most households have low profile flat screen televisions rendering the old entertainment centers functionally obsolete to keep pace with the technological advances of consumer electronics furniture manufacturers often redesign their products companies also take functional obsolescence into consideration in long term business planning depreciation of an asset is one example of quantifiable functional obsolescence companies can use various accounting methods to calculate the depreciation of an asset on its books but the overall goal is to measure and track an asset s declining usefulness over time this method of business planning also helps companies anticipate the need to sell or repurchase new assets planned obsolescence is a strategy of deliberately ensuring that the current version of a given product will become out of date or useless within a known time period functional obsolescence and real estatein real estate functional obsolescence usually leads to lower appraisal values real estate can exhibit functional obsolescence if its design features are outdated not useful or not aligned with market tastes and standards such as when an old house is located within a neighborhood of new homes while functional obsolescence is generally associated with rundown structures or dilapidated neighborhoods it can also occur in the opposite case for example a home may have over improvements when a homeowner renovates and includes features within their home that might not be necessary while various efforts have been made over the years to objectively quantify the effect of functional obsolescence in real estate assessment or appraisal of functional obsolescence is mostly subjective the subjectivity occurs because various factors go into making decisions about the price of a home in the case of real estate some features can potentially be renovated to overcome functional obsolescence examples of functional obsolescenceconsider a 1950s house with three bedrooms and one bathroom located in a gated subdivision filled with two story houses containing five bedrooms and four bathrooms because the old house does not have the capacity that buyers in this market want it is said to be functionally obsolete even if it is still in good condition and is perfectly livable within the technology industry the constantly changing parade of smartphones and the evolution of smartphone technology is another example of functional obsolescence new smartphones are able to do more and include more features that make old ones functionally obsolete in some cases the tech companies actively put policies in place such as refusing support or updates for old models to make products functionally obsolete for instance apple inc has been criticized for not maintaining updates and customer service for older outdated iphones and other devices | |
what is a fund | a fund is a pool of money that is allocated for a specific purpose a fund can be established for many different purposes a city government may set aside money to build a new civic center a college may set aside money to award a scholarship or an insurance company may set aside money to pay its customers claims | |
how funds work | individuals businesses and governments all use funds to set aside money individuals might establish an emergency fund also called a rainy day fund to pay for unforeseen expenses or start a trust fund to set aside money for a specific person individual and institutional investors can also place money in different types of funds with the goal of earning money examples include mutual funds which gather money from numerous investors and invest it in a diversified portfolio of assets and hedge funds which invest the assets of high net worth individuals hnwis and institutions in a way that is designed to earn above market returns governments use funds such as special revenue funds to pay for specific public expenses types of fundsthe following are examples of funds commonly used for personal ventures in the realm of investments some types of funds include the government also creates funds that are allocated for various reasons some government funds include | |
what is the purpose of a fund | the purpose of a fund is to set aside a certain amount of money for a specific need an emergency fund is used by individuals and families to use in times of emergency investment funds are used by investors to pool capital and generate a return college funds are usually set up by parents to contribute money to a child s future college education | |
what is an example of a fund | an example of a fund is a mutual fund mutual funds accept money from investors and use that money to invest in a variety of assets mutual funds have managers that manage the fund for a fee which they charge to investors investors allocate money to mutual funds in hopes of increasing their wealth the bottom linea fund is a pool of money that has been created for a specific reason there are different types of funds that exist for different purposes an emergency fund is created by individuals and families for emergency expenses such as medical bills or to pay for rent and food if a wage earner loses a job an investment fund is an entity created to pool the money of various investors with the goal of investing that money into various assets in order to generate a return on the invested capital individuals governments families and investors all use funds for very different purposes but the essential goal remains the same to set aside a certain amount of money for a specific need | |
what is fund flow | fund flow is the cash that flows into and out of various financial assets for specific periods of time it s usually measured on a monthly or quarterly basis fund flow doesn t measure the performance of any single asset but emphasizes how cash is moving for example with mutual funds fund flow measures the cash involved in share purchases or inflows and the cash resulting from share redemptions or outflows it doesn t say anything about how well or badly a fund performed net inflow occurs when more cash flows into say the mutual fund than out of it a net inflow creates excess cash for managers to invest theoretically this then creates demand for securities such as stocks and bonds a net outflow would indicate that more cash was taken from the mutual fund than was invested in it understanding fund flowinvestors have a choice of where to allocate their investment capital and normally place it in financial markets that they expect to be profitable if they then contemplate a downturn in the markets and their investments they may extract their investment capital and any profits this movement of investment capital is the fund flow of cash in the financial markets investors and market analysts watch fund flows to gauge investor sentiment relating to specific asset classes sectors or the market as a whole for instance net fund flow for bond funds that s negative during a given month by a large amount might signal broad based pessimism for the fixed income markets fund flow focuses on the movement of cash only and reflects the net flow after measuring inflows and outflows inflows can include the money retail investors put into mutual funds outflows can include payments to investors or payments made to a company in exchange for goods and services fund flow does not include any money that is due to be paid it looks at only actual cash that was paid into or out of the asset investors can find information about fund flow from information aggregators like morningstar and investment research firms for example the investment company institute ici provides estimated fund flows for long term mutual funds the latest estimate for july 2022 shows a net outflow of 12 82 billion 1fund flow statementsa fund flow statement discloses the types of inflows and outflows a company experiences the fund flow statement can highlight fund flow that might be out of the ordinary such as a higher than expected outflow due to an irregular expense further it often categorizes the various transaction types and sources to help track any fund flow activity changes fund flow changesbroadly speaking fund flow changes could reflect a change in customer sentiment this could relate to new product releases or improvements recent news regarding a company or shifts in feelings about an industry as a whole positive fund flow changes note an upswing in inflow a lessening of outflow or a combination of the two in contrast negative fund flow suggests lower inflows higher outflows or both while occasional shifts may not be cause for concern repeated instances of negative fund flows can be a worrying sign for example it could indicate that income can t meet a company s expenses if the trend continues a company might need a form of debt to continue operating exampleaccording to morningstar for march 2022 u s long term mutual funds and exchange traded funds etfs had total inflows of 30 billion u s large growth funds that typically see redemptions or outflows took in 9 3 billion that month still due to previous months low inflows the first quarter of 2022 was the weakest for inflows since first quarter 2020 despite a bit of good news such as for long term government bond funds which took in 8 7 billion a 9 8 one month growth rate morningstar concluded that this low level of inflow reflects softening sentiment and investor caution 2 | |
why is fund flow important to know about | many analysts and market watchers believe that fund flow provides a window on investor sentiment and behavior some investors use fund flow data to signal when to buy or sell on the other hand others use fund flow information to substantiate their investment outlooks before they take action can fund flow predict market behavior reliably not necessarily although in past years apparently it did a pretty good job morningstar has found that net outflows happen even when a market is strong if fund flow were an accurate indicator both flow and behavior would probably match more often than they do 3 | |
what is a fund manager | a fund manager is responsible for implementing a fund s investing strategy and managing its portfolio trading activities the fund can be managed by one person by two people as co managers or by a team of three or more people fund managers are paid a fee for their work which is a percentage of the fund s average assets under management aum they can be found working in fund management with mutual funds pension funds trust funds and hedge funds investors should fully review the investment style of fund managers before they consider investing in a fund investopedia joules garciaunderstanding fund managersthe main benefit of investing in a fund is trusting the investment management decisions to the professionals that s why fund managers play an important role in the investment and financial world they provide investors with peace of mind knowing their money is in the hands of an expert while a fund s performance may have a lot to do with market forces the manager s skills are also a contributing factor a highly trained manager can lead their fund to beat its competitors and their benchmark indexes this kind of fund manager is known as an active or alpha manager while those who take a backseat approach are called passive fund managers fund managers generally oversee mutual funds or pensions and manage their direction they are also responsible for managing a team of investment analysts this means the fund manager must have great business math and people skills the fund manager s main duties include meeting with their team as well as existing and potential clients since the fund manager is responsible for the success of the fund they must also research companies and study the financial industry and the economy keeping up to date on trends in the industry help the fund manager make key decisions that are consistent with the fund s goals before investing in a fund investors should review a fund manager s investment style to see if it is compatible with their own to qualify for a position in fund management mutual funds pension funds trust funds or hedge funds individuals must have a high level of educational and professional licenses and credentials and appropriate investment managerial experience investors should look for long term consistent fund performance with a fund manager whose tenure with the fund matches its performance time period most fund managers often pursue a chartered financial analysts cfa designation as a first step in becoming the head stock picker for a portfolio cfa candidates undergo rigorous coursework pertaining to investment analysis and portfolio management typically these analysts assist portfolio managers with individual research on investment ideas and subsequent buy sell or hold recommendations after a number of years working for the fund familiarity with fund operations and management style aid in the analyst in a career path successful cfas build a quality case for an internal promotion to manager if the opportunity arises responsibilities of fund managersfund managers primarily research and determine the best stocks bonds or other securities to fit the strategy of the fund as outlined in the prospectus then buy and sell them at larger funds the fund manager typically has a support staff of analysts and traders who perform some of these activities multiple managers at some investment companies oversee client money and each may be responsible for a portion or make decisions via committee some other responsibilities of the fund manager include preparing reports on how well the fund is performing for clients developing reports for potential clients to know the risks and objectives of the fund and identifying clients and companies who may make good fits as clients active vs passive managersactive fund managers try to outperform their peers and the benchmark indexes managers who engage in active fund management study trends in the market analyze economic data and stay current on company news based on this research they buy and sell securities stocks bonds and other assets to rake in greater returns these fund managers generally charge higher fees because they take on a more proactive role in their funds by constantly changing their holdings many mutual funds are actively managed which explains why their fees are generally high passive fund managers on the other hand trade securities that are held in a benchmark index this kind of fund manager applies the same weighting in their portfolio as the underlying index rather than trying to outperform the index passive fund managers normally try to mirror its returns many exchange traded funds etfs and index mutual funds are considered passively managed fees for these investments are generally much lower because there isn t a lot of expertise involved on the part of the fund manager notable mutual fund managersone of the most iconic fund managers in history piloted fidelity investments magellan fund peter lynch managed the company s notable equity portfolio from 1977 to 1990 lynch was a proponent of selecting stocks in industries with which he was most comfortable magellan s chief amassed remarkable average returns of 29 per year throughout his tenure growing aum from 20 million to 14 billion 1one of the longest tenured fund managers is albert ab nicholas founder of the nicholas company the seasoned portfolio manager ran the five star morningstar nicholas fund starting july 14 1969 besting the s p 500 index each year from 2008 through 2014 2a hedge fund iconhedge funds differ from mutual funds in that hedge fund portfolios require large investment minimums only from accredited investors ken griffin s citadel global equities hedge fund returned almost 6 after fees in 2018 3griffin had a net worth of 37 billion as of 2024 4 buying and selling stocks from his harvard dormitory in the 1980s griffin leaped right into the world of private equity management launching citadel with 4 million in 1990 5 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what is a fund of funds fof | a fund of funds fof is one that instead of investing in a pool of securities like stocks and bonds buys shares in other funds these multi manager investments offer investors further diversification and access to the expertise of other skilled fund managers the fund of funds approach has grown in recent years particularly among institutional investors like pension funds and endowments seeking to spread risk and maximize returns while open end funds as a whole have grown 42 in assets worldwide from the first quarter of 2020 to the end of 2023 fofs have grown 58 however fofs are infamous as a financial times analysis put it for their extra layers of fees 1 you pay not only for the fund in which you re directly invested but also for those funds where the asset manager places your capital fofs also make investing more obscure with the additional funds allocations a further remove from your reported allocations below we explain how these funds work and walk you through their potential benefits and drawbacks | |
how funds of funds work | the core idea behind a fund of funds strategy is that by combining various hedge fund strategies into a single portfolio investors can achieve higher returns with less risk compared with investing in individual funds themselves this diversification aims to smooth out the volatility inherent in fund investing offering a more stable path to potential gains funds of funds are found for all kinds of strategies and include hedge exchange traded mutual private equity and other funds fofs work by pooling capital from investors and allocating it in underlying funds for the most part fof managers select these funds based on their performance management quality and investment strategy this involves due diligence including analyzing past returns measures of risk and fund managers expertise 2while traditional fofs focus on actively managed hedge funds newer fofs invest in more passive indexes and exchange traded funds etfs these more passive fofs aim to provide investors with exposure to a broad range of asset classes and investment strategies at a lower cost compared with actively managed fofs there s still active management at the fof level though since there s the need to find those indexes or etfs that align with the fof s investment objectives and risk profile the fees for a fof strategy typically involve two layers the fees charged by the underlying funds and the fees imposed by the fof manager for example if an investor places 10 000 in a fof with a 1 management fee and the underlying funds collectively charge 2 the total annual fees might be 298 100 for the fof and 198 for the underlying funds after paying the first fee this is simplified but there s no doubt these fees add up especially when including performance fees hurdle rates and other expenses that could further impact the total cost for the investor 3types of funds of fundsfofs offer investors access to a diversified portfolio of funds through a single investment by pooling capital and spreading it across various underlying funds fofs provide professional management diversification and access to strategies or managers that may otherwise be difficult for individual investors to obtain fofs come in various types each designed for different investor needs risk preferences and investment objectives these types can be broadly categorized based on the underlying assets they invest in such as hedge funds mutual funds private equity real estate or commodities in addition some fofs employ specific trading strategies or invest in particular sectors or geographic regions 4the table below provides an overview of the main types of fofs as with any investment it s crucial to conduct due diligence before investing in a fof factors to assess include the fof s investment strategy managers track records fees liquidity and risks advantages and disadvantages of investing in fofsadditional diversificationaccess to premium investment opportunitiesprofessional managementsimplified investment processhigher expense ratiosthe risk of diluted returnscomplexity and risk of overlap in holdingsopaque nature of the investmentadvantages of investing in a fofinvesting in a fof provides several advantages that may appeal to a wide range of different investors individual and professional fofs come as either fettered or unfettered fettered fofs invest only in funds managed by the same company while unfettered fofs don t have to do so disadvantages of investing in a fofwhile fofs offer several benefits they also have drawbacks that investors should consider carefully multi strategy funds msfs vs fofsin the past decade many hedge funds have advertised offerings for multi strategy funds msfs a moniker that has spread to others 2 given that fofs were becoming known for excessive fees msfs seemed to some as putting new wrapping on an older idea 1 however while in some cases when multiple funds are being invested in this is true there are differences between msfs and fofs worth setting out a multi strategy fund has a single manager who oversees multiple investment strategies in most cases this shouldn t mean the manager is just average at many methods instead most multi strategy fund managers have achieved or employ those who have expertise in several strategies and rely on a team of specialists in each area the manager might have a background in one specific strategy say bonds but may incorporate new ones over time to increase the fund s capacity or capitalize on new prospects msfs are suitable for investors seeking a diversified portfolio with a single manager potentially lower fees and the ability to adapt to changing market conditions more quickly since all control is under one roof however it s easy to see the concern that a manager might not be up to handling different strategies simultaneously 2 thus fofs may appeal more to investors who value diversified exposure with multiple managers and are comfortable with potentially higher fees considerations for investors | |
when considering investing in a fof assessing your investment goals and risk tolerance is crucial ensure you determine whether your primary goals are growth income or stability and that the chosen fof aligns with your risk appetite understanding these factors can help you tailor your investment strategy to meet long term financial goals | undoubtedly understanding fees and expenses is another critical consideration while researchers still debate whether the gains of investing in multiple funds surpass their fees there s no doubt that fofs often have significantly higher expense ratios 38 these cumulative costs can greatly impact your overall returns therefore it s essential to fully comprehend the fee structure before committing to an fof investment besides that conducting thorough research and due diligence is paramount evaluate the track record of the fof managers scrutinize the underlying funds performance and strategies and ensure transparency in reporting a rigorous evaluation can help you understand the potential risks and rewards and give you more confidence when deciding | |
how do fofs fit into a long term investment strategy | fofs usually provide broad diversification as well as professional management making them suitable for long term stability and growth however higher expenses may dilute overall returns over time can individual investors create their own fund of funds individual investors can create a similarly diversified portfolio by selecting various mutual or hedge funds themselves but this takes expertise in choosing among these funds | |
are funds of funds regulated by the u s securities and exchange commission sec | like all other pooled investments fofs are overseen by the sec in particular sec rule 12d1 4 updated in 2020 sets out procedures that provide a consistent framework for fund of funds arrangements 9 it allows fofs to own more of another fund than usually permitted but with conditions these include preventing excessive control restricting voting rights and requiring detailed disclosures | |
how do economic downturns affect the performance of fofs | recessions will certainly impact fofs but their diversified nature should mitigate some risks compared with individual investments the bottom linefofs offer a diversified investment strategy by pooling various funds often providing access to exclusive prospects and professional management however they come with higher expense ratios and the potential for diluted returns understanding the fees conducting thorough research and assessing how fofs fit your long term goals are crucial despite their complexity fofs can be a valuable part of a well rounded investment portfolio | |
what is fundamental analysis | fundamental analysis involves examining a company s financial statements and broader economic indicators to uncover a security s intrinsic value the result of such an analysis should give you the investment s true worth based on a company s financial health the market and economic conditions investors perform fundamental analysis to gauge whether or not to invest in a company based on it s current and projected worth investopedia paige mclaughlinunderstanding fundamental analysis | |
when performing fundamental analysis you study the company s revenue growth profitability and competitive advantages within its industry you also assess macroeconomic factors such as the overall state of the economy and the demand for the company s products or services it also takes into account the effectiveness of the company s management team a skilled and experienced leadership team can navigate challenges and seize opportunities driving the company s growth and increasing its value | this approach to the market often allows you to see behind investor sentiment and company marketing to determine whether the company has the potential for long term success with fundamental analysis you can then gauge if the security s market price is over or undervalued fundamental analysis typically starts by analyzing a company s financial statements including the income statement balance sheet and statement of cash flows the information in these materials can be used to calculate and assess a company s financial health and intrinsic value key ratios derived from these financial statements include the price to earnings p e ratio earnings per share eps return on equity roe and debt to equity d e ratio among others fundamental analysts use measures like these to determine whether a stock is undervalued or overvalued relative to its market price and competitors 1in addition fundamental analysis frequently involves looking at gross domestic product inflation unemployment rates industry or sector trends and the company s competition fundamental analysis thus takes how a company should perform not just in the market but as a producer of goods and services this requires looking at the overall economy sector performance and the company s position within the industry to estimate its value and forecast future performance this approach not only considers economic and financial data but also often includes reviewing its business model management effectiveness brand awareness and potential for growth and profitability ultimately fundamental analysis aims to give you a number a value for the company you can use when buying holding or selling stocks it requires a comprehensive understanding of financial statements and a strategic view of how external factors could impact the company s future earnings and market position | |
why is fundamental analysis important | fundamentals allow investors to look beyond short term price fluctuations and focus on the underlying factors that drive a company s operations and long term performance the main benefit of fundamental analysis is to help quantify the value of a company and its shares financial statements offer hard data that reveal insights into a company s profitability liquidity and overall financial stability this information along with an assessment of the company s management team competitive advantages and industry trends furnishes a picture of the company s fair or target value with this knowledge investors can make more informed decisions about buying holding or selling a particular stock fundamental analysis can also help investors identify undervalued companies by considering a company s sales growth market share and product pipeline investors can gauge its ability to increase future profits and grow shareholder value by investing in companies with solid fundamentals and promising growth prospects investors can benefit from long term trends and capitalize on emerging prospects value investors in particular look for undervalued shares relative to their fundamental potential 2finally fundamental analysis can help you spot red flags and overvalued investments by researching a company s financial health and market position investors can more easily avoid stocks that may be more likely to underperform or experience significant downturns this is especially important during economic uncertainty or market volatility when a company s underlying strength can be the difference between weathering the storm and being pushed out of the market altogether | |
where to find fundamentals for a company | some of the most common and reliable sources for the fundamentals of a company include the following remember when conducting fundamental analysis it s essential to use several sources to get a well rounded view of a company s financial prospects and to be aware of any potential biases or conflicts of interest in the information you re receiving fundamental analysis is used most often for stocks but it can be useful for evaluating any security from a bond to a derivative if you consider the fundamentals from the broader economy to the company details you are doing a fundamental analysis reading a company s annual report is an essential part of fundamental analysis here s a step by step guide on how to read and analyze an annual report the information in financial statements is among the most valuable about a company s financial health and performance here s a breakdown of what you can learn from each one the cash flow statement is crucial because it s harder for a business to manipulate its cash situation an aggressive accountant can do plenty of things to manipulate earnings for example but it s tough to fake cash in the bank for this reason some investors use the cash flow statement as a more conservative measure of a company s performance a balance sheet gets its name because the three sections it contains assets liabilities and shareholders equity must balance out using this formula quantitative and qualitative fundamental analysisthe problem with defining the fundamentals is that they can cover anything related to a company s economic well being they can include numbers like revenue and profit but they can also include anything from a company s market share to the quality of its management generally these are all grouped into two categories quantitative and qualitative in this context quantitative fundamentals are hard numbers the measurable characteristics of a business the most significant source of quantitative data is financial statements the qualitative fundamentals are less tangible they might include the quality of a company s key executives brand name recognition patents and proprietary technology neither qualitative nor quantitative analysis is inherently better many analysts consider them together fundamental analysis relies on using financial ratios drawn from data on corporate financial statements to make inferences about a company s value and prospects there are certain qualitative fundamentals that analysts should always consider when analyzing a company these include the following financial statements are how a company discloses information about its financial performance here are some of the most important financial ratios with their formulas fundamental analysis vs technical analysisfundamental analysis contrasts starkly with technical analysis which attempts to forecast prices by analyzing historical market data such as price and volume technical analysis uses price trends and action often plotted on charts to create indicators and identify patterns some indicators develop patterns that have names resembling their shapes such as the head and shoulders pattern a major distinction is where value comes from for technical analysts the market sets prices and hence the changes there give a company its value for fundamental analysts there is an intrinsic value that the market can often miss estimates the intrinsic value of a company from its operationsconsiders a company s financial statements and qualitative factorslonger term focus months years best for buy and hold investinglooks at price and market trends to uncover market psychologyconsiders historical prices and chart patternsshorter term focus days weeks best for short term or swing tradinglimitations of fundamental analysisthough fundamental analysis can provide investors with insights into the future of a company it does come with some downsides keep these items in mind when performing fundamental analysis example of fundamental analysislet s analyze a hypothetical company called abc inc using fundamental analysis we ll examine its financial statements and calculate key ratios to assess its financial health and performance first let s look at some data from abc inc s financial statements for the previous fiscal year now let s calculate some key ratios profitability ratios abc inc s profitability ratios suggest that the company is generating healthy profits from its operations its gross margin is 40 operating margin is 20 and net margin is 15 its roa and roe of 10 and 15 respectively indicate that the company is generating solid returns on its assets and equity liquidity ratios assuming abc inc s current assets are 750 million with 200 million in cash 150 million in marketable securities and 200 million in accounts receivable and its current liabilities are 250 million the company s liquidity ratios are strong a current ratio of 3 0 and a quick ratio of 2 2 suggest that abc inc has ample liquidity to cover its short term obligations solvency ratios abc inc s solvency ratios indicate that the company has a manageable level of debt relative to its equity and assets a debt to equity ratio of 0 5 and a debt to assets ratio of 0 33 suggest that the company is not overly leveraged and has the financial flexibility to meet its long term obligations valuation ratios assuming abc inc has 100 million shares outstanding and its stock price is 25 per share abc inc s valuation ratios suggest that the company s stock is trading at a reasonable valuation relative to its earnings book value and sales a p e ratio of 16 67 aligns with the broader market while p b and p s ratios of 2 5 indicate that the stock is not overly expensive relative to the company s assets and revenue in addition to these quantitative measures we can also consider certain qualitative fundamentals competitive advantages management quality industry trends growth prospects corporate governance esg factors based on this hypothetical fundamental analysis abc inc appears to be a financially healthy and potentially attractive investment however it s important to remember that this is just a simplified example in practice investors would need to conduct a more thorough analysis considering the company s competitive position industry trends management quality and growth prospects before making an investment decision | |
what is fundamental analysis and its objective | fundamental analysis uses publicly available financial information and reports to determine whether a stock and the issuing company are valued correctly by the market | |
what are the tools for fundamental analysis | analysts use many tools some examples are financial reports ratios from the reports spreadsheets charts graphs infographics government agency reports on industries and the economy and market reports | |
how does fundamental analysis differ from technical analysis | fundamental analysis focuses on evaluating a security s intrinsic value based on financial and economic factors while technical analysis studies price movements and trading volumes to identify patterns and predict future price movements | |
why is earnings per share eps important in fundamental analysis | eps indicates a company s profitability on a per share basis helping investors determine how much profit a company generates for each share of its stock it is a critical metric for assessing company performance and valuing stocks the bottom linefundamental analysis is used to value a company and determine whether a stock is over or undervalued by the market it considers the economic market sector specific and financial performance financial ratios generated from financial reports and government industry and economic reports are used to assess a company not every analyst uses the same tools or views stocks similarly you might determine a stock is valued differently than another analyst what s important is that the stock you analyze meets your criteria for value and that your analysis creates actionable information | |
what are fundamentals | fundamentals include the basic qualitative and quantitative information that contributes to the financial or economic well being of a company security or currency and their subsequent financial valuation where qualitative information includes elements that cannot be directly measured such as management experience quantitative analysis qa uses mathematics and statistics to understand the asset and predict its movements understanding fundamentalsin business and economics fundamentals represent the primary characteristics and financial data necessary to determine the stability and health of an asset this data can include macroeconomic or large scale factors and microeconomic or small scale factors to set a value on securities or businesses analysts and investors examine these fundamentals to develop an estimate as to whether the underlying asset is considered a worthwhile investment and if there is fair valuation in the market for businesses information such as profitability revenue assets liabilities and growth potential are considered fundamentals through the use of fundamental analysis you may calculate a company s financial ratios to determine the feasibility of the investment while fundamentals are most often considered factors that relate to particular businesses or securities national economies and their currencies also have a set of fundamentals that can be analyzed for example interest rates gross domestic product gdp growth trade balance surplus deficits and inflation levels are some factors that are considered to be fundamentals of a nation s value macroeconomic and microeconomic fundamentalsmacroeconomic fundamentals are topics that affect an economy at large including statistics regarding unemployment supply and demand growth and inflation as well as considerations for monetary or fiscal policy and international trade these categories can be applied to the analysis of a large scale economy as a whole or can be related to individual business activity to make changes based on macroeconomic influences large scale macroeconomic fundamentals are also part of the top down analysis of individual companies microeconomic fundamentals focus on the activities within smaller segments of the economy such as a particular market or sector this small scale focus can include issues of supply and demand within the specified segment labor and both consumer and firm theories consumer theory investigates how people spend within their particular budget restraints the theory of the firm states that a business exists and makes decisions to earn profits fundamentals in businessby looking at the economics of a business including the overall management and the financial statements investors are looking at a company s fundamentals not only do these data points show the health of the business but they also indicate the probability of further growth a company with little debt and sufficient cash is considered to have strong fundamentals strong fundamentals suggest that a business has a viable framework or financial structure conversely those with weak fundamentals may have issues in the areas of debt obligation management cost control or overall organizational management a business with strong fundamentals may be more likely to survive adverse events like economic recessions or depressions than one with weaker fundamentals also strength may indicate less risk should an investor consider purchasing securities associated with the businesses mentioned fundamental analysisinvestors and financial analysts are interested in evaluating the fundamentals of a company to compare its economic position relative to its industry peers to the broader market or to itself over time fundamental analysis involves digging deep into a company s financial statements to extract its profit and growth potential relative riskiness and to ultimately decide if its shares are over under or fairly valued in the market often fundamental analysis involves computing and analyzing ratios to make apples to apples comparisons some common fundamental analysis ratios are listed below fundamental analysis should be carried out with a holistic approach utilizing several ratios and including a bottom up as well as a top down analysis to come to specific conclusions and actions real world examplein the fourth quarter of 2018 large cap tech companies microsoft and apple had similar market caps for the first time since 2010 although the two companies had similar market caps of about 850 billion they had very different fundamentals for example microsoft was trading at 45x earnings while apple was trading at 15x earnings 1also while microsoft s earnings were predicated on software as a service saas and software sales apple s were still primarily dependent on hardware sales apple s revenue base is about 2 times microsoft s the global market for its devices is far more saturated than the global market for microsoft s software 2though both companies had a similar market cap they had very different fundamentals which would need to be considered when choosing them as potential investments particularly in determining future growth prospects | |
what s the difference between macroeconoic and microeconomic fundamentals | the main difference relies on the scale of the subjects that the fundamentals are applied to macroeconomic fundamentals include the broad trends that have implications for the global economy seen as a whole like gdp inflation unemployment growth and international trade microeconomics fundamentals are those factors that affect smaller segments of the economy such as a particular market sector or entity for example supply demand labor and price levels within a specific segment | |
what s the difference between quantitative and qualitative analysis | quantitative analysis applies mathematics and statistics and uses hard data and numbers qualitative analysis on the other hand involves elements that cannot be measured or expressed as a number it can include features that are subjective and opinions | |
what s the main benefit of fundamental analysis in business | investors can use fundamental analysis to get insights into a company s value risk and growth potential and thus make informed decisions the bottom linefundamentals refer to the qualitative and quantitative information that reflects a company s financial and economic position fundamental analysis refers to the process of looking at the key ratios of a business revenue assets liabilities etc to draw conclusions on its growth potential and how financially healthy and profitable it is | |
what is a funded debt | funded debt is a company s debt that matures in more than one year or one business cycle this type of debt is classified as such because it is funded by interest payments made by the borrowing firm over the term of the loan funded debt is also called long term debt since the term exceeds 12 months it is different from equity financing where companies sell stock to investors to raise capital understanding funded debts | |
when a company takes out a loan it does so either by issuing debt in the open market or by securing financing with a lending institution loans are taken out by a company to finance its long term capital projects such as the addition of a new product line or the expansion of operations funded debt refers to any financial obligation that extends beyond a 12 month period or beyond the current business year or operating cycle it is the technical term applied to the portion of a company s long term debt that is made up of long term fixed maturity types of borrowings | funded debt is an interest bearing security that is recognized on a company s balance sheet statement a debt that is funded means it is usually accompanied by interest payments which serve as interest income to the lenders from the investor s perspective the greater the percentage of funded debt to total debt disclosed in the debt note in the notes to financial statements the better funded debt means it is usually accompanied by interest payments which serve as interest income to lenders because it is a long term debt facility funded debt is generally a safe way of raising capital for the borrower that s because the interest rate the company gets can be locked in for a longer period of time examples of funded debt include bonds with maturity dates of more than a year convertible bonds long term notes payables and debentures funded debt is sometimes calculated as long term liabilities minus shareholders equity funded vs unfunded debtcorporate debt can be categorized as either funded or unfunded while funded debt is a long term borrowing unfunded debt is a short term financial obligation that comes due in a year or less many companies that use short term or unfunded debt are those that may be strapped for cash when there isn t enough revenue to cover routine expenses examples of short term liabilities include corporate bonds that mature in one year and short term bank loans a firm may use short term financing to fund its long term operations this exposes the firm to a higher degree of interest rate and refinancing risk but allows for more flexibility in its financing analyzing funded debtanalysts and investors use the capitalization ratio or cap ratio to compare a company s funded debt to its capitalization or capital structure the capitalization ratio is calculated by dividing long term debt by the total capitalization which is the sum of long term debt and shareholders equity companies with a high capitalization ratio are faced with the risk of insolvency if their debt is not repaid on time hence these companies are considered to be risky investments however a high capitalization ratio is not necessarily a bad signal given that there are tax advantages associated with borrowing since the ratio focuses on financial leverage used by a company how high or low the cap ratio is depends on the industry business line and business cycle of a company another ratio that incorporates funded debt is the funded debt to net working capital ratio analysts use this ratio to determine whether or not long term debts are in proper proportion to capital a ratio of less than one is ideal in other words long term debts should not exceed the net working capital however what is considered an ideal funded debt to net working capital ratio may vary across industries debt funding vs equity fundingcompanies have several options available when they need to raise capital debt financing is one the other choice is equity financing in equity financing companies raise money by selling their stock to investors on the open market by purchasing stock investors get a stake in the company by allowing investors to own stock companies share their profits and may have to relinquish some control to shareholders over their operations there are several advantages to using debt over equity financing when a company sells corporate bonds or other facilities through debt financing it allows the company to retain full ownership there are no shareholders who can claim an equity stake in the company the interest companies pay on their debt financing is generally tax deductible which can lower the tax burden | |
what is funds from operations ffo | the term funds from operations ffo refers to the figure used by real estate investment trusts reits to define the cash flow from their operations real estate companies use ffo as a measurement of operating performance ffo is calculated by adding depreciation amortization and losses on sales of assets to earnings and then subtracting any gains on sales of assets and any interest income it is sometimes quoted on a per share basis the ffo per share ratio should be used in lieu of earnings per share eps when evaluating reits and other similar investment trusts investopedia sydney burnsformula and calculation of funds from operations ffo the formula for ffo is ffo ni d a psl psg ii where ffo funds from operations ni net income d depreciation a amortization psl property sales losses psg property sales gains ii interest income begin aligned text ffo text ni text d text a text psl text psg text ii textbf where text ffo text funds from operations text ni text net income text d text depreciation text a text amortization text psl text property sales losses text psg text property sales gains text ii text interest income end aligned ffo ni d a psl psg iiwhere ffo funds from operationsni net incomed depreciationa amortizationpsl property sales lossespsg property sales gainsii interest income all components of the ffo calculation are listed on a reit s income statement here are the steps to take to calculate it if for example a reit had depreciation of 20 000 gains on sales of property of 40 000 and net profit of 100 000 its ffo would be 80 000 in most situations you won t need to calculate a reit s ffo because all reits are required to show their ffo calculations on their public financial statements the ffo figure is typically disclosed in the footnotes for the income statement | |
what ffo can tell you | ffo is a measure of the cash generated by a reit real estate companies use ffo as an operating performance benchmark the national association of real estate investment trusts nareit originally pioneered this figure which is a non gaap measure the funds from operations measure the net amount of cash and equivalents that flows into a firm from regular ongoing business activities ffo should not be seen as an alternative to cash flow or as a measure of liquidity for example a typical company s cash flow would be influenced by the money earned from the sale of an asset but ffo excludes those gains also a typical company would show a cash inflow on its cfs if the company received loan proceeds from a bank however ffo does not include such cash inflows instead it is only a measure of the income from business activities | |
why ffo is a good measure of reit performance | ffo compensates for cost accounting methods that may inaccurately communicate a reit s true performance generally accepted accounting principles gaap require that all reits depreciate their investment properties over time using one of the standard depreciation methods however many investment properties actually increase in value over time making depreciation inaccurate in describing the value of a reit depreciation and amortization must be added back to net income to reconcile this issue ffo also subtracts any gains on sales of property because these types of sales are considered to be nonrecurring reits must pay out 90 of all taxable income in the form of dividends which are cash payments to investors gains on sales of property do not add to a reit s taxable income and should therefore not be included in the measurement of value and performance as mentioned ffo per share is sometimes provided by firms as a supplement to their eps earnings per share is a company s net income divided by the outstanding equity shares eps and ffo per share provide a measure of how much income is being generated on a per share basis these measures also help investors determine whether the money is being used effectively by management also many analysts and investors assess a reit s price ffo ratio as a supplement to the price to earnings p e ratio which is the stock price divided by eps in the case of a reit the market price of the reit would be divided by its ffo per share funds from operations ffo vs adjusted funds from operations affo real estate analysts are also increasingly calculating a reit s adjusted funds from operations affo this calculation takes a reit s ffo and subtracts any recurring expenditure that is capitalized and then amortized as well as any straight lining of rents these recurring capital expenditures may include such maintenance expenses as painting projects or roof replacements affo has gained traction as a more accurate estimate of a reit s earnings potential the affo measure was developed to provide a better measure of a reit s cash generated or dividend paying capacity in addition to affo this alternate measure is sometimes referred to as funds available for distribution or cash available for distribution example of how to use ffosimon property group is a popular mall reit it reported funds from operations on its 2017 income statement of 4 billion up 6 from 2016 the firm s net income meanwhile totaled 2 2 billion to arrive at ffo the firm added back depreciation and amortization of about 1 8 billion and further adjusted for other smaller figures including a reduction of 5 3 million for payment of preferred distributions and dividends and a noncontrolling interests portion of depreciation and amortization that resulted in an additional 17 1 million reduction simon also reported a diluted ffo per share figure of 11 21 compared to a diluted eps figure of 6 24 | |
what do a company s funds from operations tell you | funds from operations measure how much cash a real estate investment trust generates this cash is derived from a variety of sources including regular business activities ffo is the way that reits measure their operating performance keep in mind that ffo doesn t include the gains a reit makes on the sale of its property s that s because this doesn t count as an ongoing or recurring activity | |
where do you find a reit s funds from operations | reits are required to disclose their funds from operations to the general public you can easily find this figure on a reits public financial statements search for the income statement and look for this figure within the footnotes you can also calculate the ffo by adding together the reit s net income depreciation amortization and losses on property sales then subtract that figure from any gains on property sales and any interest income | |
what s the difference between funds from operations and the cash flow from operations | it may be easy to confuse a reit s funds from operations and the cash flow from operations but the two are different from one another the ffo represents the operating performance and takes net income depreciation amortization and losses on property sales into account while factoring out any interest income and gains from property sales the cash flow from operations on the other hand is reported on the cash flow statement it s the total amount of cash that a company earns during the course of its operations this includes working capital revenue and expenses the bottom linethere are a number of ways you can measure a company s success the metric depends on the type of corporation for instance some companies measure their profitability using ebitda or return on equity reits though use funds from operations this figure which measures the company s operating performance was established by nareit and is now an industry standard it takes into account depreciation amortization and losses on the sale of property while factoring out any interest earned along with the gains on property sales but don t worry you won t have to calculate this figure you can find it in the footnotes of the reits income statement | |
what is funds transfer pricing ftp | the term funds transfer pricing ftp refers to a system that is used to estimate how funding adds to a company s overall profitability ftp is commonly used in the banking industry to help financial institutions analyze their strengths and failures ftp may also help companies determine the profitability of various product lines offered the performance of branch outlets and judge the effectiveness of processes | |
how funds transfer pricing ftp works | funds transfer pricing is an important reporting metric that is used in banking management analysis and reporting financial institutions use this tool as a way to measure their overall profitability as well as the profitability of different segments of their business such as product offerings and customer relationships they can also determine whether keeping certain branches open is economically viable the basis of ftp is that financial institutions should benefit from both of their most basic activities lending and deposits according to moody s an ftp system that is well designed will have a bank s treasury department buy funds from the liability business unit and then sell those funds to the asset business unit at a rate that balances both the deposit and lending activity areas 1 as such ftp requires the pooling of information across assets and liabilities it is also analyzed in conjunction with asset liability management ftp may also be evaluated alongside other metrics such as net income or net interest margin nim which is the difference between a financial institution s income and interest expenses there is a great deal of risk involved if financial institutions that don t implement ftp protocols within their operations some of these issues include note that this isn t an exhaustive list funds transfer pricing is different from transfer pricing which is an accounting practice that represents the implied prices that one division in a company charges another division for goods and services funds transfer pricing ftp methodologiesthere are a variety of methodologies for ftp used in the banking industry two of the most basic methods include the multi rate methodology is often for product and maturity breakouts in these breakouts some of the more granular details of consideration may also include the funding liquidity spread the contingent liquidity spread the credit spread the option spread and the basis spread charting is a key part of all ftp methodologies charting represents the pooled data across assets and liabilities in general it provides a visual picture of the association between yield to maturity ytm and time to maturity charting can be customized based on methodology and report requirements internally financial institutions will have an interface that includes all of the high level ftp metrics they are following most global regulators have not incorporated ftp analysis into comprehensive bank regulatory reporting example of funds transfer pricing ftp many banks use ftp charting to analyze funding by location bank management would use ftp to determine the profitability of funds at individual divisions this analysis takes into account the deposits each branch brings in the amount provided as loans as well as the number of customers the location serves if a particular arm is continuously underperforming established baselines or reporting significant declines then it can lead to a branch closure decision if a branch closes it will typically transfer accounts and resources to another nearby location since the 2007 2008 financial crisis the u s government s dodd frank act primarily focused on increasing the regulated level of liquid capital to help reduce risk across the largest banks funds transfer pricing analysis has gained increased attention from bank managers as well but guidance has been more informally introduced rather than mandated according to moody s some of the leading regulatory precedents for funds transfer pricing best practices include those created by the united states federal reserve s sr16 3 letter 34 | |
why is funds transfer pricing an important tool for banks | funds transfer pricing is a tool that banks and other financial institutions use to help them determine whether their business is profitable they can also use this tool as a way to evaluate the profitability of different parts of their companies including product offerings not having a system like this in place can lead to mispricing of products and services and can increase the risk of volatility among other things | |
what is the difference between single rate and multi rate ftp | single rate and multi rate funds transfer pricing are two different methodologies used by financial institutions in the banking industry single rate ftp allows banks to take a comprehensive look at their assets compared to their liabilities under this method all assets and liabilities are given a single transfer rate multi rate ftp divides assets and liabilities into different groups based on their characteristics this gives the company s management a more detailed look of the risks involved with each group | |
how do banks earn profits | profitability is any money that is earned after all expenses are accounted for by a business or individual banks earn profits from a variety of sources the main drivers for bank profits are the fees and service charges they impose on their customers interest expenses on loans and other credit products also help generate income the bottom lineprofitability is a key metric for any business there are different tools that companies can use to determine whether they are in the black funds transfer pricing is a system that banks and other financial institutions can implement to assess their overall success and that of their individual business units products and services among other things not having a system like this can be risky for financial institutions because it can lead to mispricing and increased volatility | |
what is fungibility | fungibility is the ability of a good or asset to be interchanged with other individual goods or assets of the same type fungible assets simplify the exchange and trade processes because fungibility implies equal value between the assets understanding fungibilityfungibility implies that two things are identical in specification individual units can be mutually substituted specific grades of commodities such as no 2 yellow corn are fungible because it does not matter where the corn was grown all corn that s designated as no 2 yellow corn is worth the same amount commodities common shares options and dollar bills are all examples of fungible goods cross listed stocks or the shares of stock listed on multiple exchanges are still considered to be fungible the shares represent the same ownership interest in a firm whether you purchased them on the new york stock exchange or the tokyo stock exchange fungibility is commonly associated with finance but it s also found in other disciplines such as quantum physics cryptocurrencies are generally considered to be fungible assets but some are unique and not interchangeable they re non fungible tokens nfts fungible vs non fungiblefungible assets are of like kind which makes them interchangeable non fungible assets on the other hand have something unique about them that means one cannot be replaced by another money is another example of a fungible asset it doesn t matter to person a if they re repaid with a different 50 bill if person a lends person b a 50 bill it s mutually substitutable person a can be repaid with two 20 bills and one 10 bill and still be satisfied because the total equals 50 conversely it s not acceptable for one person to borrow a car from another person and then return a different car even if it is the same make and model as the original this is an example of non fungibility cars aren t fungible with respect to ownership although the gasoline that powers the cars is other examples of non fungible assets are special considerationsthe line between fungibility and non fungibility may be a thin one gold is generally considered to be fungible because one gold ounce is equivalent to another gold ounce but when otherwise fungible goods are given serial numbers or other uniquely identifying marks they may no longer be quite as fungible adding unique numbers to bars of gold collectibles and other items makes it possible to distinguish them which makes them non fungible for example the federal reserve bank of new york offers gold custody services to central banks and governments around the world by storing gold bars in its underground vault all the gold bars deposited into the vault are weighed and inspected to confirm they match the depositor instructions the exact bars deposited to the new york fed are the exact ones returned upon withdrawal so these types of gold deposits are not considered fungible 1 | |
what is the meaning of fungible | fungible means that an item asset or commodity can be replaced with something of like kind when fulfilling a contract or paying a debt interchangeable goods are fungible unique goods are non fungible | |
why does fungibility matter | fungible assets create a flow in trade and exchange processes because they re essentially equal in value this can be a factor in healthy economies a decrease in value in one sector or country can be offset by a rise of a fungible asset in another | |
what is a fungible issue | a fungible issue is a bond that replicates one that s been previously offered by the same company its terms are the same but the yield will most likely be different | |
what are non fungible tokens | non fungible tokens nfts are assets that are not interchangeable they re often digital and can include assets such as music images and videos as well as some forms of cryptocurrency you can have a right to ownership if you purchase an nft but this right doesn t necessarily translate to outright ownership of the asset 2the bottom linefungible assets are identical one can be substituted for another without fuss or penalty stock shares listed on multiple exchanges are an example of fungible assets because they provide the same ownership interest regardless of who purchases them or where they re purchased this strengthens the reliability of the asset in question and it can be an important consideration for the average investor non fungible assets on the other hand are unique in some way which means one cannot be replaced with the other houses gemstones and artwork are all non fungible goods | |
what is furniture fixtures and equipment ff e | furniture fixtures and equipment abbreviated as ff e or ffe refers to movable furniture fixtures or other equipment that have no permanent connection to the structure of a building these items which include desks chairs computers electronic equipment tables bookcases and partitions typically depreciate substantially over their long term use but are nevertheless important costs to consider when valuing a company especially during liquidation events 1these items are sometimes referred to as furniture fixtures and accessories ff a investopedia eliana rodgersfurniture fixtures and equipment explainedan asset is classified as ff e if it s used by a business for normal daily operations for example an office receptionist relies on their desk chair telephone computer desk organizer and pen holder to conduct routine activities throughout the normal course of doing business accountants categorize ff e as tangible assets under separate line items on financial statements and other budgeting documents the ff e balance is then added into a project s total costs to determine if an initiative comes in over or under budget real world example of ff e accounting treatmentaccountants spread the acquisition costs of ff e items over time by steadily depreciating their values over their lives but to accomplish this accountants must first correctly determine the useful life of each item based on irs guidelines although ff e items typically have useful lives of one year or more they may vary substantially from one item to the next for example while a desktop computer may be deemed technologically outdated after three years according to the irs it has a useful life of five years on the contrary the irs assigns office furniture a useful life of seven years 2security equipment such as x ray scanners may be considered ff e because these items may be removed from a building s premises and placed elsewhere real world example of ff e depreciationlet s assume a new car is worth 10 000 and it has a useful life of five years according to the irs 2 let s further assume that the vehicle s maximum salvage value is 20 when a company first buys the car it records the monthly depreciation charge as follows the depreciation charge is 133 33 at the end of the first month the net book value of the car is calculated as the difference between the original book value and the amount of its accumulated depreciation over its useful life 1 | |
what is future value fv | future value fv is the value of a current asset at a future date based on an assumed growth rate investors and financial planners use it to estimate how much an investment today will be worth in the future external factors such as inflation can adversely affect an asset s future value future value can be contrasted with present value pv investopedia yurle villegasfuture value formulathe future value calculation allows investors to predict the amount of profit that can be generated by assets the future value of an asset depends on the type of investment the future value formula assumes a stable growth rate if money is placed in a savings account with a guaranteed interest rate then the future value is easy to determine accurately however investments in the stock market or other securities with a volatile rate of return can yield different results the future value formula assumes a constant rate of growth and a single up front payment left untouched for the duration of the investment if an investment earns simple interest compounded annually then the fv formula is f v p v 1 r n where f v future value p v present value r interest rate per period n number of periods begin aligned fv pv times 1 r n textbf where fv text future value pv text present value r text interest rate per period n text number of periods end aligned fv pv 1 r nwhere fv future valuepv present valuer interest rate per periodn number of periods if a 1 000 investment is held for five years in a savings account with 10 simple interest paid annually the fv of the 1 000 equals 1 000 1 0 10 x 5 or 1 500 with compounded interest the rate is applied to each period s cumulative account balance in the example above the first year of investment earns 10 1 000 or 100 in interest the following year however the account total is 1 100 rather than 1 000 to compound interest the 10 interest rate is applied to the full balance for second year interest earnings of 10 1 100 or 110 the formula for the fv of an investment earning compounding interest is f v p v 1 r n t where f v future value p v present value r interest rate per period n number of periods t time in years begin aligned fv pv times 1 r nt textbf where fv text future value pv text present value r text interest rate per period n text number of periods t text time in years end aligned fv pv 1 r ntwhere fv future valuepv present valuer interest rate per periodn number of periodst time in years using the above example the same 1 000 invested for five years in a savings account with a 10 compounding interest rate would have an fv of 1 000 1 0 10 5 or 1 610 51 bearish about the market future value can also handle negative interest rates to calculate scenarios such as how much 1 000 invested today will be worth if the market loses 5 each of the next two years using fv calculationslimitationsrelies on readily available estimateslump sum or simple cashflows may be easy to calculatefuture value helps determine whether an investor meets a target or goal the concept of future value can be applied to any cashflow return or investment structure estimates may be quickly invalidatedfuture value of annuities or irregular cashflow may be difficult to calculatefuture value cannot be used to compare and choose between two mutually exclusive projectsfuture value models assume constant rate growthfuture value vs present valuethe concept of future value is often closely tied to the concept of present value future value calculations determine the value of something in the future and present value finds what something in the future is worth today both concepts rely on discount or growth rates compounding periods and initial investments the future value formula could be reversed to determine how much something in the future is worth today in other words assuming the same investment assumptions 1 050 has the present value of 1 000 today by changing directions future value can derive present value and vice versa the future value of 1 000 one year from now invested at 5 is 1 050 and the present value of 1 050 one year from now assuming 5 interest is 1 000 examplesthe internal revenue service imposes a failure to file penalty on taxpayers who do not file their returns by the due date the penalty is calculated as 5 of unpaid taxes for each month a tax return is late up to a limit of 25 of unpaid taxes 1 if a taxpayer knows they have filed their return late and are subject to the 5 penalty that taxpayer can easily calculate the future value of their owed taxes based on the imposed growth rate of their fee the taxpayer expects to have a 500 tax obligation the taxpayer can calculate the future value of their obligation assuming a 5 penalty imposed on the 500 tax obligation for one month in other words the 500 tax obligation has a future value of 525 when factoring in the liability growth due to the 5 penalty consider a zero coupon bond trading at a discount price of 950 the bond has two years to maturity with a target yield to maturity of 8 if an investor is interested in knowing what the value of this bond will be in two years they can calculate the future value based on the current variables in two years the future value of this bond will be 1 108 08 950 1 8 2 through treasurydirect the u s department of treasury bond website investors can utilize calculators to estimate the growth and future value of savings bonds 2 | |
what is future value used for | future value is used for planning purposes to see what an investment cashflow or expense may be in the future investors use future value to determine whether or not to embark on an investment given its future value future value can also be used to determine risk see what a given expense will grow at if interest is charged or be used as a savings target to understand whether enough money will be reserved given the current pace of savings and expected rate of return | |
what is the future value of an annuity | the future value of an annuity is the value of recurring payments at a certain date in the future assuming a particular rate of return or discount rate the higher the discount rate the greater the annuity s future value fv of an annuity if the payments are made at the end of the period i e end of the month or year is calculated as fv pmt x 1 r n 1 r where fv future value of an annuity stream pmt dollar amount of each annuity payment r the discount interest rate and n number of periods in which payments will be made | |
what is the future value of an annuity | the future value of an annuity is the value of a group of recurring payments at a certain date in the future assuming a particular rate of return or a discount rate the higher the discount rate the greater the annuity s future value as long as all of the variables surrounding the annuity are known such as payment amount projected rate and number of periods it is possible to calculate the future value of the annuity understanding the future value of an annuitybecause of the time value of money money received or paid out today is worth more than the same amount of money will be in the future that s because the money can be invested and allowed to grow over time by the same logic a lump sum of 5 000 today is worth more than a series of five 1 000 annuity payments spread out over five years formula and calculation of the future value of an annuitythe formula for the future value of an ordinary annuity is as follows an ordinary annuity pays interest at the end of a particular period rather than at the beginning as is the case with an annuity due p pmt 1 r n 1 r where p future value of an annuity stream pmt dollar amount of each annuity payment r interest rate also known as discount rate n number of periods in which payments will be made begin aligned text p text pmt times frac big 1 r n 1 big r textbf where text p text future value of an annuity stream text pmt text dollar amount of each annuity payment r text interest rate also known as discount rate n text number of periods in which payments will be made end aligned p pmt r 1 r n 1 where p future value of an annuity streampmt dollar amount of each annuity paymentr interest rate also known as discount rate n number of periods in which payments will be made ordinary annuities are more common but an annuity due will result in a higher future value all else being equal future value of an annuity duewith an annuity due payments are made at the beginning of each period so the formula is slightly different to find the future value of an annuity due simply multiply the formula above by 1 r p pmt 1 r n 1 r 1 r begin aligned text p text pmt times frac big 1 r n 1 big r times 1 r end aligned p pmt r 1 r n 1 1 r future value of an annuity examplelet s say someone decides to invest 125 000 per year for the next five years in an annuity that they expect to compound at 8 per year in this example the series of payments is a regular annuity in which the payments are made at the end of each period the expected future value of this payment stream using the above formula is as follows future value 125 000 1 0 08 5 1 0 08 733 325 begin aligned text future value 125 000 times frac big 1 0 08 5 1 big 0 08 733 325 end aligned future value 125 000 0 08 1 0 08 5 1 733 325 future value of an annuity duelet s use the same example as above but with an annuity due this means that each of the 125 000 payments was made at the beginning of each period its future value would be calculated as follows future value 125 000 1 0 08 5 1 0 08 1 0 08 791 991 begin aligned text future value 125 000 times frac big 1 0 08 5 1 big 0 08 times 1 0 08 791 991 end aligned future value 125 000 0 08 1 0 08 5 1 1 0 08 791 991 all else being equal the future value of an annuity due will be greater than the future value of an ordinary annuity because the money has had an extra period to accumulate compounded interest in this example the future value of the annuity due is 58 666 more than that of the ordinary annuity | |
what is the difference between annuity and annuity due | annuity payments are typically made at the end of a period an annuity due however is a payment that is made at the beginning of a period though it may not seem like much of a distinction there may be considerable differences between the two when considering what interest is accrued | |
what is the relationship between present value and future value | present value and future value indicate the value of an investment looking forward or looking back the two concepts are directly related as the future value of a series of cash flows also has a present value for example a present value of 1 000 today may be equal to the future value of 1 200 today most often investors and analysts will know one value and try to solve for the other for instance if you buy a stock today for 100 that awards a 2 dividend each year you can calculate the future value of that stock alternatively if you want to have 10 000 of future value on hand for a down payment for a car next year you can solve for the present value the bottom linean annuity is a series of payments made over a period of time often for the same amount each period investors can determine the future value of their annuity by considering the annuity amount projected rate of return and number of periods there are also implications as to whether the annuity payments are made at the beginning or at the end of a period | |
what is futures trading | futures are contracts to buy or sell a specific underlying asset at a future date the underlying asset can be a commodity a security or other financial instrument futures trading requires the buyer to purchase or the seller to sell the underlying asset at the set price whatever the market price at the expiration date futures trading commonly refers to futures whose underlying assets are securities in the stock market these contracts are based on the future value of an individual company s shares or a stock market index like the s p 500 dow jones industrial average or nasdaq 1 futures trading on exchanges like the chicago mercantile exchange can include underlying assets like physical commodities bonds or weather events 2underlying assetsfutures traders can lock in the price of the underlying asset these contracts have expiration dates and set prices that are known upfront stock futures have specific expiration dates and are organized by month the underlying assets in futures contracts may include 3the buyer of a futures contract must take possession of the underlying stocks or shares at the time of expiration and not before buyers of futures contracts may sell their positions before expiration there is a difference between options and futures american style options give the holder the right but not the obligation to buy or sell the underlying asset any time before the expiration date of the contract 4 | |
how futures trading works | futures contracts are standardized by quantity quality and asset delivery making trading them on futures exchanges possible they bind the buyer to purchasing and the other party to selling a stock or shares in an index at a previously fixed date and price 5 this ensures market transparency enhances liquidity and aids in accurate prices stock futures have specific expiration dates and are organized by month for example futures for a major index like the s p 500 might have contracts expiring in march june september and december 6 the contract with the nearest expiration date is known as the front month contract which often has the most trading activity as a contract nears expiration traders who want to maintain a position typically roll over to the next available contract month short term traders often work with front month contracts while long term investors might look further out 1 | |
when settling a futures contract the method depends on the asset physical delivery is standard for commodities like oil gold or wheat however for futures contracts based on stocks and stock indexes the settlement method is cash 1 | speculationa futures contract allows a trader to speculate on a commodity s price if a trader buys a futures contract and the price rises above the original contract price at expiration there is a profit however the trader could also lose if the commodity s price was lower than the purchase price specified in the futures contract before expiration the futures contract the long position can be sold at the current price closing the long position investors can also take a short speculative position if they predict the price will fall if the price declines the trader will take an offsetting position to close the contract the net difference would be settled at the expiration of the contract an investor gains if the underlying asset s price is below the contract price and loses if the current price is above the contract price suppose a trader chooses a futures contract on the s p 500 the index is 5 000 points and the futures contract is for delivery in three months each contract is 50 times the index level so one is worth 250k 5 000 points 50 without leverage traders would need 250k in futures trading traders only need to post a margin a fraction of the contract s total value 7 if the initial margin is 10 of the contract s value the trader deposits only 25 000 10 of 250 000 to enter the futures contract if the index falls by 10 to 4 500 points the value of the futures contract decreases to 225 000 4500 points x 50 traders face a loss of 25 000 which equals a 100 loss on the initial margin hedgingfutures trading can hedge the price moves of the underlying assets 2 the goal is to prevent losses from potentially unfavorable price changes rather than to speculate suppose a mutual fund manager oversees a portfolio valued at 100 million that tracks the s p 500 concerned about potential short term market volatility the fund manager hedges the portfolio against a possible market downturn using s p 500 futures contracts assume the s p 500 is at 5 000 points and each s p 500 futures contract is based on the index times a multiplier say 250 per index point since the portfolio mirrors the s p 500 assume a hedge ratio of one to one the value hedged by one futures contract would be 5 000 points 250 1 250 000 to hedge a 100 million portfolio the number of futures contracts needed is found by dividing the portfolio s value by the value hedged per contract 100 000 000 1 250 000 about 80 thus selling 80 futures contracts should effectively hedge the portfolio with two possible outcomes pros and cons of futures tradingfutures trading comes with advantages and disadvantages futures trading usually involves leverage and the broker requires an initial margin a small part of the contract value the amount depends on the contract size the creditworthiness of the investor and the broker s terms and conditions futures contracts can be an essential tool for hedging against price volatility companies can plan their budgets and protect potential profits against adverse price changes futures contracts also have drawbacks investors risk losing more than the initial margin amount because of the leverage used in futures potential speculation gainsuseful hedging featuresfavorable to tradehigher risk because of leveragemissing out on price moves when hedgingmargin as a double edged swordthe futures markets are regulated by the commodity futures trading commission cftc the cftc is a federal agency created by congress in 1974 to ensure the integrity of futures market prices including preventing abusive trading practices fraud and regulating brokerage firms engaged in futures trading 8 | |
why trade futures instead of stocks | trading futures instead of stocks provides the advantage of high leverage allowing investors to control assets with a small amount of capital this entails higher risks additionally futures markets are almost always open offering flexibility to trade outside traditional market hours and respond quickly to global events | |
which is more profitable futures or options | the profitability of futures versus options depends largely on the investor s strategy and risk tolerance futures tend to provide higher leverage and can be more profitable when predictions are correct but they also carry higher risks options offer the safety of a nonbinding contract limiting potential losses | |
when equities are the underlying asset traders who hold futures contracts until expiration settle their positions in cash the trader will pay or receive a cash settlement depending on whether the underlying asset increased or decreased during the investment holding period in some cases however futures contracts require physical delivery in this scenario the investor holding the contract until expiration would take delivery of the underlying asset | the bottom lineas an investment tool futures contracts offer the advantage of price speculation and risk mitigation against potential market downturns however they come with some drawbacks taking a contrary position when hedging could lead to additional losses if market predictions are off also the daily settlement of futures prices introduces volatility with the investment s value changing significantly from one trading session to the next | |
a futures commission merchant fcm plays an essential role in enabling customers to participate in the futures markets an fcm is an individual or organization involved in the solicitation or acceptance of buy or sell orders for futures or options on futures in exchange for payment of money commission or other assets from customers an fcm has the responsibility of collecting margins from customers the fcm is also responsible for ensuring asset delivery after the futures contract has expired 1 | in europe fcms are analogous to clearing members of the futures market basics of futures commission merchant fcm fcms are required to be registered with the national futures association nfa this is required unless the entity handles transactions only for the firm itself or the firm s affiliates top officers or directors or if the entity is a non u s resident or firm with only non u s customers and submits all trades for clearing to an fcm 2an fcm may either be a clearing member firm of one or more exchanges a clearing fcm or a non clearing member firm a non clearing fcm clearing fcms are required to hold substantial deposits with the clearing house of any exchange of which it is a member a non clearing fcm must have its customers trades cleared by a clearing fcm 3additionally fcms must also meet the commodity futures trading commission cftc guidelines a futures commission merchant is able to handle futures contract orders as well as extend credit to customers wishing to enter into such positions these include many of the brokerages with which investors in the futures markets deal if a customer wishes to purchase or sell a futures contract they contact an fcm who acts as an intermediary by purchasing or selling the contract on the customer s behalf this is similar to what a stockbroker does with stocks at maturity or the delivery date the fcm also makes sure the contract is fulfilled and either the commodity or cash is delivered to the customer fcms among other things enable farmers and companies called commercials to hedge their risks and provide customers access to exchanges and clearinghouses they can be subsidiaries of larger financial firms or smaller independent firms however in recent years and especially since the enactment of the dodd frank legislation in 2010 the numbers of fcms especially small independents have declined due to the regulatory burden 7 | |
what is a futures contract | a futures contract is a legal agreement to buy or sell a particular commodity asset or security at a predetermined price at a specified time in the future futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange the buyer of a futures contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires the seller of the futures contract is taking on the obligation to provide and deliver the underlying asset at the expiration date investopedia joules garciaunderstanding futures contractsfutures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price 2 here the buyer must purchase or the seller must sell the underlying asset at the set price regardless of the current market price at the expiration date underlying assets include physical commodities or other financial instruments futures contracts detail the quantity of the underlying asset and are standardized to facilitate trading on a futures exchange futures can be used for hedging or trade speculation futures contract and futures refer to the same thing for example you might hear somebody say they bought oil futures which means the same thing as an oil futures contract when someone says futures contract they re typically referring to a specific type of future such as oil gold bonds or s p 500 index futures futures contracts are also one of the most direct ways to invest in oil the term futures is more general and is often used to refer to the whole market such as they re a futures trader futures contracts are standardized unlike forward contracts forwards are similar types of agreements that lock in a future price in the present but forwards are traded over the counter otc and have customizable terms that are arrived at between the counterparties futures contracts on the other hand will each have the same terms regardless of who is the counterparty application of a futures contractsfutures contracts are used by two categories of market participants hedgers and speculators producers or purchasers of an underlying asset hedge or guarantee the price at which the commodity is sold or purchased they use futures contracts to ensure that they have a buyer and a satisfactory price hedging against any changes in the market 3an oil producer needs to sell its oil they may use futures contracts to lock in a price they will sell at and then deliver the oil to the buyer when the futures contract expires similarly a manufacturing company may need oil for making widgets since they like to plan ahead and always have oil coming in each month they too may use futures contracts this way they know in advance the price they will pay for oil the futures contract price and they know they will be taking delivery of the oil once the contract expires since many commodity prices tend to move in predictable patterns it is possible to make a profit by trading futures even if one does not have a direct interest in the underlying commodity traders and fund managers use futures to bet on the price of the underlying asset 4for example a trader may buy grain futures if they expect the price of grain to increase before the delivery date any unexpected changes to the weather or growing conditions may cause the futures price to rise or drop types of futures contractsfutures contracts can be used to set prices on any type of commodity or asset so long as there is a sufficiently large market for it some of the most frequently traded types of futures are outlined below futures contract vs forward contracta futures contract is similar to a forwards contract where a buyer and seller agree to set a price and quantity of a product for delivery at a later date both types of contract can be used for speculation as well as hedging however there are also important differences while a futures contract is a standardized agreement that can be traded on an exchange a forward contract is simply a private agreement between a buyer and a seller while it is possible to trade forwards on otc markets they are less regulated and less accessible to retail investors this means that there are also more opportunities to customize a forward agreement according to the buyer s and seller s needs mechanics of a futures contractimagine an oil producer plans to produce one million barrels of oil over the next year it will be ready for delivery in 12 months assume the current price is 75 per barrel the producer could produce the oil and then sell it at the current market prices one year from today given the volatility of oil prices the market price at that time could be very different than the current price if the oil producer thinks oil will be higher in one year they may opt not to lock in a price now but if they think 75 is a good price they could lock in a guaranteed sale price by entering into a futures contract a mathematical model is used to price futures which takes into account the current spot price the risk free rate of return time to maturity storage costs dividends dividend yields and convenience yields assume that the one year oil futures contracts are priced at 78 per barrel by entering into this contract in one year the producer is obligated to deliver one million barrels of oil and is guaranteed to receive 78 million the 78 price per barrel is received regardless of where spot market prices are at the time contracts are standardized for example one oil contract on the chicago mercantile exchange cme is for 1 000 barrels of oil 6 therefore if someone wanted to lock in a price selling or buying on 100 000 barrels of oil they would need to buy sell 100 contracts to lock in a price on one million barrels of oil they would need to buy sell 1 000 contracts the futures markets are regulated by the commodity futures trading commission cftc the cftc is a federal agency created by congress in 1974 to ensure the integrity of futures market pricing including preventing abusive trading practices fraud and regulating brokerage firms engaged in futures trading 1trading futures contractsretail traders and portfolio managers are not interested in delivering or receiving the underlying asset a retail trader has little need to receive 1 000 barrels of oil but they may be interested in capturing a profit on the price moves of oil futures contracts can be traded purely for profit as long as the trade is closed before expiration many futures contracts expire on the third friday of the month but contracts do vary so check the contract specifications of any and all contracts before trading them for example it is january and april contracts are trading at 55 if a trader believes that the price of oil will rise before the contract expires in april they could buy the contract at 55 this gives them control of 1 000 barrels of oil they are not required to pay 55 000 55 x 1 000 barrels for this privilege though rather the broker only requires an initial margin payment typically of a few thousand dollars for each contract the profit or loss of the position fluctuates in the account as the price of the futures contract moves if the loss gets too big the broker will ask the trader to deposit more money to cover the loss this is called maintenance margin the final profit or loss of the trade is realized when the trade is closed in this case if the buyer sells the contract at 60 they make 5 000 60 55 x 1 000 alternatively if the price drops to 50 and they close out the position there they lose 5 000 | |
why is it called a futures contract | a futures contract gets its name from the fact that the buyer and seller of the contract are agreeing to a price today for some asset or security that is to be delivered in the future | |
are futures and forwards the same thing | these two types of derivatives contract function in much the same way but the main difference is that futures are exchange traded and have standardized contract specifications these exchanges are highly regulated and provide transparent contract and pricing data forwards in contrast trade over the counter otc with terms and contract specifications customized by the two parties involved | |
what happens if a futures contract is held until it expires | unless the contract position is closed out prior to its expiration the short is obligated to make delivery to the long who is obligated to take it depending on the contract the values exchanged can be settled in cash most often the trader will simply pay or receive a cash settlement depending on whether the underlying asset increased or decreased during the investment holding period in some cases however futures contracts will require physical delivery in this scenario the investor holding the contract upon expiration would be responsible for storing the goods and would need to cover costs for material handling physical storage and insurance who uses futures contracts speculators can use futures contracts to bet on the future price of some asset or security hedgers use futures to lock in a price today to reduce market uncertainty between now and the time that good is to be delivered or received arbitrageurs trade futures contracts in or across related markets taking advantage of theoretical mispricings that may exist temporarily | |
how can i trade futures | depending on your broker and your account status with that broker you may be eligible to trade futures you will require a margin account and be approved to do so qualified traders in the u s will often have the ability to trade futures on different exchanges such as the chicago mercantile exchange cme ice futures u s intercontinental exchange and the cboe futures exchange cfe futures contracts play an important role in the smooth operations of the commodities market they allow buyers and sellers to lock in prices in advance and help farmers miners manufacturers and other market participants to work without having to worry about daily changes in the market the prices of futures are affected by interest rate changes and dividend payments | |
what is a futures market | a futures market is an auction market in which participants buy and sell commodity and futures contracts for delivery on a specified future date futures are exchange traded derivatives contracts that lock in future delivery of a commodity or security at a price set today examples of futures markets are the new york mercantile exchange nymex the chicago mercantile exchange cme the chicago board of trade cbot the cboe options exchange cboe and the minneapolis grain exchange originally such trading was carried on through open outcry and the use of hand signals in trading pits located in financial hubs such as new york chicago and london throughout the 21st century like most other markets futures exchanges have become mostly electronic the basics of a futures marketin order to understand fully what a futures market is it s important to understand the basics of futures contracts the assets traded in these markets futures contracts are made in an attempt by producers and suppliers of commodities to avoid market volatility these producers and suppliers negotiate contracts with an investor who agrees to take on both the risk and reward of a volatile market futures markets or futures exchanges are where these financial products are bought and sold for delivery at some agreed upon date in the future with a price fixed at the time of the deal futures markets are for more than simply agricultural contracts and now involve the buying selling and hedging of financial products and future values of interest rates futures contracts can be made or created as long as open interest is increased unlike other securities that are issued the size of futures markets which usually increase when the stock market outlook is uncertain is larger than that of commodity markets and is a key part of the financial system major futures marketslarge futures markets run their own clearinghouses where they can both make revenue from the trading itself and from the processing of trades after the fact some of the biggest futures markets that operate their own clearinghouses include the chicago mercantile exchange the ice and eurex 123 other markets like cboe have outside clearinghouses options clearing corporation settle trades 4most all futures markets are registered with the commodity futures trading commission cftc the main u s body in charge of regulation of futures markets exchanges are usually regulated by the nations regulatory body in the country in which they are based futures market exchanges earn revenue from actual futures trading and the processing of trades as well as charging traders and firms membership or access fees to do business futures market examplefor instance if a coffee farm sells green coffee beans at 4 per pound to a roaster and the roaster sells that roasted pound at 10 per pound and both are making a profit at that price they ll want to keep those costs at a fixed rate the investor agrees that if the price for coffee goes below a set rate the investor agrees to pay the difference to the coffee farmer if the price of coffee goes higher than a certain price the investor gets to keep profits for the roaster if the price of green coffee goes above an agreed rate the investor pays the difference and the roaster gets the coffee at a predictable rate if the price of green coffee is lower than an agreed upon rate the roaster pays the same price and the investor gets the profit | |
what are gafam stocks | gafam is an acronym for five popular u s tech stocks google alphabet apple facebook meta amazon and microsoft gafam is quite close to but nonetheless different than the more popular faang acronym which collectively indicates u s technology stocks facebook apple amazon netflix and google in the latter netflix takes the place of microsoft understanding gafam stockswhile a lot of market indexes exist to collectively track the developments of a sector there are a handful of companies that lead the pack in terms of sector influence faang gafam and batx are acronyms for influential companies that have a large impact on their sectors and the market as a whole gafam is made up of alphabet inc goog apple inc aapl meta meta formerly facebook amazon com inc amzn and microsoft corp msft all five companies are listed on the nasdaq stock exchange gafam versus faangamong the commonly used faang group of companies netflix is the only one belonging to the consumer services sector and consumer electronics video chains sub sector owing to its media content business while the other four belong to the technology sector the term gafam was coined to replace netflix with microsoft in the list making it a group of more technology focused companies while amazon is also classified under the consumer services sector and catalog specialty distribution subsector it also has its cloud hosting business and amazon web services aws which make it a significant contributor to the technology space essentially gafam represents the u s s technology leaders whose products span mobile and desktop systems hosting services online operations and software products the five gafam companies have a joint market capitalization of around 4 5 trillion and are all within the top 10 companies in the us according to market capitalization as of march 31 2020 among gafam stocks the oldest company to list on the stock exchange is apple which had its initial public offering ipo in 1980 followed by microsoft in 1986 amazon in 1997 google in 2004 and facebook in 2012 example how gafam is used in the real worldalphabet apple meta amazon and microsoft are big players in the technology space many investors believe that if these stocks are doing well the entire sector likely is as well in a way these stocks act like an index for the technology sector heading into early 2020 the nasdaq 100 index was rising gafam stocks were also rising meta was the first one to break lower peaking in late january 2020 the other gafam stocks and the nasdaq 100 continued to advance apple put in its peak on feb 12 microsoft on feb 10 the nasdaq put in its peak on february 19 therefore by the time the nasdaq peaked three of the five gafam stocks were already heading lower alphabet and amazon peaked on the same day as the nasdaq closing price basis monitoring the gafam stocks may have alerted investors that the technology sector was weakening even though the nasdaq 100 was still rising that said gafam stocks are not always a reliable indicator of what the sector will do | |
what is a gain | a gain is a general increase in the value of an asset or property a gain arises if the current price of something is higher than the original purchase price for accounting and tax purposes gains may be classified in several ways such as gross vs net gains or realized vs unrealized paper gains capital gains may additionally be classified as short term vs long term in nature a gain can be contrasted with a loss which occurs when property or assets held lose value compared to their purchase price a loss can thus be construed as a negative gain understanding a gaina gain refers generally to the positive difference between the price of something at acquisition and its current price a net gain takes transaction costs and other expenses into consideration a gain may also be either realized or unrealized a realized gain is the profit that is received when the asset is sold and an unrealized gain also known as a paper gain is an increase in value since purchase while the asset is still owned by the buyer and not yet disposed of another important distinction between gains is when they are taxable or non taxable as taxes can have a large impact on how much of a gain actually ends up in an investor s pocket for investors and traders a gain can occur anytime in the life of an asset if an investor owns a stock purchased for 15 and the market now prices that stock at 20 then the investor is sitting on a 5 gain that said a gain only truly matters when the asset is sold and the gains are realized as profit an asset may see many unrealized gains and losses between purchase and sale because the market is constantly reassessing the value of assets gains and taxesin most jurisdictions realized gains are subject to capital gains tax as well as applying to traditional assets capital gains tax may also apply to gains in alternative assets such as coins works of art and wine collections 1capital gains tax varies depending on the type of asset personal income tax rate and how long the asset gets held short term gains are generally taxed as ordinary income while long term gains held longer than one year are taxed more favorably 1a capital gain can typically be offset by a capital loss for instance if an investor realized a 50 000 capital gain in stock a and realized a 30 000 capital loss in stock b they may only have to pay tax on the net capital gain of 20 000 50 000 30 000 if the gains accrue in a non taxable account such as an individual retirement account in the u s or a retirement savings plan in canada gains will not be taxed 2for taxation purposes net realized gains rather than gross gains are taken into consideration in a stock transaction in a taxable account the taxable gain would be the difference between the sale price and purchase price after considering brokerage commissions 3here is an example of how a taxable gain works compounding gainslegendary investor warren buffet attributes compounding gains as one of the key factors to accumulating wealth the basic concept is that gains add to existing gains for example if 10 000 is invested in a stock and it gains 10 in a year it generates 1 000 after another 10 return in the following year the investment generates 1 100 11 000 x 10 gain and after the third year of a 10 gain the investment now generates 1 210 12 100 x 10 gain investors who start compounding gains at a young age have time on their side to build substantial wealth | |
what is the gambler s fallacy | the gambler s fallacy also known as the monte carlo fallacy occurs when an individual erroneously believes that a certain random event is less likely or more likely to happen based on the outcome of a previous event or series of events this line of thinking is incorrect since past events do not change the probability that certain events will occur in the future understanding the gambler s fallacyif a series of events is random and the events are independent from one another then by definition the outcome of one or more events cannot influence or predict the outcome of the next event the gambler s fallacy consists of misjudging whether a series of events is truly random and independent it involves wrongly concluding that the outcome of the next event will be the opposite of the outcomes of the preceding series of events 3for example consider a series of 10 coin flips that have all landed with the heads side up a person might predict that the next coin flip is more likely to land with the tails side up however if the person knows that this is a fair coin with a 50 50 chance of landing on either side and that the coin flips are not systematically related to one another by some mechanism then they are falling prey to the gambler s fallacy with their predictions the likelihood of a fair coin turning up heads is always 50 each coin flip is an independent event which means that any and all previous flips have no bearing on future flips if before any coins were flipped a gambler were offered a chance to bet that 11 coin flips would result in 11 heads the wise choice would be to turn it down because the probability of 11 coin flips resulting in 11 heads is extremely low however if offered the same bet with 10 flips having already produced 10 heads the gambler would have a 50 chance of winning because the odds of the next one turning up heads is still 50 the fallacy is believing that with 10 heads having already occurred an 11th heads up is now less likely traders aware of the gambler s fallacy can try to avoid it by strictly following a trading system of their own design that has specific buy and sell signals and is based on independent research they can track their own behavior before and after trades for review and analysis later examples of the gambler s fallacythe most famous example of the gambler s fallacy occurred at the casino de monte carlo in monaco in 1913 the roulette wheel s ball had fallen on black several times in a row this led people to believe that it would fall on red soon and they started pushing their chips betting that the ball would fall in a red square on the next roulette wheel turn the ball did fall on the red square but only after a total of 26 turns accounts state that millions of dollars had been lost by then 2gambler s fallacy or monte carlo fallacy represents an inaccurate understanding of probability and can equally be applied to investing some investors liquidate a position once it has risen in value after a long series of positive trading sessions they do so because they erroneously believe that because of the string of successive gains the position is now much more likely to decline | |
how far back does the gambler s fallacy go | pierre simon laplace a french mathematician who lived over 200 years ago wrote about the behavior in his philosophical essay on probabilities 4 | |
what is the cause of the gambler s fallacy | the gambler s fallacy is a behavioral issue primarily derived from the belief in small numbers people erroneously believe that small sample sets are always representative of larger populations or outcomes | |
how do you avoid the gambler s fallacy | in the area of trading and investing individuals can avoid the gambler s fallacy by letting go of the belief that previous occurrences are representative of future occurrences to do this traders and investors need to use independent research be up to date on all facts figures and strategies track trades and outcomes and ask for feedback the bottom linegambler s fallacy is the mistaken belief that a random event will occur simply because a series of the opposite of that event has taken place it s a fallacy because random and independent events have no bearing on each other and thus cannot influence a future outcome | |
what is a game changer | throughout time certain ideas have changed how people live how societies function and even the course of history these ideas have been brought to life by individuals who considered things as they were envisioned what could be and committed to creating the changes that they believed in those people are sometimes referred to as game changers think johannes gutenberg and the printing press thomas edison and the electric light andrew fleming and the antibiotic penicillin or alan turing and the first modern computer game changers are those people who bring the force of their vision will and personality to bear on the sometimes unique sometimes mundane ideas that can alter the ways in which we live game changer can also refer to a company that significantly switches things up and develops new business plans and strategies that place it above its competition game changers can drive changes that transform the landscape in which we live on either small or large scales understanding game changersgame changers compare what s possible to what s currently being done they spur a shift in the status quo the changes they pursue may be radical and difficult for others to understand however they often drive a change in the way other people think and operate a game changer therefore is someone or something that can spark new concepts inspire the desire for and acceptance of change and create the change itself a game changing individual often uses their personality traits and attitude to affect what people perceive and how they do things certain influencers might be called game changers if they shift the dynamic of thought and behavior of their followers for instance a social media influencer with a particular fashion sense who revolutionizes how people dress might be considered a game changer game changing companies usually led by game changing individuals can develop different kinds of business objectives technologies efficiencies production methods and marketing strategies these corporate innovations can open up new avenues of opportunity and potential for financial growth they can disrupt and transform entire industries or more in the process becoming a game changer requires a long term commitment one needs a certain ingenuity of thought and action time and determination game changers have to have the ability to manage uncertainties and overcome obstacles both entrepreneurs and those within companies who seek to make an impact can study and learn from the leadership strategies tactics and achievements of visionary leaders not all game changers effect positive change for instance the 20th century bore witness to charismatic leaders with unquenchable desires to alter the status quo who unleashed destruction and misery for not just their own countries but the world at large examples of game changersamazon founder and billionaire jeff bezos is widely recognized as a game changer that s not surprising when you consider what he s achieved since he founded the company in 1994 amazon started as a small ecommerce website that sold books during the internet boom of the late 1990s it quickly disrupted the retail industry as a whole 1 bezos stepped down from the role of ceo on july 5 2021 but remains executive chair of the company 2 he continues to invest in new game changing technologies such as spaceflight 3elon musk is another entrepreneurial individual who is considered a game changer musk became the ceo of electric automotive manufacturer and clean energy company tesla in 2008 he had high ambitions of being a game changer in the auto industry tesla is now a leading name in electric cars raising its stature and driving its popularity by using high powered lithium ion batteries rather than gasoline to power vehicles musk s vision for tesla s method of production may have been criticized however the company s emergence and dominance in the electric car market caused others to scramble to try to match its impressive and undeniable achievement 4 | |
what s a game changer | a game changer is a person who by the force of their personality desire to do things differently and their belief in the change they envision alter the status quo the changes that result can affect communities industries nations and the world | |
what women have been game changers | rebecca lee crumpler overcame racism and sexism to obtain a medical degree in 1864 she became the first female african american doctor in the u s 5 rachel carson the marine scientist and author of the game changing book about the harm caused by pesticides silent spring is often credited with launching the environmental movement in the 1960s 6 muriel siebert became the first woman to buy a seat on the new york stock exchange in 1967 she established the first women owned and operated brokerage firm in 1969 7 these are just three of countless women game changers each of whom faced incredible obstacles but persevered to accomplish remarkable goals that affected the lives of others | |
how do game changers make things happen | generally game changers make things happen by looking for and seeing things that others don t they strive to be innovative in small or large ways importantly they understand that they ll make the progress they seek by being persistent committed courageous energetic visionary and hard working what s more if they find that they don t have the knowledge or experience to reach their goals they get it | |
what is game theory | game theory is the study of how and why individuals and entities called players make decisions about their situations it is a theoretical framework for conceiving social scenarios among competing players in some respects game theory is the science of strategy or at least of the optimal decision making of independent and competing actors in a strategic setting game theory is used in a variety of fields to lay out various situations and predict their most likely outcomes businesses may use it for example to set prices decide whether to acquire another firm and determine how to handle a lawsuit | |
how game theory works | the goal of game theory is to explain the strategic actions of two or more players in a given situation with set rules and outcomes any time a situation with two or more players involves known payouts or quantifiable consequences we can use game theory to help determine the most likely outcomes the focus of game theory is the game which is an interactive situation that involves rational players the key to game theory is that one player s payoff is contingent on the strategy implemented by the other player the game identifies the players identities preferences available strategies and how these strategies affect the outcome depending on the model various other requirements or assumptions may be necessary game theory has a wide range of applications including psychology evolutionary biology war politics economics and business despite its many advances game theory is still a young and developing science according to game theory the actions and choices of all the participants affect the outcome of each it s assumed players within the game are rational and will strive to maximize their payoffs in the game 1useful terms in game theoryhere are a few terms commonly used in the study of game theory the key pioneers of game theory were mathematician john von neumann and economist oskar morgenstern in the 1940s 2 mathematician john nash is regarded by many as providing the first significant extension of the von neumann and morgenstern work 3the nash equilibriumnash equilibrium is an outcome reached that once achieved means no player can increase payoff by changing decisions unilaterally 3 it can also be thought of as a no regrets outcome in the sense that once a decision is made the player will have no regrets about it considering the consequences the nash equilibrium is reached over time normally however once the nash equilibrium is reached it will not be deviated from in such a case consider how a unilateral move would affect the situation does it make any sense it shouldn t and that s why the nash equilibrium outcome is described as no regrets 4generally there can be more than one equilibrium in a game however this usually occurs in games with more complex elements than two choices by two players in simultaneous games that are repeated over time one of these multiple equilibria is reached after some trial and error this scenario of different choices over time before reaching equilibrium is most often played out in the business world when two firms are determining prices for highly interchangeable products such as airfare or soft drinks impact of game theorygame theory is present in almost every industry or field of research its expansive theory can pertain to many situations making it a versatile and important theory here are several fields of study directly impacted by game theory game theory brought about a revolution in economics by addressing crucial problems in prior mathematical economic models for instance neoclassical economics struggled to explain entrepreneurial anticipation and could not handle the imperfect competition game theory turned attention away from steady state equilibrium toward the market process economists often use game theory to explain oligopoly firm behavior it helps to predict likely outcomes when firms engage in certain behaviors such as price fixing and collusion 5in business game theory is beneficial for modeling competing behaviors between economic agents businesses often have several strategic choices that affect their ability to realize economic gain for example businesses may face dilemmas such as whether to retire existing products and develop new ones or employ new marketing strategies businesses can often choose their opponent as well some focus on external forces and compete against other market participants others set internal goals and strive to be better than their previous versions whether external or internal companies are always competing for resources attempting to hire the best candidates away from rivals and dissuade customers from choosing competing goods game theory in business may most resemble a game tree as shown below a company may start in position one and must decide on two outcomes however there are continually other decisions to be made the final payoff amount is not known until the final decision has been processed 1internet encyclopedia of philosophyproject management involves social aspects of game theory as different participants may have different influences for example a project manager may be motivated to successfully complete a building development project meanwhile the construction worker may be motivated to work slower for safety or to delay the project to add more billable hours | |
when dealing with an internal team game theory may be less prevalent as all participants working for the same employer often have a greater shared interest for success however third party consultants or external parties assisting with a project may be motivated by other factors separate from the project s success | the strategy of black friday shopping is at the heart of game theory the concept holds that should companies reduce prices more consumers will buy more goods the relationship between a consumer a good and the financial exchange that transfers ownership plays a major part in game theory as each consumer has a different set of expectations other than sweeping sales in advance of the holiday season companies must utilize game theory when pricing products for launch or in anticipation of competition from rival goods a balance must be found price a good too low and it won t reap profit price a good too high and it might push customers toward a substitute types of game theoryalthough there are many types of game theory such as symmetric asymmetric simultaneous sequential and so on cooperative and non cooperative game theories are the most common cooperative game theory deals with how coalitions or cooperative groups interact when only the payoffs are known it is a game between coalitions of players rather than between individuals and it questions how groups form and how they allocate the payoff among players non cooperative game theory deals with how rational economic agents deal with each other to achieve their own goals the most common non cooperative game is the strategic game in which only the available strategies and the outcomes that result from a combination of choices are listed a simplistic example of a real world non cooperative game is rock paper scissors 6 |
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