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what is non industrial | non industrial may be most often seen in zoning regulations or discussions regarding zoning regulations this is a wide category that may include everything except manufacturing activities and manufacturing sourcing such as mining non industrial land use includes retail and services businesses entertainment and recreation sites parking lots and residential neighborhoods the bottom linefor better or worse industrialization created the modern world as we know it you would have to search far and wide to find a place on earth that has not been affected by industrialization and those places probably will be soon the industrial revolution in europe and the united states brought the world into the modern era other regions particularly in asia made the transition later the process continues into the 21st century | |
what is an industry | the term industry is a classification for a group of companies that have similar business activities in modern economies there are dozens of industry classifications industries typically are grouped into larger categories called sectors individual companies are generally assigned to an industry based on their largest sources of revenue for example while an automobile manufacturer might have a financing division that contributes 10 to the firm s overall revenues the company would be classified in the automaker industry by most classification systems rather than in the financial services industry zoe hansen investopediaunderstanding an industrysimilar businesses are grouped into industries based on the primary business activities or the primary product that they produce or sell this creates industry groups which can then be used to separate businesses from those that participate in different activities investors and economists often study industries to better understand the factors and limitations of corporate profit growth investors often compare companies operating in the same industry to evaluate their relative attractiveness as an investment investors seeking better performing stocks and etfs often study the best performing industries as well as watch industry rankings for changes for example investors might see a red flag where an investment is concerned when they see an industry that s declined in rank stocks of companies operating within the same industry tend to have similar stock price movements this is because companies within a given industry face the same headwinds challenges and broad triumphs special considerationsstocks within the same industry often rise and fall as a group because the same macroeconomic factors are likely to impact all members of an industry these macroeconomic factors can be changes in market sentiment on the part of investors such as a response to a particular event or piece of news they can also be changes involving the industry itself such as new regulations or increased raw material costs however events related to one business in particular can cause the associated stock to rise or fall separately from others within the same industry this can be the result of events such as a differentiating product release a corporate scandal in the news or a change in leadership structures industries vs sectorssectors and industries are classifications used to group similar types of business operations however sectors are broader than industries for example retail trade is a sector as defined by the north american industry classification system naics within that sector are industries such as health and personal care stores clothing stores and shoe stores rite aid corp and gap inc are members of the same consumer goods sector but each is listed in a different industry based on the products that they produce or sell rite aid corp is classified within the health and personal care stores industry naics code 44610 while gap inc is classified within both the clothing stores industry naics code 448130 and clothing accessories industry naics 448150 12it s important to note that a single company can reside in two different industries or two different sectors in addition to being within the consumer goods sector rite aid is considered part of the personal services sector as well within the photofinishing laboratories industry because this business develops photographs in addition to selling consumer goods it is assigned multiple naics codes naics code 812921 for its photo department the naics developed by the united states canada and mexico is the standard by which government agencies classify businesses when compiling statistical data in the naics hierarchy companies that use similar production processes are categorized in the same industry 3the naics is reviewed and revised every five years and the latest edition of the system was released in 2022 this updated version of industry codes best reflects company classifications especially in industries that have undergone large changes since 2017 4the global industry classification standard gics is also a commonly referenced classification system the gics assigns every public company to an industry group and economic sector that best define its business the gics was developed jointly by morgan stanley capital international msci and standard poor s s p in 1999 it was created to be an efficient investment tool to capture the breadth depth and evolution of industry sectors the gics methodology is used by the msci indexes investors analysts and economists to compare and contrast competing companies 5the gics is a four tiered hierarchical industry classification system according to the gics hierarchy there are 11 economic sectors these sectors are further divided into 24 industry groups 69 industries and 158 sub industries each stock has a code to identify it at all four of these levels 6for example materials is an economic sector within materials there are different industries chemicals construction materials containers and packaging metals and mining and paper and forest products 6 | |
what is an example of an industry | a specific naics industry is commercial banking and it is assigned its own classification code 522110 it is found in the finance and insurance sector which contains other industries such as credit intermediaries financial investment companies insurance carriers funds trusts and other financial vehicles 3 | |
what is the difference between an industry and a sector | sector is a broader term than industry industries are contained within sectors but not vice versa for example consumer goods is a sector this sector can then be broken into different consumables industries such as clothes or personal health | |
what is the difference between an industry and a business | an industry is a classification that refers to a group of businesses a business is an entity that is operated to achieve particular business goals when a collection of individual businesses operate in a similar manner and produce similar output they may be grouped together and classified as part of the same industry | |
how many different industries are there | different classification systems will group and report industries differently the naics has historically grouped companies into roughly 20 sectors 100 subsectors and over 1 000 six digit naics industry codes 3the bottom linein business and investing industry is a classification that is used to group similar companies these companies have comparable products and services and will often respond in similar ways to macroeconomic trends because of this their stock prices often move up or down at the same time industries can be further grouped into sectors which is a broader classification that includes multiple industries businesses within the same sector may respond similarly to some macroeconomic trends but not others two common classification systems for industries are the north american industry classification system and the global industry classification standard | |
what is the industry life cycle | the industry life cycle refers to the evolution of an industry or business through four stages based on the business characteristics commonly displayed in each phase the four phases of an industry life cycle are the introduction growth maturity and decline stages industries are born when new products are developed with significant uncertainty regarding market size product specifications and main competitors consolidation and failure whittle down an established industry as it grows and the remaining competitors minimize expenses as growth slows and demand eventually wanes understanding the industry life cyclethere is no universal definition for the various stages of the industry life cycle but commonly it can be organized into introduction growth maturity and decline 1life cycles are present in all aspects of life the industry life cycle can relate to youth inexperience and determination introduction learning improvement and social expansion growth achievement and fulfillment maturity and the decreasing ability to compete win and thrive decline the relative length of each phase of the industry life cycle can vary substantially among industries the standard model typically deals with manufactured goods but today s service economy can function somewhat differently especially in the realm of internet communications technology sales profits and cash flows are typical financial metrics followed closely in every phase of the industry life cycle industry life cycle phasesthe introduction or startup phase involves the development and early marketing of a new product or service innovators often create new businesses to enable the production and proliferation of the new offering information about the products and industry participants is often limited so demand tends to be unclear during this stage consumers of the goods and services need to learn more about them while the new providers are still developing and honing the offering the industry or business tends to be highly fragmented in the introduction stage participants tend to be unprofitable because expenses are incurred to develop and market the offering while revenues are still low in this second phase consumers have come to understand the value of the new offering business or industry demand grows rapidly a handful of important players usually becomes apparent and they compete to establish a share of the new market immediate profits usually are not a top priority as companies spend on research and development or marketing business processes are improved and geographical expansion is common once the new product has demonstrated viability larger companies in adjacent industries tend to enter the market through acquisitions or internal development the maturity phase begins with a shakeout period during which sales growth slows focus shifts toward expense reduction and consolidation occurs as companies begin to merge or acquire each other some firms attain economies of scale hampering the sustainability of smaller competitors growth can continue as maturity is achieved barriers to entry become higher and the competitive landscape becomes more clear market share cash flow and profitability become the primary goals of the remaining companies now that growth is relatively less important price competition becomes much more relevant as product differentiation declines with consolidation businesses may prolong the maturity phase by repositioning their offerings investing in new markets and technology and spurring new growth the decline phase marks the end of an industry s or business ability to support growth obsolescence and evolving end markets end users negatively impact demand leading to declining revenues this creates margin pressure forcing weaker competitors out of the industry further consolidation is common as participants seek synergies and further gains from scale the decline phase often signals the end of viability for the incumbent business model pushing industry participants into adjacent markets as with the maturity phase the decline phase can be delayed with large scale product improvements or repurposing however these tend simply to prolong the decline and ultimate market exit examplessome industries in the startup or emergent stage include the artificial intelligence industry the self driving vehicle industry the biotechnology industry and the virtual reality industry coca cola is an example of a savvy life cycle survivor in western countries it is considered to be in the maturity stage because its market offers no room for expansion but its ability to change its business efficiently and effectively to serve huge populations in asia also put it in the growth phase the computer industry as well has had an extended growth phase because of its longtime focus on updating hardware features and functionality in the u s mature industries include food and agriculture mining and financial services companies such as apple xerox intel ibm and procter gamble are considered mature phase companies certain revenue analysis research indicates that the fastest declining industries in the u s include 2 | |
does the industry life cycle apply to all businesses | ultimately yes however the discrete stages may occur differently and have different durations depending on a business and its industry | |
what can prolong the industry life cycle | production efficiencies new developments that position the industry business for greater achievements effective management new technologies that are harnessed properly and ongoing customer base and relationship development can all help maintain the growth and maturity phases | |
why does the industry life cycle matter | for companies life cycle stages are important because they can drive strategies and actions related to sales research expenses competition and more for investors understanding life cycles and the stage that an industry or business is in can help them decide whether to get in or out of an investment the bottom linethe industry life cycle refers to the stages of existence that an industry or business experiences from its beginning to its end the four phases are introduction growth maturity and decline understanding the life cycle can help companies manage their operational and financial decisions and activities so that they position themselves to achieve important goals these goals can include product research and development better profitability the implementation of innovative technology expanding a customer base and more | |
what is industry life cycle analysis | industry life cycle analysis is part of the fundamental analysis of a company involving the examination of the stage an industry is in at a given point in time there are four stages in an industry life cycle expansion peak contraction trough an analyst will determine where a company sits in the cycle and use this information to project future financial performance and estimate forward valuations e g forward price earnings ratios understanding industry life cycle analysisthough not necessarily the case the life cycle of a particular industry will follow the general economic cycle an industry life cycle may lead or lag an economic cycle it also can vary from an economic cycle s phases in terms of expansion or contraction percentages or duration of peak and trough stages as the economy gathers strength the industry life cycle begins again with the expansion phase as mentioned at the outset an industry life cycle is typically tied to the economic cycle the entertainment and leisure industry is an example of such an industry the technology industry on the other hand has exhibited life cycle movements at variance with the economic cycle for instance tech industry profits have boomed even in times of no economic growth using industry life cycle in analysisanalysts and traders often use industry life cycle analysis to measure the relative strength and weakness of a particular company s stock a company s future growth prospects may be bright or dim depending on the stage that it is in during an industry life cycle porter s five economic forces change as an industry matures for example rivalry is most intense between companies in a sector during the growth stage startups slash prices and ship products as quickly as possible in a bid to garner as many customers as possible during this time the threat of new entrants eating into an existing company s market share is high the scenario changes in the maturity stage less competitive startups and inferior products are weeded out or acquired the risk of new entrants is low and the industry s product is mature enough to be accepted in mainstream society startups become established firms during this stage but their future growth prospects are limited in existing markets they must search out new avenues and markets for profits or risk extinction example of industry life cycle analysisthere was a boom in social media during the early 2000s due to the success of myspace a social networking site that surpassed google as the most visited place on the internet in 2006 1 sites like orkut a google venture and bebo competed to gain users in a crowded landscape facebook now meta which started in 2004 was also gaining traction among universities and was considered the second most popular social media site 2 there were signs of consolidation when myspace was acquired by rupert murdoch s newscorp ltd for 580 million in 2005 3but that valuation turned out to be inflated after facebook overtook myspace in rankings 1 myspace eventually petered into insignificance after facebook became a social media behemoth with the exception of a few like x platform formerly twitter other social media sites also fell by the wayside the social media sites that survived made a thumping debut on the stock market their valuations were considered high in comparison to their revenues mainly because investors expected significant growth in the future as social media became popular throughout the world by may 2019 however facebook s valuation had declined and the company warned of plateauing growth figures in the future snap inc another social media company was in a similar situation both companies responded by expanding the scope of their operations to include other products such as cameras and drones in their portfolio as of december 2021 facebook has just changed its corporate parent name to meta platforms 4 the company has rebranded and is developing new products and technology these developments resulted in both analysts and the company itself seeing meta s valuation increase again 56 | |
is the industry life cycle the same as the economic cycle | the phases ofan industry life cycle have the same names as the general economic cycle expansion peak contraction and trough these phases may overlap with an industry s peak occurring at the same time as an economic peak and an industry s trough at the same as an economic trough however whether or not this happens often depends on the industry itself some industries may see their peaks at the same time as the overall economy experiences a trough or they may be in an expansion phase when the economic cycle is at a peak | |
what is the product life cycle | the product life cycle has to do with how specific products or services are developed and offered to the public this cycle has five phases development introduction growth maturity and decline this is separate from the industry life cycle since many products are developed within a single industry or even within a single company | |
what are the 3 main parts of industry analysis | performing overall industry analysis requires looking at three things the overall appeal or attractiveness of an industry both to customers and investors the factors that determine an individual company s success or failure within an industry and the wider economic political and social forces that influence an industry the bottom linethe industry life cycle is the stages of growth and decline that an industry goes through as it is created expands and eventually becomes extinct this mirrors the four main stages of the economic cycle expansion peak contraction and trough industry life cycle analysis is used to analyze a company s stock researchers analysts and investors can look at the overall stage of an industry s life cycle to understand why a company s stock is valued the way it currently is and whether that is likely to change in the future | |
what is an inefficient market | according to economic theory an inefficient market is one in which an asset s prices do not accurately reflect its true value which may occur for several reasons inefficiencies often lead to deadweight losses in reality most markets do display some level of inefficiencies and in the extreme case an inefficient market can be an example of a market failure the efficient market hypothesis emh holds that in an efficiently working market asset prices always accurately reflect the asset s true value for example all publicly available information about a stock should be fully reflected in its current market price with an inefficient market in contrast all the publicly available information is not reflected in the price suggesting that bargains are available or that prices could be over valued understanding inefficient marketsbefore looking at inefficient markets as promoted by alphanomics we must first lay out what economic theory proposes an efficient market must look like the efficient markets hypothesis emh takes on three forms proponents of the emh believe that the market s high degree of efficiency makes outperforming the market difficult most investors would therefore be well advised to invest in passively managed vehicles such as index funds and exchange traded funds etf which don t attempt to beat the market emh skeptics on the other hand believe that savvy investors can outperform the market and therefore actively managed strategies are the best option thus in an inefficient market some investors can make excess returns while others can lose more than expected given their level of risk exposure if the market were entirely efficient these opportunities and threats would not exist for any reasonable length of time since market prices would quickly move to match a security s true value as it changed quantitative analysts will look to the concept of entrophy or randomness to predict the probable price movement direction or the repetition of a pattern the emh has several problems in reality first the hypothesis assumes all investors perceive all available information in precisely the same manner the different methods for analyzing and valuing stocks pose some problems for the validity of the emh if one investor looks for undervalued market opportunities while another evaluates a stock on the basis of its growth potential these two investors will already have arrived at a different assessment of the stock s fair market value therefore one argument against the emh points out that since investors value stocks differently it is impossible to determine what a stock should be worth in an efficient market while many financial markets appear reasonably efficient events such as market wide crashes and the dotcom bubble of the late 90s seem to reveal some sort of market inefficiency example active portfolio managementif markets are truly efficient then there is no hope to beat the market as an investor or trader the emh states that no single investor is ever able to attain greater profitability than another with the same amount of invested funds under the efficient market hypothesis since they both have the same information they can only achieve identical returns but consider the wide range of investment returns attained by the entire universe of investors investment funds and so forth if no investor had any clear advantage over another would there be a range of yearly returns in the mutual fund industry from significant losses to 50 profits or more according to the emh if one investor is profitable it means every investor is profitable but this is far from true regarding passively managed versus actively managed vehicles the inefficiency of markets reveals itself for example large cap stocks are widely held and closely followed new information about these stocks is immediately reflected in the price news of a product recall by general motors for example is likely to immediately result in a drop in gm s stock price in other parts of the market however particularly small caps some companies may not be as widely held and closely followed news whether good or bad may not hit the stock price for hours days or longer this inefficiency makes it more likely that an investor will be able to purchase a small cap stock at a bargain price before the rest of the market become aware of and digests the new information likewise technical analysis is a style of trading that is completely predicated on the concept of using past data to anticipate future price movements technical analysis uses patterns in market data from the past to identify trends and make predictions for the future as a result emh is conceptually opposed to technical analysis proponents of emh are also of the belief that it s pointless to search for undervalued stocks or predict trends in the market through fundamental analysis | |
what is the infant industry theory | the infant industry theory states that new industries in developing countries need protection against competitive pressures until they mature and develop economies of scale that can rival their competitors the infant industry argument is often cited as a rationale for protectionism and was developed by alexander hamilton and friedrich list understanding the infant industry theorythe infant industry theory is the supposition that emerging domestic industries need protection against international competition until they become mature and stable in economics an infant industry is one that is new and in its early stages of development and thus not yet capable of competing against established industry competitors the infant industry theory first developed in the early 19th century by alexander hamilton and friedrich list is often a justification for protectionist trade policies 1 the basic idea is that young emerging industries in underdeveloped nations need protection from more established industries usually from foreign nations in response to these arguments governments may enact import duties tariffs quotas and exchange rate controls to prevent international competitors from matching or beating the prices of an infant industry thereby giving the infant industry time to develop and stabilize special considerationsaccording to a paper in the journal of international economics titled when and how should infant industries be protected the infant industry theory was later improved on by the economist and philosopher john stuart mill who said that infant industries should only be protected if they can mature and then become viable without protection charles francis bastable then added a simple condition that the cumulative net benefits provided by the protected industry must exceed the cumulative costs of protecting the industry 1infant industry theorists argue that industries in developing sectors of the economy need to be protected to keep international competitors from damaging or destroying the domestic infant industry infant industries they argue don t have the economies of scale that older competitors in other countries may have and should be protected just until they have built an economy of similar scale the infant industry theory holds that once the emerging industry is stable enough to compete internationally any protective measures introduced such as tariffs are intended to be removed in practice this is not always the case because the various protections that were imposed may be difficult to remove | |
what is an inferior good | an inferior good is an economic term that describes a good whose demand drops when people s incomes rise these goods fall out of favor as incomes and the economy improve as consumers begin buying more costly substitutes instead investopedia dennis madambaunderstanding inferior goodsin economics the demand for inferior goods decreases as income increases or the economy improves when this happens consumers will be more willing to spend on more costly substitutes some of the reasons behind this shift may include quality or a change to a consumer s socioeconomic status inferior goods which are the opposite of normal goods are anything a consumer would demand less of if they had a higher level of real income they may also be associated with those who typically fall into a lower socioeconomic class conversely the demand for inferior goods increases when incomes fall or the economy contracts when this happens inferior goods become a more affordable substitute for more expensive goods the term inferior good refers to affordability rather than quality even though some inferior goods may be of lower quality inferior good examplesthere are many examples of inferior goods when people have less money they tend to buy these kinds of products but when their incomes rise they often give these up for more expensive items groceries are among the most common examples of inferior products because food is a necessity that must always be acquired however the level at which consumers by food may vary as opposed to eating a steak for dinner an individual may opt for an inferior product such as canned meat or frozen food in addition the way individuals consume food may be classified differently individuals may be less likely to eat out especially at fancier restaurants in favor of inferior methods of having food prepared such as preparing the meal at home on their own one method is simply a superior substitute for the other we can also turn to transportation as an example of an inferior good when people s incomes are low they may opt to ride public transport when their incomes rise they may stop riding the bus and instead take taxis or even buy cars in addition buying a vehicle may be classified by different tiers as a used honda may be considered inferior to a new tesla along with everyday transportation many aspects of travel may be considered a superior or inferior goods consider the hotel you may stay at based on how your personal finances are doing you may also choose to attend different entertainment events or fly first class as opposed to opting to cheaper inferior travel options a mcdonald s coffee may be an inferior good compared to a starbucks coffee when a consumer s income drops they may substitute their daily starbucks java for the more affordable mcdonald s brew on the other hand when a consumer s income rises they may substitute their mcdonald s coffee for the more expensive starbucks coffee other examples of an inferior good are no name grocery store products such as cereal or peanut butter consumers may use these cheaper generic brand products when their incomes are lower and make the switch to name brand products when their incomes increase grocery store brand products provide an insightful example of how inferior goods are not necessarily of lower quality many of these goods come from the same product line as the more expensive name brand goods inferior goods and consumer behaviordemand for inferior goods is commonly dictated by consumer behavior typically demand for inferior goods is mainly driven by people with lower incomes or when there s a contraction in the economy but that isn t always the case some customers may not change their behavior and continue to purchase inferior goods consider a consumer who gets a raise from their employer despite the rise in income they may continue to buy mcdonald s coffee because they prefer it over starbucks brew or they may find a no name grocery product better than the more expensive name brand counterpart in this case it s just a matter of personal preference inferior goods aren t always the same in different parts of the world for example something as simple as fast food may be considered an inferior good in the u s but it may be deemed a normal good for people in developing nations a normal good is one whose demand increases when people s incomes start to increase giving it a positive income elasticity of demand inferior goods are associated with a negative income elasticity while normal goods are related to a positive income elasticity other types of goodsgiffen goods are rare forms of inferior goods that have no ready substitute or alternative such as bread rice and potatoes the only difference between giffen goods and traditional inferior goods is that demand for the former increases even when their prices rise regardless of a consumer s income many giffen goods are considered staples especially in areas where people live in a lower socioeconomic class when the prices of giffen goods increase consumers have no choice but to spend a larger amount of money on them so they may spend more money on rice because that s all they can afford to buy even if the price keeps rising products such as meat on the other hand become luxuries as they are far too unaffordable and out of reach an inferior good is the opposite of a normal good normal goods experience an increase in demand when incomes increase normal goods are also called necessary goods an example is organic bananas if a consumer s income is low they may buy regular bananas if their incomes rise and they have a few extra dollars to spend each month they may choose to buy organic bananas other examples include clothing and water luxury goods are the third category they are not deemed essentials or necessities to live these goods are highly desired and can be purchased when a consumer s income rises in other words the ability to purchase luxury goods is dependent on a consumer s wealth or assets luxury items include cleaning and cooking services handbags and luggage certain automobiles and haute couture another differing type of good is a veblen good a veblen good is an item whose increase in price may actually result in higher sales these types of goods are often a subset of a luxury good and this type of good often defies many traditional concepts of economics for example consider a piece of artwork that sells for 100 should the artwork actually be valued at 1 million theory holds that more investors would be interest as there is greater potential value | |
do inferior goods have an inferior quality | not necessarily inferior good is an economic term that refers to an item that becomes less desirable as the income of consumers increases in other words inferior goods are those whose price elasticity is negative but this doesn t always involve a lower quality as consumers incomes increase they tend to decrease their purchases of inferior goods opting for normal goods or luxury goods instead | |
what are some examples of inferior goods | typical examples of inferior goods include store brand grocery products instant noodles and certain canned or frozen foods although some people have a specific preference for these items most buyers would prefer buying more expensive alternatives if they had the income to do so therefore when incomes rise demand for these items tends to decrease accordingly | |
what is the difference between a giffen good and an inferior good | the term giffen goods named after the scottish economist sir robert griffin refers to goods whose demand increases even if prices rise largely because there are few substitutes or alternatives for them a classic example of a giffen good would be a basic food staple such as rice if consumers have no choice but to purchase the staple they will continue to do so even if it becomes more expensive in fact because these purchases will consume a greater share of their income demand for giffen goods will actually increase with higher prices the limits on disposable income make slightly higher options even more out of reach | |
are inferior goods bad | inferior goods aren t necessarily bad they simply represent a more economical way of achieving the same goal instead of a catered fancy meal it is not bad to make a simple meal at home inferior goods represent items that simply in less demand as people have more disposable income the bottom linean inferior good is an item that is often a substitute product whose demand drops when people s income increases during economic prosperity consumers may be more likely to invest in more luxury goods if a consumer s income drops they are more likely to resort to activities such as buying lower quality items generic brands avoiding traveling or changing eating habits | |
what is inflation | inflation is a gradual loss of purchasing power reflected in a broad rise in prices for goods and services over time the inflation rate is calculated as the average price increase of a basket of selected goods and services over one year high inflation means that prices are increasing quickly with low inflation meaning that prices are increasing more slowly inflation can be contrasted with deflation which occurs when prices decline and purchasing power increases | |
what causes inflation | an increase in the supply of money is the root of inflation though this can play out through different mechanisms in the economy a country s money supply can be increased by the monetary authorities by other causes of inflation include supply bottlenecks and shortages of key goods which can push prices to rise | |
when inflation occurs money loses its purchasing power this can occur across any sector or throughout an entire economy when inflation takes hold the expectation of inflation itself can further sustain the devaluation of money workers may demand higher wages and businesses may charge higher prices in anticipation of sustained inflation this in turn reinforces the factors that push prices up | inflation can be classified into three types demand pull inflation cost push inflation and built in inflation melissa ling copyright investopedia 2019types of inflationdemand pull inflation occurs when an increase in the supply of money and credit stimulates the overall demand for goods and services to increase more rapidly than the economy s production capacity this increases demand and leads to price rises | |
when people have more money it leads to positive consumer sentiment this in turn leads to higher spending which pulls prices higher it creates a demand supply gap with higher demand and less flexible supply which results in higher prices | cost push inflation is a result of the increase in prices working through the production process inputs when additions to the supply of money and credit are channeled into a commodity or other asset markets costs for all kinds of intermediate goods rise this is especially evident when there s a negative economic shock to the supply of key commodities these developments lead to higher costs for the finished product or service and work their way into rising consumer prices for instance when the money supply is expanded it creates a speculative boom in oil prices this means that the cost of energy can rise and contribute to rising consumer prices which is reflected in various measures of inflation built in inflation is related to adaptive expectations or the idea that people expect current inflation rates to continue in the future as the price of goods and services rises people may expect a continuous rise in the future at a similar rate as such workers may demand more costs or wages to maintain their standard of living their increased wages result in a higher cost of goods and services and this wage price spiral continues as one factor induces the other and vice versa | |
how inflation impacts consumers | while it is easy to measure the price changes of individual products over time human needs extend beyond just one or two products individuals need a big and diversified set of products as well as a host of services for living a comfortable life they include commodities like food grains metal fuel utilities like electricity and transportation and services like healthcare entertainment and labor inflation aims to measure the overall impact of price changes for a diversified set of products and services it allows for a single value representation of the increase in the price level of goods and services in an economy over a specified time prices rise which means that one unit of money buys fewer goods and services this loss of purchasing power impacts the cost of living for the common public which ultimately leads to a deceleration in economic growth the consensus view among economists is that sustained inflation occurs when a nation s money supply growth outpaces economic growth the increase in the consumer price index for all urban consumers cpi u over the 12 months ending may 2024 on an unadjusted basis prices were flat on a seasonally adjusted basis in may 2024 from the previous month to combat this the monetary authority in most cases the central bank takes the necessary steps to manage the money supply and credit to keep inflation within permissible limits and keep the economy running smoothly theoretically monetarism is a popular theory that explains the relationship between inflation and the money supply of an economy for example following the spanish conquest of the aztec and inca empires massive amounts of gold and silver flowed into the spanish and other european economies since the money supply rapidly increased the value of money fell contributing to rapidly rising prices inflation is measured in a variety of ways depending on the types of goods and services it is the opposite of deflation which indicates a general decline in prices when the inflation rate falls below 0 keep in mind that deflation shouldn t be confused with disinflation which is a related term referring to a slowing down in the positive rate of inflation investopedia julie bang | |
how to protect your finances during inflation | there are a range of measures that individuals can take to protect their finances against inflation for instance one may choose to invest in asset classes that outperform the market during inflationary times this might include commodities like grain beef oil electricity and natural gas commodity prices typically stay one step ahead of product prices and price increases for commodities are often seen as an indicator of inflation to come however commodities can also be volatile easily affected by natural disasters geopolitics or conflict real estate income may also help buffer against inflation as landlords can increase their rent to keep pace with the rise of prices overall the u s government also offers treasury inflation protected securities tips a type of security indexed to inflation to protect against declines in purchasing power types of price indexesdepending upon the selected set of goods and services used multiple types of baskets of goods are calculated and tracked as price indexes the most commonly used price indexes are the consumer price index cpi and the wholesale price index wpi the cpi is a measure that examines the weighted average of prices of a basket of goods and services that are of primary consumer needs they include transportation food and medical care cpi is calculated by taking price changes for each item in the predetermined basket of goods and averaging them based on their relative weight in the whole basket the prices in consideration are the retail prices of each item as available for purchase by the individual citizens cpi can impact the value of one currency in relation to those of other nations changes in the cpi are used to assess price changes associated with the cost of living making it one of the most frequently used statistics for identifying periods of inflation or deflation in the u s the bureau of labor statistics bls reports the cpi on a monthly basis and has calculated it as far back as 1913 the cpi u which was introduced in 1978 represents the buying habits of approximately 88 of the non institutional population of the united states the wpi is another popular measure of inflation it measures and tracks the changes in the price of goods in the stages before the retail level while wpi items vary from one country to another they mostly include items at the producer or wholesale level for example it includes cotton prices for raw cotton cotton yarn cotton gray goods and cotton clothing although many countries and organizations use wpi many other countries including the u s use a similar variant called the producer price index ppi the ppi is a family of indexes that measures the average change in selling prices received by domestic producers of intermediate goods and services over time the ppi measures price changes from the perspective of the seller and differs from the cpi which measures price changes from the perspective of the buyer in all variants the rise in the price of one component say oil may cancel out the price decline in another say wheat to a certain extent overall each index represents the average weighted price change for the given constituents which may apply at the overall economy sector or commodity level the formula for measuring inflationthe above mentioned variants of price indexes can be used to calculate the value of inflation between two particular months or years while a lot of ready made inflation calculators are already available on various financial portals and websites it is always better to be aware of the underlying methodology to ensure accuracy with a clear understanding of the calculations mathematically say you wish to know how the purchasing power of 10 000 changed between january 1975 and january 2024 one can find price index data on various portals in a tabular form from that table pick up the corresponding cpi figures for the given two months for september 1975 it was 52 1 initial cpi value and for january 2024 it was 308 417 final cpi value plugging in the formula yields since you wish to know how much 10 000 from january 1975 would be worth in january 2024 multiply the inflation rate by the amount to get the changed dollar value this means that 10 000 in january 1975 will be worth 59 197 today essentially if you purchased a basket of goods and services as included in the cpi definition worth 10 000 in 1975 the same basket would cost you 59 197 in january 2024 advantages and disadvantages of inflationinflation can be construed as either a good or a bad thing depending upon which side one takes and how rapidly the change occurs individuals with tangible assets like property or stocked commodities priced in their home currency may like to see some inflation as that raises the price of their assets which they can sell at a higher rate inflation often leads to speculation by businesses in risky projects and by individuals who invest in company stocks because they expect better returns than inflation an optimum level of inflation is often promoted to encourage spending to a certain extent instead of saving if the purchasing power of money falls over time there may be a greater incentive to spend now instead of saving and spending later it may increase spending which may boost economic activities in a country a balanced approach is thought to keep the inflation value in an optimum and desirable range buyers of such assets may not be happy with inflation as they will be required to shell out more money people who hold assets valued in their home currency such as cash or bonds may not like inflation as it erodes the real value of their holdings as such investors looking to protect their portfolios from inflation should consider inflation hedged asset classes such as gold commodities and real estate investment trusts reits inflation indexed bonds are another popular option for investors to profit from inflation high and variable rates of inflation can impose major costs on an economy businesses workers and consumers must all account for the effects of generally rising prices in their buying selling and planning decisions this introduces an additional source of uncertainty into the economy because they may guess wrong about the rate of future inflation time and resources expended on researching estimating and adjusting economic behavior are expected to rise to the general level of prices that s opposed to real economic fundamentals which inevitably represent a cost to the economy as a whole even a low stable and easily predictable rate of inflation which some consider otherwise optimal may lead to serious problems in the economy that s because of how where and when the new money enters the economy whenever new money and credit enter the economy it is always in the hands of specific individuals or business firms the process of price level adjustments to the new money supply proceeds as they then spend the new money and it circulates from hand to hand and account to account through the economy inflation does drive up some prices first and drives up other prices later this sequential change in purchasing power and prices known as the cantillon effect means that the process of inflation not only increases the general price level over time but it also distorts relative prices wages and rates of return along the way economists in general understand that distortions of relative prices away from their economic equilibrium are not good for the economy and austrian economists even believe this process to be a major driver of cycles of recession in the economy leads to higher resale value of assetsoptimum levels of inflation encourage spendingbuyers have to pay more for products and servicesimpose higher prices on the economydrives some prices up first and others later | |
how inflation can be controlled | a country s financial regulator shoulders the important responsibility of keeping inflation in check it is done by implementing measures through monetary policy which refers to the actions of a central bank or other committees that determine the size and rate of growth of the money supply in the u s the fed s monetary policy goals include moderate long term interest rates price stability and maximum employment each of these goals is intended to promote a stable financial environment the federal reserve clearly communicates long term inflation goals in order to keep a steady long term rate of inflation which is thought to be beneficial to the economy price stability or a relatively constant level of inflation allows businesses to plan for the future since they know what to expect the fed believes that this will promote maximum employment which is determined by non monetary factors that fluctuate over time and are therefore subject to change for this reason the fed doesn t set a specific goal for maximum employment and it is largely determined by employers assessments maximum employment does not mean zero unemployment as at any given time there is a certain level of volatility as people vacate and start new jobs hyperinflation is often described as a period of inflation of 50 or more per month monetary authorities also take exceptional measures in extreme conditions of the economy for instance following the 2008 financial crisis the u s fed kept the interest rates near zero and pursued a bond buying program called quantitative easing qe some critics of the program alleged it would cause a spike in inflation in the u s dollar but inflation peaked in 2007 and declined steadily over the next eight years there are many complex reasons why qe didn t lead to inflation or hyperinflation though the simplest explanation is that the recession itself was a very prominent deflationary environment and quantitative easing supported its effects consequently u s policymakers have attempted to keep inflation steady at around 2 per year the european central bank ecb has also pursued aggressive quantitative easing to counter deflation in the eurozone and some places have experienced negative interest rates that s due to fears that deflation could take hold in the eurozone and lead to economic stagnation moreover countries that experience higher rates of growth can absorb higher rates of inflation india s target is around 4 with an upper tolerance of 6 and a lower tolerance of 2 while brazil aims for 3 25 with an upper tolerance of 4 75 and a lower tolerance of 1 75 meaning of inflation deflation and disinflationwhile a high inflation rate means that prices are increasing a low inflation rate does not mean that prices are falling counterintuitively when the inflation rate falls prices are still increasing but at a slower rate than before when the inflation rate falls but remains positive this is known as disinflation conversely if the inflation rate becomes negative that means that prices are falling this is known as deflation which can have negative effects on an economy because buying power increases over time consumers have less incentive to spend money in the short term resulting in falling economic activity hedging against inflationstocks are considered to be the best hedge against inflation as the rise in stock prices is inclusive of the effects of inflation since additions to the money supply in virtually all modern economies occur as bank credit injections through the financial system much of the immediate effect on prices happens in financial assets that are priced in their home currency such as stocks special financial instruments exist that one can use to safeguard investments against inflation they include treasury inflation protected securities tips low risk treasury security that is indexed to inflation where the principal amount invested is increased by the percentage of inflation one can also opt for a tips mutual fund or tips based exchange traded fund etf to get access to stocks etfs and other funds that can help avoid the dangers of inflation you ll likely need a brokerage account choosing a stockbroker can be a tedious process due to the variety among them gold is also considered to be a hedge against inflation although this doesn t always appear to be the case looking backward examples of inflationsince all world currencies are fiat money the money supply could increase rapidly for political reasons resulting in rapid price level increases the most famous example is the hyperinflation that struck the german weimar republic in the early 1920s the nations that were victorious in world war i demanded reparations from germany which could not be paid in german paper currency as this was of suspect value due to government borrowing germany attempted to print paper notes buy foreign currency with them and use that to pay their debts this policy led to the rapid devaluation of the german mark along with the hyperinflation that accompanied the development german consumers responded to the cycle by trying to spend their money as fast as possible understanding that it would be worth less and less the longer they waited more money flooded the economy and its value plummeted to the point where people would paper their walls with practically worthless bills similar situations occurred in peru in 1990 and in zimbabwe between 2007 and 2008 | |
what causes inflation | there are three main causes of inflation demand pull inflation cost push inflation and built in inflation | |
is inflation good or bad | too much inflation is generally considered bad for an economy while too little inflation is also considered harmful many economists advocate for a middle ground of low to moderate inflation of around 2 per year generally speaking higher inflation harms savers because it erodes the purchasing power of the money they have saved however it can benefit borrowers because the inflation adjusted value of their outstanding debts shrinks over time | |
what are the effects of inflation | inflation can affect the economy in several ways for example if inflation causes a nation s currency to decline this can benefit exporters by making their goods more affordable when priced in the currency of foreign nations on the other hand this could harm importers by making foreign made goods more expensive higher inflation can also encourage spending as consumers will aim to purchase goods quickly before their prices rise further savers on the other hand could see the real value of their savings erode limiting their ability to spend or invest in the future | |
why is inflation so high as of 2024 | in 2022 inflation rates around the world rose to their highest levels since the early 1980s while there is no single reason for this rapid rise in global prices a series of events worked together to boost inflation to such high levels the covid 19 pandemic led to lockdowns and other restrictions that greatly disrupted global supply chains from factory closures to bottlenecks at maritime ports governments also issued stimulus checks and increased unemployment benefits to counter the financial impact on individuals and small businesses when vaccines became widespread and the economy bounced back demand fueled in part by stimulus money and low interest rates quickly outpaced supply which still struggled to get back to pre covid levels russia s unprovoked invasion of ukraine in early 2022 led to economic sanctions and trade restrictions on russia limiting the world s supply of oil and gas since russia is a large producer of fossil fuels food prices also rose as ukraine s large grain harvests could not be exported as fuel and food prices rose it led to similar increases down the value chains the fed raised interest rates to combat the high inflation which significantly came down in 2023 though it remains above pre pandemic levels the bottom lineinflation is a rise in prices which results in the decline of purchasing power over time inflation is natural and the u s government targets an annual inflation rate of 2 however inflation can be dangerous when it increases too much too fast inflation makes items more expensive especially if wages do not rise by the same levels of inflation additionally inflation erodes the value of some assets especially cash governments and central banks seek to control inflation through monetary policy | |
what is inflation | inflation is a gradual loss of purchasing power reflected in a broad rise in prices for goods and services over time the inflation rate is calculated as the average price increase of a basket of selected goods and services over one year high inflation means that prices are increasing quickly with low inflation meaning that prices are increasing more slowly inflation can be contrasted with deflation which occurs when prices decline and purchasing power increases | |
what causes inflation | an increase in the supply of money is the root of inflation though this can play out through different mechanisms in the economy a country s money supply can be increased by the monetary authorities by other causes of inflation include supply bottlenecks and shortages of key goods which can push prices to rise | |
when inflation occurs money loses its purchasing power this can occur across any sector or throughout an entire economy when inflation takes hold the expectation of inflation itself can further sustain the devaluation of money workers may demand higher wages and businesses may charge higher prices in anticipation of sustained inflation this in turn reinforces the factors that push prices up | inflation can be classified into three types demand pull inflation cost push inflation and built in inflation melissa ling copyright investopedia 2019types of inflationdemand pull inflation occurs when an increase in the supply of money and credit stimulates the overall demand for goods and services to increase more rapidly than the economy s production capacity this increases demand and leads to price rises | |
when people have more money it leads to positive consumer sentiment this in turn leads to higher spending which pulls prices higher it creates a demand supply gap with higher demand and less flexible supply which results in higher prices | cost push inflation is a result of the increase in prices working through the production process inputs when additions to the supply of money and credit are channeled into a commodity or other asset markets costs for all kinds of intermediate goods rise this is especially evident when there s a negative economic shock to the supply of key commodities these developments lead to higher costs for the finished product or service and work their way into rising consumer prices for instance when the money supply is expanded it creates a speculative boom in oil prices this means that the cost of energy can rise and contribute to rising consumer prices which is reflected in various measures of inflation built in inflation is related to adaptive expectations or the idea that people expect current inflation rates to continue in the future as the price of goods and services rises people may expect a continuous rise in the future at a similar rate as such workers may demand more costs or wages to maintain their standard of living their increased wages result in a higher cost of goods and services and this wage price spiral continues as one factor induces the other and vice versa | |
how inflation impacts consumers | while it is easy to measure the price changes of individual products over time human needs extend beyond just one or two products individuals need a big and diversified set of products as well as a host of services for living a comfortable life they include commodities like food grains metal fuel utilities like electricity and transportation and services like healthcare entertainment and labor inflation aims to measure the overall impact of price changes for a diversified set of products and services it allows for a single value representation of the increase in the price level of goods and services in an economy over a specified time prices rise which means that one unit of money buys fewer goods and services this loss of purchasing power impacts the cost of living for the common public which ultimately leads to a deceleration in economic growth the consensus view among economists is that sustained inflation occurs when a nation s money supply growth outpaces economic growth the increase in the consumer price index for all urban consumers cpi u over the 12 months ending may 2024 on an unadjusted basis prices were flat on a seasonally adjusted basis in may 2024 from the previous month to combat this the monetary authority in most cases the central bank takes the necessary steps to manage the money supply and credit to keep inflation within permissible limits and keep the economy running smoothly theoretically monetarism is a popular theory that explains the relationship between inflation and the money supply of an economy for example following the spanish conquest of the aztec and inca empires massive amounts of gold and silver flowed into the spanish and other european economies since the money supply rapidly increased the value of money fell contributing to rapidly rising prices inflation is measured in a variety of ways depending on the types of goods and services it is the opposite of deflation which indicates a general decline in prices when the inflation rate falls below 0 keep in mind that deflation shouldn t be confused with disinflation which is a related term referring to a slowing down in the positive rate of inflation investopedia julie bang | |
how to protect your finances during inflation | there are a range of measures that individuals can take to protect their finances against inflation for instance one may choose to invest in asset classes that outperform the market during inflationary times this might include commodities like grain beef oil electricity and natural gas commodity prices typically stay one step ahead of product prices and price increases for commodities are often seen as an indicator of inflation to come however commodities can also be volatile easily affected by natural disasters geopolitics or conflict real estate income may also help buffer against inflation as landlords can increase their rent to keep pace with the rise of prices overall the u s government also offers treasury inflation protected securities tips a type of security indexed to inflation to protect against declines in purchasing power types of price indexesdepending upon the selected set of goods and services used multiple types of baskets of goods are calculated and tracked as price indexes the most commonly used price indexes are the consumer price index cpi and the wholesale price index wpi the cpi is a measure that examines the weighted average of prices of a basket of goods and services that are of primary consumer needs they include transportation food and medical care cpi is calculated by taking price changes for each item in the predetermined basket of goods and averaging them based on their relative weight in the whole basket the prices in consideration are the retail prices of each item as available for purchase by the individual citizens cpi can impact the value of one currency in relation to those of other nations changes in the cpi are used to assess price changes associated with the cost of living making it one of the most frequently used statistics for identifying periods of inflation or deflation in the u s the bureau of labor statistics bls reports the cpi on a monthly basis and has calculated it as far back as 1913 the cpi u which was introduced in 1978 represents the buying habits of approximately 88 of the non institutional population of the united states the wpi is another popular measure of inflation it measures and tracks the changes in the price of goods in the stages before the retail level while wpi items vary from one country to another they mostly include items at the producer or wholesale level for example it includes cotton prices for raw cotton cotton yarn cotton gray goods and cotton clothing although many countries and organizations use wpi many other countries including the u s use a similar variant called the producer price index ppi the ppi is a family of indexes that measures the average change in selling prices received by domestic producers of intermediate goods and services over time the ppi measures price changes from the perspective of the seller and differs from the cpi which measures price changes from the perspective of the buyer in all variants the rise in the price of one component say oil may cancel out the price decline in another say wheat to a certain extent overall each index represents the average weighted price change for the given constituents which may apply at the overall economy sector or commodity level the formula for measuring inflationthe above mentioned variants of price indexes can be used to calculate the value of inflation between two particular months or years while a lot of ready made inflation calculators are already available on various financial portals and websites it is always better to be aware of the underlying methodology to ensure accuracy with a clear understanding of the calculations mathematically say you wish to know how the purchasing power of 10 000 changed between january 1975 and january 2024 one can find price index data on various portals in a tabular form from that table pick up the corresponding cpi figures for the given two months for september 1975 it was 52 1 initial cpi value and for january 2024 it was 308 417 final cpi value plugging in the formula yields since you wish to know how much 10 000 from january 1975 would be worth in january 2024 multiply the inflation rate by the amount to get the changed dollar value this means that 10 000 in january 1975 will be worth 59 197 today essentially if you purchased a basket of goods and services as included in the cpi definition worth 10 000 in 1975 the same basket would cost you 59 197 in january 2024 advantages and disadvantages of inflationinflation can be construed as either a good or a bad thing depending upon which side one takes and how rapidly the change occurs individuals with tangible assets like property or stocked commodities priced in their home currency may like to see some inflation as that raises the price of their assets which they can sell at a higher rate inflation often leads to speculation by businesses in risky projects and by individuals who invest in company stocks because they expect better returns than inflation an optimum level of inflation is often promoted to encourage spending to a certain extent instead of saving if the purchasing power of money falls over time there may be a greater incentive to spend now instead of saving and spending later it may increase spending which may boost economic activities in a country a balanced approach is thought to keep the inflation value in an optimum and desirable range buyers of such assets may not be happy with inflation as they will be required to shell out more money people who hold assets valued in their home currency such as cash or bonds may not like inflation as it erodes the real value of their holdings as such investors looking to protect their portfolios from inflation should consider inflation hedged asset classes such as gold commodities and real estate investment trusts reits inflation indexed bonds are another popular option for investors to profit from inflation high and variable rates of inflation can impose major costs on an economy businesses workers and consumers must all account for the effects of generally rising prices in their buying selling and planning decisions this introduces an additional source of uncertainty into the economy because they may guess wrong about the rate of future inflation time and resources expended on researching estimating and adjusting economic behavior are expected to rise to the general level of prices that s opposed to real economic fundamentals which inevitably represent a cost to the economy as a whole even a low stable and easily predictable rate of inflation which some consider otherwise optimal may lead to serious problems in the economy that s because of how where and when the new money enters the economy whenever new money and credit enter the economy it is always in the hands of specific individuals or business firms the process of price level adjustments to the new money supply proceeds as they then spend the new money and it circulates from hand to hand and account to account through the economy inflation does drive up some prices first and drives up other prices later this sequential change in purchasing power and prices known as the cantillon effect means that the process of inflation not only increases the general price level over time but it also distorts relative prices wages and rates of return along the way economists in general understand that distortions of relative prices away from their economic equilibrium are not good for the economy and austrian economists even believe this process to be a major driver of cycles of recession in the economy leads to higher resale value of assetsoptimum levels of inflation encourage spendingbuyers have to pay more for products and servicesimpose higher prices on the economydrives some prices up first and others later | |
how inflation can be controlled | a country s financial regulator shoulders the important responsibility of keeping inflation in check it is done by implementing measures through monetary policy which refers to the actions of a central bank or other committees that determine the size and rate of growth of the money supply in the u s the fed s monetary policy goals include moderate long term interest rates price stability and maximum employment each of these goals is intended to promote a stable financial environment the federal reserve clearly communicates long term inflation goals in order to keep a steady long term rate of inflation which is thought to be beneficial to the economy price stability or a relatively constant level of inflation allows businesses to plan for the future since they know what to expect the fed believes that this will promote maximum employment which is determined by non monetary factors that fluctuate over time and are therefore subject to change for this reason the fed doesn t set a specific goal for maximum employment and it is largely determined by employers assessments maximum employment does not mean zero unemployment as at any given time there is a certain level of volatility as people vacate and start new jobs hyperinflation is often described as a period of inflation of 50 or more per month monetary authorities also take exceptional measures in extreme conditions of the economy for instance following the 2008 financial crisis the u s fed kept the interest rates near zero and pursued a bond buying program called quantitative easing qe some critics of the program alleged it would cause a spike in inflation in the u s dollar but inflation peaked in 2007 and declined steadily over the next eight years there are many complex reasons why qe didn t lead to inflation or hyperinflation though the simplest explanation is that the recession itself was a very prominent deflationary environment and quantitative easing supported its effects consequently u s policymakers have attempted to keep inflation steady at around 2 per year the european central bank ecb has also pursued aggressive quantitative easing to counter deflation in the eurozone and some places have experienced negative interest rates that s due to fears that deflation could take hold in the eurozone and lead to economic stagnation moreover countries that experience higher rates of growth can absorb higher rates of inflation india s target is around 4 with an upper tolerance of 6 and a lower tolerance of 2 while brazil aims for 3 25 with an upper tolerance of 4 75 and a lower tolerance of 1 75 meaning of inflation deflation and disinflationwhile a high inflation rate means that prices are increasing a low inflation rate does not mean that prices are falling counterintuitively when the inflation rate falls prices are still increasing but at a slower rate than before when the inflation rate falls but remains positive this is known as disinflation conversely if the inflation rate becomes negative that means that prices are falling this is known as deflation which can have negative effects on an economy because buying power increases over time consumers have less incentive to spend money in the short term resulting in falling economic activity hedging against inflationstocks are considered to be the best hedge against inflation as the rise in stock prices is inclusive of the effects of inflation since additions to the money supply in virtually all modern economies occur as bank credit injections through the financial system much of the immediate effect on prices happens in financial assets that are priced in their home currency such as stocks special financial instruments exist that one can use to safeguard investments against inflation they include treasury inflation protected securities tips low risk treasury security that is indexed to inflation where the principal amount invested is increased by the percentage of inflation one can also opt for a tips mutual fund or tips based exchange traded fund etf to get access to stocks etfs and other funds that can help avoid the dangers of inflation you ll likely need a brokerage account choosing a stockbroker can be a tedious process due to the variety among them gold is also considered to be a hedge against inflation although this doesn t always appear to be the case looking backward examples of inflationsince all world currencies are fiat money the money supply could increase rapidly for political reasons resulting in rapid price level increases the most famous example is the hyperinflation that struck the german weimar republic in the early 1920s the nations that were victorious in world war i demanded reparations from germany which could not be paid in german paper currency as this was of suspect value due to government borrowing germany attempted to print paper notes buy foreign currency with them and use that to pay their debts this policy led to the rapid devaluation of the german mark along with the hyperinflation that accompanied the development german consumers responded to the cycle by trying to spend their money as fast as possible understanding that it would be worth less and less the longer they waited more money flooded the economy and its value plummeted to the point where people would paper their walls with practically worthless bills similar situations occurred in peru in 1990 and in zimbabwe between 2007 and 2008 | |
what causes inflation | there are three main causes of inflation demand pull inflation cost push inflation and built in inflation | |
is inflation good or bad | too much inflation is generally considered bad for an economy while too little inflation is also considered harmful many economists advocate for a middle ground of low to moderate inflation of around 2 per year generally speaking higher inflation harms savers because it erodes the purchasing power of the money they have saved however it can benefit borrowers because the inflation adjusted value of their outstanding debts shrinks over time | |
what are the effects of inflation | inflation can affect the economy in several ways for example if inflation causes a nation s currency to decline this can benefit exporters by making their goods more affordable when priced in the currency of foreign nations on the other hand this could harm importers by making foreign made goods more expensive higher inflation can also encourage spending as consumers will aim to purchase goods quickly before their prices rise further savers on the other hand could see the real value of their savings erode limiting their ability to spend or invest in the future | |
why is inflation so high as of 2024 | in 2022 inflation rates around the world rose to their highest levels since the early 1980s while there is no single reason for this rapid rise in global prices a series of events worked together to boost inflation to such high levels the covid 19 pandemic led to lockdowns and other restrictions that greatly disrupted global supply chains from factory closures to bottlenecks at maritime ports governments also issued stimulus checks and increased unemployment benefits to counter the financial impact on individuals and small businesses when vaccines became widespread and the economy bounced back demand fueled in part by stimulus money and low interest rates quickly outpaced supply which still struggled to get back to pre covid levels russia s unprovoked invasion of ukraine in early 2022 led to economic sanctions and trade restrictions on russia limiting the world s supply of oil and gas since russia is a large producer of fossil fuels food prices also rose as ukraine s large grain harvests could not be exported as fuel and food prices rose it led to similar increases down the value chains the fed raised interest rates to combat the high inflation which significantly came down in 2023 though it remains above pre pandemic levels the bottom lineinflation is a rise in prices which results in the decline of purchasing power over time inflation is natural and the u s government targets an annual inflation rate of 2 however inflation can be dangerous when it increases too much too fast inflation makes items more expensive especially if wages do not rise by the same levels of inflation additionally inflation erodes the value of some assets especially cash governments and central banks seek to control inflation through monetary policy | |
what is the inflation adjusted return | the inflation adjusted return is the measure of return that takes into account the time period s inflation rate the purpose of the inflation adjusted return metric is to reveal the return on an investment after removing the effects of inflation removing the effects of inflation from the return of an investment allows the investor to see the true earning potential of the security without external economic forces the inflation adjusted return is also known as the real rate of return or required rate of return adjusted for inflation 1understanding inflation adjusted returnthe inflation adjusted return is useful for comparing investments especially between different countries that s because each country s inflation rate is accounted for in the return in this scenario without adjusting for inflation across international borders an investor may get vastly different results when analyzing an investment s performance the inflation adjusted return serves as a realistic measure of an investment s return when compared to other investments for example assume a bond investment is reported to have earned 2 in the previous year this appears like a gain however suppose that inflation last year was 2 5 essentially this means the investment did not keep up with inflation and it effectively lost 0 5 assume also a stock that returned 12 last year when inflation was running at 3 an approximate estimate of the real rate of return is 9 or the 12 reported return less the inflation amount 3 calculating the inflation adjusted returncalculating the inflation adjusted return requires three basic steps first the return on the investment must be calculated second the inflation for the period must be calculated and third the inflation amount must be geometrically backed out of the investment s return inflation and returns compound meaning if you don t use the correct formula and simply subtract the rate of inflation from the nominal return the result you get won t be fully accurate example of inflation adjusted returnassume an investor purchases a stock on january 1 of a given year for 75 000 at the end of the year on december 31 the investor sells the stock for 90 000 during the course of the year the investor received 2 500 in dividends at the beginning of the year the consumer price index cpi was at 700 on december 31 the cpi was at a level of 721 the first step is to calculate the investment s return using the following formula the second step is to calculate the level of inflation over the period using the following formula the third step is to geometrically back out the inflation amount using the following formula since inflation and returns compound it is necessary to use the formula in step three an investor who simply takes a linear estimate by subtracting 3 from 23 3 would arrive at an inflation adjusted return of 20 3 which in this example is 0 6 too high nominal return vs inflation adjusted returnusing inflation adjusted returns is often a good idea because they put things into a very real world perspective focusing on how investments are doing over the long term can often present a better picture when it comes to its past performance rather than a day to day weekly or even monthly glance but there may be a good reason why nominal returns work over those adjusted for inflation nominal returns are generated before any taxes investment fees or inflation since we live in a here and now world these nominal prices and returns are what we deal with immediately to move forward so most people will want to get an idea of how the high and low price of an investment is relative to its future prospects rather than its past performance in short how the price fared when adjusted for inflation five years ago won t necessarily matter when an investor buys it tomorrow | |
what is an example of inflation adjustment | inflation adjustment means removing the effect of price inflation from data for example if a stock rose 23 in a year that inflation was running at 3 we could conclude more or less that the actual return accounting for the increased cost of living was about 20 | |
why is inflation adjustment important | prices rise and that affects purchasing power for example 50 in april 2013 has the same buying power as 65 23 in april 2023 the same applies to money invested a return on a 5 000 investment may be advertised as 70 over the course of 10 years however in reality if you account for inflation the actual return or profit you make is lower 2 | |
what s the best measure of inflation | in the u s the consumer price index cpi which is produced by the bureau of labor statistics bls is the most widely used measure of inflation it influences government policy and the cost of borrowing money however like other measures it isn t perfect and won t reflect changing living costs for all the bottom lineinflation is part of life costs rise and erode among other things the value of investments if your investment rose 12 in a given year but the cost of living went up 4 then your actual return isn t going to be 12 that s why many investors look at the inflation adjusted return this measure takes the nominal return and deducts inflation to reveal the real return of an investment the inflation adjusted return allows us to see the true earning potential of a security without external economic forces and it can also be particularly useful when comparing investments between different countries each of which will likely have different levels of inflation | |
what is an inflation hedge | an inflation hedge is an investment that is considered to protect the decreased purchasing power of a currency that results from the loss of its value due to rising prices either macro economically or due to inflation it typically involves investing in an asset that is expected to maintain or increase its value over a specified period of time alternatively the hedge could involve taking a higher position in assets which may decrease in value less rapidly than the value of the currency | |
how inflation hedging works | inflation hedging can help protect the value of an investment certain investments might seem to provide a decent return but when inflation is factored in they can be sold at a loss for example if you invest in a stock that gives a 5 return but inflation is 6 you are losing that 1 assets that are considered an inflation hedge could be self fulfilling investors flock to them which keeps their values high even though the intrinsic value may be much lower gold is widely considered an inflationary hedge because its price in u s dollars is variable for example if the dollar loses value from the effects of inflation gold tends to become more expensive so an owner of gold is protected or hedged against a falling dollar because as inflation rises and erodes the value of the dollar the cost of every ounce of gold in dollars will rise as a result so the investor is compensated for this inflation with more dollars for each ounce of gold a real world example of inflation hedgingcompanies sometimes engage in inflation hedging to keep their operating costs low one of the most famous examples is delta air lines purchasing an oil refinery from conocophillips in 2012 to offset the risk of higher jet fuel prices to the extent that airlines try to hedge their fuel costs they typically do so in the crude oil market delta felt they could produce jet fuel themselves at a lower cost than buying it on the market and in this way directly hedged against jet fuel price inflation at the time delta estimated that it would reduce its annual fuel expense by 300 million limitations of inflation hedginginflation hedging has its limits and at times can be volatile for example delta has not consistently made money from its refinery in the years since it was purchased limiting the effectiveness of its inflation hedge the arguments for and against investing in commodities as an inflation hedge are usually centered around variables such as global population growth technological innovation production spikes and outages emerging market political turmoil chinese economic growth and global infrastructure spending these continually changing factors play a role in the effectiveness of inflation hedging | |
what is an inflation swap | an inflation swap is a contract used to transfer inflation risk from one party to another through an exchange of fixed cash flows in an inflation swap one party pays a fixed rate cash flow on a notional principal amount while the other party pays a floating rate linked to an inflation index such as the consumer price index cpi the party paying the floating rate pays the inflation adjusted rate multiplied by the notional principal amount usually the principal does not change hands each cash flow comprises one leg of the swap | |
how an inflation swap works | inflation swaps are used by financial professionals to mitigate hedge the risk of inflation and to use the price fluctuations to their advantage many types of institutions find inflation swaps to be valuable tools payers of inflation are typically institutions that receive inflation cash flows as their core line of business a good example might be a utility company because its income is linked either explicitly or implicitly to inflation one party to an inflation swap will receive a variable floating payment linked to an inflation rate and pay an amount based on a fixed rate of interest while the other party will pay that inflation rate linked payment and receive the fixed interest rate payment notional amounts are used to calculate the payment streams zero coupon swaps are most common where the cash flows are swapped only at maturity as with other swaps an inflation swap initially values at par or face value as interest and inflation rates change the value of the swap s outstanding floating payments will change to be either positive or negative at predetermined times the market value of the swap is calculated a counterparty will post collateral to the other party and vice versa depending on the value of the swap benefits of inflation swapsthe advantage of an inflation swap is that it provides an analyst with a fairly accurate estimation of what the market considers to be the break even inflation rate conceptually it is very similar to the way that a market sets the price for any commodity namely the agreement between a buyer and a seller between demand and supply to transact at a specified rate in this case the specified rate is the expected rate of inflation simply put the two parties to the swap come to an agreement based on their respective takes on what the inflation rate is likely to be for the period of time in question as with interest rate swaps the parties exchange cash flows based on a notional principal amount this amount is not actually exchanged but instead of hedging against or speculating on interest rate risk their focus is solely on the inflation rate inflation swap examplean example of an inflation swap would be an investor purchasing commercial paper at the same time the investor enters into an inflation swap contract receiving a fixed rate and paying a floating rate linked to inflation by entering into an inflation swap the investor effectively turns the inflation component of the commercial paper from floating to fixed the commercial paper gives the investor real libor plus credit spread and a floating inflation rate which the investor exchanges for a fixed rate with a counterparty | |
what is an inflationary gap | an inflationary gap measures the difference between the current level of real gross domestic product gdp and the gdp that would exist if an economy was operating at full employment understanding an inflationary gapan inflationary gap exists when the demand for goods and services exceeds production due to higher levels of employment increased trade activities or elevated government expenditure the real gdp can exceed the potential gdp resulting in an inflationary gap inflationary gap actual gdp anticipated gdp begin aligned text inflationary gap text actual gdp text anticipated gdp end aligned inflationary gap actual gdp anticipated gdp the inflationary gap represents the point in the business cycle when the economy expands as consumers purchase more goods and services as demand increases but production lags prices rise to restore market equilibrium the real gdp must be higher than the potential gdp for the gap to be considered inflationary when the potential gdp is higher than the real gdp the gap is instead referred to as a deflationary gap calculating real gross domestic product gdp gdp measures the monetary value of final goods and services produced in a given period and bought by the final user within an economy gdp is composed of goods and services for sale in the market and includes some nonmarket output such as defense or education services provided by the government 1according to macroeconomic theory the goods market determines the real gdp shown in the following relationship to calculate real gdp first compute the nominal gdp y c i g nxwhere y nominal gdpc consumption expenditurei investmentg government expenditurenx net exports begin aligned text y text c text i text g text nx textbf where text y text nominal gdp text c text consumption expenditure text i text investment text g text government expenditure text nx text net exports end aligned y c i g nxwhere y nominal gdpc consumption expenditurei investmentg government expenditurenx net exports then the real gdp y d where d is the gdp deflator which takes inflation into effect over time an increase in consumption expenditure investments government expenditure or net exports causes real gdp to rise in the short run real gdp provides a measure of economic growth while compensating for the effects of inflation or deflation this accounts for the difference between actual economic growth and a simple shift in the prices of goods or services within the economy fiscal and monetary policy to manage the inflationary gapa government may use fiscal policy to help reduce an inflationary gap by decreasing the number of funds circulating in the economy this is accomplished through reductions in government spending tax increases bond and securities issues and transfer payment reductions these adjustments to the fiscal conditions within the economy can restore economic equilibrium as the amount of money in circulation decreases the overall demand for goods and services declines reducing inflation central banks also have tools at their disposal to combat inflationary activity when the federal reserve fed raises interest rates borrowing funds is more expensive tight monetary policy can lower the money available to most consumers triggering less demand and inflation retreats once equilibrium is reached the fed or other central bank can shift interest rates accordingly | |
how do you identify an inflationary gap | an inflationary gap is a difference between the full employment gross domestic product and the actual reported gdp number it represents the extra output as measured by gdp between what it would be under the natural rate of unemployment and the reported gdp number | |
what is an inflection point | an inflection point is an event that results in a significant change in the progress of a company industry sector economy or geopolitical situation and can be considered a turning point after which a dramatic change with either positive or negative results is expected to result companies industries sectors and economies are dynamic and constantly evolving inflection points are more significant than the small day to day progress typically made and the effects of the change are often well known and widespread understanding an inflection pointbased on mathematical charting models the inflection point is where the direction of a curve changes in response to an event to qualify the shift must be noticeable or decisive and attributed to a particular cause this principle can be applied to a variety of economic business and financial information such as shifts in the gross domestic product gdp or changes in security prices but it is not used in reference to normal market fluctuations that are not the result of an event andy grove intel s co founder described a strategic inflection point as an event that changes the way we think and act 1inflection points can be a result of action taken by a company or through actions taken by another entity that has a direct impact on the company additionally inflection points may be caused by an unintentional action or an unforeseen event special considerationsregulatory changes for instance could lead to an inflection point for a corporation that was previously held back by regulatory compliance issues inflection points in technology include the advent of the internet and smartphones politically an inflection point can be illustrated by the fall of the berlin wall or the fall of communism in poland and other eastern bloc countries certain unforeseen events can include major economic downturns such as the financial crisis of 2008 or natural disasters that affect a particular business or industry in a meaningful way in this regard an inflection point may not be identifiable until after the event has occurred and a change in direction has been subsequently noted real world example | |
when an inflection point is identified it is often a sign that the affected industry must make certain fundamental changes in order to continue to operate for example with the introduction of the smartphone other mobile technology manufacturers had to adapt to the changing market conditions in order to remain successful | palm inc the manufacturer of the palm pilot personal organizer attempted to adjust to changing market conditions through the release of the palm treo smartphone but it was ultimately unable to compete with stronger industry competitors such as the blackberry and the iphone this competitive pressure resulted in a significant loss of stock value in 2010 hp inc announced its acquisition of palm which included an offer that amounted to approximately 5 70 per common share of palm stock 2as of q2 2021 apple s global market share of the mobile phone market is 15 behind xiaomi 16 and samsung 18 3the change in the mobile phone market towards smartphones not only impacted palm but most of the large mobile phone companies at the time of the iphone s release this includes nokia and motorola at the start of the 2000s nokia had a 30 6 market share of the mobile phone market the dominant company in the industry after not being able to compete with the emergence of smartphones nokia sold its mobile phone business to microsoft in 2013 microsoft couldn t figure out a way to reboot the company and sold it in 2016 45the company still makes mobile phones catering to the mid lower price point but is just a shadow of its former self | |
what is a point of inflection | a point of inflection is the location where a curve changes from sloping up or down to sloping down or up also known as concave upward or concave downward points of inflection are studied in calculus and geometry in business the point of inflection is the turning point of a business due to a significant change this turning point can be positive or negative | |
what does inflection point mean in common usage | in common usage an inflection point is simply the point at which a significant change occurs the change may be a positive one or negative one depending on how the inflection point impacts the subject at hand | |
what is an inflection point in calculus | in calculus the inflection point is where a graph s concavity changes from either up to down or down to up this change may be slow or dramatic but it is regarded as the point where the slope starts to change | |
what is the information coefficient ic | the information coefficient ic is a measure used to evaluate the skill of an investment analyst or an active portfolio manager the information coefficient shows how closely the analyst s financial forecasts match actual financial results the ic can range from 1 0 to 1 0 with 1 indicating the analyst s forecasts bear no relation to the actual results and 1 indicating that the analyst s forecasts perfectly matched actual results the formula for the ic is ic 2 proportion correct 1 where proportion correct proportion of predictions made correctly by the analyst begin aligned text ic 2 times text proportion correct 1 textbf where text proportion correct text proportion of predictions made text correctly by the analyst end aligned ic 2 proportion correct 1where proportion correct proportion of predictions madecorrectly by the analyst explaining the information coefficientthe information coefficient describes the correlation between predicted and actual stock returns sometimes used to measure the contribution of a financial analyst an ic of 1 0 indicates a perfect linear relationship between predicted and actual returns while an ic of 0 0 indicates no linear relationship an ic of 1 0 indicates that the analyst always fails at making a correct prediction an information coefficient ic score near 1 0 indicates that the analyst has great skill in forecasting but in reality if the definition of correct is that the analyst s prediction matched the direction up or down of actual results then the odds of getting the forecast right are 50 50 so even an analyst with no skill whatsoever could be expected to have an ic of around 0 meaning that half of the forecasts were right and half were wrong a score close to 0 reveals that the analyst s forecasting skills are no better than results that could be achieved by chance suggesting that ics approaching 1 are rare the ic is not to be confused with the information ratio ir the ir is a measure of an investment manager s skill comparing a manager s excess returns to the amount of risk taken the ic and the ir are both components of the fundamental law of active management which states that a manager s performance ir depends on skill level ic and its breadth or how often it is used example of the information coefficientas a hypothetical example if an investment analyst made two predictions and got two right the information coefficient would be ic 2 1 0 1 1 0 begin aligned text ic 2 times 1 0 1 1 0 end aligned ic 2 1 0 1 1 0 if an analyst s predictions were only half of the time right then ic 2 0 5 1 0 0 begin aligned text ic 2 times 0 5 1 0 0 end aligned ic 2 0 5 1 0 0 if however none of the predictions were right then ic 2 0 0 1 1 0 begin aligned text ic 2 times 0 0 1 1 0 end aligned ic 2 0 0 1 1 0 limitations of the information coefficientthe ic is only meaningful for an analyst who makes a large number of predictions this is because if there only a small number of predictions random chance may explain a great deal of the results so if there are only two predictions made and both are right the information coefficient is 1 0 if however the ic is till at or close to 1 0 after several dozen predictions have been made then it is far more attributable to skill than to chance | |
what is the information ratio ir | the information ratio ir is a measurement of portfolio returns beyond the returns of a benchmark usually an index compared to the volatility of those returns the benchmark used is typically an index that represents the market or a particular sector or industry the ir is often used as a measure of a portfolio manager s level of skill and ability to generate excess returns relative to a benchmark but it also attempts to identify the consistency of the performance by incorporating a tracking error or standard deviation component into the calculation the tracking error identifies the level of consistency in which a portfolio tracks the performance of an index a low tracking error means less volatility in tracking the benchmark and a lower likelihood of incurring costs from a volatile performance a high tracking error means that the portfolio returns are more volatile over time and not as consistent with the benchmark s performance formula and calculation of the information ratio ir although compared funds may be different in nature the ir standardizes the returns by dividing the difference in their performances known as their expected active return by their tracking error ir portfolio return benchmark return tracking error where ir information ratio portfolio return portfolio return for period benchmark return return on fund used as benchmark tracking error standard deviation of difference between portfolio and benchmark returns begin aligned text ir frac text portfolio return text benchmark return text tracking error textbf where text ir text information ratio text portfolio return text portfolio return for period text benchmark return text return on fund used as benchmark text tracking error text standard deviation of difference text between portfolio and benchmark returns end aligned ir tracking errorportfolio return benchmark return where ir information ratioportfolio return portfolio return for periodbenchmark return return on fund used as benchmarktracking error standard deviation of differencebetween portfolio and benchmark returns to calculate ir subtract the total of the portfolio return for a given period from the total return of the tracked benchmark index divide the result by the tracking error the tracking error can be calculated by taking the standard deviation of the difference between the portfolio returns and the index returns for ease calculate the standard deviation using a financial calculator or excel | |
what the ir can tell you | the information ratio identifies how much a fund has exceeded a benchmark higher information ratios indicate a desired level of consistency whereas low information ratios indicate the opposite many investors use the information ratio when selecting exchange traded funds etfs or mutual funds based on their preferred risk profiles of course past performance is not an indicator of future results but the ir is used to determine whether a portfolio is exceeding a benchmark index fund the tracking error is often calculated by using the standard deviation of the difference in returns between a portfolio and the benchmark index standard deviation helps to measure the level of risk or volatility associated with an investment a high standard deviation means there is more volatility and less consistency or predictability the information ratio helps to determine how much and how often a portfolio trades in excess of its benchmark but factors in the risk that comes with achieving the excess returns with the fees being charged by active fund managers more investors are turning to passively managed funds that track benchmark indexes like the s p 500 some investors are paying 0 5 to 2 annually for an actively managed fund by a fund manager it s important to determine whether the fund is beating a similar benchmark index on a consistent basis the ir calculation can help provide a quantitative result of how well your fund is being managed the difference between the ir and the sharpe ratiolike the information ratio the sharpe ratio is an indicator of risk adjusted returns however the sharpe ratio is calculated as the difference between an asset s return and the risk free rate of return divided by the standard deviation of the asset s returns the risk free rate of return would be consistent with the rate of return from a risk free investment like a u s treasury security if a particular treasury security paid a 3 annual yield the sharpe ratio would employ 3 as the risk free rate for comparative purposes the ir on the other hand measures the risk adjusted return in relation to a benchmark such as the standard poor s 500 index s p 500 instead of a risk free asset the ir also measures the consistency of an investment s performance however the sharpe ratio measures how much an investment portfolio outperformed the risk free rate of return on a risk adjusted basis both financial metrics have their usefulness but the index comparison makes the ir more appealing to investors since index funds are typically the benchmark used in comparing investment performance and the market return is usually higher than the risk free return as with all financial ratios using one to determine the suitability of an investment is not recommended utilizing multiple financial metrics to assess an investment is a more prudent approach limitations of using the irany ratio that measures risk adjusted returns can have varied interpretations depending on the investor each investor has different risk tolerance levels and depending on factors such as age financial situation and income might have different investment goals as a result the ir is interpreted differently by each investor depending on their needs goals and risk tolerance levels also comparing multiple funds against a benchmark is difficult to interpret because the funds might have different securities asset allocations for each sector and entry points in their investments as with any single financial ratio it s best to look at additional types of ratios and other financial metrics to make a more comprehensive and informed investment decision example of how to use the ira high ir can be achieved by having a high rate of return in the portfolio as compared to a lower return in the index as well as a low tracking error a high ratio means that on a risk adjusted basis a manager has produced better returns consistently compared to the benchmark index for example say you re comparing two different fund managers fund manager a s ir equals 1 81 or 13 1 5 8 fund manager b s ir equals 2 11 or 8 1 5 4 5 although manager b had lower returns than manager a their portfolio had a better ir because in part it has a lower standard deviation or tracking error which means less risk and more consistency of the portfolio s performance relative to the benchmark index | |
what is a good information ratio range | a good information ratio starts at 0 5 information ratios above signify progressively better results information ratios of 1 and above would be considered excellent | |
what is the difference between information ratio and tracking error | an information ratio will inform an investor if the portfolio manager or investment is generating enough returns in comparison to the risk taken a tracking error will inform how much the investment s returns deviate from the benchmark can an information ratio be negative yes an information ratio can be negative if the investment is returning below the benchmark then the information ratio will be negative the bottom linethe information ratio can be used to determine the effectiveness of a portfolio manager and whether the manager can continuously outperform a specific benchmark this can help investors choose where to allocate their capital specifically in deciding whether it is better to invest in a specific actively managed fund or if a passively managed fund would be a better option particularly since passively managed funds have lower expense ratios | |
what is infrastructure | infrastructure is defined as the basic physical systems of a business region or nation and often involves the production of public goods or production processes examples of infrastructure include transportation systems communication networks sewage water and school systems 1investments in infrastructure tend to be costly and capital intensive but vital to a region s economic development and prosperity projects related to infrastructure improvements may be funded publicly privately or through public private partnerships investopedia sydney burnsunderstanding infrastructurethe term infrastructure first appeared in the late 1880s derived from french with infra meaning below and structure meaning building 2 infrastructure can mean the foundation upon which the structure of an economy is built infrastructure includes a variety of systems and structures where physical components are required such as the electrical grid across a city state or country while the facilities equipment or similar physical assets like bridges and roads are essential to an economy infrastructure also enables citizens to participate in the social and economic community and provides them with necessities such as food and water because infrastructure often involves the production of either public goods or goods that lend themselves to production it is typical to see public financing control supervision or regulation of infrastructure this usually takes the form of direct government production or production by a closely regulated legally sanctioned entity the first federally funded infrastructure project was the cape henry lighthouse built in 1792 at virginia beach virginia 3sometimes private companies choose to invest in a country s infrastructure development as part of a business expansion effort for example an energy company may build pipelines and railways in a country where it wants to refine petroleum and this investment can benefit both the company and the country individuals may also choose to fund improvements to certain pieces of public infrastructure for example an individual may fund improvements to hospitals schools or local law enforcement efforts types of infrastructureinfrastructure is often categorized as hard or soft hard infrastructure is the tangible physical assembly of structures such as roads bridges tunnels and railways soft infrastructure is the services required to maintain the economic health and social needs of a population hard infrastructure is the physical system needed to run a modern industrialized nation examples include roads highways and bridges as well as the assets required to make them operational such as transit buses vehicles and oil refineries technical systems such as networking equipment and cabling are considered hard infrastructure and provide a critical function to support business operations according to the brookings institution 16 6 million people have jobs in fields directly related to infrastructure from locomotive engineers and electrical power line installers to truck drivers and construction laborers infrastructure jobs account for nearly 11 8 of the nation s workforce 4soft infrastructure represents human capital and institutions necessary to maintain an economy that delivers certain services to the population such as healthcare financial institutions government offices law enforcement and education investments in soft infrastructure target how people thrive and participate in daily life in 2021 president biden s build back better plan targeted soft infrastructure proposals like expansions to medicare and tuition free community college 5maintaining infrastructure | |
how infrastructure is maintained and funded generally depends on who owns it the government owns a lot of infrastructure for transportation water and public education most infrastructure is owned by state and local governments often partially supported through federal subsidies and some infrastructure may be entirely privately owned | additionally public private partnerships exist in maintaining infrastructure in 2004 cintra entered into a 99 year lease with the city of chicago to operate and maintain the chicago skyway bridge as part of the agreement cintra receives all toll and concession revenue generated by the bridge while the city benefited from a 1 82 billion cash infusion and is no longer responsible for maintaining the bridge 6the united states has embarked on many infrastructure plans including the american recovery and reinvestment act of 2009 and in 2015 the 305 billion transportation infrastructure bill 78on november 15 2021 president joe biden signed the infrastructure investment and jobs act which allocates 1 2 trillion to fund the rebuilding of roads bridges water infrastructure internet and more 9the 2021 package also includes new incentives and investment in developing infrastructure components such as 7 5 billion to support electric vehicles and 65 billion to ensure every american has access to reliable high speed internet 10 in 2022 the white house announced that at t comcast verizon spectrum and 16 other providers will offer high speed internet plans of at least 100 megabits per second for no more than 30 per month to eligible low income households citing the new government subsidy established by 2021 legislation 11 | |
what is the digital divide | as highlighted by the covid 19 pandemic many areas within the united states have limited or no internet broadband access creating a digital divide within the country included in the infrastructure investment and jobs act iija of 2021 is funding to ensure every american has access to reliable high speed internet 11 | |
are electric vehicles considered a part of infrastructure | the investment and jobs act iija provides funding to develop the country s ev charging infrastructure and install 500 000 publicly accessible charging stations compatible with all vehicles and technologies by 2030 12 | |
why is infrastructure important to a society | infrastructure powers businesses and connects workers to their jobs and citizens to opportunities for healthcare and education it creates opportunities within communities and an economy needs reliable infrastructure to connect supply chains and move goods and services | |
what is inherent risk | inherent risk is a form of raw risk this type of risk is any that occurs naturally due to a factor other than a failure of internal control in a financial audit inherent risk is most likely to occur when transactions are complex or in situations that require a high degree of judgment in regard to financial estimates this type of risk represents a worst case scenario because all internal controls in place have nonetheless failed examples of inherent risks include disruptions in supply chains unaudited financial statements or even unedited social media posts for businesses investopedia jake shiunderstanding inherent riskthe simple definition of risk is the potential for a bad outcome in the world of finance risk refers to the chance that a venture s end result will be negative or in a loss some of the types of risk include operational risk market risk liquidity risk and inherent risk inherent risk is the natural risk that occurs without any risk management controls | |
when conducting an audit or analyzing a business the auditor or analyst tries to gain an understanding of the nature of the business while examining control risks and inherent risks if inherent and control risks are considered to be high an auditor can set the detection risk to an acceptably low level to keep the overall audit risk at a reasonable level to lower detection risk an auditor will take steps to improve audit procedures through targeted audit selections or increased sample sizes | companies operating in highly regulated sectors such as the financial sector are more likely to have higher inherent risk especially if the company does not have an internal audit department or has an audit department without an oversight committee with a financial background the ultimate risk posed to the company also depends on the financial exposure created by the inherent risk if the process of accounting for the exposure fails inherent risk is highest when management has to use a substantial amount of judgment and approximation in recording a transaction or where complex financial instruments are involved special considerationscomplex financial transactions such as those during the lead up to the financial crisis can be difficult for even the most intelligent financial professionals to understand asset backed securities such as collateralized debt obligations cdos became difficult to account for as tranches of varying qualities were repackaged again and again this complexity may make it difficult for an auditor to make the correct opinion which in turn can lead investors to consider a company to be more financially stable than in actuality inherent risk vs other audit risksinherent risk is one of the risks auditors and analysts must look for when reviewing financial statements but there are other audit risks that auditors must look out for on a regular basis we ve highlighted some of them below control risk is a type of risk that occurs when a financial misstatement results from a lack of proper accounting controls in the firm this means that there aren t enough internal controls or management in place to avoid risk put simply control risk occurs when there is a failure to review financial statements in other cases these precautions may be in place but don t function properly this type of risk can lead to increased lossesdetection risk occurs when auditors simply fail to detect an easy to notice error this may be a result of fraud or other errors detection risk may occur unintentionally in that an auditor may miss an error accidentally in other cases an auditor may misinterpret the figures on the financial statements they re charged with reviewing that it results in one or more errors | |
when an estimation is made it should be disclosed to financial statement users for clarity 1 | examples of inherent riskinherent risk is often present when a company releases forward looking financial statements either to internal investors or the public as a whole forward looking financials by nature rely on management s estimates and value judgments which pose an inherent risk the same applies to accounts that require approximations or value judgments by management fair value accounting estimates are tricky to make and can be highly subjective | |
what are the 3 types of audit risk | there are three main types of audit risk inherent risk control risk and detection risk | |
what is the difference between inherent risk and control risk | inherent risk is an error or omission in a financial statement due to a factor other than a failure of internal control control risk on the other hand refers to the misstatement of financial statements due to sloppy accounting practices can auditors reduce inherent risk if inherent and control risks are considered high an auditor can keep the overall audit risk at a reasonable level by lowering the detection risk this can be achieved by targeted audit selections or increased sample sizes | |
what factors can increase inherent risk | factors that can increase inherent risk include subjective estimates non routine transactions and the use of complex financial instruments generally the more complicated a company s business model and transactions are the higher the inherent risk is the bottom lineinherent risk is not always easy to spot particularly compared to the other main two audit risks and increases substantially in business sectors where transactions are open to a substantial amount of judgment and approximation these risks are important to take into account as they can drastically mislead investors and are generally best combatted by getting several qualified auditors to go over the books | |
what is an inheritance | inheritance refers to the assets that an individual bequeaths to their loved ones after they pass away an inheritance may contain cash investments such as stocks or bonds and other assets such as jewelry automobiles art antiques and real estate a person may name beneficiaries in their will who will receive an inheritance in other cases assets will automatically pass to a spouse or children as heirs those who receive an inheritance may be subject to inheritance taxes where the more distantly related a beneficiary is to the decedent the larger the inheritance tax is likely to be in the united states assets can also be subject to federal and state income tax though life insurance policy death benefits are typically tax free for named beneficiaries | |
how an inheritance works | the value of an inheritance can range from a few thousand dollars to several million dollars in most countries inheritance assets are subject to inheritance taxes where beneficiaries may find themselves saddled with tax liabilities the rates of an inheritance tax sometimes referred to as a death duty or the last twist of the taxman s knife depend on a host of factors including a beneficiary s state of residence the value of the inheritance and the beneficiary s relationship to the decedent currently the six american states that have inheritance taxes are iowa kentucky maryland nebraska new jersey and pennsylvania and in most of these states any assets that are bequeathed to a spouse are exempt from inheritance taxes in some cases children are also exempt or they may face lower rates of taxation 1an inheritance tax differs from an estate tax which is a levy on the transfer of a deceased person s estate but estate taxes do not apply to assets left to a spouse or to federally recognized charities in most cases beneficiaries with no familial ties to the decedent are typically subject to higher inheritance taxes than beneficiaries who are closely related to the decedent consider the following example in nebraska in 2018 a parent grandparent sibling child or other lineal descendants including adopted children paid an inheritance tax of 1 on assets exceeding 40 000 by contrast relatives who were further removed from the decedent paid inheritance taxes of 13 on amounts over 15 000 all other beneficiaries such as friends and far distant relatives paid inheritance taxes at a rate of 18 on assets exceeding 10 000 life insurance is not subject to inheritance taxes if you wish to avoid an inheritance tax consider taking out a life insurance policy with your heirs named as beneficiaries the probate processprobate is the legal process by which a decedent s assets are divided among their heirs and beneficiaries according to their will and state laws if the decedent died with a will that will is reviewed by a probate court which appoints an executor for the decedent s estate the executor is then responsible for dividing the estate among the people named in the will and any creditors any disputes are resolved through probate court a person who dies without a will or with an invalid will is said to have died intestate in this circumstance the probate court will appoint an administrator of the estate to divide the assets according to state laws beneficiaries vs heirsthere is a distinction between a beneficiary and an heir beneficiaries refer to individuals named in a will while heirs refer to people such as a child or a surviving spouse who are entitled to receive a decedent s property by intestate succession this is a set of rules created to sort out inheritance matters in the absence of a will | |
what can you do to avoid inheritance taxes | an inheritance tax is a state tax on the estate of a decedent in most cases inheritance taxes are higher according to the size of the inheritance and the beneficiary s relationship to the deceased you can reduce the inheritance tax burden on your beneficiaries by placing your assets in a trust or by gifting assets to your beneficiaries while they are still living another option is to take out a life insurance policy naming your heirs as beneficiaries these payouts are not subject to inheritance taxes | |
how can you avoid taxes on a 401 k inheritance | if you inherit a 401 k from a spouse the conventional wisdom is to roll the sum into your own individual retirement account ira this allows you to defer taxes until you start taking distributions if you inherit from a parent it s a little more complicated the first step should be to consult the plan documents to determine what options are available most advisors caution against a lump sum distribution which would incur greater taxes than you would otherwise a five or 10 year distribution allows you to spread out the tax burden and allows interest to compound some plans also allow distributions over your calculated life expectancy under very specific conditions can you protect an inheritance from a chapter 13 bankruptcy if you receive an inheritance within 180 days of filing chapter 13 bankruptcy your trustee may require you to pay the sum into your bankruptcy plan it s more complicated for inheritances received more than 180 days after a bankruptcy filing most courts have ruled that these windfalls should be repaid to creditors but some courts have allowed the inheritor to keep the money | |
how do i find out if i have an unclaimed inheritance | according to the u s government the first step to finding unclaimed assets is to check your state s unclaimed money office this is where the state collects records of unpaid wages unclaimed bank accounts and heirs who could not be located if you are uncertain about the contents of a will the first step is to contact the decedent s executor in addition their will should be filed with the local county recorder | |
what is probate | the term probate refers to a legal process in which the validity and authenticity of a will are determined probate also refers to the general administration of a deceased person s will or the estate of a deceased person without a will after an asset holder dies the court appoints an executor named in the will or an administrator if there is no will to administer the process of probate this involves collecting the deceased s assets to pay any liabilities that remain on their estate and to distribute the assets to beneficiaries the bottom lineinheritance planning is an unpleasant but necessary task for those of advancing age while nobody enjoys thinking about their death a well structured estate plan can save your heirs and beneficiaries from a lot of legal unpleasantries moreover it can also ensure that they receive as much money as possible without losing too much value in taxes | |
what is inheritance tax | an inheritance tax is a tax imposed by some states on the recipients of inherited assets in contrast to an estate tax an inheritance tax is paid by the recipient of a bequest rather than the estate of the deceased the inheritance tax is not common in the u s in fact just six states have an inheritance tax as of 2023 the taxation of an inheritance depends on the state in which the deceased lived or owned property the value of the inheritance and the beneficiary s relationship to the decedent 1understanding inheritance taxesthere is no federal inheritance tax in the u s while the u s government taxes large estates directly imposing estate taxes and if relevant income tax on any earnings from the estate it does not impose an inheritance tax on those who receive assets from an estate 2inheritance taxes are collected by six u s states iowa kentucky maryland nebraska new jersey and pennsylvania 3whether an inheritance will be taxed and at what rate depends on its value the relationship of the beneficiary to the person who passed away and the prevailing rules where the decedent the person with the estate lived 4that is inheritance taxes may be assessed by the state or states where the decedent lived or owned property if those states impose an inheritance tax 4 as a beneficiary your state s inheritance tax rule if any doesn t apply in other words if you receive an inheritance from someone who lived in a state with no inheritance tax you won t pay an inheritance tax even if you live in a state with an inheritance tax normally your inheritance must be greater than a certain minimum amount for you to owe taxes on it that means that few people only around 2 typically ever have to pay an inheritance tax 5an inheritance tax is not the same as an estate tax an estate tax is assessed on the estate itself before its assets are distributed while an inheritance tax may be imposed on the beneficiaries of a bequest | |
how inheritance taxes are calculated | an inheritance tax if due is applied only to the portion of an inheritance that exceeds an exemption amount above that threshold tax is usually assessed on a sliding basis rates typically begin in the single digits and rise to between 15 and 18 as an example if a state charges an inheritance tax on bequests larger than 100 000 and you receive 150 000 you could owe taxes on 50 000 say that the tax rate is 10 the calculation for the inheritance tax owed would be bear in mind that both the exemption you receive and the rate you re charged relate to your relationship to the deceased more so than to the value of assets that you inherit 4as a rule the closer your familial relationship to the deceased the higher the exemption and the lower the rate you ll pay surviving spouses are exempt from inheritance tax in all six of the states mentioned above 4domestic partners too are exempt in new jersey 67 descendants are only subject to an inheritance tax in nebraska and pennsylvania 8life insurance payable to a named beneficiary typically is not subject to an inheritance tax it may be subject to an estate tax if the estate or a revocable trust was the beneficiary of the policy 9inheritance tax thresholdsin most states an inheritance tax applies to bequests above a certain amount in a few instances the size of the estate is significant for example there are further exemptions for heirs depending on how closely related they were to the deceased here are the details by state consider giving money gradually while you re alive to recipients instead of a lump sum bequest upon your death with the exception of connecticut states usually don t tax gifts 19inheritance tax vs estate taxinheritance taxes and estate taxes are often lumped together however they are two distinct forms of taxation both levies are based on the fair market value of a deceased person s property usually as of the date of death but an estate tax is levied on the value of the decedent s estate and the estate pays it in contrast an inheritance tax is levied on the value of an inheritance received by the beneficiary and it is the beneficiary who pays it 4the distinction between an estate tax and an inheritance tax with identical rates and exemptions might make no difference to a sole heir but in some rare situations an inheritance could be subject to both estate and inheritance taxes according to the internal revenue service irs federal estate tax returns are only required for estates with values exceeding 13 61 million in 2024 up from 12 92 million in 2023 20 if the estate passes to the spouse of the deceased person no estate tax is assessed 221if a person inherits an estate large enough to trigger the federal estate tax the decedent lived or owned property in a state with an inheritance tax and the bequest is not fully exempt under that state s law the beneficiary faces the federal estate tax as well as a state inheritance tax the estate is taxed before it is distributed and the inheritance is then taxed at the state level heirs may also face a state estate tax as of 2023 12 states and one district still collected estate taxes connecticut district of columbia hawaii illinois maine massachusetts maryland new york oregon minnesota rhode island vermont and washington 4if you live in a state with an estate tax you re more likely to feel its pinch than you are to pay federal estate tax the exemptions for state and district estate taxes are all less than half those of the federal assessment some state estate tax exemptions may be as low as 1 million 4maryland is currently the only state that imposes both an estate tax and an inheritance tax 4avoiding inheritance taxwhile there are a lot of exceptions and exemptions for inheritance taxes especially for spouses and children residents with significant assets in a state with an inheritance tax may still want to minimize the exposure for their heirs one common strategy is to buy a life insurance policy equal to the sum that you wish to bequeath and make the person you want to leave it to the beneficiary of the policy the death benefit from an insurance policy is not subject to inheritance taxes 22you could also put assets in a trust preferably an irrevocable trust this effectively removes them from your estate and their classification as an inheritance upon your death you can set up a schedule for the distribution of the funds when you establish the trust trusts are complicated and they must be set up and worded carefully to comply with state tax laws set up a trust with the help of a trust and estates attorney | |
how much can you inherit without paying taxes | the six u s states with inheritance taxes provide varying exemptions based on the size of the inheritance and the familial relationship of the heir to the deceased the federal estate tax exemption exempts 13 61 million over a lifetime as of 2024 there s no income tax on inheritances | |
what is the federal inheritance tax rate | there is no federal inheritance tax that is a tax on the sum of assets an individual receives from a deceased person however a federal estate tax applies to estates larger than 13 51 million in 2024 the tax is assessed only on the portion of an estate that exceeds that amounts the tax rate applied is based on a sliding scale from 18 to 40 23 | |
do beneficiaries have to pay taxes on inheritance | whether beneficiaries have to pay taxes on inheritance depends on their familial relationship to the deceased and on the state where the decedent lived or owned property only estates or property located in one of six states that impose inheritance taxes may be subject to them surviving spouses are always exempt from inheritance taxes other immediate relatives like the deceased s parents children and siblings are exempt to varying degrees depending on the state inheritance taxes mainly affect more distant relatives and unrelated heirs the bottom lineinheritance taxes only affect bequests made by residents in six states and they mainly apply to distant relatives or those completely unrelated to the deceased spouses are always exempt from paying inheritance tax and immediate family members like children parents are often exempt as well still inheritance taxes can kick in at relatively small inheritance amounts sometimes as little as 500 those considering bequests that could be subject to an inheritance tax might consider estate planning strategies including gifts insurance policies and irrevocable trusts | |
what is an inherited ira | an inherited ira is an account that is opened when an you inherit an ira or employer sponsored retirement plan after the original owner dies the individual inheriting the individual retirement account ira the beneficiary may be anyone a spouse relative unrelated party or entity e g estate or trust rules on how to handle an inherited ira differ for spouses and non spouses however learn more about how inherited iras work | |
how an inherited ira works | an inherited ira is also known as a beneficiary ira many of the top brokers for iras provide support in resolving matters related to the inheritance of ira assets taxation issues and continuation of retirement account status tax laws surrounding inherited iras are quite complicated and they became even more so with the setting every community up for retirement enhancement secure act of 2019 which made some significant changes to the regulations mainly for non spousal heirs 1a beneficiary may open an inherited ira using the proceeds from any type of ira including traditional roth rollover sep and simple iras generally assets held in the deceased individual s ira must be transferred into a new inherited ira in the beneficiary s name this transfer must be made even if a lump sum distribution is planned you cannot make additional contributions to an inherited ira the internal revenue service provides guidelines for inherited ira beneficiaries 1 irs forms 1099 r and 5498 are required for reporting inherited iras and their distributions for tax purposes inherited iras are treated the same whether they are traditional iras or roth iras the tax treatment of withdrawals does vary consistent with the type of ira funded with pre tax dollars like the traditional type or post tax dollars like with the roth inherited iras rules for spousesspouses have more flexibility in how to handle an inherited ira for one they can roll over the ira or a part of the ira into their own existing individual retirement accounts the advantage of this rollover is the ability to defer required minimum distributions rmds of the funds until they reach the age of 73 rmds previously began at 70 but the age was raised to 72 following the december 2019 passage of the setting every community up for retirement enhancement secure act this limit has since been increased again to 73 as part of secure 2 0 act 2they have 60 days from receiving a distribution to roll it over into their own iras as long as the distribution is not a required minimum distribution spousal heirs can also set up a separate inherited ira account as described above how they deal with this ira depends on the age of the deceased account holder if the original owner had already begun receiving rmds at the time of death the spousal beneficiary must continue to receive the distributions as calculated or submit a new schedule based on their own life expectancy if the owner had not yet committed to an rmd schedule or reached their required beginning date rbd the age at which they had to begin rmds the beneficiary of the ira has a five year window to withdraw the funds which would then be subject to income taxes inherited iras rules for non spousesnon spouse beneficiaries may not treat an inherited ira as their own that is they may not make additional contributions to the account nor can they transfer inherited funds into their existing ira account non spouses may not leave assets in the original ira they must set up a new inherited ira account unless they want to distribute the assets immediately via a lump sum payment it is in the realm of distributions that the secure act most significantly affects non spouse inheritors of iras previously these beneficiaries could handle rmds as spousal heirs could specifically they could recalculate them based on their own life expectancy which often significantly decreased the annual amount that had to be withdrawn and the tax due on them in the case of traditional iras 1if you inherit a roth ira you are required to take distributions unlike the original account owners but the funds remain tax free and also free of any early withdrawal penalty even if you re under 59 now the secure act dictates that for accounts inherited after dec 31 2019 non spouse beneficiaries typically must cash out the account within 10 years of the original owner s death some heirs are exempted for beneficiaries in these categories and those who already have inherited iras the old distribution rules and schedules apply there s no particular timetable for the withdrawals you can take the money out in small withdrawals or all at once your options for receiving benefitsira beneficiaries have several options for claiming their inheritance but choices depend on their relationship to the decedent all beneficiaries have the option to receive a lump sum distribution of the funds or disclaim the inheritance depending on the type of account inherited natural beneficiaries may elect to leave the proceeds in the plan spouses have the most options followed by natural non spousal beneficiaries non natural beneficiaries have the fewest options as a spouse inheriting ira funds you have the most options for protecting and receiving your inherited funds you may elect to non spousal beneficiaries include natural persons and non natural persons for non natural persons such as charities businesses trusts and estates funds can be distributed as a lump sum or transferred into an inherited ira in the name of the beneficiary for natural non spousal beneficiaries funds can be frequently asked questions faqs | |
do beneficiaries pay taxes on inherited iras | the recipient of an inherited ira may or may not pay taxes depending on their situation in general if you inherit a roth ira you re free of taxes however if you inherit a traditional ira any amount withdrawn is often subject to taxes on the other hand estates subject to the estate tax may also be allowed an income tax deduction for the estate taxes paid on the ira 3 | |
what happens when you inherit an ira from a parent | if a child is not yet of age a custodian may manage the money in the ira until the child reaches the state s recognized age of adulthood then at that time the child would have complete access to the funds they may choose to withdraw funds from the ira but depending on the type of account they may be subject to taxes on withdrawal | |
how do i avoid paying taxes on an inherited ira | some of the strongest tax avoidance strategies for an inherited ira are executed before the original owner passes away in many cases it s best for the individual to convert a traditional ira to a roth ira to potentially minimize the tax burden especially after their passing in addition individuals inheriting iras can choose to not take non qualifying distributions that would otherwise be taxable the bottom linemany individuals leverage traditional and roth iras to plan for their retirement unfortunately people may pass away before they make it to retirement age or withdraw all funds from their account inherited roth iras often have better tax avoidance capabilities though those inheriting traditional iras will be further constrained in addition traditional iras will have greater rmd requirements | |
what is an initial coin offering ico | an initial coin offering ico is the cryptocurrency industry s equivalent of an initial public offering ipo a company seeking to raise money to create a new blockchain app or service with a cryptocurrency can launch an ico as a way to raise funds interested investors can buy into an initial coin offering to receive a new cryptocurrency issued by the company this token may have some utility related to the product or service that the company is offering or represent a stake in the company or project in many cases icos are security offerings and need to be registered however they may not need to register under certain circumstances rule 504 of regulation d does allow companies to offer and sell up to 10 million in securities in a 12 month period if they have filed form d after first selling their securities coin issuers who sell coins to investors as securities can do so legally if they comply with this rule you can check the sec s edgar database to see if a company has filed its form 1eliana rodgers investopedia | |
when a cryptocurrency project wants to raise money through an ico the project organizers first step is determining how they will structure the coin icos can be structured in a few different ways including | these three different types of icos are illustrated below image by sabrina jiang investopedia 2022alongside structuring the ico the crypto project usually creates a pitchbook called a white paper in the crypto industry that it makes available to potential investors via a new website dedicated to the token the promoters of the project use their white paper to explain important information related to the ico the project releases the white paper as part of its ico campaign which it designs to encourage enthusiasts and supporters to buy some of the project s tokens investors can generally use fiat or digital currency to buy the new tokens and it s increasingly common for investors to pay using other forms of crypto such as bitcoin or ethereum these newly issued tokens are similar to shares of stock sold to investors during an ipo if the money raised in an ico is less than the minimum amount required by the ico s criteria the funds may be returned to the project s investors the ico would then be deemed unsuccessful if the funding requirements are met within the specified period the money raised is spent in pursuit of the project s goals anyone can launch an ico however regulators in the u s and other developed nations monitor icos closely to ensure they are registered if necessary but this still means that someone might do whatever it takes to make you believe they have a legitimate ico including fake registration approval letters emails or forms of communication that might fool someone of all the possible funding avenues an ico is probably one of the easiest to set up as a scam even if anyone can establish and launch an ico that doesn t mean everyone should if you re considering starting an initial coin offering ask yourself if your business would substantially benefit from one you ll likely need to go through the process of registering a security with the sec if you re set on buying into a new ico that you ve heard about make sure to do your homework the first step is ensuring that the people putting up the ico are real and accountable next investigate the project leads history with crypto and blockchain if it seems that the project doesn t involve anyone with relevant easily verified experience the scam alarms in your head should start ringing identifying icos and scamsico activity began to decrease dramatically in 2019 partly because of the legal gray area that icos inhabit 2 if you re interested you can research and find icos in which to participate but there is no surefire way to stay abreast of all the latest initial coin offerings websites like topicolist com compare different icos against one another you can also look at registered cryptocurrency exchanges to see what new coins they have listed and which they don t most of these will not list coins they have not vetted so checking exchanges can add a measure of safety cryptocurrency aggregators can also help you identify potential scams or real opportunities aggregators do not vet new cryptocurrencies they are only informational in nature many will provide links to the project s gihub pages websites and social media pages and discuss issues the project is attempting to solve if there is no section dedicated to describing a coin and no readily available information on websites other than nonsensical phrases like teh dankest cornur of teh interwebs where teh perfict hooman specinem gathur you might want to pass 3the u s securities and exchange commission sec can intervene in an ico if necessary for example after the creator of telegram raised 1 7 billion in an ico in 2018 and 2019 the sec filed an emergency action and obtained a temporary restraining order alleging illegal activity on the part of the development team 4 in march 2020 the u s district court for the southern district of new york issued a preliminary injunction telegram was ordered to return 1 2 billion to investors and pay a civil penalty of 18 5 million 5there is no guarantee that you won t be on the losing end of a scam when investing in an ico but there are some other steps you can take to avoid ico scams some icos require that another cryptocurrency be used to invest in an ico so you may need to purchase other coins to invest in the project icos can generate a substantial amount of hype and there are numerous sites online where investors gather to discuss new opportunities famous actors entertainers or other individuals with an established presence like steven seagal have also encouraged their followers or fans to invest in a hot new ico 6 however the sec released a warning to investors stating that it is illegal for celebrities to use social media to endorse icos without disclosing any compensation they received 7boxing superstar floyd mayweather jr and music mogul dj khaled once promoted centra tech an ico that raised 30 million at the end of 2017 8 centra tech was ultimately deemed a scam in court resulting in the two celebrities settling charges with u s regulators plus three centra tech founders pleading guilty to ico fraud 9you should always familiarize yourself with cryptocurrency and understand everything about an ico before participating because fake icos are caught rather than prevented prospective investors should exercise extreme caution when investing initial coin offering ico vs initial public offering ipo initial public offerings ipos must follow a very structured process that includes marketing roadshows brochures and capital investment by the company itself the process informs investors and entices them to purchase shares after they are publicly listed and begin trading on public exchanges in many jurisdictions creating a cryptocurrency is not illegal however if it meets the criteria set by whatever test regulators in each country use it will likely be considered a security in that country thus becoming an ico in the u s the howey test is used if a coin issue meets the criteria of this test the sec will consider it an unregistered security sale and force compliance the howey test is not something only the sec can use look an ico over for yourself if a project requires an investment of money in a common enterprise with the expectation of profits from the work of others it is an investment contract no matter what it is labeled if the project s management doesn t treat it as one it s likely not an investment worth your money however there are circumstances where it might not be a scam but it s best to let others find out unless you have money to spare examples of initial coin offeringsethereum s ico in 2014 is an early prominent example of an initial coin offering the ethereum ico raised 18 million over 42 days 10in another example during a one month ico ending in march 2018 dragon coin raised about 320 million 11 also in 2018 the company behind the eos platform shattered dragon coin s record by raising a whopping 4 billion during a yearlong ico 12the first instance of the sec cracking down on an ico occurred on dec 11 2017 when the agency halted an ico by munchee a california company with a food review app munchee was attempting to raise money to create a cryptocurrency that would work within the app to order food the sec issued a cease and desist letter treating the ico as an unregistered securities offering 13 | |
how does an initial coin offering work | icos generally release a whitepaper describing how a company will issue a coin and how it intends to use any funds raised the whitepaper is similar to a pitchbook more trustworthy icos will have a long background of development notable contributors a community following it and be active on social media with non coin hyping posts | |
what is the meaning of ico | an initial coin offering is the first attempt by a group or company to raise funds for a blockchain and cryptocurrency project | |
what s the difference between an ipo and ico | an initial public offering is when a company lists its stock on a public exchange an ico is an attempt by a small private company or group to raise funds for their project by issuing cryptocurrency the bottom lineinitial coin offerings icos are opportunities for investors to speculate on a new cryptocurrency or blockchain project it s important to be cautious when investing in an ico although they have been very profitable in the past many unscrupulous people are trying to take advantage of less cautious investors with fake offerings before buying into an ico do your homework and investigate everything you can find about the developers the project how the coin is used in the blockchain and the blockchain s purpose | |
what is initial margin | initial margin is the percentage of the purchase price of a security that must be covered by cash or collateral when using a margin account the current initial margin requirement set by the federal reserve board s regulation t is 50 however this regulation is only a minimum requirement some equity brokerage firms may set their initial margin requirement higher 1 | |
how does initial margin work | to open a margin account at a brokerage firm an account holder first needs to post a certain amount of cash securities or other collateral known as the initial margin requirement a margin account encourages investors traders and other market participants to use leverage to purchase securities with a total value that s greater than the available cash balance in the account a margin account is essentially a line of credit in which interest is charged on the outstanding margin balance securities in the margin account are paid for with cash loaned to the account holder by the brokerage firm and are designated as collateral this process allows for magnification of potential profits but also magnifies potential losses in the extreme event that securities purchased in a margin account decline to zero value the account holder needs to deposit the full initial value of the securities in cash or other liquid collateral to cover the loss for futures contracts exchanges set initial margin requirements as low as 5 or 10 of the contract to be traded for example if a crude oil futures contract is quoted at 100 000 a futures account holder can enter a long position by posting only 5 000 initial margin or 5 of the contract value in other words this initial margin requirement would give the account holder a 20x leverage factor during periods of high market volatility futures exchanges may increase initial margin requirements to any level they deem appropriate matching the power of equity brokerage firms to increase initial margin levels above those required by fed regulation initial margin vs maintenance margininitial margin is distinct from maintenance margin the two both relate to the amount of cash vs the amount you can borrow when investing however the initial margin requirement is the amount of cash or collateral required to actually purchase securities the federal reserve s regulation t sets that sum at a minimum of at least 50 of the purchase in other words you can t borrow more than half the price of the investment in contrast the maintenance margin is the amount of equity that must be kept in the margin account going forward the minimum maintenance margin requirement set by reg t is 25 that means an investor must maintain enough cash or collateral value in the account to cover 25 of the securities owned 2maintenance margin helps ensure account holders maintain collateral in the account should the value of their securities fall some securities especially volatile ones will have higher margin requirements set by brokerages example of initial marginas an example assume an account holder wants to purchase 1 000 shares of meta inc meta formerly facebook which is quoted at 200 per share the total cost for this transaction in a cash balance account would be 200 000 however if the account holder opens a margin account and deposits the 50 initial margin requirement or 100 000 the total purchasing power will rise to 200 000 in this case the margin account has access to two to one leverage | |
what is an ipo | an ipo is an initial public offering in which shares of a private company are made available to the public for the first time an ipo allows a company to raise equity capital from public investors the transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes a share premium for current private investors meanwhile it also allows public investors to participate in the offering investopedia zoe hansen | |
how an initial public offering ipo works | before an ipo a company is considered private as a pre ipo private company the business has grown with a relatively small number of shareholders including early investors like the founders family and friends along with professional investors such as venture capitalists or angel investors an ipo is a big step for a company as it provides the company with access to raising a lot of money this gives the company a greater ability to grow and expand the increased transparency and share listing credibility can also be a factor in helping it obtain better terms when seeking borrowed funds as well | |
when a company reaches a stage in its growth process where it believes it is mature enough for the rigors of sec regulations along with the benefits and responsibilities to public shareholders it will begin to advertise its interest in going public | typically this stage of growth will occur when a company has reached a private valuation of approximately 1 billion also known as unicorn status however private companies at various valuations with strong fundamentals and proven profitability potential can also qualify for an ipo depending on the market competition and their ability to meet listing requirements ipo shares of a company are priced through underwriting due diligence when a company goes public the previously owned private share ownership converts to public ownership and the existing private shareholders shares become worth the public trading price share underwriting can also include special provisions for private to public share ownership generally the transition from private to public is a key time for private investors to cash in and earn the returns they were expecting private shareholders may hold onto their shares in the public market or sell a portion or all of them for gains meanwhile the public market opens up a huge opportunity for millions of investors to buy shares in the company and contribute capital to a company s shareholders equity the public consists of any individual or institutional investor who is interested in investing in the company overall the number of shares the company sells and the price for which shares sell are the generating factors for the company s new shareholders equity value shareholders equity still represents shares owned by investors when it is both private and public but with an ipo the shareholders equity increases significantly with cash from the primary issuance history of iposthe term initial public offering ipo has been a buzzword on wall street and among investors for decades the dutch are credited with conducting the first modern ipo by offering shares of the dutch east india company to the general public since then ipos have been used as a way for companies to raise capital from public investors through the issuance of public share ownership through the years ipos have been known for uptrends and downtrends in issuance individual sectors also experience uptrends and downtrends in issuance due to innovation and various other economic factors tech ipos multiplied at the height of the dotcom boom as startups without revenues rushed to list themselves on the stock market the 2008 financial crisis resulted in a year with the least number of ipos after the recession following the 2008 financial crisis ipos ground to a halt and for some years after new listings were rare more recently much of the ipo buzz has moved to a focus on so called unicorns startup companies that have reached private valuations of more than 1 billion investors and the media heavily speculate on these companies and their decision to go public via an ipo or stay private |
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