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what is preservation of capital | preservation of capital is a conservative investment strategy where the primary goal is to preserve capital and prevent loss in a portfolio this strategy necessitates investment in the safest short term instruments such as treasury bills and certificates of deposit preservation of capital is also referred to as capital preservation understanding preservation of capitalinvestors hold their funds in various types of investments according to their investment objectives an investor s objective or portfolio strategy is dictated by a number of factors including age investment experience family responsibilities education annual income etc these factors typically point out how risk averse an investor is common investment objectives include current income growth and capital preservation the current income strategy focuses on investing in securities that can create returns quickly these include securities such as high yield bonds and high dividend paying stocks the growth strategy involves finding stocks that emphasize capital appreciation with minimum consideration for current income growth investors are willing to tolerate more risk and will invest in growth stocks that have high price earnings p e ratios another common type of investment objective for a portfolio is capital preservation securities that are used for the preservation of capital have little to no risk and in effect smaller returns compared to current income and growth strategies preservation of capital is a priority for retirees and those approaching retirement since they may be relying on their investments to generate income to cover their living expenses these types of investors have limited time to recoup losses if markets experience a downdraft and give up any potential for high earnings in return for the security of existing capital since retirees want to ensure that they don t outlive their retirement savings they usually opt for investments with minimal risk such as u s treasury securities high yield savings accounts money market accounts and bank certificates of deposit cds a majority of investment vehicles used by investors focused on capital preservation are insured by the federal deposit insurance corporation fdic up to 250 000 1 in some but not all instances these investors may only be investing their money for the short term a major drawback of the capital preservation strategy is the insidious effect of inflation on the rate of return from safe investments over prolonged periods of time while inflation may not have a significant impact on returns in the short term over time it can substantially erode the real value of an investment for example a modest 3 annual inflation rate can slash the real or inflation adjusted value of an investment by 50 in 24 years the amount that you have is preserved but in some cases the interest you earn on a savings account is unlikely to increase enough in value to offset the gradual loss of purchasing power that is a result of even moderate inflation as a result in real terms you could lose value even though you have the same amount of cash for this reason investors utilizing the capital appreciation strategy are better off investing in inflation adjusted investments such as treasury inflation protected securities tips which are issued by the u s government | |
what is a press conference | a press conference is an event organized to officially distribute information and answer questions from the media press conferences are also announced in response to specific public relations issues corporate press conferences are generally led by the company s executive management press liaison or communications officer given limited resources particularly during a time of quarterly or annual earnings it may be difficult to attract major media attention unless a company has a truly unique or newsworthy announcement to share press conferences are held by corporations and other businesses politicians and other government officials understanding a press conferencepress conferences are held by companies or individuals and are attended by the media during the event one or more speakers may address those attending reporters may then be able to ask questions before a press conference takes place a company may issue a press release outlining the nature of the event at times these are issued well in advance of the conference a company has the opportunity to present a news story in its most favorable light by inviting the press to special events in other cases lesser known companies may want to increase their stature in the media by making it easier for news agencies to cover company events by gaining favorable media exposure companies are able to gain greater brand recognition and authority in the market usually at a much lower cost than would be required for a widespread advertising campaign press conferences are also called news conferences when there is no official statement or no questions allowed the event is called a photo op | |
why hold a press conference | there are many reasons why companies choose to hold press conferences they may be called to do any of the following of course these are just some of the instances when a company may call a conference in some cases companies may time their press conferences before any news breaks this can be beneficial to get ahead of any negative news to portray the company in an honest and truthful light as opposed to a company that was trying to hide the negative news things to consider before the press conferencebefore holding the press conference or presser as they re known to journalists there are a few key points a company will consider first is the press release in addition to announcing the conference the release should be well crafted it should be clear concise and to the point but it should also address the issue at hand whether that s a positive announcement like a product launch or in response to negative news or controversy the follow up after the press conference is just as important so any queries that are answered after will carry the same weight the location of the presser is also really important it should be able to accommodate the number of attendees and should have a link to what s being announced a company may decide to hold the conference at the production facility or in a retail store if it s about a new product launch another consideration is who to invite companies generally have a list of media who are apprised of the conference with a copy of the press release the invitation just like the release should be well crafted in order to get the maximum level of people interested | |
what are pretax earnings | pretax earnings are a company s income after all operating expenses including interest and depreciation have been deducted from total sales or revenues but before income taxes have been subtracted because pretax earnings exclude taxes this measure enables the intrinsic profitability of companies to be compared across industries or geographic regions where corporate taxes differ for instance while u s based corporations face the same tax rates at the federal level they face different tax rates at the state level also known as pretax income or earnings before tax ebt | |
how pretax earnings work | a company s pretax earnings provide insight into its financial performance before the impact of tax is employed some consider this metric a better measure of performance than net income because certain factors such as tax credits carryforwards and carrybacks can have a bearing on a company s tax expenses in a given year pretax earnings are calculated by subtracting a firm s operating expenses from its gross margin or revenue operating expenses include items such as depreciation insurance interest and regulatory fines for example a manufacturer with revenues of 100 million in a fiscal year may have 90 million in total operating expenses including depreciation and interest expenses excluding taxes in this case pretax earnings amount to 10 million the after tax earnings figure or net income is computed by deducting corporate income taxes from pretax earnings of 10 million businesses may prefer tracking pre tax earnings over net income as items such as tax deductions and employee benefits paid in one period may differ from another period in effect the pre tax earnings are viewed as a more consistent measure of business performance and fiscal health over time because it erases the volatile differences brought on by tax considerations 1pretax earnings marginpretax earnings are used by analysts and investors to calculate the pretax earnings margin which provides an indication of a company s profitability the pretax earnings margin is the ratio of a company s pre tax earnings to its total sales the higher the pretax profit margin the more profitable the company 2for example assume company abc has an annual gross profit of 100 000 it has operating expenses of 50 000 interest expenses of 10 000 and sales totaling 500 000 the pretax earnings are calculated by subtracting the operating and interest costs from the gross profit that is 100 000 60 000 40 000 for the given fiscal year fy the pretax earnings margin is 40 000 500 000 8 but company xyz which has 750 000 in sales and 50 000 in pretax earnings has a higher profitability than company abc in dollars however xyz has a lower pretax earnings margin of 50 000 750 000 6 7 pretax earnings vs taxable incomethe pretax earnings are shown on a company s income statements as earnings before taxes it is the amount on which the corporate tax rate is applied to calculate tax for financial statement purposes pretax earnings are determined using guidelines from the generally accepted accounting principles gaap taxable income on the other hand is calculated using tax codes governed by the internal revenue service irs it is the actual amount of income on which the corporation will pay income tax during the accounting period 3 | |
what is a pretax profit margin | the pretax profit margin is a financial accounting tool used to measure the operating efficiency of a company it is a ratio of the percentage of revenues that are turned into profits or how many cents a business pockets from each dollar of sale before deducting taxes the pretax profit margin is widely used to compare the profitability of companies within the same industry understanding pretax profit marginmost companies aim to generate as much profit as possible that s usually what the people in charge are tasked with doing and what investors funding its activities demand one of the most common and useful measures to gauge corporate profitability is to look at profit margins consistently high pretax profit margins are a sign of a healthy company with an efficient business model and pricing power low pretax profit margins suggest the opposite to boost profitability management teams must strike a balance between increasing sales and reducing costs pretax profit margins provide an indicator of how successful companies are at achieving this goal as a result pretax profit margins are closely watched by analysts and investors and frequently referred to in financial statements the pretax profit margin offers investors one of the best ways to compare competing companies as well as those with significant differences in size and scale in the same industry generally businesses that regularly deliver higher pretax profit margins than their peer group can be thought of as better run pretax profit margins can vary considerably by sector and as a comparative tool work best when pitching a company against others in its industry or its past performance | |
how to calculate pretax profit margin | pretax profit margin only requires two pieces of information from the income statement revenues and earnings before taxes ebt the percentage ratio is calculated by dividing ebt which sometimes may be called pre tax income profit before tax or income before income taxes and appears just above the net income line item by sales and then multiplying the resulting number by 100 pretax margin examplecompany ez supply has an annual gross profit of 100 000 it has operating expenses of 50 000 interest expenses of 10 000 and sales totaling 500 000 the calculation of earnings before taxes is made by subtracting the operating and interest costs from the gross profit 100 000 60 000 ez supply has pretax earnings of 40 000 and total sales of 500 000 for the given fiscal year fy the pretax profit margin is calculated by dividing pretax earnings by sales resulting in a ratio of 8 pretax profit margin vs profit marginoften profit margins after taxes gain more prominence among analysts and investors however it can be argued that tax payments offer little insight into the efficiency of companies and should therefore be stripped out of the equation tax expenditures can make profitability comparisons between companies misleading tax rates vary from state to state are generally out of management s control and aren t necessarily a fair reflection of how a business is performing one alternative comparison ratio is the berry ratio which compares gross profit to operating expense at times the tax expense can be more substantial in a current year than in previous years due to tax penalties and new legislation imposing higher tax rates alternatively the present tax expense may be much lower than it had been in earlier years due to tax credits deductions and tax breaks in this case analysts may be able to decrease earnings volatility by calculating the pretax profit margin limitations of the pretax profit marginthough very insightful pretax profit margins like other financial ratios have limitations for one they cannot be used effectively to compare companies from other sectors as each industry generally has different operating expenses and sales patterns certain sectors are more profitable than others legal services is an example of a high margin profession overheads are low there s little need for big investment costs other than salaries and demand is fairly constant in contrast other sectors such as airlines have to deal with stiff competition fluctuating prices for key materials such as fuel hefty maintenance expenses and countless other costs for this same reason investors should also be cautious about using pretax profit margins when comparing diversified companies serving several industries | |
is a higher or lower pretax margin better | the higher the pretax margin the better the bigger the profit the more money the company gets to keep to reinvest in the business or filter back to investors like any metric though consistency is key one good quarter means nothing to be deemed a high margin business one of the best badges of honor a company can have it must prove that it can regularly turn a decent portion of sales into earnings | |
what are pretax profits | pretax profits are a company s income after all expenses other than tax have been deducted from sales investors prefer to look at profits before tax because the tax rates companies pay aren t uniform | |
is 7 a good pretax profit margin | that depends on the company in some sectors particularly those with higher fixed costs stiff competition and fluctuating demand a 7 pretax profit margin might be considered good in others it would hint at a lack of efficiency which could perhaps be the symptom of limited pricing power or poor management of costs the bottom linethe pretax profit margin represents the portion of a company s sales revenue that it gets to keep as a profit after subtracting all of its costs other than taxes if a company reports a 25 pretax profit margin it means that it netted 0 25 from each dollar of sales generated before paying taxes profit is the metric that companies and investors often pay the most attention to and the pretax profit margin is one of the best ways of gauging it taking tax out of the equation makes sense because these payments vary across jurisdictions fluctuate and generally offer little insight into the efficiency of companies | |
what is price action | price action is the movement of a security s price plotted over time price action forms the basis for all technical analyses of a stock commodity or other asset charts many short term traders rely exclusively on price action and the formations and trends extrapolated from it to make trading decisions technical analysis as a practice is a derivative of price action since it uses past prices in calculations that can then be used to inform trading decisions | |
what does price action tell you | price action can be seen and interpreted using charts that plot prices over time traders use different chart compositions to improve their ability to spot and interpret trends breakouts and reversals many traders use candlestick charts since they help better visualize price movements by displaying the open high low and close values in the context of up or down sessions candlestick patterns such as the harami cross engulfing pattern and three white soldiers are all examples of visually interpreted price action there are many more candlestick formations that are generated off price action to set up an expectation of what will come next these same formations can apply to other types of charts including point and figure charts box charts box plots and so on in addition to the visual formations on the chart many technical analysts use price action data when calculating technical indicators the goal is to find order in the sometimes seemingly random movement of a price for example an ascending triangle pattern formed by applying trendlines to a price action chart may be used to predict a potential breakout since the price action indicates that bulls have attempted a breakout on several occasions and have gained momentum each time | |
how to use price action | price action is not generally seen as a trading tool like an indicator but rather the data source off which all the tools are built swing traders and trend traders tend to work most closely with price action eschewing any fundamental analysis in favor of focusing solely on support and resistance levels to predict breakouts and consolidation even these traders must pay some attention to additional factors beyond the current price as the volume of trading and the periods being used to establish levels all have an impact on the likelihood of their interpretations being accurate many institutions have begun leveraging algorithms to analyze prior price action and execute trades in certain circumstances in a 2020 report to congress the securities and exchange commission sec noted that the use of algorithms in trading is pervasive 1 these automated systems are fed price action data and can deduce outcomes and determine potential future price action limitations of price actioninterpreting price action is very subjective it s common for two traders to arrive at different conclusions when analyzing the same price action one trader may see a bearish downtrend and another might believe that the price action shows a potential near term turnaround of course the time period being used also has a huge influence on what traders see as a stock can have many intraday downtrends while maintaining a month over month uptrend the important thing to remember is that trading predictions made using price action on any time scale are speculative the more tools you can apply to your trading prediction to confirm it the better in the end however the past price action of a security is no guarantee of future price action high probability trades are still speculative trades which means traders take on the risks to get access to the potential rewards price action does not explicitly incorporate macroeconomic or non financial matters impacting a security | |
how can i use price action in trading | price action is used to analyze trends and identify entry and exit points when trading many traders use candlestick charts to plot prior price action then plot potential breakout and revering patterns although prior price action does not guarantee future results traders often analyze a security s historical patterns to better understand where the price may move to next | |
how do i read price action | price action is often depicted graphically in the form of a bar chart or line chart there are two general factors to consider when analyzing price action the first is to identify the direction of the price and the second is to identify the direction of the volume | |
what is bullish price action | bullish price action is an indicator giving positive signals that a security s price is due for future increases for exactly one bullish trend is often defined by higher highs and higher lows forming an ascending triangle pattern this means the price action of a security recently surpassed a high price but remained higher than a recent low price | |
is price action good for swing trading | swing traders rely on price movement if a security s price remains unchanged it is harder to seek opportunities to profit in general price action is good for swing traders because traders can identify the oscillations up and down and trade accordingly | |
what is a price ceiling | a price ceiling is the mandated maximum amount that a seller is permitted to charge for a product or service price ceilings are usually set by law and are typically applied to staples such as food and energy products when these goods become unaffordable to regular consumers price ceilings are essentially a type of price control they can be advantageous in allowing essentials to be affordable at least temporarily but economists question how beneficial such ceilings are in the long run investopedia paige mclaughlin | |
how a price ceiling works | price ceilings are implemented when a regulator sets a maximum price they believe is acceptable or appropriate all sellers must offer their products at a price equal to or below this amount and the sale of goods is regulated and monitored how companies offer their products can be regulated and monitored as well regulators review the price ceiling regularly to ensure that it still represents an appropriate level they perpetually evaluate market supply and demand to best understand whether the price ceiling should be increased or decreased a good may experience an unexpected shortage the regulators may decide that a price ceiling may negatively influence producers or impact product quality in this case thus necessitating the removal of the ceiling price ceilings might seem to be a good thing for consumers but they also carry long term ramifications costs go down in the short run and this can stimulate demand but producers must find some way to compensate for the price and profit controls they may ration supply cut back on production or production quality or charge extra for formerly free options and features as a result economists wonder how efficient price ceilings can be at protecting the most vulnerable consumers from high costs or even protecting them at all a broader and more theoretical objection to price ceilings is that they create a deadweight loss to society this describes an economic deficiency caused by an inefficient allocation of resources that disturbs the equilibrium of a marketplace and contributes to making it more inefficient real world cases of price ceilingsthere are several types of government enforced price ceilings usually for goods that are considered essential some areas have rent ceilings to protect renters from rapidly climbing rates on residences such rent controls are a frequently cited example of the ineffectiveness of price controls in general and price ceilings in particular rent controls were widely implemented in new york city and throughout new york state in the late 1940s homecoming veterans were flocking and establishing families in the aftermath of world war ii and rent rates for apartments skyrocketed as a major housing shortage ensued the original post war rent control applied only to specific types of buildings but it continued into the 1970s in a somewhat less restricted form that was referred to as rent stabilization rent control tenants in new york city are generally in buildings that were built before feb 1 1947 and where the tenant was in continuous occupancy before july 1 1971 1 rent stabilization applies to buildings of six or more units built between feb 1 1947 and dec 31 1973 2the aim was to help maintain an adequate supply of affordable housing in the cities but critics say the effect has been to reduce the overall supply of available residential rental units in new york city which has in turn led to even higher prices in the market some housing analysts further say that controlled rental rates discourage landlords from having the necessary funds or at least committing to the necessary expenditures to maintain or improve their rental properties this can lead to deterioration in the quality of rental housing some governments may cap the prices of essential goods such as food and fuel to ensure access to these essential goods and to prevent profiteering the german government pledged to cap energy prices due to the shortage of russian natural gas following the russian invasion of ukraine in 2022 3there s a strong incentive for medical equipment and drug manufacturers in the united states to raise prices knowing that the increased cost will most likely fall on taxpayers or insurance companies president biden signed the inflation reduction act in 2022 it includes price caps on the negotiated prices of certain drugs to prevent further price rises rideshare services could charge much higher fares during peak hours as the popularity of uber and other rideshare services boomed this price variability concerned india and the karnataka government decided to implement the price per kilometer that uber and other rideshares could charge the government noted in the long run that passengers often had to wait longer to get an uber because fewer drivers were incentivized even though more riders demonstrated interest in using their rideshare services 4price ceilings in professional sports can relate to the maximum amount a single employee may receive in compensation consider this agreement between the national basketball association and the national basketball players association the collective bargaining agreement between the two associations outlines several situations where a player is eligible to receive a maximum salary these are the terms for newer players in the league with less than seven years of service 5price ceiling vs price floora price floor is the opposite of a price ceiling it sets a minimum purchase cost for a product or service also known as price support it represents the lowest legal amount at which a good or service can be sold and still function within the traditional supply and demand model a minimum wage is a familiar type of price floor it operates on the premise that someone working full time ought to earn enough to afford a basic standard of living and it sets the lowest legal amount that a job can pay both floors and ceilings are forms of price controls like a price ceiling a price floor may be set by the government or by producers themselves in some cases federal or municipal authorities may name specific figures for the floors but they often operate simply by entering the market and buying the product thus propping its prices up above a certain level many countries periodically impose floors on agricultural crops and products to mitigate the swings in supply and farmers incomes that can commonly occur due to factors beyond their control effects of price ceilingsprice ceilings are intended to ensure access to the most essential goods but they may sometimes have the counterintuitive effect of making those goods less accessible this can happen because the government enforced price doesn t reflect the market forces of supply and demand many municipal governments enforce policies that limit rises in rental prices to keep housing more affordable landlords are unable to raise rents when housing is in short supply developers are less likely to fund new developments because of these restrictions their profits will be limited by existing rent controls the supply of housing is less likely to increase in these cities as a result even when there s a shortage types of price ceilingsgovernments can implement several types of price ceilings depending on the good that s being regulated and the entity that s doing the regulating advantages and disadvantages of price ceilingsthe big pro of a price ceiling is the limit on costs for the consumer it keeps things affordable and prevents price gouging and producers suppliers from taking unfair advantage of them ceilings can mitigate the pain of higher prices until supply returns to normal levels if it s just a temporary shortage that s causing rampant inflation price ceilings can also stimulate demand and encourage spending price ceilings have their advantages in the short term but they can become a problem if they continue for too long or when they re set too far below the market equilibrium price when the quantity demanded equals the quantity supplied demand can skyrocket when this happens leading to shortages in supply something will have to give if the prices that producers are allowed to charge are too out of line with their production costs and business expenses they may have to cut corners reduce quality or charge higher prices on other products they may have to discontinue offerings or not produce as much causing more shortages some may even be driven out of business if they can t realize a reasonable profit on their goods and services keeps prices affordableprevents price gougingstimulates demandoften causes supply shortagesmay induce loss of quality corner cuttingmay lead to extra charges or boosted prices on other goodsexample of a price ceilingthe u s government imposed price ceilings on gasoline after some sharp rises in oil prices in the 1970s shortages quickly developed as a result the regulated prices seemed to function as a disincentive to domestic oil companies to step up or even maintain production as was necessary to counter interruptions in oil supply from the middle east shortages developed and rationing was often imposed as supplies fell short of demand this was achieved through schemes like alternating days in which only cars with odd and even numbered license plates could be served these long waits imposed costs on the economy and motorists through lost wages and other negative economic impacts the supposed economic relief of controlled gas prices was also offset by new expenses some gas stations sought to compensate for lost revenue by making formerly optional services a required part of filling up such as washing the windshield they imposed charges for them the consensus of economists is that consumers would have been better off in every respect had controls never been applied they argue that the long lines at gas stations would never have developed if the government had simply let prices increase oil companies would have bumped up production due to the higher prices and consumers who now had a stronger incentive to conserve gas would have limited their driving or bought more energy efficient cars | |
what does price ceiling mean | a price ceiling also referred to as a price cap is the highest price at which a good or service can be sold it s a type of price control and it sets the maximum amount that can be charged for something it s often imposed by government authorities to help consumers when it seems that prices are excessively high or rising out of control | |
what are some price ceiling examples | rent controls are an example of a price ceiling they limit how much landlords can charge monthly for residences and how much they can increase rents caps on the costs of prescription drugs and lab tests are another example of common price ceilings and insurance companies often set caps on the amount they ll reimburse a doctor for a procedure treatment or office visit | |
what is a price ceiling and price floor | price ceilings and price floors are two types of price controls they re opposites as their names suggest a price ceiling puts a limit on how much you have to pay or how much you can charge for something it sets a maximum cost keeping prices from rising above a certain level a price floor establishes a bottom line benchmark it keeps a price from falling below a particular level | |
how do you calculate a price ceiling | governments typically calculate price ceilings that attempt to match the supply and demand curve at an economic equilibrium point for the product or service in question they impose control within the boundaries of what the natural market will bear but the price ceiling itself can impact the supply and demand of the product or service over time the calculated price ceiling may result in shortages or reduced quality in such cases the bottom lineprice ceilings prevent a price from rising above a certain level they re a form of price control they often benefit consumers in the short run but the long term effects of price ceilings are complex they can negatively impact producers and sometimes even the consumers they aim to help by causing supply shortages and a decline in the quality of goods and services | |
what are price controls | the term price controls refers to the legal minimum or maximum prices set for specified goods price controls are normally mandated by the government in the free market they are usually implemented as a means of direct economic intervention to manage the affordability of certain goods and services including rent gasoline and food although it may make certain goods and services more affordable price controls can often lead to disruptions in the market losses for producers and a noticeable change in quality understanding price controlsas mentioned above price controls are a form of government mandated economic intervention they are meant to make things more affordable for consumers and are also commonly used to help steer the economy in a certain direction for instance these restrictions may be deemed necessary in order to curb inflation price controls are opposite to prices set by market forces which are determined by producers because of supply and demand 2price controls are commonly imposed on consumer staples these are essential items such as food or energy products for instance prices were capped for things like rent and gasoline in the united states controls set by the government may impose minimums or maximums price caps are referred to as price ceilings while minimum prices are called price floors although the reasons for price controls may be affordability and economic stability they may have the opposite effect over the long term price controls have been known to lead to problems such as shortages rationing deterioration of product quality and illegal markets that arise to supply the price controlled goods through unofficial channels producers may experience losses especially if prices are set too low this can often lead to a drop in the quality of available goods and services 2some economists believe that price controls are usually only effective on an extremely short term basis 1history of price controlsprice controls aren t a new concept they go back thousands of years according to historians the production and distribution of grain were regulated by egyptian authorities in the third century b c other civilizations implemented price controls including the babylonians the ancient greeks and the roman empire 3we can find instances of price control in more modern times including during times of war and revolution in the united states colonial governments controlled the prices of commodities required by george washington s army which resulted in severe shortages 3governments continue to intervene and set limits on how producers can price their products and services for instance municipal governments often limit how much rent a landlord can collect from their tenants and the amount by which they can increase these rents to make housing more affordable the u s government also set price caps on energy prices during times of crisis including world war i and ii and between 1971 and 1973 345types of price controlsprice controls come in two forms price floors and price ceilings price floors are the minimum prices set for goods and services they may be set by the government or in some cases by producers themselves minimum prices are imposed to help producers when authorities believe that prices are too low leading to an unfair market once set prices can t fall below the minimum 2price ceilings or caps are the highest points at which goods and services can be sold this occurs when authorities want to help consumers if they feel that prices are far too high this is especially true in the case of rent control when government agencies want to protect tenants from slumlords and overzealous landlords just like price floors prices can t go above ceilings once they re set 2example of price controlsrent control is one of the most common forms of price control government programs establish limits on the maximum amount of rent a property owner can collect from their tenants these limits are also imposed on annual rent increases the rationale behind rent control is that it helps keep housing affordable especially for more vulnerable people like those with lower incomes and aging adults 6governments commonly impose controls on drug prices this is especially true for life saving and specialty medications like insulin drug companies often come under pressure for setting prices too high their rationale is normally patent protection and to cover the expensive costs of research and development r d and distribution consumers and governments say this puts certain medications out of reach for the average citizen 1minimum wages are considered a form of price control as well in this case it is a price floor or the lowest possible salary an employer can pay to their employees minimum wages ensure that individuals can maintain a specific standard of living 2sports franchises often put price controls through a method called dynamic pricing for example tickets to a new york yankee baseball game are subject to variable prices that may differ from other games according to major league baseball these prices are based on changing factors that affect market demand 7advantages and disadvantages of price controlsprice controls are often imposed when governments feel that consumers can t afford goods and services for instance price ceilings are established to prevent producers from price gouging this is common in the housing rental industry and in the drug health sector 21governments may also set price limits on goods and services if they feel that producers aren t benefiting from how goods and services are priced in the free market this allows companies to remain competitive and ensure that they are profitable 2controlling how prices are set keeps companies from developing monopolies companies are at an advantage and can dictate prices when demand is high and supply is short as such they may be able to inflate prices to boost their profits governments can intervene and set price ceilings to prevent suppliers from continuing to raise prices allow competitors to enter the market and crush monopolies that exploit consumers 2price controls may be enacted with the best of intentions but they often don t work most attempts to control prices often struggle to overcome the economic forces of supply and demand for any significant length of time when prices are established by commerce in a free market prices shift to maintain the balance between supply and demand government imposed price controls can lead to the creation of excess demand in the case of price ceilings or excess supply in the case of price floors 28critics say that as a result price controls often lead to an imbalance between supply and demand this can in turn lead to shortages and underground markets when prices are too low enough for things like housing there may not be enough supply thereby increasing demand for instance landlords may let the condition of their properties deteriorate because they aren t making enough to maintain them 28price controls can lead to losses and a significant drop in quality when prices are too low there s a good chance that producer revenue drops they may have to find a way to cut down on costs some may choose to cut down production or may end up putting more inferior products out on the market as a result r d drops while newer and more innovative products stop appearing on the market 28protects consumers by eliminating price gouginghelps producers remain competitive and profitableeliminates monopoliescan lead to shortages and illegal marketsmay create excess demand or excess supplyoften result in losses for producers and a drop in quality of products and services | |
what is meant by price control | price control is an economic policy imposed by governments that set minimums floors and maximums ceilings for the prices of goods and services in order to make them more affordable for consumers | |
what are examples of price controls | some of the most common examples of price controls include rent control where governments impose a maximum amount of rent that a property owner can charge and the limit by how much rent can be increased each year prices on drugs to make medication and health care more affordable and minimum wages the lowest possible wage a company can pay its employees 2 | |
what are price controls in economics | price controls in economics are restrictions imposed by governments to ensure that goods and services remain affordable they are also used to create a fair market that is accessible by all the point of price controls is to help curb inflation and to create balance in the market | |
are price controls good or bad | price controls can be both good and bad they help make certain goods and services such as food and housing more affordable and within reach of consumers they can also help corporations by eliminating monopolies and opening up the market to more competition but it can also have a negative effect as it may lead to shortages or an overabundance of supplies underground markets and a decrease in the quality of goods and services available on the market 28the bottom lineunlike the free market where prices are dictated by supply and demand price controls set minimum and maximum prices for goods and services governments and supporters of price controls say that these policies are necessary in order to make things more amenable for both consumers and suppliers by enacting price control policies consumers can afford essential goods and services and producers can remain profitable but critics say it often has the opposite effect leading to an imbalance in the market between supply and demand and illegal markets 2 | |
what is price discovery | price discovery is the process conducted between buyers and sellers whether explicit or inferred of setting the spot price or the fair price of any asset that is being traded it includes evaluating tangible and intangible factors including supply and demand investor risk attitudes and the overall economic and geopolitical environment simply put price discovery is the point at which a buyer and a seller agree on a price and a transaction occurs the balance between buyers and sellers is a key factor in price discovery the law of supply and demand is the main factor driving price understanding price discoveryat its core price discovery involves finding where supply and demand meet in economics terms the supply curve and the demand curve intersect at a single price which then allows a transaction to occur the shape of those curves is subject to many factors from the size of the transaction to background conditions of previous or future scarcity or abundance location storage transaction costs and psychology also play a role there is no specific formula using all these factors as variables indeed the formula is a dynamic process that can change frequently if not from trade to trade while the term itself is relatively new price discovery has been around for millennia as a process ancient souqs in the middle east and marketplaces in europe the indian subcontinent and china brought together traders and buyers to establish acceptable prices of goods in modern times derivatives traders in the pits of the chicago mercantile exchange cme used hand signals and verbal cues to signal prices for a given commodity electronic trading has replaced most of the manual processes with mixed results while it has significantly increased trading volumes and liquidity electronic trading has also resulted in more volatility and less transparency about large positions price discovery as a processprice discovery is the central function in any marketplace whether it is a financial exchange or a local farmer s market the market brings potential buyers and sellers together with members of each side having very different reasons for trading and varying styles for doing so by bringing buyers and sellers together marketplaces allow the interested parties to interact and by doing so a consensus price is established whether they re consciously aware of it or not all the players do it again to set the very next price and so on price discovery is influenced by a wide variety of factors among these factors are the stage of market development its structure security type and information available in the market those parties with the freshest or highest quality information have an advantage as they can act before others get that information when new information arrives it changes both the current and future condition of the market for that asset and therefore can change the price at which both sides are willing to trade too much transparency in information can be detrimental to a market because it increases the risks for traders moving large or significant positions price discovery vs valuationprice discovery is not the same as valuation price discovery is a market driven interactive process while valuation is a model driven mechanism valuation is the present value of presumed cash flows of an asset based on many factors including interest rates competitive analysis and technological changes both in place and envisioned other names for valuation of an asset are fair value and intrinsic value by comparing market value to valuation analysts can conclude whether an asset is overpriced or underpriced by the market the market price is considered the correct price but any differences can provide trading opportunities if and when the market price adjusts to include any information in the valuation models not previously considered | |
is price discovery a transparent process | price discovery has to be transparent in order to work correctly for both buyers and sellers consider the traditional auction process if a bidder did not know what prices were being offered by other buyers it would be impossible to establish a fair price for any participant | |
which comes first price discovery or valuation | valuation comes first a buyer or seller determines an acceptable price or price range for an asset based on many factors in fundamental stock analysis for example this includes looking at a company s earnings history its competition its management and the product plans it has in the pipeline that gives the buyer a way to project a stock s potential growth and set a fair price or price range for it the buyer only then is ready to enter the interactive process of price discovery | |
how do i use price discovery when i use an online broker | whether you re aware of it or not you re using price discovery every time you buy or sell a stock or other asset the current quote is either acceptable or unacceptable to you as a buyer or seller if it s unacceptable you wait until it changes the bottom lineprice discovery is an integral part of the process of buying and selling in a stock market or in any marketplace it s the point at which a buyer and a seller agree on a price that is acceptable to both parties | |
what is price discovery | price discovery is the process conducted between buyers and sellers whether explicit or inferred of setting the spot price or the fair price of any asset that is being traded it includes evaluating tangible and intangible factors including supply and demand investor risk attitudes and the overall economic and geopolitical environment simply put price discovery is the point at which a buyer and a seller agree on a price and a transaction occurs the balance between buyers and sellers is a key factor in price discovery the law of supply and demand is the main factor driving price understanding price discoveryat its core price discovery involves finding where supply and demand meet in economics terms the supply curve and the demand curve intersect at a single price which then allows a transaction to occur the shape of those curves is subject to many factors from the size of the transaction to background conditions of previous or future scarcity or abundance location storage transaction costs and psychology also play a role there is no specific formula using all these factors as variables indeed the formula is a dynamic process that can change frequently if not from trade to trade while the term itself is relatively new price discovery has been around for millennia as a process ancient souqs in the middle east and marketplaces in europe the indian subcontinent and china brought together traders and buyers to establish acceptable prices of goods in modern times derivatives traders in the pits of the chicago mercantile exchange cme used hand signals and verbal cues to signal prices for a given commodity electronic trading has replaced most of the manual processes with mixed results while it has significantly increased trading volumes and liquidity electronic trading has also resulted in more volatility and less transparency about large positions price discovery as a processprice discovery is the central function in any marketplace whether it is a financial exchange or a local farmer s market the market brings potential buyers and sellers together with members of each side having very different reasons for trading and varying styles for doing so by bringing buyers and sellers together marketplaces allow the interested parties to interact and by doing so a consensus price is established whether they re consciously aware of it or not all the players do it again to set the very next price and so on price discovery is influenced by a wide variety of factors among these factors are the stage of market development its structure security type and information available in the market those parties with the freshest or highest quality information have an advantage as they can act before others get that information when new information arrives it changes both the current and future condition of the market for that asset and therefore can change the price at which both sides are willing to trade too much transparency in information can be detrimental to a market because it increases the risks for traders moving large or significant positions price discovery vs valuationprice discovery is not the same as valuation price discovery is a market driven interactive process while valuation is a model driven mechanism valuation is the present value of presumed cash flows of an asset based on many factors including interest rates competitive analysis and technological changes both in place and envisioned other names for valuation of an asset are fair value and intrinsic value by comparing market value to valuation analysts can conclude whether an asset is overpriced or underpriced by the market the market price is considered the correct price but any differences can provide trading opportunities if and when the market price adjusts to include any information in the valuation models not previously considered | |
is price discovery a transparent process | price discovery has to be transparent in order to work correctly for both buyers and sellers consider the traditional auction process if a bidder did not know what prices were being offered by other buyers it would be impossible to establish a fair price for any participant | |
which comes first price discovery or valuation | valuation comes first a buyer or seller determines an acceptable price or price range for an asset based on many factors in fundamental stock analysis for example this includes looking at a company s earnings history its competition its management and the product plans it has in the pipeline that gives the buyer a way to project a stock s potential growth and set a fair price or price range for it the buyer only then is ready to enter the interactive process of price discovery | |
how do i use price discovery when i use an online broker | whether you re aware of it or not you re using price discovery every time you buy or sell a stock or other asset the current quote is either acceptable or unacceptable to you as a buyer or seller if it s unacceptable you wait until it changes the bottom lineprice discovery is an integral part of the process of buying and selling in a stock market or in any marketplace it s the point at which a buyer and a seller agree on a price that is acceptable to both parties | |
what is the price earnings to growth peg ratio | the price earnings to growth ratio peg ratio is a stock s price to earnings p e ratio divided by the growth rate of its earnings for a specified time period the peg ratio is used to determine a stock s value while also factoring in the company s expected earnings growth and it is thought to provide a more complete picture than the more standard p e ratio investopedia paige mclaughlin | |
how to calculate the peg ratio | peg ratio price eps eps growth where eps the earnings per share begin aligned text peg ratio frac text price eps text eps growth textbf where text eps the earnings per share end aligned peg ratio eps growthprice eps where eps the earnings per share to calculate the peg ratio an investor or analyst needs to either look up or calculate the p e ratio of the company in question the p e ratio is calculated as the price per share of the company divided by the earnings per share eps or price per share eps once the p e is calculated find the expected growth rate for the stock in question using analyst estimates available on financial websites that follow the stock plug the figures into the equation and solve for the peg ratio number as with any ratio the accuracy of the peg ratio depends on the inputs used when considering a company s peg ratio from a published source it s important to find out which growth rate was used in the calculation in an article from morgan stanley wealth management for example the peg ratio is calculated using a p e ratio based on current year data and a five year expected growth rate 1using historical growth rates for example may provide an inaccurate peg ratio if future growth rates are expected to deviate from a company s historical growth the ratio can be calculated using one year three year or five year expected growth rates for example to distinguish between calculation methods using future growth and historical growth the terms forward peg and trailing peg are sometimes used | |
what does the peg ratio tell you | while a low p e ratio may make a stock look like a good buy factoring in the company s growth rate to get the stock s peg ratio may tell a different story the lower the peg ratio the more the stock may be undervalued given its future earnings expectations adding a company s expected growth into the ratio helps to adjust the result for companies that may have a high growth rate and a high p e ratio the degree to which a peg ratio result indicates an over or underpriced stock varies by industry and by company type as a broad rule of thumb some investors feel that a peg ratio below one is desirable according to well known investor peter lynch a company s p e and expected growth should be equal which denotes a fairly valued company and supports a peg ratio of 1 0 when a company s peg exceeds 1 0 it s considered overvalued while a stock with a peg of less than 1 0 is considered undervalued 2example of how to use the peg ratiothe peg ratio provides useful information to compare companies and see which stock might be the better choice for an investor s needs as follows assume the following data for two hypothetical companies company a and company b given this information the following data can be calculated for each company company acompany bmany investors may look at company a and find it more attractive since it has a lower p e ratio among the two companies but compared to company b it doesn t have a high enough growth rate to justify its current p e company b is trading at a discount to its growth rate and investors purchasing it are paying less per unit of earnings growth based on its lower peg company b may be relatively the better buy | |
what is considered to be a good peg ratio | in general a good peg ratio has a value lower than 1 0 peg ratios greater than 1 0 are generally considered unfavorable suggesting a stock is overvalued meanwhile peg ratios lower than 1 0 are considered better indicating a stock is relatively undervalued | |
what is better a higher or lower peg ratio | lower peg ratios are better especially ratios under 1 0 | |
what does a negative peg ratio indicate | a negative peg can result from either negative earnings losses or a negative estimated growth rate either case suggests that a company may be in trouble the bottom linewhile the p e ratio is more commonly used by investors the peg ratio improves upon the p e by incorporating earnings growth estimates this provides a fuller picture of a company s relative value in the market however because it relies on earnings estimates having good estimates is key a bad forecast or assumption or naively projecting historical growth rates into the future can produce unreliable peg ratios | |
what is price elasticity of demand | price elasticity of demand is a measurement of the change in the demand for a product in relation to a change in its price elastic demand is when the change in demand is large when there is a change in price inelastic demand is when the change in demand is small when there is a change in price theresa chiechi investopediaunderstanding price elasticity of demandeconomists have found that the prices of some goods are very inelastic that is a reduction in price does not increase demand much and an increase in price does not hurt demand either for example gasoline has little price elasticity of demand drivers will continue to buy as much as they have to as will airlines the trucking industry and nearly every other buyer other goods are much more elastic so price changes for these goods cause substantial changes in their demand or their supply not surprisingly this concept is of great interest to marketing professionals it could even be said that their purpose is to create inelastic demand for the products that they market they achieve that by identifying a meaningful difference in their products from any others that are available if the quantity demanded of a product changes greatly in response to changes in its price it is elastic that is the demand point for the product is stretched far from its prior point if the quantity purchased shows a small change after a change in its price it is inelastic the quantity didn t stretch much from its prior point price elasticity of demand expressed mathematically is as follows factors that affect price elasticity of demandthe more easily a shopper can substitute one product for another the more the price will fall for example in a world in which people like coffee and tea equally if the price of coffee goes up people will have no problem switching to tea and the demand for coffee will fall this is because coffee and tea are considered good substitutes for each other the more discretionary a purchase is the more its quantity of demand will fall in response to price increases that is the product demand has greater elasticity say you are considering buying a new washing machine but the current one still works it s just old and outdated if the price of a new washing machine goes up you re likely to forgo that immediate purchase and wait until prices go down or the current machine breaks down the less discretionary a product is the less its quantity demanded will fall inelastic examples include luxury items that people buy for their brand names addictive products are quite inelastic as are required add on products such as inkjet printer cartridges one thing all these products have in common is that they lack good substitutes if you really want an apple ipad then a kindle fire won t do addicts are not dissuaded by higher prices and only hp ink will work in hp printers unless you disable hp cartridge protection the length of time that the price change lasts also matters demand response to price fluctuations is different for a one day sale than for a price change that lasts for a season or a year clarity of time sensitivity is vital to understanding the price elasticity of demand and for comparing it with different products consumers may accept a seasonal price fluctuation rather than change their habits types of price elasticity of demandprice elasticity of demand can be categorized according to the number calculated by dividing the percentage change in quantity demanded by the percentage change in price these categories include the following example of price elasticity of demandas a rule of thumb if the quantity of a product demanded or purchased changes more than the price changes then the product is considered to be elastic for example the price goes up by 5 but the demand falls by 10 if the change in quantity purchased is the same as the price change say 10 10 1 then the product is said to have unit or unitary price elasticity finally if the quantity purchased changes less than the price say 5 demanded for a 10 change in price then the product is deemed inelastic to calculate the elasticity of demand consider this example suppose that the price of apples falls by 6 from 1 99 a bushel to 1 87 a bushel in response grocery shoppers increase their apple purchases by 20 the elasticity of apples is thus 0 20 0 06 3 33 the demand for apples is quite elastic | |
what makes a product elastic | if a price change for a product causes a substantial change in either its supply or its demand it is considered elastic generally it means that there are acceptable substitutes for the product examples would be cookies luxury automobiles and coffee | |
what makes a product inelastic | if a price change for a product doesn t lead to much if any change in its supply or demand it is considered inelastic generally it means that the product is considered to be a necessity or a luxury item for addictive constituents examples would be gasoline milk and iphones | |
what is the importance of price elasticity of demand | knowing the price elasticity of demand for goods allows someone selling that good to make informed decisions about pricing strategies this metric provides sellers with information about consumer pricing sensitivity it is also key for makers of goods to determine manufacturing plans as well as for governments to assess how to impose taxes on goods the bottom lineprice elasticity of demand is the ratio of the percentage change in quantity demanded of a product to the percentage change in price economists employ it to understand how supply and demand change when a product s price changes | |
what is price leadership | price leadership occurs when a leading firm in a given industry is able to exert enough influence in the sector that it can effectively determine the price of goods or services for the entire market this type of firm is sometimes referred to as the price leader this level of influence oftentimes leaves the rivals of the price leader with little choice but to follow its lead and match the prices if they are to hold onto their market share this phenomenon is common in industries that have oligopolistic market conditions such as the airline industry in the airline industry a dominant company typically sets the prices and other airlines feel compelled to adjust their prices to match the prices of the leading firm | |
how price leadership works | there are certain economic conditions that make the emergence of price leadership more likely to occur within an industry such as when the number of companies involved in a sector is small when entry to the industry is restricted when products are homogeneous when demand is inelastic and when organizations have a similar long run average total cost lratc lratc is an economics metric that is used to determine the minimum or lowest average total cost at which a firm can produce any given level of output in the long run when all inputs are variable the proliferation of price leadership tends to occur more often in sectors that produce goods and services that offer little differentiation from one producer to another price leadership also tends to emerge when there is a high level of consumer demand for a specific product this results in consumers being drawn away from any competing products thus the price of the specific product that is experiencing high levels of consumer demand becomes the market leader types of price leadershipthere are three primary models of price leadership barometric collusive and dominant the barometric price leadership model occurs when a particular firm is more adept than others at identifying shifts in applicable market forces such as a change in production costs this allows the firm to respond to market forces more efficiently for instance the firm may initiate a price change it is possible for a firm with a small market share to act as a barometric price leader if it s a good producer and if the firm is attuned to trends in its market other producers may follow its lead assuming that the price leader is aware of something that they have yet to realize however because a barometric leader has very little power to impose its decisions on other firms in the industry its leadership might be short lived the collusive price leadership model may emerge within markets that have oligopolistic conditions collusive price leadership occurs as a result of an explicit or implicit agreement among a handful of dominant firms to keep their prices in mutual alignment smaller firms within the market are effectively forced into following the price change initiated by the dominant firms this practice is most common in industries where the cost of entry is high and the costs of production are known these agreements between firms either explicit or implicit may be considered illegal if the effort is designed to defraud the public there is a fine line between price leadership and illegal acts of collusion price leadership is more likely to be considered collusive and potentially illegal if the changes in the price of a good are not related to changes in the operating costs of the firm the dominant price leadership model occurs when one firm controls the vast majority of the market share in its industry within the industry there are other smaller firms that provide the same products or services as the leading firm however in this model these smaller firms cannot influence prices a dominant price leadership model is sometimes referred to as a partial monopoly in this type of model the price leader might engage in predatory pricing which refers to the practice of lowering prices to levels that make it impossible for smaller competing firms to remain in business in most countries business decisions that enact predatory pricing and are aimed at hurting smaller companies are illegal advantages and disadvantages of price leadershipthere are many potential advantages for firms that emerge as price leaders within an industry in some instances other firms within an industry may also benefit from the emergence of a price leader for example if companies in a particular market follow a price leader by setting higher prices then all producers in that market stand to profit as long as demand remains steady price leadership also has the potential to eliminate or reduce price wars if a market is completely comprised of companies of a similar size in the absence of price leadership price wars could ensue as each competitor tries to increase its share of the market one side effect of price leadership may be better quality products as a result of an increase in profits increased profits often mean more revenue for companies to invest in research and development and thus an increase in their ability to design new products and deliver more value to customers the dynamics of price leadership may also create a system of interdependence rather than rivalry when firms in the same market choose a parallel pricing structure instead of undercutting each other it fosters a positive environment conducive to growth for all companies there are also many potential disadvantages to the emergence of price leadership within an industry in general price leadership is only advantageous to businesses in terms of their profits and performance price leadership where prices are increased does not convey any material advantages to consumers however in the case where the price leader lowers prices consumers may benefit from less expensive goods and services in every price leadership model barometric collusive dominant it is the sellers that benefit from increased revenues not the consumers customers will need to pay more for items that they were used to getting for less before the sellers conspired to raise prices consumers however may benefit in the short run if a price leader lowers prices this assumes the price leader is not using predatory pricing to drive firms not able to respond out of business and later on exert monopoly pressure and raise prices price leadership can also be unfair to smaller firms because small firms who attempt to match a leader s prices may not have the same economies of scale as the leaders this can make it hard for them to sustain consistent price declines and in the long term to remain in business price leadership can also result in malpractices on the part of competing firms that make the decision not to follow the leader s prices instead they may engage in aggressive promotion strategies such as rebates money back guarantees free delivery services and installment payment plans finally in a price leadership model there is an inevitable discrepancy between the benefits conferred to the price leader versus the benefits conferred to other firms operating in the same industry for example if it costs the price leader less capital to produce the same product than it costs another firm then the leader will set lower prices this will result in a loss for any firm that has higher costs than the price leader | |
what is cost leadership versus price leadership | cost leadership and price leadership are two closely related concepts cost leadership occurs when a firm is able to produce goods at the lowest cost relative to its competitors typically by achieving economies of scale or finding ways to maximize efficiency price leadership is centered on a firm s ability to set consumer facing prices | |
what is the opposite of price leadership | the inverse of price leadership is price followership when a firm closely and regularly monitors the prices set by its competitors and then seeks to match them this firm is a price follower | |
what is an example of a price leader | as mentioned above airlines can be good examples of price leaders the airline industry is typically dominated by a few big firms and there are high barriers to entry into the sector consequently airlines that dominate certain routes may be able to set prices as they wish if there isn t sufficient competition to challenge them the bottom lineprice leadership occurs in a market when a single firm is influential enough to set prices for goods and services other firms in a market usually have little choice but to follow a price leader s move price leadership can take many forms with the primary ones being barometric collusive and dominant | |
what is price level | price level is the average of current prices across the entire spectrum of goods and services produced in an economy in more general terms price level refers to the price or cost of a good service or security in the economy price levels may be expressed in small ranges such as ticks with securities prices or presented as a discrete value such as a dollar figure in economics price levels are a key indicator and are closely watched by economists they play an important role in the purchasing power of consumers as well as the sale of goods and services it also plays an important part in the supply demand chain understanding price levelthere are two meanings of the term price level in the world of business the first is what most people are accustomed to hearing about namely the price of goods and services or the amount of money a consumer or other entity is required to give up to purchase a good service or security in the economy prices rise as demand increases and drop when demand decreases the movement in prices is used as a reference for inflation and deflation or the rise and fall of prices in the economy if the prices of goods and services rise too quickly when an economy experiences inflation a central bank can step in and tighten its monetary policy and raise interest rates this in turn decreases the amount of money in the system thereby decreasing aggregate demand if prices drop too quickly the central bank can do the reverse loosen its monetary policy thereby increasing the economy s money supply and aggregate demand the other meaning of price level refers to the price of assets traded on the market such as a stock or a bond which is often referred to as support and resistance as in the case of the definition of price in the economy demand for a security increases when its price drops this forms the support line when the price increases a sell off occurs cutting off demand this is where the resistance zone lies price level in the economyin economics price level refers to the buying power of money or inflation in other words economists describe the state of the economy by looking at how much people can buy with the same dollar of currency the most common price level index is the consumer price index cpi the price level is analyzed through a basket of goods approach in which a collection of consumer based goods and services is examined in aggregate changes in the aggregate price over time push the index measuring the basket of goods higher weighted averages are typically used rather than geometric means price levels provide a snapshot of prices at a given time making it possible to review changes in the broad price level over time as prices rise inflation or fall deflation consumer demand for goods is also affected which leads to changes in broad production measures such as gross domestic product gdp price levels are one of the most watched economic indicators in the world economists widely believe that prices should stay relatively stable year to year so that they don t cause undue inflation if price levels rise too quickly central banks or governments look for ways to decrease the money supply or the aggregate demand for goods and services although prices change gradually over time during inflationary periods they can change more than once a day when an economy experiences hyperinflation price level in the investment worldtraders and investors make money by buying and selling securities they buy and sell when the price reaches a certain level these price levels are referred to as support and resistance traders use these areas of support and resistance to define entry and exit points support is a price level where a downtrend is expected to pause due to a concentration of demand as the price of a security drops demand for the shares increases forming the support line meanwhile resistance zones arise due to a sell off when prices increase once an area or zone of support or resistance is identified it provides valuable potential trade entry or exit points this is so because as a price reaches a point of support or resistance it will do one of two things bounce back away from the support or resistance level or violate the price level and continue in its direction until it hits the next support or resistance level | |
what is the price rate of change roc indicator | the price rate of change roc is a momentum based technical indicator that measures the percentage change in price between the current price and the price a certain number of periods ago the roc indicator is plotted against zero with the indicator moving upwards into positive territory if price changes are to the upside and moving into negative territory if price changes are to the downside the indicator can be used to spot divergences overbought and oversold conditions and centerline crossovers image by sabrina jiang investopedia 2021formula for the price roc indicator current price price n periods agoprice n periods ago 100 begin aligned bigg frac text current price text price n text periods ago text price n text periods ago bigg times100 end aligned price n periods agocurrent price price n periods ago 100 | |
how to calculate the price roc indicator | the main step in calculating the roc is picking the n value short term traders may choose a small n value such as nine longer term investors may choose a value such as 200 the n value is how many periods ago the current price is being compared to smaller values will see the roc react more quickly to price changes but that can also mean more false signals a larger value means the roc will react slower but the signals could be more meaningful when they occur | |
what does the price roc indicator tell you | the price rate of change is classed as a momentum or velocity indicator because it measures the strength of price momentum by the rate of change for example if a stock s price at the close of trading today is 10 and the closing price five trading days prior was 7 then the five day roc is 42 85 calculated as 10 7 7 100 42 85 begin aligned 10 7 div 7 times 100 42 85 end aligned 10 7 7 100 42 85 like most momentum oscillators the roc appears on a chart in a separate window below the price chart the roc is plotted against a zero line that differentiates positive and negative values positive values indicate upward buying pressure or momentum while negative values below zero indicate selling pressure or downward momentum increasing values in either direction positive or negative indicate increasing momentum and moving back toward zero indicates waning momentum zero line crossovers can be used to signal trend changes depending on the n value used these signals may come early in a trend change small n value or very late in a trend change larger n value the roc is prone to whipsaws especially around the zero line therefore this signal is generally not used for trading purposes but rather to simply alert traders that a trend change may be underway overbought and oversold levels are also used these levels are not fixed but will vary by the asset being traded traders look to see what roc values resulted in price reversals in the past often traders will find both positive and negative values where the price reversed with some regularity when the roc reaches these extreme readings again traders will be on high alert and watch for the price to start reversing to confirm the roc signal with the roc signal in place and the price reversing to confirm the roc signal a trade may be considered roc is also commonly used as a divergence indicator that signals a possible upcoming trend change divergence occurs when the price of a stock or another asset moves in one direction while its roc moves in the opposite direction for example if a stock s price is rising over a period of time while the roc is progressively moving lower then the roc is indicating bearish divergence from price which signals a possible trend change to the downside the same concept applies if the price is moving down and roc is moving higher this could signal a price move to the upside divergence is a notoriously poor timing signal since a divergence can last a long time and won t always result in a price reversal price roc indicator vs momentum indicatorthe two indicators are very similar and will yield similar results if using the same n value in each indicator the primary difference is that the roc divides the difference between the current price and price n periods ago by the price n periods ago this makes it a percentage most calculations for the momentum indicator don t do this instead the difference in price is simply multiplied by 100 or the current price is divided by the price n periods ago and then multiplied by 100 both these indicators end up telling similar stories although some traders may marginally prefer one over the other as they can provide slightly different readings the formula for the momentum indicator is momentum indicator closing pricepclosing pricep n 100where closing pricep closing price of most recent periodclosing pricep n closing price n periods beforemost recent period begin aligned text momentum indicator left frac text closing price p text closing price p n right times100 textbf where text closing price p text closing price of most recent period text closing price p n text closing price n text periods before text most recent period end aligned momentum indicator closing pricep n closing pricep 100where closing pricep closing price of most recent periodclosing pricep n closing price n periods beforemost recent period limitations of using the price roc indicatorone potential problem with using the roc indicator is that its calculation gives equal weight to the most recent price and the price from n periods ago despite the fact that some technical analysts consider more recent price action to be of more importance in determining likely future price movement the indicator is also prone to whipsaws especially around the zero line this is because when the price consolidates the price changes shrink moving the indicator toward zero such times can result in multiple false signals for trend trades but do help confirm the price consolidation while the indicator can be used for divergence signals the signals often occur far too early when the roc starts to diverge the price can still run in the trending direction for some time therefore divergence should not be acted on as a trade signal but could be used to help confirm a trade if other reversal signals are present from other indicators and analysis methods | |
what is price sensitivity | price sensitivity is the degree to which the price of a product affects consumers purchasing behaviors generally speaking it s how demand changes with the change in the cost of products in economics price sensitivity is commonly measured using the price elasticity of demand or the measure of the change in demand based on its price change for example some consumers are not willing to pay a few extra cents per gallon for gasoline especially if a lower priced station is nearby | |
when companies and product manufacturers study and analyze price sensitivity they can make sound decisions about products and services | understanding price sensitivityprice sensitivity can basically be defined as the extent to which demand changes when the price of a product or service changes the price sensitivity of a product varies with the relative level of importance consumers place on price compared to other purchasing criteria some people may value quality over price making them less susceptible to price sensitivity for example customers seeking top quality goods are typically less price sensitive than bargain hunters so they re willing to pay more for a high quality product by contrast people who are more sensitive to price may be willing to sacrifice quality these individuals will not spend more for something like a brand name even if it has a higher quality than a generic store brand product price sensitivity varies from person to person or from one consumer to the next some people are able and willing to pay more for goods and services than others companies and governments are also able to pay more compared to individuals but even one individual can have different price sensitivities for different purchases for instance someone may price shop when they re buying paper towel but be more focused on quality than price when they re looking for a dining room table at some point demand will fall to or close to zero if it reaches a certain price the law of demand states that if all other market factors remain constant a relative price increase leads to a drop in the quantity demanded inelastic demand means consumers are more willing to buy a product even after price increases high elasticity means even small price increases may significantly lower demand in a perfect world businesses would set prices at the exact point where supply and demand produce as much revenue as possible this is referred to as the equilibrium price although this is difficult computer software models and real time analysis of sales volume at given price points can help determine equilibrium prices even if a small price rise diminishes sales volume the relative gains in revenue may overcome a proportionally smaller decline in consumer purchases influences on price sensitivityprice sensitivity places a premium on understanding the competition the buying process and the uniqueness of products or services in the marketplace for example consumers have lower price sensitivity if a product or service is unique or has few substitutes consumers are less sensitive to price when the total cost is low compared to their total income likewise the total expenditure compared to the total cost of the end product affects price sensitivity for example if registration costs for a convention are low compared to the total cost of travel hotel and food expenses attendees may be less sensitive to the registration fee | |
when the expense is shared consumers have less price sensitivity people attending the same conference may share one hotel room making them less sensitive to the hotel room rate | price sensitivity varies from person to person and good or service with some items deemed worthy of costing a premium and others not consumers also have less price sensitivity when a product or service is used along with something they already own for instance once members pay to join an association they are typically less sensitive to paying for other association services consumers also have less price sensitivity when the product or service is viewed as prestigious exclusive or possessing high quality for example an association may have a premium feature of its membership delivered through its programs and services making members less price sensitive to changes in dues business pricing strategiesthere are a number of different factors that businesses use to come up with pricing strategies these factors will separate consumers based on their sensitivity to prices businesses may use marketing and advertising techniques to get consumers to shift their focus from price to other factors such as product offerings benefits and other values this is common in the travel tourism and hospitality industries airlines will generally charge more for certain flights especially on weekends or for different classes of flights many business travelers are less sensitive to price changes | |
what is a high price sensitivity | high price sensitivity means consumers are especially sensitive to price changes and are likely to spurn a good or service if it suddenly costs more than similar alternatives | |
what products are price sensitive | generally speaking the products that are most price sensitive are those that have lots of competition and don t stand out much in terms of quality or prestige price sensitivity can also become a bigger factor among higher priced products since these purchases command a significant portion of the buyer s budget a 2 jump in a favorite cereal brand may even potentially go unnoticed however add that same percentage to a big ticket item and it s more likely the consumer will shop around for cheaper alternatives | |
what is price insensitive | price insensitive is the opposite of price sensitive it means demand remains the same when the price goes up or down | |
how do you calculate price sensitivity | one way to measure price sensitivity is to divide the percentage change in quantity demanded by the percentage change in price so for example if a 30 jump in the cost of a soda drink leads to a 10 drop in purchases we can conclude that the item has a price sensitivity of 0 33 the bottom lineprice sensitivity affects how much money companies and employers generate from their activities and consumer spending that makes it a crucial component of the economy and something very much worth keeping tabs on | |
what is price skimming | price skimming is a pricing strategy in which a company starts by charging the highest price that customers will pay over time the company lowers the price to reach different types of customers initially the high price targets early adopters willing to pay more for a new product as these early customers are satisfied and competitors enter the market the company reduces prices to attract more price sensitive consumers 1 price skimming originates from skimming layers like removing successive layers of cream from the top of milk unlike penetration pricing which starts with a low price to attract a large customer base quickly price skimming leverages initial high prices to maximize early profits before adjusting to more competitive levels 2investopedia sydney saporito | |
how price skimming works | price skimming is often used when a new product type enters the market the goal is to gather as much revenue as possible while high consumer demand and competition haven t entered the market this approach works well for products with a high perceived value or innovative features where early adopters are less sensitive to price initially targeting these consumers companies can recover their investment quickly and generate significant early profits once the market becomes more saturated with competitors lowering the price helps capture a broader audience and maintain market share key factors for effective price skimming include understanding the product s life cycle projected demand and the competitive landscape high demand allows for higher initial prices while increased competition necessitates price adjustments 4skimming can encourage the entry of competitors since other firms will notice the artificially high margins available in the product they will quickly enter this approach contrasts with the penetration pricing model which focuses on releasing a lower priced product to grab as much market share as possible this technique is generally better suited for lower cost items such as basic household supplies where price may be a driving factor in most customers production selections firms often use price skimming to recover development costs and in situations where for new products like innovative home technology a high initial price can signal quality and exclusivity this attracts early adopters willing to spend more and can generate valuable word of mouth marketing 5price skimming exampleone of the most common examples of price skimming is the launch of apple s iphone when apple introduces a new iphone model it tends to set a high initial price to target early adopters willing to pay a premium for the latest technology however as demand from this segment is met and newer iphone models are released apple gradually lowers the price of the older models to attract more price sensitive customers this strategy allows apple to maximize early revenue from a new product and gradually expand its market reach without alienating different customer segments by lowering prices over time apple can remain competitive and continues to generate sales throughout the product s life cycle price skimming carries a timing risk customers may switch to cheaper alternatives if the price reduction occurs too late this could lead to lost sales and reduced revenue as competitors capture more price sensitive customers however there s also the risk of dropping prices too early for example when apple reduced the price of its iphone by a third after only two months on the market loyal buyers complained forcing ceo steve jobs to apologize and offer a partial rebate 6price skimming limitsgenerally the price skimming model is best used for a short time allowing the early adopter market to become saturated but not alienating price conscious buyers over the long term if the price isn t reduced promptly consumers may turn to cheaper competitors resulting in lost sales and revenue price skimming may also be less effective for any competitor s follow up products for example once the initial market of early adopters has purchased the latest gaming console other buyers may not purchase a competing product at a higher price without significant improvements over the original | |
what is the meaning of price skimming | price skimming is a strategy where a company introduces a new or innovative product at a high price to maximize revenue from customers willing to pay a premium once the demand from these early adopters is met the company gradually reduces the price to attract more price sensitive buyers this method helps maximize profits in the early stages of the product s life cycle and assists in recovering development costs | |
is price skimming illegal | no price skimming isn t illegal however if not executed correctly it can cost a company a buyer s trust the key to the strategy is to price the product right at launch and then time the price reduction appropriately when done correctly it can maximize revenue without alienating customers | |
what types of businesses use price skimming | price skimming is commonly used by businesses in industries where products have high initial development costs and significant consumer interest this includes technology companies like apple and samsung which use this strategy for new smartphone and gadget launches as well as high end fashion brands and automobile makers 7the bottom lineprice skimming sets high initial prices for new innovative products to target early adopters then lowers prices over time to attract more budget conscious buyers this approach maximizes early profits and helps recover development costs as seen with apple s iphone however timing is critical for example delaying price cuts can drive customers to competitors though effective price skimming works best for highly innovation products or products with a high perceived value it s less successful for follow up competitor products because the early adopter market may already be saturated | |
what is price stickiness | price stickiness is the resistance of a market price to change quickly despite shifts in the broad economy suggesting a different price is optimal sticky is a general economics term that can apply to any financial variable that is resistant to change when applied to prices it means that the sellers or buyers of certain goods are reluctant to change the price despite changes in input cost or demand patterns price stickiness would occur for instance if the price of a once in demand smartphone remains high at say 800 even when demand drops significantly price stickiness can also be referred to as nominal rigidity and is related to wage stickiness understanding price stickinessthe laws of supply and demand hold that quantity demanded for a good falls as the price rises and the quantity supplied rises when prices rise and vice versa most goods and services are expected to respond to the laws of demand and supply however this adjustment process takes time and with certain goods and services does not always happen very quickly due to price stickiness price stickiness or sticky prices refers to the tendency of prices to remain constant or to adjust slowly despite changes in the cost of producing and selling the goods or services this stickiness can have a number of important implications for the operations and efficiency of the economy for example from a microeconomic perspective price stickiness can induce the same welfare reducing effects and deadweight losses as government imposed price controls in a macroeconomic context it may mean that changes in the money supply have an impact on the real economy inducing changes in investment employment output and consumption rather than just nominal price levels | |
when prices cannot adjust immediately to changes in economic conditions or in the supply of money there is an inefficiency in the market that is a market disequilibrium exists as long as prices fail to adjust the presence of price stickiness is an important part of new keynesian macroeconomic theory since it can explain why markets might not reach equilibrium in the short run or even possibly in the long run | the fact that price stickiness exists can be attributed to several different forces such as the costs to update pricing including changes to marketing materials that must be made when prices do change these are known as menu costs part of price stickiness is also attributed to imperfect information in the markets or irrational decision making by company executives some firms will try to keep prices constant as a business strategy even though it is not sustainable based on costs of material labor etc price stickiness appears in situations where a long term contract is involved a company that has a two year contract to supply office equipment to another business is stuck to the agreed price for the duration of the contract even if relevant conditions change such as the government raising taxes or production costs changing special considerationsprice stickiness can occur in just one direction if prices move up or down with little resistance but not easily in the opposite direction a price is said to be sticky up if it can move down rather easily but will only move up with pronounced effort when the market clearing price implied by new circumstances rises the observed market price remains artificially lower than the new market clearing level resulting in excess demand or scarcity sticky down refers to the tendency of a price to move up easily but prove quite resistant to moving down therefore when the implied market clearing price drops the observed market price remains artificially higher than the new market clearing level resulting in excess supply or a surplus the concept of price stickiness can also apply to wages when sales fall in a company the company doesn t resort to cutting wages as a person becomes accustomed to earning a certain wage they are not normally willing to take a pay cut and so wages tend to be sticky in his book the general theory of employment interest and money john maynard keynes argued that nominal wages display downward stickiness in the sense that workers are reluctant to accept cuts in nominal wages this can lead to involuntary unemployment as it takes time for wages to adjust to equilibrium from a business perspective it is often preferable to layoff less productive employees rather than cut pay across the board which could demotivate all workers including those that are most productive union and civil service wage contracts may also strongly contribute to downward stickiness of wages in the same way as other types of long term contracts | |
what is price stickiness in oligopoly | oligopolies are markets in which a few firms exert significant control price stickiness can be characteristic of oligopolies because firms may hesitate to change raise prices for fear of ceding market share to other firms but also to lower their prices out of concern that doing so may trigger price competition | |
what is another word for price stickiness | as mentioned above nominal rigidity is another term used to refer to stickiness in economics it refers to the rigidity or firmness of the face value of prices even when economic conditions would suggest that another price is more optimal | |
why is price stickiness bad | price stickiness can lead to market inefficiences consider the grocery store during a period of supply chain disruption prices for produce and packaged goods may increase to reflect higher labor transportation and manufacturing costs if economic conditions later smoothed out consumers would expect that prices would fall back to their previous equilibrium however if prices were sticky down then they may remain at higher levels even if these were not optimal prices this could lead to inflationary pressures that ripple through the rest of the broader economy the bottom lineprice stickiness is the quality that a market price exhibits when it responds slowly or not at all to economic shifts that indicate a more optimal price the idea of stickiness can be applied to other economic concepts including wages price stickiness leads to inefficiencies in the market | |
what is a price taker | a price taker is an individual or company that must accept prevailing prices in a market lacking the market share to influence market price on its own all economic participants are considered to be price takers in a perfectly competitive market as defined as one in which all companies sell an identical product there are no barriers to entry or exit each company has a relatively small market share and all buyers have full information in the stock market individual investors are considered to be price takers while market makers are those who set the bid and offer in a security being a market maker however does not mean that they can set any price they want market makers are in competition with one another and are constrained by the economic laws of the markets like supply and demand understanding price takersin most competitive markets firms are price takers if firms charge higher than prevailing market prices for their products consumers will simply purchase from a different lower cost seller to the extent that these firms all sell identical substitutable goods or services grain markets are a prime example of a good that is almost identical in quality between its many sellers so the price of grain is determined by competitive activity in domestic and global markets and commodities exchanges in the case of wheat low cost producers will have a competitive advantage in that they will be able to drive out high cost producers and take their market share by offering progressively lower prices technological innovation that lowers the cost of production is part of the process of competition whereby capitalist firms have no choice but to be price takers the market for oil is slightly different while oil is competitively produced as a standardized commodity on a global market the industry imposes steep barriers to entry for sellers this is due to the high capital costs and expertise needed to drill or refine oil as well as the high bidding price of oil fields as a result there are relatively few oil producing firms compared to wheat farmers and so most consumers of gasoline and other petroleum products are the price takers they have few producers to choose from outside a handful of global companies the organization of petroleum exporting countries opec also has great power to move prices up and down through controls on output this underscores how a consumer is price taking to the extent that he can t or doesn t want to produce the good on his own nevertheless due to intense competition and technological innovation among these firms consumers still get oil at low prices the nature of an industry or market greatly dictates whether firms and individuals are price takers for example most consumers in retail markets are indeed price takers for instance you walk into a clothing store or supermarket and decide what to buy or not but you are beholden to the price tag attached to a product you cannot go to your supermarket and competitively bid for a dozen eggs or a box of cereal you must take the price being offered or leave it online auction sites such as ebay for example allow consumers to bid in such cases some sellers may become the price takers special considerations different types of marketsa perfectly competitive market is rare in most markets each firm or individual has a varying ability to influence prices either through sales or purchases the polar opposites of perfectly competitive markets are monopolies and monopsonies a monopoly is a market in which a single seller or a group of sellers controls an overwhelming share of supply giving the seller or sellers the power to drive up prices on their own opec has a monopoly to a degree a monopsony is a market in which a single buyer or a group of buyers has a significant enough share of demand to drive prices down | |
what is a price taker example | one of the most evident examples of a price taker is an individual shopping for an airplane ticket in most cases consumers can not negotiate airfare with airlines rather ticket prices for all class types are set and controlled by the firms flyers can choose either to take those prices or to not fly at all | |
is a price taker a buyer or seller | price takers are not necessarily always buyers any participant in a market can be a price taker let s take a hypothetical regional dairy market for example in this case there might be many sellers who have produced milk and are trying to sell it however imagine there was just one buyer for this milk say a single large processing facility within this region in this case then the sellers of milk would be price takers | |
what is a price taker behavior | price takers are characterized by an inability to control prices they do not have leverage or power to negotiate prices rather they must accept the prevailing prices or not engage in the market at all the bottom linein economics price takers refer to firms or individuals that must accept prevailing market prices examples of price takers and their opposite price makers are widely prevalent throughout every sector from retail shopping to oil and commodities markets in a hypothetical market with perfect competition all participants are price takers | |
what is a price target | a price target is an analyst s projection of a security s future price price targets can pertain to all types of securities from complex investment products to stocks and bonds when setting a stock s price target an analyst is trying to determine what the stock is worth and where the price will be in 12 or 18 months ultimately price targets depend on the valuation of the company that s issuing the stock analysts generally publish their price targets in research reports on specific companies along with their buy sell and hold recommendations for the company s stock stock price targets are often quoted in the financial news media understanding price targetsa price target is a price at which an analyst believes a stock to be fairly valued relative to its projected and historical earnings when an analyst raises their price target for a stock they generally expect the stock price to rise conversely lowering their price target may mean that the analyst expects the stock price to fall price targets are an organic factor in financial analysis they can change over time as new information becomes available factors that help to determine a price targetthe price target is based on assumptions about a security s future supply and demand technical levels and fundamentals different analysts and financial institutions use various valuation methods and take into account different economic conditions when deciding on a price target for fundamental analysts a common way to discern the price target for a stock is to create a multiple of the price to earnings p e ratio by multiplying the market price by the company s trailing 12 month earnings 1in some cases particularly with volatile stocks analysts will look for additional guidance to form their price targets which could include reviewing a company s balance sheet and other financial statements and comparing them to historical results current economics and the competitive environment studying the health of a company s management and analyzing other ratios technical analysts use indicators price action statistics trends and price momentum to gauge the future price of a security one way that they arrive at a price target is to find areas of defined support and resistance an analyst will do this by charting a price that moves between at least two similar highs and lows without breaking above or below those points at any point in between special considerations about price targetstraders will generally look to exit their position on a stock when the originally expected value of the trade has been recognized although price targets can help traders understand when to buy or sell a stock traders can and should determine their own price targets for entering and exiting positions for individual investors the assumptions that underlie analysts price targets are not always obvious investors should use analysts price targets and recommendations as just one part of their investment due diligence which could include reviewing a company s financials and regulatory filings among other resources despite the most careful analysis we cannot know for certain the price at which a stock will trade in the future nevertheless when a prominent analyst changes their price target it can have a significant impact on the price of a security accurately forecasting a security s price movement is based on projection probability numerous tools and lots of experience however even for the most seasoned professional a price target is still a calculated guess some portfolio managers believe that price targets along with research reports function mainly as marketing tools for brokerages and investment banks to generate interest in a security that they re underwriting | |
how are price targets calculated | price targets try to predict what a given security will be worth at some point in the future analysts attempt to satisfy this basic question by projecting a security s future price using a blend of fundamental data points and educated assumptions about the security s future valuation | |
are price targets accurate | despite the best efforts of analysts a price target is a guess with the variance in analyst projections linked to their estimates of future performance studies have found that historically the overall accuracy rate is around 30 for price targets with 12 18 month horizons however price targets do have the ability to sway investor sentiment especially if they come from credible analysts | |
where are price targets found | analysts generally publish their price targets in research reports on specific companies along with their buy sell and hold recommendations for the company s stock stock price targets are often quoted in the financial news media | |
what is the price to book p b ratio | many investors use the price to book ratio p b ratio to compare a firm s market capitalization to its book value and locate undervalued companies this ratio is calculated by dividing the company s current stock price per share by its book value per share bvps investopedia theresa chiechiformula and calculation of the price to book p b ratiothe formula for the price to book ratio is p b r a t i o m a r k e t p r i c e p e r s h a r e b o o k v a l u e p e r s h a r e p b ratio dfrac market price per share book value per share p b ratio book value per sharemarket price per share | |
where | market value per share is obtained by looking at the information available on most stock tracking websites you need to find the company s balance sheet to obtain total assets total liabilities and outstanding shares most investment websites display this financial report under a financials tab some show it on a stock s summary tab | |
what the price to book p b ratio can tell you | the p b ratio reflects the value that market participants attach to a company s equity relative to the book value of its equity many investors use the p b ratio to find undervalued stocks by purchasing an undervalued stock they hope to be rewarded when the market realizes the stock is undervalued and returns its price to where it should be according to the investor s analysis some investors believe that the p b ratio is a forward looking metric that reflects a company s future cash flows however when you look at the information used to calculate the p b ratio the factors used are the price investors are willing to pay currently the number of shares issued by a company and values from a balance sheet that reflect data from the past thus the ratio isn t forward looking and doesn t predict or indicate future cash flows the p b ratio also provides a valuable reality check for investors seeking growth at a reasonable price it is often evaluated with return on equity roe a reliable growth indicator large discrepancies between the p b ratio and roe often raise a red flag for investors overvalued growth stocks frequently show a combination of low roe and high p b ratios properly valued stocks have roe and p b ratios that grow somewhat similarly because stocks that generate higher returns tend to attract investors and increase demand thus increasing the stock s market price a high p b ratio suggests a stock could be overvalued while a lower p b ratio could mean the stock is undervalued as with most ratios the p b ratio varies by industry a company should be compared with similarly structured companies in similar industries otherwise the comparison results could be misleading it is difficult to pinpoint a specific numeric value of a good price to book p b ratio when determining if a stock is undervalued and therefore a good investment it s helpful to identify some general parameters or a range for p b value then consider various other factors and valuation measures that more accurately interpret the p b value and forecast a company s potential for growth the p b ratio has been favored by value investors for decades and is widely used by market analysts traditionally any value under 1 0 is considered desirable for value investors indicating an undervalued stock may have been identified however some value investors may often consider stocks with a less stringent p b value of less than 3 0 as their benchmark due to accounting procedures the market value of equity is typically higher than a security s book value resulting in a p b ratio above 1 0 during times of low earnings a company s p b ratio can dive below a value of 1 0 for example in most cases companies must expense research and development costs reducing book value because this includes the expenses on the balance sheet however these r d outlays can create unique production processes for a company or result in new patents that can bring royalty revenues while accounting principles favor a conservative approach in capitalizing costs market participants may raise the stock price because of such r d efforts resulting in wide differences between the market and book values of equity example of how to use the price to book p b ratioassume that a company has 100 million in assets on the balance sheet no intangibles and 75 million in liabilities therefore the book value of that company would be calculated as 25 million 100 million 75 million if there are 10 million shares outstanding each share would represent 2 50 of book value therefore if the share price is 5 the p b ratio would be 2 0 5 2 50 this illustrates that the market price is valued at twice its book value which may or may not indicate overvaluation this would depend on how p b ratios compare against other similarly sized companies in the same sector the price to book ratio may not be as useful when evaluating the stock of a company with fewer tangible assets on its balance sheets such as services firms and software development companies price to book p b ratio vs price to tangible book ratioclosely related to the p b ratio is the price to tangible book value ratio ptvb the latter is a valuation ratio expressing the price of a security compared to its hard or tangible book value as reported in the company s balance sheet the tangible book value number is equal to the company s total book value less than the value of any intangible assets intangible assets can be items such as patents intellectual property and goodwill this may be a more useful valuation measure when valuing something like a patent in different ways or if it is difficult to put a value on such an intangible asset in the first place limitations of using the price to book p b ratioinvestors find the p b ratio useful because the book value of equity provides a relatively stable and intuitive metric they can easily compare to the market price the p b ratio can also be used for firms with positive book values and negative earnings since negative earnings render price to earnings ratios useless there are fewer companies with negative book values than companies with negative earnings however when accounting standards applied by firms vary p b ratios may not be comparable especially for companies from different countries additionally p b ratios can be less useful for service and information technology companies with little tangible assets on their balance sheets finally the book value can become negative because of a long series of negative earnings making the p b ratio useless for relative valuation other potential problems in using the p b ratio stem from the fact that any number of scenarios such as recent acquisitions recent write offs or share buybacks can distort the book value figure in the equation when searching for undervalued stocks investors should consider multiple valuation measures to complement the p b ratio | |
what does the price to book p b ratio compare | the price to book ratio is a commonly used financial ratio it compares a share s market price to its book value essentially showing the value given by the market for each dollar of the company s net worth high growth companies often show price to book ratios well above 1 0 whereas companies facing financial distress occasionally show ratios below 1 0 another valuable tool is the price to sales ratio which shows the company s revenue generated from equity investments | |
why is the price to book p b ratio important | the price to book ratio is important because it can help investors understand whether a company s market price seems reasonable compared to its balance sheet for example if a company shows a high price to book ratio investors might check to see whether that valuation is justified given other measures such as its historical return on assets or growth in earnings per share eps | |
what counts as a good price to book ratio will depend on the industry in question and the overall state of valuations in the market an investor assessing the price to book ratio of a stock might choose to accept a higher average price to book ratio as compared to an investor looking at the stock of a company in an industry where lower price to book ratios are the norm | the bottom linethe price to book p b ratio considers how a stock is priced relative to the book value of its assets if the p b is under 1 0 then the market is thought to be underpricing the stock since the accounting value of its assets if sold would be greater than the market price of the shares therefore value investors typically look for companies that have low price to book ratios among other metrics a high p b ratio can also help investors identify and avoid overvalued companies | |
what is the price to cash flow p cf ratio | the price to cash flow p cf ratio is a stock valuation indicator or multiple that measures the value of a stock s price relative to its operating cash flow per share the ratio uses operating cash flow ocf which adds back non cash expenses such as depreciation and amortization to net income p cf is especially useful for valuing stocks that have positive cash flow but are not profitable because of large non cash charges investopedia jiaqi zhouthe formula for the price to cash flow p cf ratio is price to cash flow ratio share price operating cash flow per share text price to cash flow ratio frac text share price text operating cash flow per share price to cash flow ratio operating cash flow per shareshare price in order to avoid volatility in the multiple a 30 or 60 day average price can be utilized to obtain a more stable stock value that is not skewed by random market movements the operating cash flow ocf used in the denominator of the ratio is obtained through a calculation of the trailing 12 month ttm ocfs generated by the firm divided by the number of shares outstanding in addition to doing the math on a per share basis the calculation can also be done on a whole company basis by dividing a firm s total market value by its total ocf | |
what does the price to cash flow p cf ratio tell you | the p cf ratio measures how much cash a company generates relative to its stock price rather than what it records in earnings relative to its stock price as measured by the price earnings p e ratio the p cf ratio is said to be a better investment valuation indicator than the p e ratio because cash flows cannot be manipulated as easily as earnings which are affected by accounting treatment for items such as depreciation and other non cash charges some companies may appear unprofitable because of large non cash expenses for example even though they have positive cash flows example of the price to cash flow p cf ratioconsider a company with a share price of 10 and 100 million shares outstanding the company has an ocf of 200 million in a given year its ocf per share is as follows 200 million 100 million shares 2 frac text 200 million text 100 million shares 2 100 million shares 200 million 2the company thus has a p cf ratio of 5 or 5x 10 share price ocf per share of 2 this means that the company s investors are willing to pay 5 for every dollar of cash flow or that the firm s market value covers its ocf five times alternatively one can calculate the p cf ratio on a whole company level by taking the ratio of the company s market capitalization to its ocf the market capitalization is 10 x 100 million shares 1 000 million so the ratio can also be calculated as 1 000 million 200 million 5 0 which is the same result as calculating the ratio on a per share basis special considerationsthe optimal level of this ratio depends on the sector in which a company operates and its stage of maturity a new and rapidly growing technology company for instance may trade at a much higher ratio than a utility that has been in business for decades this is because although the technology company may only be marginally profitable investors will be willing to give it a higher valuation because of its growth prospects the utility on the other hand has stable cash flows but few growth prospects and as a result trades at a lower valuation there is no single figure that points to an optimal p cf ratio however generally speaking a ratio in the low single digits may indicate the stock is undervalued while a higher ratio may suggest potential overvaluation the p cf ratio vs the price to free cash flow ratiothe price to free cash flow ratio is a more rigorous measure than the p cf ratio though very similar to p cf this metric is considered a more exact measure because it uses free cash flow fcf which subtracts capital expenditures capex from a company s total ocf thereby reflecting the actual cash flow available to fund non asset related growth companies use this metric when they need to expand their asset bases either to grow their businesses or simply to maintain acceptable levels of fcf | |
what is the price to earnings p e ratio | the price to earnings p e ratio measures a company s share price relative to its earnings per share eps often called the price or earnings multiple the p e ratio helps assess the relative value of a company s stock it s handy for comparing a company s valuation against its historical performance against other firms within its industry or the overall market investopedia xiaojie liuunderstanding the p e ratiothe p e ratio is one of the most widely used by investors and analysts reviewing a stock s relative valuation it helps to determine whether a stock is overvalued or undervalued a company s p e can also be benchmarked against other stocks in the same industry or against the broader market such as the s p 500 index analysts interested in long term valuation trends can look at the p e 10 or p e 30 measures which average the past 10 or 30 years of earnings these measures are often used when trying to gauge the overall value of a stock index such as the s p 500 because these longer term metrics can show overall changes through several business cycles the p e ratio of the s p 500 going back to 1927 has had a low of roughly 6 in mid 1949 and been as high as 122 in mid 2009 right after the financial crisis as of april 2024 the s p 500 s p e ratio was 26 26 1p e ratio formula and calculationthe formula and calculation are as follows p e ratio market value per share earnings per share text p e ratio frac text market value per share text earnings per share p e ratio earnings per sharemarket value per share to determine the p e value divide the stock price by the eps the stock price p can be found simply by searching a stock s ticker on a reputable financial website although this concrete value reflects what investors currently pay for the stock the eps is related to earnings reported at different times eps is generally given in two ways trailing 12 months ttm represents the company s performance over the past 12 months another is found in earnings releases which often provide eps guidance this is the company s advice on what it expects in future earnings these different versions of eps form the basis of trailing and forward p e respectively analysts and investors review a company s p e ratio to determine if the share price accurately represents the projected earnings per share forward price to earningsthe most commonly used p e ratios are the forward p e and the trailing p e a third and less typical variation uses the sum of the last two actual quarters and the estimates of the following two quarters the forward or leading p e uses future earnings guidance rather than trailing figures sometimes called estimated price to earnings this forward looking indicator helps compare current earnings to future earnings and can clarify what earnings will look like without changes and other accounting adjustments however there are problems with the forward p e metric namely companies could underestimate earnings to beat the estimated p e when the next quarter s earnings arrive furthermore external analysts may also provide estimates that diverge from the company estimates creating confusion trailing price to earningsthe trailing p e relies on past performance by dividing the current share price by the total eps for the previous 12 months it s the most popular p e metric because it s thought to be objective assuming the company reported earnings accurately but the trailing p e also has its share of shortcomings including that a company s past performance doesn t necessarily determine future earnings investors often base their purchases on potential earnings not historical performance using the trailing p e ratio can be a problem because it relies on a fixed earnings per share eps figure while stock prices are constantly changing this means that if something significant affects a company s stock price either positively or negatively the trailing p e ratio won t accurately reflect it in essence it might not provide an up to date picture of the company s valuation or potential the trailing p e ratio will change as the price of a company s stock moves because earnings are released only each quarter while stocks trade whenever the market is open as a result some investors prefer the forward p e if the forward p e ratio is lower than the trailing p e ratio analysts are expecting earnings to increase if the forward p e is higher than the current p e ratio analysts expect them to decline valuation from p ein addition to indicating whether a company s stock price is overvalued or undervalued the p e ratio can reveal how a stock s value compares with its industry or a benchmark like the s p 500 the p e ratio indicates the dollar amount an investor can expect to invest in a company to receive 1 of that company s earnings hence it s sometimes called the price multiple because it shows how much investors are willing to pay per dollar of earnings if a company trades at a p e multiple of 20x investors are paying 20 for 1 of current earnings the p e ratio also helps investors determine a stock s market value compared with the company s earnings that is the p e ratio shows what the market is willing to pay today for a stock based on its past or future earnings a high p e ratio could signal that a stock s price is high relative to earnings and is overvalued conversely a low p e could indicate that the stock price is low relative to earnings examples of the p e ratiolet s clarify this with an example looking at fedex corporation fdx we can calculate the p e ratio for fdx as of feb 9 2024 when the company s stock price closed at 242 62 the company s earnings per share eps for the trailing 12 months was 16 85 2therefore fdx s p e ratio was as follows let s now look at two energy companies to see their relative values hess corporation hes had the following data at the close of feb 9 2024 we ll use the diluted eps to account for what would occur should all convertible securities be exercised hes thus traded at about 31 times trailing earnings however the p e of 31 isn t helpful unless you have something to compare it with like the stock s industry group a benchmark index or hes s historical p e range hes s p e ratio was higher than the s p 500 which as of feb 9 2024 was about 22 times 12 month trailing earnings 4 to compare hes s p e ratio to a peer let s look at marathon petroleum corporation mpc | |
when you compare hes s p e of 31 to mpc s of 7 hes s stock could appear substantially overvalued relative to the s p 500 and mpc alternatively hes s higher p e might mean that investors expect much higher earnings growth in the future than mpc | however no ratio can tell you everything you need about a stock before investing it s wise to use various financial tools to determine whether a stock is fairly valued investor expectationsin general a high p e suggests that investors expect higher earnings growth than those with a lower p e a low p e can indicate that a company is undervalued or that a firm is doing exceptionally well relative to its past performance when a company has no earnings or is posting losses the p e is expressed as n a though it s possible to calculate a negative p e it s not common the p e ratio can also standardize the value of 1 of earnings throughout the stock market in theory by taking the median of p e ratios over a period of several years one could formulate something of a standardized p e ratio which could then be seen as a benchmark and used to indicate whether a stock is worth buying a p e ratio of n a means the ratio is unavailable for that company s stock a company can have a p e ratio of n a if it s newly listed on the stock exchange and has not yet reported earnings such as with an initial public offering it could also mean a company has zero or negative earnings p e vs earnings yieldthe inverse of the p e ratio is the earnings yield which can be thought of as the earnings price ratio the earnings yield is the eps divided by the stock price expressed as a percentage if stock a is trading at 10 and its eps for the past year is 50 cents ttm it has a p e of 20 i e 10 50 cents and an earnings yield of 5 50 cents 10 if stock b is trading at 20 and its eps ttm is 2 it has a p e of 10 i e 20 2 and an earnings yield of 10 2 20 the earnings yield is not as widely used as the p e ratio earnings yields are useful if you re concerned about the rate of return on investment for equity investors who earn periodic investment income this may be a secondary concern this is why many investors may prefer value based measures like the p e ratio or stocks the earnings yield is also helpful when a company has zero or negative earnings since this is common among high tech high growth or startup companies eps will be negative and listed as an undefined p e ratio denoted as n a if a company has negative earnings however it would have a negative earnings yield which can be used for comparison p e vs peg ratioa p e ratio even one calculated using a forward earnings estimate doesn t always tell you whether the p e is appropriate for the company s expected growth rate to address this investors turn to the price earnings to growth ratio or peg the peg ratio measures the relationship between the price earnings ratio and earnings growth to give investors a complete picture investors use it to see if a stock s price is overvalued or undervalued by analyzing earnings and the expected growth rate for the company the peg ratio is calculated as a company s trailing price to earnings p e ratio divided by its earnings growth rate for a given period since it s based on both trailing earnings and future earnings growth peg is often viewed as more informative than the p e ratio for example a low p e ratio could suggest a stock is undervalued and worth buying however including the company s growth rate to get its peg ratio might tell a different story peg ratios can be termed trailing if using historical growth rates or forward if using projected growth rates although earnings growth rates can vary among different sectors a stock with a peg of less than one is typically considered undervalued because its price is low relative to its expected earnings growth a peg greater than one might be considered overvalued because it suggests the stock price is too high relative to the company s expected earnings growth 6absolute vs relative p eanalysts also distinguish between absolute p e and relative p e ratios in their analyses the numerator of this ratio is usually the current stock price and the denominator may be the trailing eps ttm the estimated eps for the next 12 months forward p e or a mix of the trailing eps of the last two quarters and the forward p e for the next two quarters | |
when distinguishing absolute p e from relative p e remember that absolute p e represents the p e of the current period for example if the stock price today is 100 and the ttm earnings are 2 per share the p e is 50 100 2 | the relative p e compares the absolute p e to a benchmark or a range of past p es over a relevant period such as the past 10 years the relative p e shows what portion or percentage of the past p es that the current p e has reached the relative p e usually compares the current p e value with the highest value of the range investors might also compare the current p e to the bottom side of the range measuring how close the current p e is to the historic low the relative p e will have a value below 100 if the current p e is lower than the past value whether the past is high or low if the relative p e measure is 100 or more this tells investors that the current p e has reached or surpassed the past value limitations of using the p e ratiolike any other fundamental metric the price to earnings ratio comes with a few limitations that are important to understand companies that aren t profitable and have no earnings or negative earnings per share pose a challenge for calculating p e views among analysts vary about how to deal with this some say there is a negative p e others assign a p e of 0 while most just say the p e doesn t exist n a until a company becomes profitable a main limitation of using p e ratios is for comparing the p e ratios of companies from varied sectors companies valuation and growth rates often vary wildly between industries because of how and when the firms earn their money as such one should only use p e as a comparative tool when considering companies in the same sector because this is the only kind that will provide worthwhile results for example comparing the p e ratios of a retail company and the p e of an oil and gas drilling company could suggest one is the superior investment but that s not a cogent conclusion an individual company s high p e ratio for example would be less cause for concern when the entire sector has high p e ratios other p e considerationsbecause a company s debt can affect both share price and earnings leverage can skew p e ratios as well for example suppose two similar companies differ in the debt they hold the firm with more debt will likely have a lower p e value than the one with less debt however if the business is solid the one with more debt could have higher earnings because of the risks it has taken another critical limitation of price to earnings ratios lies within the formula for calculating p e p e ratios rely on accurately presenting the market value of shares and earnings per share estimates the market determines the prices of shares available in many places however the source of earnings information is the company itself thus it s possible it could be manipulated so analysts and investors have to trust the company s officers to provide genuine information the stock will be considered riskier and less valuable if that trust is broken to reduce these risks the p e ratio is only one measurement analyst s review if a company were to manipulate its results intentionally it would be challenging to ensure all the metrics were aligned in how they were changed that s why the p e ratio continues to be a central data point when analyzing public companies though by no means is it the only one alternatives to p e ratioswhile the p e ratio is a commonly used metric you can also use several other alternatives one such alternative is the price to book p b ratio this ratio compares a company s market value to its book value the book value represents the company s net asset value according to its balance sheet the p b ratio is particularly useful for industries with substantial tangible assets and a lower p b ratio may indicate that the stock is undervalued another alternative is the price to sales p s ratio which compares a company s stock price to its revenues this ratio is useful for evaluating companies that may not be profitable yet or are in industries with volatile earnings the p s ratio gives you insight into how much investors are willing to pay per dollar of sales making it particularly relevant for start ups or tech companies with high growth potential but inconsistent earnings the last alternative to consider is the enterprise value to ebitda ev ebitda ratio it assesses a company s valuation relative to its earnings before interest taxes depreciation and amortization the ev ebitda ratio is helpful because it accounts for the company s debt and cash levels providing a more holistic view of its valuation compared to the p e ratio investors often use the ev ebitda ratio to evaluate companies in capital intensive industries such as telecommunications or utilities | |
what is a good price to earnings ratio | the answer depends on the industry some industries tend to have higher average price to earnings ratios for example in february 2024 the communications services select sector index had a p e of 17 60 while it was 29 72 for the technology select sector index 78 to get a general idea of whether a particular p e ratio is high or low compare it to the average p e of others in its sector then other sectors and the market | |
is it better to have a higher or lower p e ratio | many investors say buying shares in companies with a lower p e ratio is better because you are paying less for every dollar of earnings a lower p e ratio is like a lower price tag making it attractive to investors looking for a bargain in practice however there could be reasons behind a company s particular p e ratio for instance if a company has a low p e ratio because its business model is declining the bargain is an illusion | |
what does a p e ratio of 15 mean | a p e ratio of 15 means that the company s current market value equals 15 times its annual earnings put literally if you were to hypothetically buy 100 of the company s shares it would take 15 years for you to earn back your initial investment through the company s ongoing profits however that 15 year estimate would change if the company grows or its earnings fluctuate | |
what is the difference between forward p e and trailing p e | the trailing p e ratio uses earnings per share from the past 12 months reflecting historical performance in contrast the forward p e ratio uses projected earnings for the next 12 months incorporating future expectations forward p e is often used to gauge investor sentiment about the company s growth prospects while trailing p e provides a snapshot based on actual past performance | |
what are the limitations of the p e ratio | the p e ratio has several limitations it doesn t account for future earnings growth can be influenced by accounting practices and may not be comparable across different industries it also doesn t consider other financial aspects such as debt levels cash flow or the quality of earnings the bottom linethe p e ratio is one of many fundamental financial metrics for evaluating a company it s calculated by dividing the current market price of a stock by its earnings per share it indicates investor expectations helping to determine if a stock is overvalued or undervalued relative to its earnings the p e ratio helps compare companies within the same industry like an insurance company to an insurance company or telecom to telecom it offers insights into market sentiment and investment prospects however it should be used with other financial measures since it doesn t account for future growth prospects debt levels or industry specific factors | |
what is the price to free cash flow ratio | price to free cash flow p fcf is an equity valuation metric that compares a company s per share market price to its free cash flow fcf this metric is very similar to the valuation metric of price to cash flow but is considered a more exact measure because it uses free cash flow which subtracts capital expenditures capex from a company s total operating cash flow thereby reflecting the actual cash flow available to fund non asset related growth companies can use this metric to base growth decisions and maintain acceptable free cash flow levels understanding the price to free cash flow ratioa company s free cash flow is essential because it is a primary indicator of its ability to generate additional revenues which is a crucial element in stock pricing the price to free cash flow metric is calculated as follows price to fcf market capitalization free cash flow begin aligned text price to fcf frac text market capitalization text free cash flow end aligned price to fcf free cash flowmarket capitalization for example a company with 100 million in total operating cash flow and 50 million in capital expenditures has a free cash flow total of 50 million if the company s market cap value is 1 billion it has a ratio of 20 meaning its stock trades at 20 times its free cash flow 1 billion 50 million you might find a company that has more free cash flows than it does market cap or one that is very close to equal amounts of both for example a market cap of 102 million and free cash flows of 110 million would result in a ratio of 93 there is nothing inherently wrong with this if it is typical for the company s industry however suppose the company operates in an industry where comparable company market caps hover around 200 million in that case you may want to investigate further to determine why the business s market cap is low free cash flows or market caps that are non typical for a company s size and industry should raise the flag for further investigation the business might be in financial trouble or it might not it s critical to find out | |
how is the price to free cash flow ratio used | because the price to free cash flow ratio is a value metric lower numbers generally indicate that a company is undervalued and its stock is relatively cheap in relation to its free cash flow conversely higher price to free cash flow numbers may indicate that the company s stock is somewhat overvalued in relation to its free cash flow therefore value investors tend to favor companies with low or decreasing p fcf values that indicate high or increasing free cash flow totals and relatively low stock share prices compared to similar companies in the same industry the price to free cash flow ratio is a comparative metric that needs to be compared to something to mean anything past p fcf ratios competitor ratios or industry norms are comparable ratios that can be used to gauge value they tend to avoid companies with high price to free cash flow values that indicate the company s share price is relatively high compared to its free cash flow in short the lower the price to free cash flow the more a company s stock is considered to be a better bargain or value as with any equity evaluation metric it is most useful to compare a company s p fcf to that of similar companies in the same industry however the price to free cash flow metric can also be viewed over a long term time frame to see if the company s cash flow to share price value is generally improving or worsening the price to free cash flow ratio can be manipulated by a company for example you might find some that preserve cash levels in a reporting period by delaying inventory purchases or their accounts payable payments until after they have published their financial statements the fact that reported numbers can be manipulated makes it essential that you analyze a company s finances entirely to achieve a larger picture of how it is doing financially when you do this over a few reporting periods you can see what a company is doing with its cash how it is using it and how other investors value the company | |
what is a good price to free cash flow ratio | a good price to free cash flow ratio is one that indicates its stock is undervalued a company s p fcf should be compared to the ratios of similar companies to determine whether it is under or over valued in the industry it operates in generally speaking the lower the ratio the cheaper the stock is | |
is a high price to free cash flow ratio good | a high ratio one that is higher than is typical for the industry it operates in may indicate a company s stock is overvalued |
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