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b71a3e1d54fe9cd1c77b1ba8aa953693 | https://www.investopedia.com/articles/investing/062513/role-commercial-banks-economy.asp | The Role of Commercial Banks in the Economy | The Role of Commercial Banks in the Economy
Many of us share a fairly basic view of banks. They are places to store money, make basic investments like term deposits, sign up for a credit card or get a loan. Behind this mundane view, however, is a highly regulated system that ties our day-to-day banking back into the wider financial system. In this article, we’ll look at commercial banks, how they are created and what their larger purpose is in the overall economy.
When is a Bank a Commercial Bank?Between 1933 and 1999, it was fairly easy to tell banks apart thanks to the Glass-Steagall Act. If you helped companies issue shares, you were an investment bank. If you were primarily concerned with deposits and lending, then you were a commercial bank. From the late 1990s onward, however, the ability to enforce Glass-Steagall as a black-and-white rule eroded, and the act was effectively repealed. Since then, the old distinction between a commercial bank and an investment bank is essentially meaningless. For example, as of 2013, JPMorgan Chase Bank is among the largest commercial banks in the U.S. by assets and, in 2012, the same bank was one of the lead underwriters in the Facebook IPO.
For better or worse, we’ve lost the issuance of securities and active investment in securities as defining actions that a commercial bank cannot take. Instead, we can look at the actions all commercial banks share. Commercial banks:
Accept deposits Lend money Process payments Issue bank drafts and checks Offer safety deposit boxes for items and documents
There are more actions, of course, and finer categories within this broad view. Commercial banks may offer other services such as brokering insurance contracts, giving investment advice and so on. They also provide a wide variety of loans and offer other credit vehicles like cards and overdrafts. However, the common theme among these activities is that they are aimed at providing a financial service to an individual or business.
From Zero to Operational in Two Years or LessTo understand commercial banking, it is worth looking at how they are established. Although big banks like JPMorgan Chase, Wells Fargo and Citibank are well-known and global in scope, there are thousands of commercial banks in the United States alone. Despite the seemingly large number, starting and operating a commercial bank is a long process due to the regulatory steps and capital needs. Rules vary by state, but in the U.S. an organizing group begins the process by securing several million dollars in seed capital. This capital is used to bring together a management team with experience in the banking industry as well as a board. Once the board and management are set, a location is selected and the overall vision for the bank is created. The organizing group then sends its plan, along with information on the board and management, to regulators who review it and decide if the bank can be granted a charter. The review costs thousands of dollars, and the plan may be sent back with recommendations that need to be addressed for approval.<br/> If the charter is granted, the bank must be operational within a year. In the next 12 months, the organizers must get their FDIC insurance paid, secure staff, buy equipment and so on, as well as go through two more regulatory inspections before the doors can open. This timing on the entire process can vary, but including preparation before the first filing to regulators it is measured in years, not months. To get to the stage where a bank can make money by leveraging deposited dollars as consumer loans, there needs to be millions in capital, some of which can be raised in private circles and paid back through an eventual public share offering. In theory, a charter bank can be 100% privately funded, but most banks go public because the shares become liquid, making it easier to pay out investors. Consequently, having an IPO in the original plan makes it easier to attract early-stage investors as well. Commercial Banks and the Big PictureThe process of launching a commercial bank foreshadows the overall role that these banks play in the economy. A commercial bank is basically a collection of investment capital in search of a good return. The bank – the building, people, processes and services – is a mechanism for drawing in more capital and allocating in a way that the management and board believe will offer the best return. By allocating capital efficiently, the bank will be more profitable and the share price will increase. From this view, a bank provides a service to the consumer mentioned earlier. But it also provides a service to investors by acting as a filter .for who gets allocated how much capital. Banks that do both jobs will go on to be successes. Banks that don’t do one or either of these jobs may eventually fail. In the case of failure, the FDIC swoops in, protects depositors and sees that the bank's assets end up in the hands of a more successful bank. Bottom LineMost of us interact with commercial banks every day, whether it is a debit card purchase, an online payment or a loan application. Beyond providing these basic services, commercial banks are in the business of capital allocation for profit – also known as investing. In the commercial banking definition of investing, this means making loans and extending credit to people who can pay it back on the bank’s terms. Today, commercial banks can invest in securities and even in issues that they help make public. But these activities are usually relegated to an investment arm – basically a traditional investment bank couched in a commercial bank. At the end of the day, a commercial bank needs to provide good service to its customers and good returns to its investors to continue to be successful.
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6f15da415a8227aadb71ac98ebbe5fda | https://www.investopedia.com/articles/investing/062515/best-ways-invest-gold-without-holding-it.asp | The Best Ways To Invest In Gold Without Holding It | The Best Ways To Invest In Gold Without Holding It
Gold has been a substance of value for millennia, and remains valuable today with the price of one ounce of the precious metal surpassing $1,300. Many investors seek to hold gold as a store of value and as a hedge against inflation, but it can be difficult and cumbersome to hold large quantities of physical gold. Security efforts are often put in place to prevent its theft which can also be expensive. Fortunately, there are a number of ways to gain exposure to movements in the price of gold without physically holding it. (For more, see also: 8 Reasons To Own Gold.)
Key Takeaways If you want to add gold to your portfolio, you may find it difficult and extra costly to track down physical gold coins, bars, or pieces of jewelry. Luckily, investors can still add gold investments to their portfolio through derivative contracts whose prices track that of the precious metal. For those unable to trade derivatives, you can also purchase gold mutual funds or ETFs that track its price, or invest in the shares of gold mining stocks.
Gold Receipts
It has been speculated that the earliest form of credit banking took place via goldsmiths who would store the gold of members of the community. In return, those depositing gold would receive a paper receipt which could be redeemed for their gold at some point in the future. Knowing that at any given moment only a small fraction of those receipts would be redeemed, they could issue receipts for a larger amount of bullion than they actually kept in their coffers. And thus a fractional reserve credit system was born. (For more, see also: What Drives The Price Of Gold.)
Today, it is still possible to invest in gold receipts which can be redeemed for physical gold. Although most government mints do not deal privately with gold any longer, some enterprising private "mints" do. For example, the Royal Canadian Mint (not affiliated with the Canadian government) offers electronic tradable receipts (ETRs) backed by their vaulted gold, as well as collectible coins minted from precious metals. These ETRs can trade on an exchange or change hands privately and track the price of the gold that backs it.
Derivatives
While receipts are backed by gold and can be redeemed for it on demand, derivatives markets use gold as the underlying asset and are contracts that allow for the delivery of gold at some point in the future. A forward contract on gold gives the owner of the contract the right to buy physical gold at some point in the future at a price specified today. Forward contracts are traded over-the-counter (OTC), and can be customized between the buyer and seller to arrange such terms as contract expiration and nature of the underlying (how many ounces of gold must be delivered and at what location).
Futures contracts operate in much the same way as forwards, the difference being that futures are traded on an exchange and the terms of the contracts are predetermined by the exchange and not customizable. Because forwards trade OTC, they expose each side to credit risk that the counterparty may not deliver. Exchange traded futures eliminate this risk. Often times, forward or futures contracts are not held until expiration and so physical gold is not delivered. Instead, the contracts are either closed out (sold) or rolled over to another new contract with a later expiration. (For more, see: Trading Gold And Silver Futures Contracts.)
Call options can also be used to gain exposure to gold. Unlike a futures or forward contract which gives the buyer the obligation to own gold in the future, call options give the owner the right but not the obligation to buy gold. In this way, a call option is only exercised when the price of gold is favorable and left to expire worthless if it is not. In other words, the price paid for the option (known as the premium) can be thought of as a deposit for the right to buy gold at some point in the future for a price specified today (the strike price). If the actual price of gold rises above that specified price, the owner of the option will make a profit. If, however, the price of gold does not rise above the strike price, the buyer of the option will lose the premium – like losing a deposit.
Gold Funds
Derivatives markets are efficient ways to gain exposure to gold and are generally the most cost-effective, as well as provide the greatest degree of leverage. For the average investor, however, derivatives markets are unaccessible. Instead, a typical investor can gain exposure to gold via mutual funds that buy gold, or using gold ETFs which are traded like shares on stock exchanges . The SPDR Gold Trust ETF (GLD) is popularly used; the investment objective of the Trust is for its shares to reflect the performance of the price of gold bullion. There are also leveraged gold ETFs that provide the owner with 2-times long exposure, ProShares Ultra Gold (UGL), or alternatively 2-times short exposure, Goldcorp (GG).
Gold Mining Stocks
While it may seem like a good way to gain indirect exposure to gold, owning the stocks of companies that mine for and sell gold, such as Barrick Gold (ABX) or Kinross Gold (KGC), may not give the investor the exposure to the precious metal that they wanted. The reason for this is that the majority of gold companies are in the business to make a profit based on the cost to mine for gold versus what they can sell it for. They are not in the business of speculating on its price fluctuations. Therefore, most gold companies hedge their exposures to gold price risk in derivatives markets, and owning shares of these companies mainly gives the investor exposure to the operating profit margins of that company.
Still, if an investor wants to own gold stocks to diversify an equity portfolio they may want to consider a gold miners ETF such as the Market Vectors Gold Miners (GDX).
The Bottom Line
Owning gold can be a store of value and a hedge against unexpected inflation. Holding physical gold, however, can be cumbersome and costly. Fortunately, there are several ways to own gold without keeping a physical stash of it. Gold receipts, derivatives and mutual funds/ETFs are all viable strategies to gain such exposure. Shares of gold mining companies, while seemingly a good alternative on the surface, may not give the gold exposure to investors that they want since these companies usually hedge their own exposure to price movements in gold using derivatives markets.
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650b1d7a41afec249bbf8ec16bb182c6 | https://www.investopedia.com/articles/investing/062515/how-netflix-pays-movie-and-tv-show-licensing.asp | How Netflix Pays for Movie and TV Show Licensing | How Netflix Pays for Movie and TV Show Licensing
Netflix (NFLX) is the world's top provider of streaming movies and television, with 193 million paid subscribers in more than 190 countries. Netflix is changing the television industry and leads competitors such as Hulu, Disney+, Amazon Prime Video and HBO.
Online entertainment companies typically rely on advertising or a subscription business model, or some combination thereof, to support their operations. For example, Hulu's basic plan combines advertising with subscription fees, though customers can also pay more for ad-free viewing. Netflix has chosen a business model that relies solely on subscription revenue. It offers three tiers of pricing that gives customers access to exclusive and non-exclusive TV shows and movies which the company has either produced itself or licensed from the content owner.
Fees collected from subscribers, coupled with capital raising through new debt issues, allow Netflix to invest in content, either through in-house production or license agreements with content providers.
Key Takeaways Netflix is the top entertainment streaming service in the world with 193 million paying subscribers.Netflix is constantly negotiating new licensing deals with TV shows, networks and filmmakers.At the end of 2019, Netflix had $14.7 billion worth of licensed content on its books.Content that Netflix produced itself was worth $9.8 billion.
How Netflix Finances Its Content
To keep growing its subscriber base, Netflix is constantly negotiating new licensing deals with TV shows, networks and film producers, or investing in its own content production. Licensing content involves obtaining rights from the owners of a TV show or movie to stream the content through a service such as Netflix. A licensing agreement is established between the content owners and Netflix. Each agreement varies based upon the needs of both parties.
For example, the owner of a TV show could agree to allow Netflix to stream all seasons of its show for one, three or five years. The licensing agreement may limit Netflix to, or exclude it from, specified geographies. A British crime show might be available for online distribution everywhere globally except the U.K., the producer's home market. When the licensing agreement ends, both parties can negotiate a renewal, or Netflix could drop the show from its library if viewer interest doesn't warrant the cost.
A content owner may license programming to multiple streaming platforms, such as Hulu or Amazon Prime Video, making the licensing agreements between parties non-exclusive. Licensing agreements that are non-exclusive are generally less expensive to obtain because the non-exclusivity diminishes the content's value.
As competition continues to saturate the market, streaming service providers recognize the importance of exclusive content. Under an exclusive licensing agreement, the streaming distribution channel (sometimes referred to as a distribution window) is reserved for a single platform. Agreements can be for a set period or into perpetuity.
Exclusive licensing agreements are far more expensive compared with non-exclusive agreements, though they have the potential to drive greater subscriber numbers over time.
The Cost of the Content Business
Securing licensing agreements is one of the biggest expenses for Netflix. At the end of 2019, Netflix had $24.5 billion of content assets on its balance sheet, up from $20.1 billion the year before.
Of this, licensed content accounted for $14.7 billion in 2019 and $14.08 billion in 2018. The company is devoting more of its financial resources to developing its own TV programs and film. It had $9.8 billion in produced content in 2019, up from $6 billion in 2018.
$24.5 billion The value of content Netflix held on its books at the end of 2019.
Examples of licensed content include second-run movies and shows such as Shameless from Showtime, How to Get Away with Murder from ABC, The Office from Universal and The Godfather from Paramount. Examples of Netflix-branded originals that are nonetheless licensed content include House of Cards from MRC, Orange is the New Black from Lionsgate and The Crown from Sony. Movies and shows that Neflix produced and owns include Stranger Things, Mind Hunter and The Irishman.
Netflix uses consumer data mining to determine which content viewers pay to see and relies heavily on this information to determine the total cost of each licensing agreement. The data is compiled to determine the expected hours of viewing each TV show or movie generates over the course of a licensing agreement—establishing a cost per hour viewed. It compares this metric to similar content arrangements, and it bases final pricing on exclusivity, as well as the time frame of the contract.
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232e22d6f94df62fd958f3cf2ad2464e | https://www.investopedia.com/articles/investing/062713/capital-losses-and-tax.asp | Capital Losses and Tax | Capital Losses and Tax
It's never fun to lose money on an investment, but declaring a capital loss on your tax return can be an effective consolation prize in many cases. Capital losses have limited impact on earned income in subsequent tax years, but they can be fully applied against future capital gains. Investors who understand the rules of capital losses can often generate useful deductions with a few simple strategies.
Key Takeaways A capital loss—when a security is sold for less than the purchase price—can be used to reduce the tax burden of future capital gains. There are three types of capital losses—realized losses, unrealized losses, and recognizable losses. Capital losses make it possible for investors to recoup at least part of their losses on their tax returns by offsetting capital gains and other forms of income.
The Basics
Capital losses are, of course, the opposite of capital gains. When a security or investment is sold for less than its original purchase price, then the dollar amount of difference is considered a capital loss.
For tax purposes, capital losses are only reported on items that are intended to increase in value. They do not apply to items used for personal use such as automobiles (although the sale of a car at a profit is still considered taxable income).
Tax Rules
Capital losses can be used as deductions on the investor’s tax return, just as capital gains must be reported as income. Unlike capital gains, capital losses can be divided into three categories:
Realized losses occur on the actual sale of the asset or investment. Unrealized losses are not reported. Recognizable losses are the amount of a loss that can be declared in a given year.
Any loss can be netted against any capital gain realized in the same tax year, but only $3,000 of capital loss can be deducted against earned or other types of income in the year. Remaining capital losses can then be deducted in future years up to $3,000 a year, or a capital gain can be used to offset the remaining carry-forward amount.
For example, an investor buys a stock at $50 a share in May. By August, the share price has dropped to $30. The investor has an unrealized loss of $20 per share. They hold the stock until the following year, and the price climbs to $45 per share. The investor sells the stock at that point and realizes a loss of $5 per share. They can only report that loss in the year of sale; they cannot report the unrealized loss from the previous year.
Another category is recognizable gains. Although all capital gains realized in a given year must be reported for that year, there are some limits on the amount of capital losses that may be declared in a given year in some cases. While any loss can ultimately be netted against any capital gain realized in the same tax year, only $3,000 of capital loss can be deducted against earned or other types of income in a given year.
For example, Frank realized a capital gain of $10,000 in 2013. He also realized a loss of $30,000. He will be able to net $10,000 of his loss against his gain, but can only deduct an additional $3,000 of loss against his other income for that year. He can deduct the remaining $17,000 of loss in $3,000 increments every year from then on until the entire amount has been deducted. However, if he realizes a capital gain in a future year before he has exhausted this amount, then he can deduct the remaining loss against the gain. So if he deducts $3,000 of loss for the next two years and then realizes a $20,000 gain, he can deduct the remaining $11,000 of loss against that gain, leaving a taxable gain of only $9,000.
1:54 Capital Losses and Tax
The Long and Short of It
Capital losses do mirror capital gains in their holding periods. An asset or investment that is held for a year to the day or less, and sold at a loss, will generate a short-term capital loss.
A sale of any asset held for more than a year to the day, and sold at a loss, will generate a long-term loss. When capital gains and losses are reported on the tax return, the taxpayer must first categorize all gains and losses between long and short term, and then aggregate the total amounts for each of the four categories.
Then the long-term gains and losses are netted against each other, and the same is done for short-term gains and losses. Then the net long-term gain or loss is netted against the net short-term gain or loss. This final net number is then reported on Form 1040.
For example, Frank has the following gains and losses from his stock trading for the year:
Short-term gains: $6,000 Long-term gains: $4,000 Short-term losses: $2,000 Long-term losses: $5,000 Net short-term gain/loss: $4,000 ST gain ($6,000 ST gain - $2,000 ST loss) Net long-term gain/loss: $1,000 LT loss ($4,000 LT gain - $5,000 LT loss) Final net gain/loss: $3,000 short-term gain ($4,000 ST gain - $1,000 LT loss)
Again, Frank can only deduct $3,000 of the final net short- or long-term losses against other types of income for that year and must carry forward any remaining balance.
Tax Reporting
A new tax form was recently introduced. This form provides more detailed information to the Internal Revenue Service (IRS) so that it can compare gain and loss information with that reported by brokerage firms and investment companies. Form 8949 is now used to report net gains and losses, and the final net number from that form is then transposed to the newly revised Schedule D and then to the 1040.
Capital Loss Strategies
Although novice investors often panic when their holdings decline substantially in value, experienced investors who understand the tax rules are quick to liquidate their losers, at least for a short time, to generate capital losses. Smart investors also know that capital losses can save them more money in some situations than others. Capital losses that are used to offset long-term capital gains will not save taxpayers as much money as losses that offset short-term gains or other ordinary income.
Wash Sale Rules
Investors who liquidate their losing positions must wait at least 31 days after the sale date before buying the same security back if they want to deduct the loss on their tax returns.
If they buy back in before that time, the loss will be disallowed under the IRS wash sale rule. This rule may make it impractical for holders of volatile securities to attempt this strategy, because the price of the security may rise again substantially before the time period has been satisfied.
But there are ways to circumvent the wash sale rule in some cases. Savvy investors will often replace losing securities with either very similar or more promising alternatives that still meet their investment objectives.
For example, an investor who holds a biotech stock that has tanked could liquidate this holding and purchase an ETF that invests in this sector as a replacement. The fund provides diversification in the biotech sector with the same degree of liquidity as the stock.
Furthermore, the investor can purchase the fund immediately, because it is a different security than the stock and has a different ticker symbol. This strategy is thus exempt from the wash sale rule, as it only applies to sales and purchases of identical securities.
The Bottom Line
Capital losses make it possible for investors to recoup at least part of their losses on their tax returns by offsetting capital gains and other forms of income. For more information on capital losses, download the Schedule D instructions from the IRS website at www.irs.gov or consult your financial advisor.
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880d2c20ce456bf6c40f9c0cadeb1e3b | https://www.investopedia.com/articles/investing/062713/investing-stock-rights-and-warrants.asp | Investing in Stock Rights and Warrants | Investing in Stock Rights and Warrants
Companies that need to raise additional capital can do so by issuing additional shares of stock. However, these additional shares will dilute the value of existing shares, which can be a concern for shareholders. Some companies, therefore, choose to issue rights or warrants as an alternative means of generating capital. These instruments give shareholders the preemptive right to purchase additional shares of stock directly from the company, typically at a discounted price.
What Are Stock Rights?
Stock rights are instruments issued by companies to provide current shareholders with the opportunity to preserve their fraction of corporate ownership. A single right is issued for each share of stock, and each right can typically purchase a fraction of a share, so that multiple rights are required to purchase a single share.
The underlying stock will trade with the right attached immediately after the right is issued, which is referred to as "rights on." Then the right will detach from the stock and trade separately, and the stock then trades "rights off" until the rights expire. Rights are short-term instruments that expire quickly, usually within 30-60 days of issuance. The exercise price of rights is always set below the current market price, and no commission is charged for their redemption.
What Are Warrants?
Warrants are long-term instruments that also allow shareholders to purchase additional shares of stock at a discounted price, but they are typically issued with an exercise price above the current market price. A waiting period of perhaps six months to a year is thus assigned to warrants, which gives the stock price time to raise enough to exceed the exercise price and provide intrinsic value. Warrants are usually offered in conjunction with fixed income securities and act as a "sweetener," or financial enticement to purchase a bond or preferred stock.
A single warrant can usually purchase a single share of stock, although they are structured to purchase more or less than this in some instances. Warrants have also been used on rare occasions to purchase other types of securities such as preferred offerings or bonds. Warrants differ from rights in that they must be purchased from a broker for a commission and usually qualify as marginable securities.
Both rights and warrants conceptually resemble publicly traded call options in some respects. The value of all three instruments inherently depends on the underlying stock price. They also resemble market options in that they have no voting rights and do not pay dividends or offer any form of claim on the company.
Rights and Warrants vs. Options
Rights and warrants differ from market options in that they are initially issued only to existing shareholders, although a secondary market typically springs up that allows other buyers to acquire these securities.
Shareholders who receive rights and warrants have four options available to them:
Hold their rights or warrants for the time being Purchase additional rights or warrants in the secondary market Sell their rights or warrants to another investor Simply allow their rights or warrants to expire
The final option listed here is never a wise one for investors. If the current market price of the stock exceeds the exercise price, then investors who do not wish to exercise them should always sell them in the secondary market to receive their intrinsic value. However, many uneducated stockholders who do not understand the value of their rights do this on a regular basis.
Determining Value
As with market options, the stock's market price could fall below the exercise price, at which point the rights or warrants would become worthless. Rights and warrants also become worthless upon expiration regardless of where the underlying stock is trading. The values for stock rights and warrants are determined in much the same way as for market options. They have both intrinsic value, which is equal to the difference between the market and exercise prices of the stock, and time value, which is based on the stock’s potential to rise in price before the expiration date.
Both types of securities will become worthless upon expiration regardless of the current price of the underlying stock. They will also lose their intrinsic value if the market price of the stock drops below their exercise or subscription price. For this reason, companies must set the exercise prices on these issues carefully to minimize the chance that the entire offering fails. However, rights and warrants can also provide substantial gains for shareholders in the same manner as do call options if the price of the underlying stock rises.
Rights Pricing
The formula used to determine the value of a stock right is:
Right Value = Current Price − Subscription Price Rights Needed where: Current Price = Current market price of stock Subscription Price = Exercise price of new stock Rights Needed = Number of rights needed to buy one new share \begin{aligned} &\text{Right Value} = \frac{ \text{Current Price} -\text{Subscription Price} }{ \text{Rights Needed} } \\ &\textbf{where:} \\ &\text{Current Price} = \text{Current market price of stock} \\ &\text{Subscription Price} = \text{Exercise price of new stock} \\ &\text{Rights Needed} = \text{Number of rights needed to buy} \\ &\text{one new share} \\ \end{aligned} Right Value=Rights NeededCurrent Price−Subscription Pricewhere:Current Price=Current market price of stockSubscription Price=Exercise price of new stockRights Needed=Number of rights needed to buyone new share
For example, if the current market price of current outstanding shares is $60, the subscription price of new stock is $50, and the number of rights needed to buy one new share of stock is $5:
Right Value = $ 6 0 − $ 5 0 5 = $ 2 \begin{aligned} &\text{Right Value} = \frac{ \$60 -\$50 }{ 5 } = \$2 \\ \end{aligned} Right Value=5$60−$50=$2
Warrant Pricing
The formula for determining a warrant's value is:
Warrant Value = Current Price − Subscription Price Warrants Needed where: Current Price = Current market price of stock Subscription Price = Exercise price of new warrants Rights Needed = Number of shares that can be purchased with one warrant \begin{aligned} &\text{Warrant Value} = \frac{ \text{Current Price} -\text{Subscription Price} }{ \text{Warrants Needed} } \\ &\textbf{where:} \\ &\text{Current Price} = \text{Current market price of stock} \\ &\text{Subscription Price} = \text{Exercise price of new warrants} \\ &\text{Rights Needed} = \text{Number of shares that can be} \\ &\text{purchased with one warrant} \\ \end{aligned} Warrant Value=Warrants NeededCurrent Price−Subscription Pricewhere:Current Price=Current market price of stockSubscription Price=Exercise price of new warrantsRights Needed=Number of shares that can bepurchased with one warrant
For example, if the current market price of a stock is $45, the subscription price of a warrant is $30, and the number of stock shares a single warrant can buy is 1:
Warrant Value = $ 4 5 − $ 3 0 1 = $ 1 5 \begin{aligned} &\text{Warrant Value} = \frac{ \$45 -\$30 }{ 1 } = \$15 \\ \end{aligned} Warrant Value=1$45−$30=$15
Tax Considerations of Rights and Warrants
Rights and warrants are taxed in the same manner as any other security. The difference between the exercise and sale prices of these securities is taxed as a long- or short-term gain. Any gain or loss realized from trading rights or warrants in the secondary market is taxed in the same manner (except that all gains and losses will be short-term).
The Bottom Line
Rights and warrants can allow current shareholders to purchase additional shares at a discount and maintain their share of ownership in the company. However, neither of these instruments is used much today, as stock and market options have become much more popular. For more information on rights and warrants, consult your stockbroker or financial advisor.
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17c3c3a06ca71b59eedfbb70e567cfc6 | https://www.investopedia.com/articles/investing/062915/why-professional-sports-hasnt-worked-las-vegas.asp | Why Professional Sports Hasn't Worked in Las Vegas | Why Professional Sports Hasn't Worked in Las Vegas
With a 2010 metropolitan statistical area (MSA) population of nearly 2 million, Las Vegas is the 30th largest city in the United States. The city's MSA population puts it in the same peer group as Cleveland, Kansas City, Cincinnati, and Indianapolis. One glaring difference between Las Vegas and its peer cities, however, is that Las Vegas is home to no major professional sports franchises. Las Vegas is the largest city in the U.S. by MSA that does not have major pro sports. The closest thing the city has is a minor league baseball team, the Las Vegas 51s.
Failed Las Vegas Professional Sports Attempts
While professional sports teams have been attempted in Las Vegas, none were from the four major leagues in the U.S.: the National Football League (NFL), National Basketball Association (NBA), Major League Baseball (MLB) and National Hockey League (NHL).
The Canadian Football League attempted expansion into U.S. markets, including Las Vegas, in 1994. However, its Las Vegas franchise folded after one season of play, with league executives citing big losses at the box office as the reason.
In 2001, the XFL's debut included the Las Vegas Outlaws. The entire league dissolved after its first season due to lack of profitability.
Another attempt at pro sports in Las Vegas came in 2009 when the United States Football League emerged as a hopeful competitor to the NFL. Its roster of teams featured one in Las Vegas. This proved the city's most successful attempt, with the team and league lasting three seasons. However, both went under in 2012, and as of 2015, no further attempts have been made to put a professional sports team in Las Vegas.
Challenges for Professional Sports Teams in Las Vegas
Industry analysts cite several reasons why professional sports have yet to become viable in Las Vegas, despite the city being a robust market in terms of population.
1. Odd Hours
One reason is the unique nature of the city's labor force. The entertainment industry employs a large percentage of workers in Las Vegas, and this translates to a lot of shift work, weekend work, and unpredictable hours. While roughly the same number of people reside in the Las Vegas area as reside in Cleveland or Cincinnati, a much smaller percentage of those residents are available to spend their Sundays at the stadium cheering on an NFL team. Pro sports leagues attempt to schedule games at times when the highest number of fans are off work and able to attend. However, those times are less uniform and less concrete in a city such as Las Vegas, making it more challenging to fill seats.
2. Too Much to Do
Las Vegas also features myriad entertainment options that may provide pro sports teams with too much competition for locals' leisure time and discretionary spending. Casinos, clubs, shows, and other world-class nightlife constantly beckon, and a day at the ballpark or inside an ice rink become less enticing when juxtaposed with these flashier choices. It's doubtful that a Las Vegas sports team could count on a full house every weekend when they would regularly compete against must-see boxing and UFC cards, and once-in-a-lifetime concerts.
3. Scandals Waiting to Happen
The stigma of Las Vegas as the gambling mecca of the United States remains a major turnoff for professional sports leagues. Even the appearance of possible impropriety is enough to make leagues exceedingly cautious about placing a franchise in Las Vegas. Leagues are stepping up efforts to present their sports as wholesome, family-oriented entertainment. Issues such as domestic violence in the NFL and performance-enhancing drug use in MLB have presented enough of a public relations nightmare; league executives are wary of potentially adding gambling to the mix.
Hopeful for Hockey
One professional sports league, the NHL, has Las Vegas on its expansion short list as of 2015. The league has several reasons for optimism about the viability of a Las Vegas franchise. A trial season-ticket drive topped 11,000 in ticket sales. MGM is already building a suitable arena with a capacity of over 17,000 on the Las Vegas strip. Corporate clients have lined up to purchase season tickets if and when they become available. Despite these positive signs, league executives stated in April 2015 that an expansion to Las Vegas, if it happens, will not occur before 2017. Plus, there's always a concern that the early interest will fade like many other Vegas novelty acts, leaving the NHL with a second bankrupt hockey team withering in the desert.
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d6973a6f600a1d76ae0b407ddb7c25b6 | https://www.investopedia.com/articles/investing/070115/4-ways-survive-and-prosper-bear-market.asp | 4 Ways to Survive and Prosper in a Bear Market | 4 Ways to Survive and Prosper in a Bear Market
Bear markets are a fact of life. However, it can be hard to anticipate them, know how long they will last, or how severely they will impact stock prices. Because bear markets are a natural part of market cycles, not only can you survive them, you can also position yourself to benefit from them. Below are some techniques you can use to either reduce your portfolio losses or even to make some money off the bear market.
Key Takeaways While few investors cheer the arrival of a bear market, there are some smart strategies that an otherwise long investor can use to make the most of it. Getting defensive and buying protective puts is one way to limit your downside losses. Also keep an eye out for over-sold values, buying shares of great companies when they are "on sale" at deep discounts.
What Is a Bear Market?
A bear market is when prices of securities fall sharply, and a sweeping negative view causes the sentiment to further entrench itself. As investors anticipate losses in a bear market and selling continues, pessimism grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.
When stocks begin to fall, it's hard to know when they will reach their bottom. If you wait too long—and stocks rise again—you’ve missed an opportunity to buy on a dip and won’t profit from the rebound in prices. But if you are too quick to pull the trigger, you may see your new stock purchases continue to decline further. It can be tricky to identify the best timing in these cases and to manage active trading at the onset of a bear market.
A 10% correction is not the problem. Most investors can stomach that. It's the 78% correction, as we saw with the tech bubble bursting from 2000 to 2002—or the 54% lost by the Dow Jones Industrial Average between 2007 and 2009—that makes most investors succumb to fear and lose money.
Oftentimes, during a bull market, a 10% correction will cause Wall Street cheerleaders to calm the public with, "Hold on, don't panic, buy more." They may suggest buying dividend stocks as a hedge. But if you go all-in when the market falls 10%, and then it falls another 40% or 50%, that 5% dividend is often a very small consolation in light of the money you've lost.
So then what can we do to really cushion our losses, and even make some money in a bear market? Here are four strategies for overcoming the next bear market:
The 401(k)
One lesson from the bear market of 2007 to 2009 is that if you buy index funds at regular intervals through a 401(k), you will prosper when the market finally does rebound. Those who used this strategy didn’t know whether the bear would end in December 2007, June 2008, or as it finally did, in March 2009.
Some investors say their 401(k) was cut in half by the time the bear market ended, but all of the shares that were bought on the way down became profitable when the market finally turned around and climbed higher.
By 2015, those who hung in there had made enormous profits from the cheaper shares purchased during the downturn, plus company matching (plus all of the money that they got back and then more profit from the shares bought before the peak in 2006 to 2007). The moral of the story is it’s best not to go all-in at any one time, but to just keep investing small amounts at regular intervals.
Image by Sabrina Jiang © Investopedia 2020
Buying Short- and Long-Term Puts
If you feel that a bear market is developing and have substantial long positions in the market, another useful strategy is to buy inexpensive short and long-term puts on the major indices. Keep in mind trading derivatives often comes with margin requirements—and that may require special access privileges with your brokerage account.
A put is an option that represents rights for 100 shares, has a fixed time length before it expires worthless, and has a specified price for selling. If you buy puts on the Dow Jones Industrial Average, S&P 500, and Nasdaq and the market declines, your puts will gain in value as these indexes are falling.
Because options increase or decrease by a much larger percentage than stocks, even a small number of put contracts can offset your long stock position losses. As expiration is approaching, you have the option to sell your puts on the open market or exercise and give up the shares. This is a very risky strategy and requires some experience before you try it for the first time.
Selling Naked Puts
Selling a naked put involves selling the puts that others want to buy, in exchange for cash premiums. In a bear market, there should be no shortage of interested buyers.
When you sell a put contract, your hope is that the put expires worthless at or above its strike price. If it does, you profit by keeping the entire premium, and the transaction ends. But if the stock price falls below the strike price and the holder of the put exercises the option, you are forced to take delivery of the shares with a loss.
The premium does give you some downside protection. For example, let’s say you sell a July 21 put with a $10 strike, and the premium paid to you is $0.50. This gives you a cushion of down to $9.50 for which to maintain break-even.
With naked puts, you are on the receiving end of a derivative transaction so the best strategy can be to keep selling short-term puts on solid companies that you wouldn’t mind owning if you had to, especially if they pay dividends. Even in a bear market, there will be periods where stock prices rise, giving you profits from these short-term put sales. But be warned: If the market continues to drop, those short puts can generate large losses for you.
Finding the Assets That Increase in Price
It is helpful to research past bear markets, in order to see which stocks, sectors, or assets actually went up (or at least held their own when all around them the market was tanking).
Sometimes the precious metals, like gold and silver, outperform. Food and personal care stocks—often called “defensive stocks”—usually do well. There are times when bonds go up as stocks decline. Sometimes a particular sector of the market, such as utilities, real estate, or health care, might do well, even if other sectors are losing value.
Many financial websites publish sector performances for different time frames, and you can easily see which sectors are currently outperforming others. Begin to allocate some of your cash in those sectors, as once a sector does well, it usually performs well for a long period of time. Bear markets can also have different catalysts, so this strategy can also help investors allocate accordingly.
The Bottom Line
So as you can see, we do not have to fear a bear market, but rather by employing some alternative strategies, we can do quite well during those times when many others are suffering major losses in their portfolios.
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c057c1a51aa2ec4c8121f2ddeb478da4 | https://www.investopedia.com/articles/investing/070313/introduction-commercial-paper.asp | An Introduction to Commercial Paper | An Introduction to Commercial Paper
The world of fixed-income securities can be divided into two main categories. Capital markets consist of securities with maturities of more than 270 days, while the money market comprises all fixed-income instruments that mature in 270 days or fewer. The commercial paper falls into the latter category and is a common fixture in many money market mutual funds. This short-term instrument can be a viable alternative for retail fixed-income investors who are looking for a better rate of return on their money.
Key Takeaways Commercial paper is a common form of unsecured, short-term debt issued by a corporation. Commercial paper is typically issued for the financing of payroll, accounts payable, inventories, and meeting other short-term liabilities. Maturities on most commercial paper ranges from a few weeks to months. Commercial paper is usually issued at a discount from face value and reflects prevailing market interest rates.
Commercial Paper Characteristics
Commercial paper is an unsecured form of promissory note that pays a fixed rate of interest. It is typically issued by large banks or corporations to cover short-term receivables and meet short-term financial obligations, such as funding for a new project. As with any other type of bond or debt instrument, the issuing entity offers the paper assuming that it will be in a position to pay both interest and principal by maturity. It is seldom used as a funding vehicle for longer-term obligations because other alternatives are better suited for that purpose.
The commercial paper provides a convenient financing method because it allows issuers to avoid the hurdles and expense of applying for and securing continuous business loans, and the Securities and Exchange Commission (SEC) does not require securities that trade in the money market to be registered. It is usually offered at a discount with maturities that can range from one to 270 days, although most issues mature in one to six months.
History of Commercial Paper
Commercial paper was first introduced over 100 years ago when New York merchants began to sell their short-term obligations to dealers that acted as intermediaries. These dealers would purchase the notes at a discount from their par value and then pass them on to banks or other investors. The borrower would then repay the investor an amount equal to the par value of the note.
Marcus Goldman of Goldman Sachs was the first dealer in the money market to purchase commercial paper, and his company became one of the biggest commercial paper dealers in America following the Civil War. The Federal Reserve also began trading commercial paper along with Treasury bills from that time until World War II to raise or lower the level of monetary reserves circulating among banks.
After the war, commercial paper began to be issued by a growing number of companies, and eventually, it became the premier debt instrument in the money market. Much of this growth was facilitated by the rise of the consumer credit industry, as many credit card issuers would provide cardholder facilities and services to merchants using money generated from commercial paper. The card issuers would then purchase the receivables placed on the cards by customers from these merchants (and make a substantial profit on the spread).
A debate raged in the 1980s about whether banks were violating the Banking Act of 1933 by underwriting commercial paper since it is not classified as a bond by the SEC. Today commercial paper stands as the chief source of short-term financing for investment-grade issuers along with commercial loans and is still used extensively in the credit card industry.
Commercial Paper Markets
Commercial paper has traditionally been issued and traded among institutions in denominations of $100,000, with notes exceeding this amount available in $1,000 increments. Financial conglomerates such as investment firms, banks, and mutual funds have historically been the chief buyers in this market, and a limited secondary market for this paper exists within the banking industry.
Wealthy individual investors have also historically been able to access commercial paper offerings through a private placement. The market took a severe hit when Lehman Brothers declared bankruptcy in 2008, and new rules and restrictions on the type and amount of commercial paper that could be held inside money market mutual funds were instituted as a result. Nevertheless, these instruments are becoming increasingly available to retail investors through online outlets sponsored by financial subsidiaries.
Commercial paper usually pays a higher rate of interest than guaranteed instruments, and the rates tend to rise along with national economic growth. Some financial institutions even allow their customers to write checks and make transfers online with commercial paper fund accounts in the same manner as a cash or money market account.
However, investors need to be aware that these notes are not FDIC-insured. They are backed solely by the financial strength of the issuer in the same manner as any other type of corporate bond or debenture. Standard &Poor’s and Moody’s both rate commercial paper on a regular basis using the same rating system as for corporate bonds, with AAA and Aaa being their highest respective ratings. As with any other type of debt investment, commercial paper offerings with lower ratings pay correspondingly higher rates of interest. But there is no junk market available, as commercial paper can only be offered by investment-grade companies.
Commercial Paper Defaults
As a practical matter, the Issuing and Paying Agent, or IPA, is responsible for reporting the commercial paper issuer's default to investors and any involved exchange commissions. Since commercial paper is unsecured, there is very little recourse for investors who hold defaulted paper, except for calling in any other obligations or selling any held stock of the company. In fact, a large default can actually scare the entire commercial paper market. Many commercial paper issuers purchase insurance as a form of backup.
Defaults are more common than in past years. Prior to the financial crisis of 2007-08, commercial paper issuers in the U.S. defaulted on approximately 3% of their issues. That number rose sharply in 2007-08. In fact, the outstanding amount of commercial paper dropped by around 29% by September 2008 for fear of continued default.
One famous example of commercial paper default took place in 1970 when the transportation giant Penn Central declared bankruptcy. The company defaulted on all of its commercial paper obligations. The immediate consequence was that its creditors lost their money. There was so much Penn Central commercial paper floating around that the entire commercial paper market took a hit. Issuers who had no relation to Penn Central saw investors lose confidence in the instrument altogether. The commercial paper market declined by nearly 10% within a month. After this debacle, the practice of buying backup loan commitments as a form of insurance for commercial paper became commonplace in the market.
Trading in Commercial Paper
It is possible for small retail investors to purchase commercial paper, although there are several restrictions that make it more difficult. Most commercial paper is sold and resold to institutional investors, such as large financial institutions, hedge funds, and multinational corporations. A retail investor would need access to very large amounts of capital to buy and own commercial paper; otherwise, indirect investment is possible through mutual funds, exchange-traded funds (ETFs) or a money market account administered and held at a depository institution.
Factors such as regulatory costs, the scale of investable capital, and physical access to the capital markets can make it very difficult for an individual or retail investors to buy and own commercial paper.
For example, commercial paper is typically sold in round lots totaling $100,000. This threshold in itself makes buying commercial paper generally exclusive to institutional investors and wealthy individuals. Further, broker-dealers issuing commercial paper on behalf of a client have pre-existing relationships with institutional buyers that make the market efficient through large purchases of primary offerings. They would not be likely to look to individual investors as a source of capital to fund the transaction.
Commercial Paper Rates and Pricing
The Federal Reserve Board posts the current rates being paid by commercial paper on its website. The FRB also publishes the rates of AA-rated financial and non-financial commercial paper in its H.15 Statistical Release daily weekdays Monday through Friday at 4:15 p.m. The data used for this publication are taken from the Depository Trust & Clearing Corporation (DTCC), and the rates are calculated based on the estimated relationship between the coupon rates of new issues and their maturities. Additional information on rates and trading volumes is available each day for the previous day’s activity. Figures for each outstanding commercial paper issue are also available at the close of business every Wednesday and on the last business day of every month.
The Bottom Line
Commercial paper is becoming increasingly available to retail investors from many outlets. Those who seek higher yields will likely find these instruments appealing due to their superior returns with modest risk. For more information on commercial paper, contact your financial advisor or visit the Federal Reserve Board website.
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6b31c0388263651d352a6d7c0febd0ed | https://www.investopedia.com/articles/investing/070714/want-career-asset-management-read-first.asp | Best Schools for a Career in Asset Management | Best Schools for a Career in Asset Management
In the eyes of hedge fund and mutual fund shops who are hiring, not all college degrees are created equal. According to a recently released report from alternative fund database house eVestment, the likelihood of graduates snagging coveted jobs in the asset management field largely depends on the academic halls they emerged from.
eVestment gathered alma mater information from over 35,000 investment analysts and portfolio managers who graduated after 2010, and are employed by some 4,500 mutual funds and hedge funds spanning the country.
Undergrads from the University of Pennsylvania, MBA alums from the University of Chicago's Booth School of Business, and those who earned diplomas in 2010 or later from Columbia University stood a greater chance of landing asset management jobs, eVestment found.
Penn’s esteemed Wharton School (both for MBA and undergrads) spawned 1,101 asset management workers – the highest number of combined alumni holding jobs at Goldman Sachs Asset Management (GS), BlackRock Inc. (BLK), Pacific Investment Management Co. (PIMCO), and other industry stalwarts. But Penn’s lead appears to be slipping; while it was the highest asset management seeder practically every year from 1960 to 2004, the University of Chicago has owned that honor from 2005 to 2009, passing the baton to Columbia from 2010 to 2014.
Unsurprisingly, Ivy League schools showed well. Yet non-Ivy League schools have not done badly at all. Boston College placed in the top 10 for total alums, and took sixth place when the data factored in undergraduate degrees alone. BC placed seventh when ranked by school size. Incidentally, U.S. News & World Report ranked BC 31st overall. Another notable non-Ivy League performer was Lehigh University, ranking ninth for undergraduate degrees when scaled by school size. Lehigh was ranked 41st overall by U.S. News & World Report. (For related reading, see: Prestigious Colleges in the World.)
Finally, eVestment looked at schools with a focus on investment products to learn that Harvard University topped the list for American hedge funds, trailed by the University of Chicago and Penn. Conversely, Penn took first for U.S. equities, trailed by Harvard and Chicago. Penn likewise led the pack for U.S. fixed income, followed by the University of Chicago and New York University.
Here is a list of rankings by overall numbers, adjusted by size, and MBA grads:
Raw Rank Total Alumni Employed by Asset Managers 1. University of Pennsylvania 1,101 2. Harvard University 920 3. Columbia University 886 4. University of Chicago 877 5. New York University 810 6. Stanford University 470 7. Northwestern University 429 8. UCLA 412 9. UC Berkeley 373 10. Boston College 372 Size-Adjusted Rank 1. University of Chicago 877 2. University of Pennsylvania 1,101 3. Dartmouth College 291 4. Harvard University 920 5. Princeton University 273 6. Massachusetts Institute of Technology 357 7. Boston College 372 8. Stanford University 470 9. Yale University 303 10. Columbia University 886 MBA Rank 1. University of Chicago 720 2. Columbia University 557 3. New York University 533 4. University of Pennsylvania 533 5. Harvard University 471 6. Northwestern University 234 7. UCLA 208 8. Stanford University 182 9. University of Southern California 125 10. University of Michigan 124
Source: eVestment
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e4bf025a8e79e03dd822fdd2e0bb404f | https://www.investopedia.com/articles/investing/070715/confused-how-imf-world-bank-wto-differ.asp | IMF vs. WTO vs. World Bank: What’s the Difference? | IMF vs. WTO vs. World Bank: What’s the Difference?
IMF vs. WTO vs. World Bank: An Overview
The International Monetary Fund (IMF), the World Bank and the World Trade Organization (WTO) are highlighted in the financial press or on television nearly every day. From loans to Greece to trade deals in Asia, these organizations make headlines across the globe. Understanding these entities and their missions will provide greater insight into how these organizations help to shape the global economy.
The International Monetary Fund (IMF) is a global organization with 189 member countries currently based in Washington, D.C. The fund's purpose is to promote financial stability and economic growth among other objectives.
The World Trade Organization (WTO is also a global association with 164 member countries. The organization's purpose is to promote fair trade between nations.
The World Bank is also an international organization and has a goal to reduce poverty through financial assistance.
The International Monetary Fund – IMF
The IMF promotes itself as “an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.” It was created in 1944, while World War II was still raging, as part of the Bretton Woods Agreement. The agreement sought to create a monetary and exchange rate management system that might prevent a repeat of the currency devaluations that contributed to the economic challenges of that period.
The organization’s “primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other.” The IMF’s broad, self-defined mandate encompasses “all macroeconomic and financial sector issues that bear on global stability,” including trade promotion, economic growth and poverty reduction.
The IMF Mission
The IMF advances its mission in a variety of ways. Monitoring and reporting on economic developments is a large part of the effort, including making recommendations to member countries on future courses of action. For example, in 2015, the IMF reviewed the health of the U.S. economy and recommended that the U.S. Federal Reserve hold off on its plans to increase interest rates because it might harm the economy. Although the IMF's recommendations are not legally binding, they are made public. Economic policymakers are certainly aware of them and are undoubtedly influenced by them.
Lending money to poor countries is also a major initiative at the IMF. The organization provides financing to help troubled nations avoid or recover from economic challenges. The IMF has made significant loans to Portugal, Greece, Ireland, Ukraine, Mexico, Poland, Columbia, and Morocco, among others. All of the IMF’s initiatives are self-funded by its members. The organization’s headquarters is in Washington, D.C. (For more information, read: An Introduction To The International Monetary Fund.)
The World Bank
The World Bank Group, like the IMF, was created at Bretton Woods in 1944. Its goal is to provide “financial and technical assistance to developing countries around the world” in an effort to “reduce poverty and support development.” It consists of five underlying institutions, the first two of which are collectively referred to as The World Bank.
International Bank for Reconstruction and Development (IBRD). This is the IMF's lending arm. It provides financial assistance to credit-worthy, middle- and low-income nations.International Development Association (IDA). IDA provides loans and grants to poor countries. International Finance Corporation (IFC). In contrast to the World Bank, which focuses its efforts on governments, the IFC provides money and advice to private sector entities. Multilateral Investment Guarantee Agency. MIGA seeks to encourage foreign direct investment in developing nations.International Centre for Settlement of Investment Disputes. ICSID provides physical facilities and procedural expertise to help resolve the inevitable disputes that arise when money is at the heart of a disagreement between two parties.
Advancing the World Bank Mission
The World Bank pursues its objectives by delivering financial assistance to developing nations. It gives low- or no-interest loans and grants to finance “a wide array of investments in such areas as education, health, public administration, infrastructure, financial and private sector development, agriculture, and environmental and natural resource management.” For example, the World Bank loaned India $500 million in 2015 to support micro-, small- and mid-sized businesses. The 10-year loan was made on favorable terms that include a provision that repayment does not need to begin for five years.
The World Bank’s efforts include providing advice and guidance in addition to working closely with the International Monetary Fund. The group is self-funded and has its home office in Washington, D.C. (For related reading, see: The World Bank's All-Important World Development Indicators (WDI).)
The World Trade Organization – WTO
The World Trade Organization (WTO) claims to be “the only global international organization dealing with the rules of trade between nations.” The WTO’s efforts center on developing trade agreements between nations to encourage cross-border commerce. This includes setting up the agreements, interpreting the agreements and facilitating dispute settlement.
Officially founded in 1995, the WTO traces its roots back to Bretton Woods where the General Agreement on Trade and Tariffs (GATT) was crafted in an effort to encourage and support trade between nations. Following up on GATT, the 1986-1994 Uruguay Roundtable trade negotiations resulted in the formal creation of the WTO. The WTO headquarters is located in Geneva, Switzerland. Like the IMF and the World Bank, the WTO is funded by its members.
Advancing the WTO Mission
The WTO seeks to facilitate cross-border trade. Negotiations are conducted in an all-or-nothing format, with every issue on the table discussed until resolved. Accordingly, there are no partial deals, so missed deadlines and protracted efforts that continue for many years are not uncommon. In addition to large-scale trade initiatives, the WTO also facilitates trade dispute negotiations, such as a disagreement between Mexico and the United States over tuna fishing. (For related reading, see: 3 Times the WTO Got It Right This Century.)
The Bottom Line
While all three organizations promote themselves as fostering positive developments, not everyone agrees with their self-assessments. The organizations do provide financial assistance to countries in need, but like just about every other known method of obtaining financial resources, the money comes with strings attached and the motives behind the initiatives are often in question.
For example, what these groups refer to as “promoting economic growth,” their detractors view as a blueprint for destroying the local economy and despoiling the environment with globalization efforts that benefit only the rich. Protests, including those in Davos, Switzerland, Washington, D.C., Cancun, Mexico, and other major cities are a regular feature at IMF, World Bank, and WTO events. Aside from the public protests, even some business leaders argue against the organizations. (See: The Dark Side of the WTO.)
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12db58fcc1f50655872df17827fdc6ed | https://www.investopedia.com/articles/investing/070715/sp-500-vs-russell-2000-etf-which-should-you-get.asp | S&P 500 vs. Russell 2000 ETF: What's the Difference? | S&P 500 vs. Russell 2000 ETF: What's the Difference?
S&P 500 vs. Russell 2000 ETFs: An Overview
If you find yourself on the conservative end of the active vs. passive spectrum, then investing in exchange-traded funds (ETFs) may be one way to go. You may not beat the market, but you will certainly come close to matching it. Here, we’ll focus on ETFs that track two of the more popular indexes, the S&P 500 and the Russell 2000.
Key Takeaways The S&P 500 and the Russell 2000 are two popular indexes.Many investors consider the S&P 500 to be the pulse of the US equity market. Russell 2000 ETFs closely track the Russell 2000 Index, which combines 2000 of the small-cap companies in the Russell universe of 3000 stocks.
S&P 500 ETFs
The Standard & Poor's 500 (S&P 500) is a market-capitalization-weighted index of some of the largest publicly-traded U.S. corporations. Most analysts see the S&P 500 as the best indicator of the U.S. equity market. This index is a commonly used benchmark for many portfolio managers, mutual funds, and exchange-traded funds.
The three most commonly traded ETFs that track the performance of the S&P 500 index include:
State Street’s SPDR S&P 500 ETF Trust (SPY)BlackRock’s iShares Core S&P 500 ETF (IVV)Vanguard’s S&P 500 ETF (VOO)
The common theme between all three funds is, of course, the index they track—the S&P 500. Many investors consider this index to be the pulse of the U.S. equity market. It is calculated using the market capitalizations of the 500+ largest U.S. companies with stocks listed on the New York Stock Exchange (NYSE) or the Nasdaq Stock Market. Index constituents are selected by a committee, which takes into account criteria such as market capitalization, liquidity, financial viability, length of trading, and other factors.
The oldest and the most widely held of the three ETFs is SPY. The fund's expenses come in at 0.09%. While this expense is negligible in a broader asset management context, it is the highest among the three competitors. Even in spite of the higher expense, the fund has superior liquidity, with an average daily trading volume of 30 to 60 times that of IVV and VOO.
When comparing the performance numbers of the three—represented by net asset value (NAV) returns—all three slightly underperformed the S&P500 index over the last 10 years. VOO is the new kid on the block with a fund inception date of Sept. 9, 2010, so, it has fewer years of data for consideration. The SPY returned the lowest of the three funds. The lowered return is to be expected since it has the highest expense ratio among the three ETFs. Also, it must be understood that the funds are comparing to the virtually frictionless S&P 500 Index.
SPY is also structurally different from IVV and VOO in that it is set up as a unit investment trust (UIT) with restrictions on lending the underlying shares to other firms. Additionally, any dividends from SPY constituents for the period are collected and held in cash until distribution, whereas IVV and VOO allow for the reinvestment of dividends.
Russell 2000 ETFs
On the opposite side of the spectrum is the Russell 2000 Index that follows the performance of around 2,000 U.S. small-cap firms. Like the S&P 500, the index is weighted and regularly serves as a benchmark index.
As the name suggests, Russell 2000 ETFs closely track the Russell 2000 Index, which combines 2000 of the small-cap companies in the Russell universe of 3000 stocks. The Russell 3000 tracks nearly 98% of all publicly traded U.S. stocks.
Both the S&P 500 and Russell 2000 indexes are market-capitalization-weighted. Unlike the S&P 500 index, however, the securities in the Russell 2000 index are not selected by a committee, but rather through a formula based on their market cap and current index membership.
The most notable ETFs tracking the Russell 2000 index, in the order of their significance, are:
BlackRock’s iShares Russell 2000 ETF (IWM)Vanguard’s Russell 2000 ETF (VTWO)Direxion Daily Small Cap Bill 3x Shares (TNA)
Here again, the higher liquidity of Blackrock's IWM seems to drive its higher expense ratio. Compared to the S&P 500 ETFs, however, all funds tracking the Russell 2000 index command higher fees despite their much lower overall liquidity.
IWM is the heaviest traded Russell 2000 ETF, yet it trades at just one-quarter of the volume of SPDR's SPY. The higher fees of Russell 2000 ETFs are likely due to the increased management effort of periodically balancing a larger number of securities.
Russell 2000 ETFs may look more attractive than S&P 500 ETFs at the start of a bull market. The Russell 2000 constituents on average are bound to outperform their big brothers in the S&P 500 Index if the uptrend continues. The challenge is the volatility of their returns. So, as an investor, you may be in for a rough ride.
Special Considerations
The advantages of ETFs as an attractive investment for those who are content with matching the return on a wider market at a fraction of an active management cost. Investors have many ETFs to choose from based on the size, geographical location, or sector affiliation of companies in the index.
Two of the more popular choices are the S&P 500 ETFs and Russell 2000 ETFs. Key distinctions between them are driven by the size of the companies in the index they track—large-cap for the S&P 500 and small-cap for the Russell 2000—the volatility of the underlying index, the method of constituent selection, and the fees they charge.
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962593a246dc81e617737e990f5a612f | https://www.investopedia.com/articles/investing/070915/how-negative-interest-rates-work.asp | How Negative Interest Rates Work | How Negative Interest Rates Work
Interest rates are often defined as the price paid to borrow money. For example, an annualized 2% interest rate on a $100 loan means that the borrower must repay the initial loan amount plus an additional $2 after one full year. So what does it mean when we have a negative interest rate—meaning borrowers are credited interest, instead of being charged it? That, say, a -2% interest rate means the bank pays the borrower $2 after a year of using the $100 loan?
At first glance, negative interest rates seem like a counterintuitive, if not downright crazy, strategy. Why would a lender be willing to pay someone to borrow money, considering the lender is the one taking the risk of loan default? Inside-out as it might appear, though, there are times when central banks run out of policy options to stimulate their nations' economies and turn to the desperate measure of negative interest rates.
Key Takeaways Negative interest rates are an unconventional, and seemingly counterintuitive, monetary policy tool.Central banks impose the drastic measure of negative interest rates when they fear their national economies are slipping into a deflationary spiral, in which there is no spending—and hence, dropping prices, no profits, and no growth.With negative interest rates, cash deposited at a bank yields a storage charge, rather than the opportunity to earn interest income; the idea is to incentivize loaning and spending, rather than saving and hoarding.In recent years, several European and Asian central banks have imposed negative interest rates on commercial banks.
Negative Interest Rates in Theory and Practice
Negative interest rates are not only an unconventional monetary policy tool, but they are also a recent one. Sweden's central bank was the first to deploy them: In July 2009, the Riksbank cut its overnight deposit rate to -0.25%. The European Central Bank (ECB) followed suit in June 2014 when it lowered its deposit rate to -0.1%. Other European countries and Japan have since opted to offer negative interest rates, resulting in $9.5 trillion worth of government debt carrying negative yields in 2017.
Why did they take this drastic measure? The monetary policymakers were afraid that Europe was at risk of falling into a deflationary spiral. In harsh economic times, people and businesses tend to hold on to their cash while they wait for the economy to improve. But this behavior can weaken the economy further, as a lack of spending causes further job losses, lowers profits, and prices to drop—all of which reinforces people’s fears, giving them even more incentive to hoard. As spending slows even more, prices drop again, creating another incentive for people to wait as prices fall further. And so on.
This is precisely the deflationary spiral that European central banks are trying to avoid with the negative-interest strategy, which not only affects bank loans but bank deposits.
When you deposit money in an account at a financial institution, you are in effect becoming a lender—letting the bank have use of your funds—and the institution effectively becomes a borrower.
With negative interest rates, cash deposited at a bank yields a storage charge, rather than the opportunity to earn interest income. By charging European banks to store their reserves at the central bank, the policyholders hope to encourage banks to lend more.
In theory, banks would rather lend money to borrowers and earn at least some interest as opposed to being charged to hold their money at a central bank. Additionally, negative rates charged by a central bank may carry over to deposit accounts and loans. This means that deposit holders would also be charged for parking their money at their local bank while some borrowers enjoy the privilege of actually earning money by taking out a loan.
Another primary reason the ECB has turned to negative interest rates is to lower the value of the euro. Low or negative yields on European debt will deter foreign investors, thus weakening demand for the euro. While this decreases the supply of financial capital, Europe's problem is not one of supply but of demand. A weaker euro should stimulate demand for exports and, hopefully, encourage businesses to expand.
Risks of Negative Interest Rates
In theory, negative interest rates should help to stimulate economic activity and stave off inflation, but policymakers remain cautious because there are several ways such a policy could backfire. Because banks have certain assets such as mortgages that are contractually tied to the prevailing interest rate, such negative rates could squeeze profit margins to the point where banks are actually willing to lend less.
There is also nothing to stop deposit holders from withdrawing their money and stuffing the physical cash in mattresses. While the initial threat would be a run on banks, the drain of cash from the banking system could lead to a rise in interest rates—the exact opposite of what negative interest rates are supposed to achieve.
Although the Federal Reserve, the U.S. central bank, has never imposed negative interest rates, it has come close with near-zero rates—most recently on Mar. 15, 2020, when it cut the benchmark interest rate to a 0%–.25% range.
The Bottom Line
While negative interest rates may seem paradoxical, this apparent intuition has not prevented a number of European and Asian central banks from adopting them. This is evidence of the dire situation that policymakers believe is characteristic of the European economy. When the Eurozone inflation rate dropped into deflationary territory at -0.6% in Feb. 2015, European policymakers promised to do whatever it took to avoid a deflationary spiral. However, even as Europe entered unchartered monetary territory, a number of analysts warned that negative interest rate policies could have severe unintended consequences.
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eb4054b577e3ae407f23e737c74dbe8f | https://www.investopedia.com/articles/investing/070915/most-successful-corporations-us.asp | The Most Successful Corporations in the U.S. | The Most Successful Corporations in the U.S.
Because there are many ways to measure a company's success, here are the most successful companies in the U.S. as measured by five different metrics. The metrics are Sales, Profits, Shareholder Returns, Quality of Workplace, and Carbon Footprint. Data for Sales, Profit, and Shareholder Returns are measured over the last 12 months, and Employee Satisfaction and Carbon footprint are as of the most recently available data.. The list will be limited to the S&P 500 as data on these companies are most readily available.
Sales:
Big-box retailer Wal-Mart (WMT) brought in $521 billion in the past 12 months, the most of any company in the S&P 500.
Profits:
Electronics firm Apple (AAPL) has earned $55.3 billion in net income over the past 12-months, more than any company in the S&P 500.
Shareholder Returns
Semiconductor manufacturer Advanced Micro Devices (AMD) has a 1-year trailing return of 87.9%, a higher return for investors than any other S&P 500 company.
Employee Satisfaction
Hilton Worldwide Holdings (HLT) was rated the best place to work in Fortune Magazine's "100 Best Companys To Work For" survey of 2019. The survey, done by analytics firm, Great Place to Work, surveyed 4.3 million employees with more that 60 survey questions about their workplace.
Carbon Footprint:
Apple has the lowest ratio of greenhouse gas emissions to revenue generated of any company in the S&P 500. Apple emits 120.5 tons of carbon dioxide for every million dollars in revenue it makes. This includes not only direct emissions by the company and indirect emissions from energy usage, but the whole array of emissions upstream and downstream from the company including raw materials, transportation of goods, and disposal costs of products. For more on the methodology used in the emissions measured, look here.
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d0fd32f06f656d7164d95852d856b748 | https://www.investopedia.com/articles/investing/071113/breaking-down-geometric-mean.asp | Breaking Down the Geometric Mean in Investing | Breaking Down the Geometric Mean in Investing
Understanding portfolio performance, whether for a self-managed, discretionary portfolio or a non-discretionary portfolio, is vital to determining if the portfolio strategy is working or needs to be amended. There are numerous ways to measure performance and determine whether the strategy is successful. One way is using the geometric mean.
Geometric mean, sometimes referred to as compounded annual growth rate or time-weighted rate of return, is the average rate of return of a set of values calculated using the products of the terms. What does that mean? Geometric mean takes several values and multiplies them together and sets them to the 1/nth power. For example, the geometric mean calculation can be easily understood with simple numbers, such as 2 and 8. If you multiply 2 and 8, then take the square root (the ½ power since there are only 2 numbers), the answer is 4. However, when there are many numbers, it is more difficult to calculate unless a calculator or computer program is used.
Geometric mean is an important tool for calculating portfolio performance for many reasons, but one of the most significant is it takes into account the effects of compounding.
Geometric vs. Arithmetic Mean Return
The arithmetic mean is commonly used in many facets of everyday life, and it is easily understood and calculated. The arithmetic mean is achieved by adding all values and dividing by the number of values (n). For example, finding the arithmetic mean of the following set of numbers: 3, 5, 8,-1, and 10 is achieved by adding all the numbers and dividing by the quantity of numbers.
3 + 5 + 8 + -1 + 10 = 25/5 = 5
This is easily accomplished using simple math, but the average return fails to take into account compounding. Conversely, if the geometric mean is used, the average takes into account the impact of compounding, providing a more accurate result.
Example 1:
An investor invests $100 and receives the following returns:
Year 1: 3%
Year 2: 5%
Year 3: 8%
Year 4: -1%
Year 5: 10%
The $100 grew each year as follows:
Year 1: $100 x 1.03 = $103.00
Year 2: $103 x 1.05 = $108.15
Year 3: $108.15 x 1.08 = $116.80
Year 4: $116.80 x 0.99 = $115.63
Year 5: $115.63 x 1.10 = $127.20
The geometric mean is: [(1.03*1.05*1.08*.99*1.10) ^ (1/5 or .2)]-1= 4.93%.
The average return per year is 4.93%, slightly less than the 5% computed using the arithmetic mean. Actually, as a mathematical rule, the geometric mean will always be equal to or less than the arithmetic mean.
In the above example the returns did not show very high variation from year to year. However, if a portfolio or stock does show a high degree of variation each year, the difference between the arithmetic and geometric mean is much greater.
Example 2:
An investor holds a stock that has been volatile with returns that varied significantly from year to year. His initial investment was $100 in stock A, and it returned the following:
Year 1: 10%
Year 2: 150%
Year 3: -30%
Year 4: 10%
In this example the arithmetic mean would be 35% [(10+150-30+10)/4].
However, the true return is as follows:
Year 1: $100 x 1.10 = $110.00
Year 2: $110 x 2.5 = $275.00
Year 3: $275 x 0.7 = $192.50
Year 4: $192.50 x 1.10 = $211.75
The resulting geometric mean, or a compounded annual growth rate (CAGR), is 20.6%, much lower than the 35% calculated using the arithmetic mean.
One problem with using the arithmetic mean, even to estimate the average return, is that the arithmetic mean tends to overstate the actual average return by a greater and greater amount the more the inputs vary. In the above Example 2, the returns increased by 150% in year 2 and then decreased by 30% in year 3, a year-over-year difference of 180%, which is an astoundingly large variance. However, if the inputs are close together and do not have a high variance, then the arithmetic mean could be a quick way to estimate the returns, especially if the portfolio is relatively new. But the longer the portfolio is held, the higher the chance the arithmetic mean will overstate the actual average return.
The Bottom Line
Measuring portfolio returns is the key metric in making buy/sell decisions. Using the appropriate measurement tool is critical to ascertaining the correct portfolio metrics. Arithmetic mean is easy to use, quick to calculate, and can be useful when trying to find the average for many things in life. However, it is an inappropriate metric to use to determine the actual average return of an investment. The geometric mean is a more difficult metric to use and understand. However, it is an exceedingly more useful tool for measuring portfolio performance.
When reviewing the annual performance returns provided by a professionally managed brokerage account or calculating the performance to a self-managed account, you need to be aware of several considerations. First, if the return variance is small from year to year, then the arithmetic mean can be used as a quick and dirty estimate of the actual average annual return. Second, if there is great variation each year, then the arithmetic average will overstate the actual average annual return by a large amount. Third, when performing the calculations, if there is a negative return make sure to subtract the return rate from 1, which will result in a number less than 1. Last, before accepting any performance data as accurate and true, be critical and check that the average annual return data presented is calculated using the geometric average and not the arithmetic average, since the arithmetic average will always be equal to or higher than the geometric average.
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4b110b023284a6e37a077fb65c3588c9 | https://www.investopedia.com/articles/investing/071114/why-gold-has-always-had-value.asp | Why Has Gold Always Been Valuable? | Why Has Gold Always Been Valuable?
There exist a plethora of articles about gold as a financial investment so here we focus on the social and psychological aspects of gold.
Key Takeaways Since ancient civilization, from the Egyptians to the Inca, gold has held a special place of actual and symbolic value for humanity.Gold has moreover been used as money for exchange, as a store of value, and as valuable jewelry and other artifacts.Gold's value is ultimately a social construction: it is valuable because we all agree it has been and will be in the future.Still, gold's lustrous and metallic qualities, its relative scarcity, and the difficulty of extraction have only added to the perception of gold as a valuable commodity.
Why Has Gold Always Had Value?
Some people argue that gold has no intrinsic value, that it is a barbaric relic which no longer holds the monetary qualities of the past. They contend that in a modern economic environment, paper currency is the money of choice; that gold's only worth is as a material to make jewelry.
At the other end of the spectrum are those that assert that gold is an asset with various intrinsic qualities that make it unique and necessary for investors to hold in their portfolios. They believe that investors have as many reasons for investing in gold as they do vehicles to make those investments.
Gold's Essential Dichotomy
Most would agree that gold has always had value for all of these reasons—a component of decorative jewelry, a sometime currency, and as an investment. But in addition to these concrete values, we would add another characteristic of gold, which, though harder to pinpoint, is as just as real: its mystery. Part of the very appeal of gold is the mystery of its appeal.
In the world of finance and investing, we often like to tiptoe around the word "mystery." Yet, as is true with most disciplines, there is always a place for both science and art, and even mystery.
Gold can stimulate a subjective personal experience, but gold can also be objectified if it's adopted as a system of exchange.
This duplicity is a conundrum that is unique to gold as a commodity. Gold can be something quantitative and tangible, like money, and at the same time, it can embody something ephemeral, like a feeling, even a host of feelings. So, part of the reason that gold has always had value lies in the psychology and nature of the human experience.
Gold can exist as something that is quantitative and tangible while embodying the qualitative and ephemeral.
Gold, The Feel-Good Metal
It's a cold day in mid-December. You're strolling along Fifth Avenue in New York—either alone, or with a familiar—to look at the holiday shop windows. It's late afternoon and the thin winter light has begun to fade; even darker earlier because of the threat of snow or rain today. The bells of Salvation Army red-kettle ringers grow muffled and distant; the sky lowers, closing in around you, as the first flakes of winter fall.
You stop, drawn by a Tiffany window featuring a discrete few gold pieces. Exquisitely designed yellow, pink, and white gold shapes peek from an exotic display of corals and underwater fauna. Lights beat down like the sun, coaxing the metal's incandescence. Suddenly, a brisk wind rises, making flakes to swirl faster around you. "Hmmm," you think, "Hot chocolate? A cognac?" You duck into a nearby hotel bar—the St. Regis, perhaps, snug with its familiar fireplace.
Well, maybe you haven't had this exact experience. But you get the idea.
Something about the warmth of gold speaks to our human need for comfort and nurture.
In Search of a Metal to Worship
Our ancestors were faced with coming up with a method of exchange that was easier to implement than a barter system. A coin is one such medium of exchange. Of all the metals in the periodic table of elements, gold is the logical choice. We can rule out elements other than metals because a gaseous or liquid currency is not very practical from the standpoint of personal portability. This leaves metals like iron, copper, lead, silver, gold, palladium, platinum, and aluminum.
Iron, Lead, Copper, and Aluminum. These metals are prone to corrode over time so they would not be a good value in terms of storage, which is required of coins; and keeping the metals from corroding is labor-intensive. Aluminum feels very light and unsubstantial—not ideal for a coin-metal that could invoke feelings of security and value.
The "Noble Metals." Platinum or palladium are reasonable choices because they are mostly non-reactive to other elements—that is, produce little corrosion—but they are too rare to generate enough coins to circulate. To assign value to a metal, it must be somewhat rare—so that not everyone is producing coins—but available enough so that a reasonable number of coins can be created for commerce.
Gold and Silver. Gold doesn't corrode and can be melted over a flame, making it easy to work with and stamp as a coin. Silver and gold are beautiful metals that are easy to form into jewelry, and both of these precious metals have their own devotees in fine-jewelry circles.
Gold, The Mysterious Metal
Although silver can be polished and textured in multiple ways so as to catch the light and the eye, there remains no metal quite like gold. Unlike other elements, gold naturally possesses a subtle array of unique and beautiful colors. The atoms in gold are actually heavier than in silver and other metals. This attribute makes the electrons move faster, which in turn allows for some of the light to be absorbed into the gold—a process that Einstein's theory of relativity helped to discern.
Perhaps gold's physical quality of absorbing light makes its special shine come literally from within itself.
Gold, Psychology, and Society
If the modern paper-money economy were to collapse, gold may not have immediate use—as panic sets in and people fight for their basic needs—but it will eventually.
Humans are Pack Animals. We prefer the company of other humans (to varying degrees) over complete independence. It is easier to work in groups than to attempt to live off the land on our own. This human trait forces us to find ways of working together, which in turn leads us to find ways of exchanging goods and services easily and efficiently.
Gold Provides the Comfort of Sustainability. Gold is the logical choice for this exchange. If disaster strikes, such that paper money and the system that supports it no longer exists, we will revert to gold. Arguably, gold is one of the only substances on earth with all of the qualities for the job, including sustainability.
How a Gold Brooch Can Become a Wagu Steak. A chunk of gold may have no immediate physical value to the person holding it; they cannot eat or drink it, for example. But if society agrees to turn gold into coins into a system of exchange for goods, then that coin would instantly assume a value. What was originally inedible could become a wagyu steak dinner, for example.
Because others believe that gold has value, you do too; and because they think that you value gold, others value it too.
The Bottom Line
From an elemental perspective, gold is the most logical choice for a medium of exchange for goods and services. The metal is abundant enough to create coins but rare enough so that not everyone can produce them. Gold doesn't corrode, providing a sustainable store of value, and humans are physically and emotionally drawn to it. Societies and economies have placed value on gold, thus perpetuating its worth.
Gold is the metal we'll fall back on when other forms of currency don't work, which means that gold will always have value in tough as well as good times.
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a463ca7c3c351c27d72c97481f6b91a6 | https://www.investopedia.com/articles/investing/071315/why-doctors-cant-manage-money.asp | Reasons Why Doctors Can't Manage Money | Reasons Why Doctors Can't Manage Money
Doctors are one of our most esteemed professions. They’re held up as geniuses, seemingly unable to do wrong. Except when it comes to money.
It's a stereotype that doctors are often lax with their finances. But it's true: They rack up debt, are careless with their earnings, and fail to save for retirement.
Joe Saul-Seh, of the personal finance podcast Stacking Benjamins (and a physician's husband) says because doctors have high salaries, they think it’s okay to spend accordingly. “Many spend their money on trappings that make them appear rich: nice vacations, expensive cars, maybe a boat and a large house,” he notes.
A God Complex
Dr. Jim Dahle, a blogger at the White Coat Investor, says that the common reasons that most people struggle with money apply to doctors. These include “a lack of financial literacy, poor financial discipline and a lack of long-term perspective.” “In addition, there is a bit of a culture within academic medicine where you don't talk about financial topics,” he says.
There’s also the God complex. Doctors are used to being in charge and having people rely on them. Because they are so used to being looked up to, that they find it difficult to seek out advice on anything, Saul-Sehy says. To them, asking for advice is a sign of weakness. Physicians are supposed to be confident and it’s hard for them to trust someone else, or appear vulnerable to anyone. And the feeling is mutual: Saul-Sehy says he knows of a financial advisor who refused to work with doctors. When asked why, he said, “Because I can only worship one god.”
Careers Start Late, Mounds of Debt
Most doctors spend years getting their undergraduate and medical degrees. Their friends are 22 when they graduate, start working and earn a real living. In contrast, most physicians don't finish their training until their early 30s. After years of studying, exams and living on a student budget, they’re ready to splurge. (For more, see: A Look at Advisors Serving Niche Clients.)
Dahle says for many, the income jump is one of the reasons for poor financial habits. But being a doctor also comes with its own set of financial baggage. Even though they’re earning well into six figures, most are also paying off hundreds of thousands of dollars of student loans.
Alexi Zemsky, cardiologist and blogger at MilesDividendMD, finds that many doctors fail to account for being in a higher tax bracket. “Unique challenges for professions with high levels of earned income really have to do with keeping effective tax rates as low as possible,” he says.
Some of the ways he saves on taxes include maxing out contributions to his retirement accounts, health savings account and recording any losses from investing.
Finding a good financial advisor is one way physicians can avoid the problems so common to their profession. But they shouldn't neglect developing their own financial literacy. Dahl himself got interested in investments was after a bad experience with an advisor.
The Bottom Line
Just because doctors have a reputation for being bad with money doesn't mean they're doomed to a life of debt or worse. If they seek professional help, live within their means and remember to save for retirement, they're as likely to succeed as anyone. Like anyone, they should start saving while they're young and continue to maintain good habits throughout their careers. (For more, see: How Advisors Can Tap the Doctor Niche.)
“Physicians have already won the money game,” Dahle says. “Their high incomes get them 90% of the way. If they just manage to do a few things right, they will be financially successful.”
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ae73ffab555f7ba9ba01245cf0793e83 | https://www.investopedia.com/articles/investing/071415/list-major-stock-exchanges-caribbean.asp | List of the Major Stock Exchanges in the Caribbean | List of the Major Stock Exchanges in the Caribbean
Though the Caribbean is well-known for its beautiful beaches and vibrant music, it has an emerging capital market that should not be ignored. As many as twelve national stock exchanges can be found in the region. In addition, the Caribbean is also home to the first regional securities exchange to be formed in the Western Hemisphere. (For more, see An Introduction to Securities Market.)
In 1871, the Bermuda Stock Exchange became the first stock market in the Caribbean to give investors the opportunity to buy and sell shares in companies. The region’s most recently formed exchange is the Dutch Caribbean Securities Exchange, which was established in 2010. There are currently eight companies listed on that market.
Below is a list of the four stock exchanges where the majority of Caribbean stock trading activity takes place.
Eastern Caribbean Securities Exchange
With twelve listed companies, the Eastern Caribbean Securities Exchange (ECSE) is the Western Hemisphere’s regional securities market. Headquartered in the island of St. Kitts, a nation with a population of less than 60,000 people, the ECSE’s listed securities are a composite of government bonds, financial institutions and utility companies partially owned by Eastern Caribbean governments.
The ECSE serves the islands of Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, Saint Kitts and Nevis, Saint Lucia and Saint Vincent and the Grenadines. It provides the citizens of these small islands with the opportunity to own a stake in some of the region’s most eminent companies.
Barbados Stock Exchange
Although the Barbados Stock Exchange (BSE) is the third largest stock exchange in the Caribbean, its market capitalization is just under $2.75 billion. There are only twenty companies listed on the market, and many are only traded a few times a year. For example, shares in The West Indian Biscuit Company Limited, have not traded hands since August 2014. There are also many days where absolutely no trading takes place on the exchange.
The securities listed on the BSE are a composite of government bonds, corporate debentures and shares in businesses that mainly operate in the consumer goods and financial services industry. A handful of those firms are actually cross-listed on other regional and international exchanges. Sagicor Financial Corporation, which trades on the London Stock Exchange, and Trinidad Cement Limited, which trades on the Trinidad and Tobago Stock Exchange, are both examples of such companies.
Jamaica Stock Exchange
More than 45 companies that operate in the finance, communications, manufacturing, retail, real estate and tourism industries are listed on the Jamaica Stock Exchange (JSE), making it one of the Caribbean's largest, most liquid and sector-diverse stock exchanges. Shares on the JSE trade for only three and half hours each days. The JSE, which dates back to 1968, has played a critical role in the development and growth of the Jamaican private sector. To date, the market capitalization of the JSE is just over $3.3 billion.
Trinidad and Tobago Stock Exchange
Although the Trinidad and Tobago Stock Exchange (TTSE) has roughly the same number of listed companies as the JSE, it is by far the largest exchange in the region. The market capitalization of the exchange is more than $17 billion. Unlike the other regional exchanges that have seen significant declines in their market caps since 2010, the total value of the TTSE has been growing. The three largest companies listed on the TTSE are Trinidadian conglomerate ANSA McAL, Republic Bank Limited and National Enterprises Limited.
The Bottom Line
While a dozen national stock exchanges can be found throughout the islands of the Caribbean, the majority of the region's trading activity is done on four, including a regional securities exchange that serves islands belonging to the Organization of the Eastern Caribbean States (OECS). Generally, the stock exchanges in the Caribbean are small and have very low trading volumes. However, they provide households with an alternative to keeping money in a savings account.
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b31f68e44a5f1d826045d2f0a17ad860 | https://www.investopedia.com/articles/investing/071513/understanding-offbalance-sheet-financing.asp | Understanding Off-Balance Sheet Financing | Understanding Off-Balance Sheet Financing
Off-balance sheet (OBS) financing is an accounting practice whereby a company does not include a liability on its balance sheet. It is used to impact a company’s level of debt and liability. The practice has been denigrated by some since it was exposed as a key strategy of the ill-fated energy giant Enron.
Examples
Common forms of off-balance-sheet financing include operating leases and partnerships. Operating leases have been widely used, although accounting rules have been tightened to lessen the use. A company can rent or lease a piece of equipment and then buy the equipment at the end of the lease period for a minimal amount of money, or it can buy the equipment outright.
In both cases, a company will eventually own the equipment or building. If the company chooses an operating lease, the company records only the rental expense for the equipment and does not include the asset on the balance sheet. If the company buys the equipment or building, the company records the asset (the equipment) and the liability (the purchase price). By using the operating lease, the company records only the rental expense, which is significantly less than the entire purchase price and results in a cleaner balance sheet.
Partnerships are another common OBS financing item, and Enron hid its liabilities by creating partnerships. When a company engages in a partnership, even if the company has a controlling interest, it does not have to show the partnership’s liabilities on its balance sheet, again, resulting in a cleaner balance sheet.
These two examples of OBS financing arrangements illustrate why companies might use OBS to reduce their liabilities on the balance sheet to seem more appealing to investors. However, the problem that investors encounter when analyzing a company’s financial statements is that many of these OBS financing agreements are not required to be disclosed, or they have partial disclosures. These disclosures do not adequately reflect the company’s total debt. Even more perplexing is that these financing arrangements are allowable under current accounting rules, although some rules govern how each can be used. Because of the lack of full disclosure, investors must determine the worthiness of the reported statements prior to investing by understanding any OBS arrangements.
Why Is OBS Financing so Attractive?
OBS financing is attractive to all companies, but particularly to those that are already highly levered. For a company that has a high debt-to-equity, increasing its debt may be problematic for several reasons.
First, for companies that already have high debt levels, borrowing more money is typically more expensive than for companies that have little debt because the interest charged by the lender is higher. Second, borrowing may increase a company’s leverage ratios causing agreements (called covenants) between the borrower and lender to be violated.
Third, partnerships, such as in those for R&D, are attractive to companies because R&D is expensive and may have a long time horizon before completion. The accounting benefits of partnerships are many. For example, accounting for an R&D partnership allows the company to add minimal liability to its balance sheet while conducting the research. This is beneficial because, during the research process, there is no high-value asset to help offset the large liability. This is particularly true in the pharmaceutical industry where R&D for new drugs takes many years to complete.
Lastly, OBS financing can often create liquidity for a company. For example, if a company uses an operating lease, capital is not tied up in buying the equipment since only the rental expense is paid out.
How OBS Financing Affects Investors
Financial ratios are used to analyze a company’s financial standing. OBS financing affects leverage ratios such as the debt ratio, a common ratio used to determine if the debt level is too high when compared to a company's assets. Debt-to-equity, another leverage ratio, is perhaps the most common because it looks at a company's ability to finance its operations long-term using shareholder equity instead of debt. The debt-to-equity ratio does not include short-term debt used in a company's day-to-day operations to more accurately depict a company’s financial strength.
In addition to debt ratios, other OBS financing situations include operating leases and sale-leaseback impact liquidity ratios. Sale-leaseback is a situation where a company sells a large asset, usually a fixed asset such as a building or large capital equipment, and then leases it back from the purchaser. Sale lease-back arrangements increase liquidity because they show a large cash inflow after the sale and small nominal cash outflow for booking a rental expense instead of a capital purchase. This reduces the cash outflow level tremendously so the liquidity ratios are also affected.
Current assets to current liabilities is a common liquidity ratio used to assess a company’s ability to meet its short-term obligations. The higher the ratio, the better the ability to cover current liabilities. The cash inflow from the sale increases the current assets making the liquidity ratio more favorable.
The Bottom Line
OBS financing arrangements are discretionary, and although they are allowable under accounting standards, some rules govern how they can be used. Despite these rules, which are minimal, the use complicates investors’ ability to critically analyze a company’s financial position. Investors need to read the full financial statements, such as 10Ks, and look for keywords that may signal the use of OBS financing. Some of those keywords include partnerships, rental, or lease expenses, and investors should be critical of their appropriateness.
Analyzing these documents is important because accounting standards require some disclosures, such as operating leases, in the footnotes. Investors should always contact company management to clarify if OBS financing agreements are being used and the extent to which they affect a company's true liabilities. A keen understanding of a company’s financial position today and in the future is key to making an informed and sound investment decision.
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7ce26e3f0ad3dc48f236cc882b655c44 | https://www.investopedia.com/articles/investing/071513/warrants-and-call-options.asp | Understanding Warrants and Call Options | Understanding Warrants and Call Options
Warrants and call options are both types of securities contracts. A warrant gives the holder the right, but not the obligation, to buy common shares of stock directly from the company at a fixed price for a pre-defined time period. Similarly, a call option (or “call”) also gives the holder the right, without the obligation, to buy a common share at a set price for a defined time period. So what are the differences between these two?
Warrants and Call Options Similarities
The basic attributes of a warrant and call are the same:
Strike price or exercise price – The guaranteed price at which the warrant or option buyer has the right to buy the underlying asset from the seller (technically, the writer of the call). “Exercise price” is the preferred term with reference to warrants. Maturity or expiration date – The finite time period during which the warrant or option can be exercised. Option price or premium – The price at which the warrant or option trades in the market.
For example, consider a warrant with an exercise price of $5 on a stock that currently trades at $4. The warrant expires in one year and is currently priced at 50 cents. If the underlying stock trades above $5 at any time within the one-year expiration period, the warrant’s price will rise accordingly. Assume that just before the one-year expiration of the warrant, the underlying stock trades at $7. The warrant would then be worth at least $2 (i.e. the difference between the stock price and the warrant’s exercise price). If the underlying stock instead trades at or below $5 just before the warrant expires, the warrant will have very little value.
A call option trades in a very similar manner. A call option with a strike price of $12.50 on a stock that trades at $12 and expires in one month will see its price fluctuate in line with the underlying stock. If the stock trades at $13.50 just before option expiry, the call will be worth at least $1. Conversely, if the stock trades at or below $12.50 on the call’s expiry date, the option will expire worthlessly.
The Difference in Warrants and Calls
Three major differences between warrants and call options are:
Issuer: Warrants are issued by a specific company, while exchange-traded options are issued by an exchange such as the Chicago Board Options Exchange in the U.S. or the Montreal Exchange in Canada. As a result, warrants have few standardized features, while exchange-traded options are more standardized in certain aspects, such as expiration periods and the number of shares per option contract (typically 100). Maturity: Warrants usually have longer maturity periods than options. While warrants generally expire in one to two years, they can sometimes have maturities well in excess of five years. In contrast, call options have maturities ranging from a few weeks or months to about a year or two; the majority expire within a month. Longer-dated options are likely to be quite illiquid. Dilution: Warrants cause dilution because a company is obligated to issue new stock when a warrant is exercised. Exercising a call option does not involve issuing new stock since a call option is a derivative instrument on an existing common share of the company.
Why Issue Warrants and Calls?
Warrants are typically included as a “sweetener” for an equity or debt issue. Investors like warrants because they enable additional participation in the company’s growth. Companies include warrants in equity or debt issues because they can bring down the cost of financing and provide assurance of additional capital if the stock does well. Investors are more inclined to opt for a slightly lower interest rate on a bond financing if a warrant is attached, as compared with a straightforward bond financing.
Warrants are very popular in certain markets such as Canada and Hong Kong. In Canada, for instance, it is common practice for junior resource companies that are raising funds for exploration to do so through the sale of units. Each such unit generally comprises one common stock bundled together with one-half of a warrant, which means that two warrants are required to buy one additional common share. (Note that multiple warrants are often needed to acquire a stock at the exercise price.) These companies also offer “broker warrants” to their underwriters, in addition to cash commissions, as part of the compensation structure.
Option exchanges issue exchange-traded options on stocks that fulfill certain criteria, such as share price, number of shares outstanding, average daily volume and share distribution. Exchanges issue options on such “optionable” stocks to facilitate hedging and speculation by investors and traders.
Intrinsic and Time Value
While the same variables affect the value of a warrant and a call option, a couple of extra quirks affect warrant pricing. But first, let’s understand the two basic components of value for a warrant and a call—intrinsic value and time value.
Intrinsic value for a warrant or call is the difference between the price of the underlying stock and the exercise or strike price. The intrinsic value can be zero, but it can never be negative. For example, if a stock trades at $10 and the strike price of a call on it is $8, the intrinsic value of the call is $2. If the stock is trading at $7, the intrinsic value of this call is zero. As long as the call option's strike price is lower than the market price of the underlying security, the call is considered being "in-the-money."
Time value is the difference between the price of the call or warrant and its intrinsic value. Extending the above example of a stock trading at $10, if the price of an $8 call on it is $2.50, its intrinsic value is $2 and its time value is 50 cents. The value of an option with zero intrinsic value is made up entirely of time value. Time value represents the possibility of the stock trading above the strike price by option expiry.
Factor Influencing Valuation
Factors that influence the value of a call or warrant are:
Underlying stock price – The higher the stock price, the higher the price or value of the call or warrant. Call options require a higher premium when their strike price is closer to the underlying security's current trading price because they're more likely to be exercised. Strike price or exercise price – The lower the strike or exercise price, the higher the value of the call or warrant. Why? Because any rational investor would pay more for the right to buy an asset at a lower price than a higher price. Time to expiry – The longer the time to expiry, the pricier the call or warrant. For example, a call option with a strike price of $105 may have an expiration date of March 30, while another with the same strike price may have an expiration date of April 10; investors pay a higher premium on call option investments that have a greater number of days until the expiry date because there's a greater chance the underlying stock will hit or exceed the strike price. Implied volatility – The higher the implied volatility, the more expensive the call or warrant. This is because a call has a greater probability of being profitable if the underlying stock is more volatile than if it exhibits very little volatility. For instance, if the stock of company ABC frequently moves a few dollars throughout each trading day, the call option costs more as it is expected the option will be exercised. Risk-free interest rate – The higher the interest rate, the more expensive the warrant or call.
Pricing Call Options and Warrants
There are a number of complex formula models that analysts can use to determine the price of call options, but each strategy is built on the foundation of supply and demand. Within each model, however, pricing experts assign value to call options based on three main factors: the delta between the underlying stock price and the strike price of the call option, the time until the call option expires, and the assumed level of volatility in the price of the underlying security. Each of these aspects related to the underlying security and the option affects how much an investor pays as a premium to the seller of the call option.
The Black-Scholes model is the most commonly used one for pricing options, while a modified version of the model is used for pricing warrants. The values of the above variables are plugged into an options calculator, which then provides the option price. Since the other variables are more or less fixed, the implied volatility estimate becomes the most important variable in pricing an option.
Warrant pricing is slightly different because it has to take into account the dilution aspect mentioned earlier, as well as its “gearing". Gearing is the ratio of the stock price to the warrant price and represents the leverage that the warrant offers. The warrant's value is directly proportional to its gearing.
The dilution feature makes a warrant slightly cheaper than an identical call option, by a factor of (n / n+w), where n is the number of shares outstanding, and w represents the number of warrants. Consider a stock with 1 million shares and 100,000 warrants outstanding. If a call on this stock is trading at $1, a similar warrant (with the same expiration and strike price) on it would be priced at about 91 cents.
Profiting From Calls and Warrants
The biggest benefit to retail investors of using warrants and calls is that they offer unlimited profit potential while restricting the possible loss to the amount invested. A buyer of a call option or warrant can only lose his premium, the price he paid for the contract. The other major advantage is their leverage: Buyers are locking in a price, but only paying a percentage up front; the rest is paid when they exercise the option or warrant (presumably with money left over).
Basically, you use these instruments to bet whether the price of an asset will increase—a tactic known as the long call strategy in the options world.
For example, say shares of company ABC are trading at $20 and you think the stock price will increase within the next month: Corporate earnings will be reported in three weeks, and you have a hunch they're going to be good, bumping up the current earning per share (EPS).
So, to speculate on that hunch, you purchase one call option contract for 100 shares with a strike price of $20, expiring in one month for $0.50 per option, or $50 per contract. This will give you the right to purchase shares for $20 on or before the expiration date. Now, 21 days later, it turns out you guessed correctly: ABC reports strong earnings and raised its revenue estimates and earnings guidance for the next year, pushing the stock price to $30.
The morning after the report, you exercise your right to buy 100 shares of company stock at $20 and immediately sell them for $30. This nets you $10 per share or $1,000 for one contract. Since the cost was $50 for the call option contract, your net profit is $950.
Buying Calls vs. Buying Stock
Consider an investor who has a high tolerance for risk and $2,000 to invest. This investor has a choice between investing in a stock trading at $4 or investing in a warrant on the same stock with a strike price of $5. The warrant expires in one year and is currently priced at 50 cents. The investor is very bullish on the stock, and for maximum leverage decides to invest solely in the warrants. Therefore, she buys 4,000 warrants on the stock.
If the stock appreciates to $7 after about a year (i.e. just before the warrants expire), the warrants would be worth $2 each. The warrants would be altogether worth about $8,000, representing a $6,000 gain or 300% on the original investment. If the investor had chosen to invest in the stock instead, her return would only have been $1,500 or 75% on the original investment.
Of course, if the stock had closed at $4.50 just before the warrants expired, the investor would have lost 100% of her $2,000 initial investment in the warrants, as opposed to a 12.5% gain if she had invested in the stock instead.
Other drawbacks to these instruments: Unlike the underlying stock, they have a finite life and are ineligible for dividend payments.
The Bottom Line
While warrants and calls offer significant benefits to investors, as derivative instruments they are not without their risks. Investors should, therefore, understand these versatile instruments thoroughly before venturing to use them in their portfolios.
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38686465879d5aabe51e03f778a2629d | https://www.investopedia.com/articles/investing/071615/what-drives-price-chocolate.asp | Why the Price of Chocolate Fluctuates | Why the Price of Chocolate Fluctuates
At various points in history, the price of chocolate has fluctuated, but consumers were largely unaware. Most of us don’t notice if the price of our candy bar increases by a few cents since it is often an impulse buy to satisfy an immediate craving. However, supply and demand and how they affect this sweet treat deserve a closer look.
Limited Cocoa Supply Means Higher Chocolate Prices
The supply of chocolate drivers tends to be the stronger influencer of chocolate’s price volatility. Many commodities are used to manufacture chocolate, and the key ingredient is cocoa. Others such as sugar, dairy products, nuts, corn sweeteners and energy (natural gas and fuel oil) are also necessary to produce chocolate products. The prices of these commodities are driven, for the most part, by the commodities market, which sets the price based on supply and demand levels and can result in varying levels of volatility on commodity prices.
Overall, the greatest price factor is the cost of cocoa. Chocolate makers use two components of cocoa to produce chocolate: cocoa powder and cocoa butter. Cocoa butter is by far the more desirable of the two since it creates the richer chocolates and is used in thin chocolate confectionery treats, but it is also the harder and more expensive to produce so any disruption in cocoa supply will eventually trickle down and drive consumer prices higher.
Africa – primarily the Ivory Coast and Ghana – is the largest global producer of cocoa, supplying just north of 70% of the world’s cocoa. Supply fluctuations are a result of a number of factors, from political and civil unrest to labor issues and the effect of weather, diseases, and pests on crop yields. For example, long periods of dry weather are not conducive to cocoa bean growth, resulting in supply shortages.
Other issues like reduced labor can impact the ability of cocoa supplies to make it to the market. For example, Tulane University issued a report in 2015 revealing that over 2 million children were working in the cocoa industry. Movements to reduce the use of this illegal and immoral cheap labor can result in either a lower supply if the labor force is cut or higher cocoa prices because farmers have to pay higher wages to adult laborers.
Demand for Chocolate Continues to Increase
The global demand for chocolate has risen by double digits since the recession in 2008 and is forecasted to continue to grow, with a projected compound annual growth rate (CAGR) of 3% by 2021. A significant portion of this demand increase has to do with the developing taste of global consumers for dark chocolate, particularly in light of its potential positive health benefits. But the demand for dark chocolate has a dual impact: It increases the demand for chocolate products and for cocoa since dark chocolate requires more cocoa beans per ounce than milk chocolate.
While North America and Western Europe have always been big consumers of chocolate products, other regions, such as the Asian-Pacific region, are adding to the demand as their interest in chocolate increases.
The Bottom Line
Cocoa price volatility is not novel, as commodity prices are often fluid. However, the current rise in demand coupled with any disruption to or inadequate supply of cocoa could dramatically impact the price of chocolate. Large chocolate producers will try to hedge the price fluctuations related to commodity prices with forwarding contracts that establish a price they are willing to pay in the future, but in the long run, sustained commodity price increases will result in higher chocolate prices as companies pass along these higher supply costs to chocolate lovers everywhere.
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f52e2fe74b382bd65495b1365252e557 | https://www.investopedia.com/articles/investing/071715/risks-chasing-high-dividend-stocks.asp | The Risks of Chasing High Dividend Stocks | The Risks of Chasing High Dividend Stocks
High dividend stocks can provide exceptional opportunities for savvy investors. Who wouldn't jump at the chance to earn a juicy yield on their investment? But investors should be wary of chasing high dividend stocks, as all might not be as it seems. A company's high dividend might be because its stock has suffered a significant drop in share price, suggesting financial trouble that could imperil its ability to make future dividend payments. In addition, investors should be aware of interest rate risk and how an environment of rising rates makes dividend stocks less attractive. We discuss both potential pitfalls in detail below.
Key Takeaways A high dividend yield might indicate a business in distress. The yield could be high because the company's shares have fallen in response to financial troubles, and the struggling company hasn't cut its dividend yet. Investors should scrutinize a company's ability to pay consistent dividends, which includes examining its free cash flow, historical dividend payout ratio and other metrics of financial health. Dividend stocks are vulnerable to rising interest rates. As rates rise, dividends become less attractive compared to the risk-free rate of return offered by government securities.
High Dividends Can Be Fool's Gold
While high dividends have natural appeal, investors should be careful they are not buying fool's gold. An investor should ask, why is the dividend yield so high? In some cases, a high dividend yield can indicate a company in distress. The yield is high because the company's shares have fallen in response to financial troubles. And the high yield may not last for much longer. A company under financial stress could reduce or scrap its dividend in an effort to conserve cash. This in turn could send the company's share price even lower.
For example, suppose Company XYZ trades at $50 and pays a $2.50 annual dividend for a 5% yield. A negative external shock sends the stock to $25. The company may not cut its dividend immediately. Therefore, at a superficial glance, Company XYZ appears to now be paying a 10% dividend yield.
However, this high yield could be temporary. The same catalysts that cratered the stock price could lead Company XYZ to reduce its dividend. At other times, a company might elect to keep its dividend intact as a reward to loyal shareholders. Thus, investors should look to a company's financial health and operations and determine whether its dividend payments can be maintained.
Key factors to investigate are the company's free cash flow, historical dividend payout ratio, historical dividend schedules, and whether the company has been increasing or decreasing payments. Many of the best dividend payers are blue chip companies with a steady record of producing revenue and income growth over multiple quarters and years. With strong underlying fundamentals comes a reputation for consistent dividend payments. That said, there are always new companies establishing themselves as dividend payers, while others struggle to establish a record of consistency that investors crave. It's important for investors to maintain steadfast due diligence.
Real estate investment trusts (REITs), utilities, master limited partnerships and consumer staples are among the sectors that pay high dividends.
Interest Rate Risk
High dividend stocks are among a group of assets that are subject to interest rate risk. Generally speaking, high dividend stocks become more attractive as interest rates fall. But when the Federal Reserve tightens monetary policy by raising interest rates, dividends become less attractive to investors, leading to an outflow in equities in general and dividend stocks in particular.
This is because investors compare yields with the risk-free rate of return they can earn by holding a government bond such as a Treasury bond. Let's return to our earlier example of Company XYZ, which pays a dividend yield of 5%. If interest rates rise from 2% to 4%, suddenly that 5% yield becomes less attractive. This is because most investors will prefer the safety of guaranteed 4% return, rather than risk their principal for an extra 1% yield.
As of September 2020, the low interest rate environment favors dividend stocks. The Federal Reserve target for the federal funds rate, which is the overnight bank lending rate against which many other loans are benchmarked, is set at 0% to 0.25%. The Fed lowered the rate by 100 basis points on March 16, 2020, in response to the challenges facing the economy amid the COVID-19 pandemic. Rates haven't been this low since 2008, when the Fed eased monetary policy amid the 2007-2008 Financial Crisis. Rates stayed low through 2015, when the Federal Reserve slowly began raising them in tune with an improving economy.
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431eea42ed8f5df29d7aca3ddd6d8add | https://www.investopedia.com/articles/investing/072114/coffee-cost-cup.asp | Coffee: The Cost Of A Cup | Coffee: The Cost Of A Cup
Coffee: Plenty of us swear by our daily caffeine fix. Coffee has to be one of the cheapest addictive substances in the world, and as an added bonus it doesn't give you cancer. At a food cart in New York, you can get an 8-ounce cup for a dollar or less.
That may change, though, as some long-term trends will likely push the price up for consumers. How much is anybody's guess, as it depends on several factors, only some of which growers can control.
How the Coffee Market Works
In the countries that produce coffee, such as Brazil (the single largest), Colombia or Indonesia, the beans are grown on mountain plantations. The coffee is packed into 60-kilogram (132-pound) bags and handed off to someone to transport it to the ports. At this point the coffee is a greenish bean.
The coffee is taken to the ports and shipped to the consumer country. The largest consumer is the U.S., with Europe in second place, but that's the EU taken as a bloc. The U.S. is number one among individual countries, importing some 27 million bags in 2013.
After that the coffee beans are roasted. Roasters buy the bulk coffee and bake in a margin to resell it to the companies that distribute it – which could mean big outfits such as Smucker's, which owns the Folgers brand, or big end-users such as Starbucks (SBUX).
The roasting companies' margins are pretty flexible but not infinitely so. That said, the margin there provides a cushion for those of us who buy coffee retail.
Dan Cox, owner and president of Coffee Enterprises, a consulting firm, noted that roasters will sometimes buy coffee at a certain price for several months at a time, but not too long in case the price drops. There's also an important role for the "middlemen" who export the coffee from the farm to the country where it's going. "Buying direct is a fraud," he said. "There's so much risk. You have to make sure the coffee is the same product you paid for, for instance."
That's the role those importers and shippers play. Cox said when he used to buy coffee for a major chain, he might go to the farm and agree on a price for a certain amount, but he would go to another company that would make sure the product was right and ship it to port.
A Price Breakdown
Cox gave the following breakdown for a pound bag of premium coffee, one that sells for $15 per pound (which is about the price for a pound of Equal Exchange whole-bean coffee on Amazon.com).
The retail store, he said, takes about $4. The roaster that "cooks" the coffee when it arrives in the U.S. takes in about $2. Transporting the roasted beans costs about $1.50. Meanwhile, in the roasting process about 15-20% of the coffee's weight is lost, as the moisture is removed from the green beans. Starbucks or Peet's, which use a dark roast, will lose 20-22%, while a bulk user such as Kraft Foods Group (KRFT) will lose less, about 15%. But that adds about $2.50 to the price. Another $1 goes into getting the coffee from a possibly remote farm to the point where it's exported, and one can add to that the $4 per pound for the raw beans. A major chain such as Starbucks might pay about $2-3 per pound on average, Cox said.
The situation is slightly different for the non-specialty coffees, the ones that come in cans and bulk containers. Those are usually blends of two species of coffee, coffea Arabica, which makes most higher-end brews, and coffea Robusta, which makes a poorer-tasting one. The latter is added to give Arabica extra bulk. Cox noted that the price of that won't move by more than a few cents at a time, and raising prices by $1 would indicate a worldwide shortage of coffee. Those brands tend to be sold with smaller margins, and customer loyalty isn't nearly as strong.
That's why it was a big news item this month (June) when Kraft Foods, Smucker's and Starbucks said they would raise the price of coffee. For a typical can of Maxwell House, owned by Kraft, that won't mean much more than a few cents. Starbucks, though, said some beverage prices would rise by up to 40 cents.
The driver is a drought in Brazil and a fungal disease in Central America. Brazil is the largest single producer of coffee for the mass market, while other nations produce it for coffee-bar chains such as Starbucks.
Supply and Demand
Coffee prices also depend almost entirely on supply rather than demand. Demand tends to be relatively inelastic and increases in a linear fashion, says Tom Copple, an economist at the International Coffee Organization. About the only exception to this is Germany, but the Germans are a relatively small consumer compared to the U.S., the fame of their coffee shops notwithstanding. (In fact, while a number of European nations beat the U.S. in coffee consumed per capita, the U.S. is far and away the biggest single market.)
It is possible for new producers to drastically affect the price of coffee. Cox said when Vietnam started making coffee in the mid 1990s, the country had no tradition of growing it at all – but now it is a major producer with about 20 percent of the world market. Vietnam was one factor in the price of coffee falling in the early 2000s enough to drive many Latin American producers from the business. An increase in the specialty-coffee market size reversed that trend, and since then Latin America has returned to a premier position.
The price on the coffee futures market is not always closely related to what the roasters pay or what the sale price is at the farm. The reason is that the futures price is a bet on the future supply and demand for coffee, and thus a bet on the price that a grower can demand. The prices in the real world tend to lag what the futures market shows, meaning that even though coffee as a commodity is a very volatile trading item, the price at the store or coffee shop stays relatively stable.
While it might seem that a major user like Starbucks could affect the price, it turns out not to be the case. Starbucks' policies could affect an individual farm or group of farms, but no one coffee consumer is large enough to move the needle on the commodity prices.
Longer-term, there's a more worrying trend: climate change. Coffee has some flexibility in where it can grow, but it isn't infinitely so. A big issue is the loss of land on which coffee can be grown as temperatures rise and rainfall patterns change. Many African countries may no longer be able to produce coffee at all. The production might move southward, but it is far from clear whether temperatures, rainfall and soil chemistry will be amenable to the plant.
And all this could raise the price of your daily cup of joe significantly. Assuming a linear relation between supply and price, a loss of half the available coffee cultivation area would mean that $3 latte at Starbucks would double.
But so far that hasn't happened, and work is being done to improve the coffee plant and create varieties that can grow in a wider climate range.
The Bottom Line
For investors, coffee will remain a wild ride. Meanwhile, there's every possibility that efforts to improve coffee plants will expand the area where coffee can be grown, even as climate change puts pressure on traditional regions. Since that's an uncertain process, it's likely coffee prices will rise over the long term, in a slow burn consumers aren't likely to notice as it will take years.
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c7af6a97626a7a81915b813d2a0314de | https://www.investopedia.com/articles/investing/072115/how-amtrak-works-makes-money.asp | How Amtrak Makes Money | How Amtrak Makes Money
Amtrak, which is officially called The National Railroad Passenger Corporation, is a passenger railroad provider that runs short-distance (under 750 miles) and long-distance trains between more than 500 destinations in 46 states and in three Canadian provinces. It operates more than 300 trains daily over 21,400 miles of track. Amtrak only owns about 623 miles of this track. The rest are owned by a variety of other “host railroads,” private companies that Amtrak pays to use their tracks.
Key Takeaways Amtrak is a state-owned enterprise. This means that Amtrak is a for-profit company, but that the federal government owns all its preferred stock.Amtrak made $3.5 billion in 2019 and shrunk its loss by 82.8% YoY.Amtrak provides rail service to over 500 destinations in 46 states and three Canadian provinces.Amtrak transported 32.5 million people in 2019. That's 89,000 every day.
Amtrak's History
Amtrak was founded in 1971 as a state-owned enterprise when the federal government stepped in to save an American rail industry that had been pushed to the brink of collapse by a host of macroeconomic forces. By the 1960s, the proliferation of air travel and highways increased competition in the civilian transportation industry to unsustainable levels for rail companies. This, combined with rising labor costs and outdated regulation that deterred private expansion resulted in the U.S.’s two largest rail companies, Pullman Company and Penn Central to declare bankruptcy by 1970. The Nixon administration intervened and Amtrak was the result.
Amtrak receives considerable subsidies from both a state and federal governments, but is managed as a for-profit company. This is not unusual. No country in the world operates a passenger rail system without public support. That said, Amtrak’s “for-profit” status is sadly ironic. The train company has never been profitable since its founding nearly fifty years ago. It is only thanks to its subsidies, which over the years amount to over $45 billion, that the provider has survived.
Given its chronically unprofitable history, 2019 wasn’t a bad year for Amtrak. Amtrak earned $3.5 billion in revenues last year, which was up about 3.4% YoY. More importantly, the rail provider’s losses shrunk by an impressive 82.8% YoY.
The Business Model
In 2019, Amtrak served 32.5 million passengers, over 89,000 every day, while employing more than 18,000 people. A recent study showed that almost two-thirds of passengers come from the 10 largest metropolitan areas and 83% of passengers travel on routes shorter than 400 miles. According to the company's annual report, ticket sales from these passengers make up the bulk of Amtrak’s revenues. Amtrak also makes money by leveraging its infrastructural assets.
Ticket sales
76% of Amtrak’s revenues in 2019 came from ticket sales and roughly 80% of that came from short-distance trips. This means that ticket sales from short-distance lines are the bread and butter of Amtrak’s business. One of these lines in particular, the Northeast Corridor (NEC), which runs from Washington D.C. to Boston, is vitally important to Amtrak’s financial survival. In 2019, this line accounted for 38% of Amtrak’s passengers, 56% of its total revenues and almost all of its operating profits. 6 of its 10 busiest stations are along the NEC. To give you an idea of how heavily Amtrak relies on this line, consider that the first section of the “Principle Business” section in the company’s annual report is dedicated to the NEC.
Amtrak operates on 21,400 miles of track but derives 56% of its revenues from the Northeast Corridor, which is only 457 miles long.
Relative to the NEC, all of Amtrak's other lines are small potatoes. Ticket sales from all of Amtrak’s other short-distance lines, including the Pacific Surfliner in California, the Amtrak Cascades in the Pacific Northwest, and the Hiawatha and Lincoln lines near Chicago, accounted for only 23% of Amtrak’s 2019 total revenue.
Amtrak’s long distance lines are its least profitable, making up only 21% of the company’s 2019 total revenue. It is also the slowest growth segment of Amtrak’s business. Short distance ridership was up about 4% last year, but long distance ridership went up by only 1.7%.
Ticket prices for Amtrak trains range anywhere from $6 to $1000, depending on the trip. However, prices for Amtrak’s most popular routes average around $140.
State and Federal Subsidies
Amtrak receives funding from 21 state agencies and 18 states to support its short-distance lines (all except the NEC). 47% of all Amtrak trips last year took place on state-funded lines. In total, Amtrak received $234.2 million in state subsidies last year, which amounts to 7% of its total revenue.
Furthermore, Amtrak received roughly $1.8 billion in federal grants in 2019. In its annual report, however, the company does not consider these subsidies revenue. These funds are part of the $8.1 billion sum that the Fixing America's Surface Transportation (FAST) Act of 2015 allocated for Amtrak to use between 2016 and 2020.
$8.1 billion The amount of money Amtrak received from the federal government between 2016 and 2020.
Leveraging Infrastructural Assets
Amtrak derives the remaining 24% of its revenue, $837 million, from an assortment of business activities related to the infrastructure it owns. Amtrak owns 623 miles of NEC track as well as station structures, platforms and parking facilities near some of the 526 stations it serves. Amtrak leverages these assets by charging freight train and commuter train companies to use its track, and by charging access to and/or development of its stations, platforms and parking lots. Revenues from this segment of Amtrak’s business grew by 4% YoY in 2019.
Future Plans
Despite its heavy reliance on state subsidies and inability to turn a profit, Amtrak is growing, and it has big plans for the future. In the face of the changing economy and climate, Americans are increasingly eschewing cars and airplanes from more efficient and environmentally friendly modes of transportation. This trend bodes well for companies like Amtrak. To capitalize on this trend, Amtrak’s must make quick progress toward its primary goal; replacing its aging fleet.
New Acela Express Trains
Amtrak’s most important assets are its trains, and Amtrak's most important trains are its Acelas. These high-speed trains travel up to 150mph, making them the fastest trains in the western hemisphere, and generated $642 million in revenue for Amtrak last year. However, like most of Amtrak’s fleet, its Acela’s are getting old. The company’s fleet of 20 Acelas has been in service since 2000.
In 2016, Amtrak announced plans to build a new fleet of 28 Acelas by 2021. All of these trains will be put to work on the NEC line, its most frequent trips being between Boston and New York, which is likely to remain Amtrak’s most popular route.
150 mph The top speed of Amtrak's Acela trains, the fastest trains in the western hemisphere.
Siemens Contract
In 2018, Amtrak awarded Siemens Mobility, a subsidiary of the German conglomerate that manufactures traffic systems and railway technology, an $850 million contract to build 75 new passenger diesel “Tier 4 locomotives." These trains travel up to 125 mph and are meant replace aging trains used for regional travel. Many of the soon-to-be-replaced trains have over 25 years of service.
Improving Safety
Aging trains are a huge problem for Amtrak’s public image, which has undergone serious damage due to the company’s poor safety record of late. There have been eight serious crashes or derailments in the past five years alone.
In response to these shortcomings, Amtrak has is implementing what it calls the Positive Train Control (PTC). The PTC is a communications network that combines GPS, radio signals, data centers and dispatchers to closely monitor the status of every Amtrak train, all the time.
Extending the Network
Amtrak is working to extend its reach into some of the fastest-growing regions of the United States, i.e. the South, Southwest and Mountains States. Recently the rail provider added stations in Virginia and North Carolina. Going forward, Amtrak will also extend its NEC further into Maine and plans to lengthen its Southwest Chief long-distance line to Colorado.
Key Challenges
Keeping Prices Down
To improve its competitive edge over busses, air travel and private cars, Amtrak must keep its prices down. This won’t be easy, even with government subsidies. As it stands, Amtrak tickets are generally cheaper than flights, but still cost considerably more than busses. For instance, it costs at least $55 to take an Amtrak from Boston to New York, but a bus starts at $14.
Amtrak's high prices are attributable to a confluence of factors that make the rail business extremely costly in the United States. Amtrak’s trains are old and thus depreciate quickly, are costly to maintain, and require significant investment to replace. Volatile oil prices have increased Amtrak’s expenditure on fuel in recent years, and poor track coverage and maintenance decrease Amtrak’s reliability, making it harder for the company to justify higher prices.
Amtrak must keep its ticket prices low to compete with busses, air travel and private cars.
NEC Repair Backlog
Amtrak’s cash cow, the NEC, is approaching the limit of its capacity. Unfortunately, the price tag for the corridor's urgently needed repairs and infrastructure expansions, which include massive tunnels and bridges as well as general maintenance, is a whopping $45.2 billion. If Amtrak fails to secure this astronomical amount of funding, the NEC will begin to face increasingly serious operational constraints while its ridership increases. Of all the challenges Amtrak faces, this one may be its achilles heal. If NEC ridership begins to buckle, so will Amtrak’s cash flow.
Federal Funding Cuts
Due to its status as a state-owned enterprise, Amtrak’s survival is ultimately up to the federal government. And, perhaps unsurprisingly, the Trump administration seems happy to let Amtrak fail. The Trump administration’s current budget for FY 2020 proposes a dramatic 53% reduction in grants for Amtrak. A cut like this could be no less than catastrophic for Amtrak. Thus, it’s not an understatement to suggest that Amtrak’s future hinges on the election of a democratic president in 2020.
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0b643460cc73b97d58bc6ced87c7f379 | https://www.investopedia.com/articles/investing/072115/how-military-spending-affects-economy.asp | How Military Spending Affects the Economy | How Military Spending Affects the Economy
The Stockholm International Peace Research Institute (SIPRI) has excellent data on military spending by nation. According to its research, the five biggest spenders in 2019 were the United States, China, India, Russia, and Saudi Arabia. Together, these countries made up around 60% of global military spending.
In 2019, U.S. military expenditure increased by almost 5.3% to $732 billion. China increased its military spending by 5.1%, India increased its spending by 6.8%, Russia increased it by 4.5%, and Saudi Arabia decreased it by 16%.
As with any government spending, these investments have an impact on the economies of the nations that make them.
The Why of Military Spending
Military spending is one area where there is no private solution. No single corporation or group of citizens is motivated and trustworthy enough to take financial responsibility for maintaining a nation's military.
Key Takeaways Every dollar spent on defense is a dollar not spent on other public services. On the other hand, dollars spent on the military wind up in the private sector as payment for goods and services the military requires. Military spending may skew civilian technology development, but talent and applications flow both ways.
Adam Smith, a father of free-market economics, identified the defense of society as one of the primary functions of government and a justification for reasonable taxation. The government is acting on behalf of the public to ensure that the military is capable of defending the nation.
In practice, defending the nation expands to defending a nation’s strategic interests. And, the whole concept of “sufficient” is up for debate in any democracy.
The Hole That Debt Built
Capital is finite, and capital going into one spending category means less money for something else.
This fact becomes more urgent when we consider that any government spending that exceeds revenues results in a deficit, adding to the national debt. A ballooning national debt has an economic impact on everyone. As the debt grows, the interest expense of the debt grows and the cost of borrowing increases due to the risk that increased debt represents. In theory, the increased debt will eventually drag on economic growth and drive taxes higher.
The Cost of Borrowing
The U.S. has historically enjoyed generous debt terms from domestic and international lenders. That tends to reduce political pressure to cut military spending in order to reduce the deficit.
Some advocates for decreased military spending might tie it to a real or potential increase in the mortgage rates people pay, given the relationship between Treasury yields and commercial lending. This reasoning holds and military spending does sit as a large percentage of discretionary spending.
In other nations, particularly ones that are still developing economically, a focus on military spending often means foregoing other important priorities. Many nations have a standing military but an unreliable public infrastructure, from hospitals to roads to schools. North Korea is an extreme example of what an unrelenting focus on military spending can do to the standard of living for the general population.
The generous debt terms that the U.S. enjoys are far from universal, so the trade-off between military spending and public infrastructure is more painful for many nations.
Employment and Military Spending
Jobs are a big part of the economic impact of military spending. In addition to supporting the troops, military spending creates a considerable infrastructure to support the active-duty personnel.
Then there are the private businesses that spring up as a result of the military spending, including everything from weapons manufacturers to the restaurants that pop up near military bases.
Public vs. Private
A free-market economist would point out that the public dollars supporting those may be sucking the equivalent number of jobs—or more—out of the private economy due to the taxation required to create them.
It really comes down to whether or not you believe a standing military is a necessity. If it is, then some jobs will need to be sacrificed in the private sector to make that happen.
Technological Developments
One argument for the negative economic impact of military spending is that it diverts critical talent and technical skills towards military research and development.
Guns and Butter This famous model illustrates the balance between military and civilian spending priorities.
On the other hand, technology and talent flow back and forth between military and civilian roles. Military research has been vital to the creation of the microwave, the internet, and global positioning systems (GPS), among other applications. We now have drones taking wedding photos and, at least in tests, delivering packages for Amazon.com. Much of the expense of creating the basic technology was covered through military spending.
Guns and Butter
The guns and butter curve is a classic illustration of how there is an opportunity cost to every expenditure. If you believe a standing military is a necessity for a nation, the size of that military can be disputed but its existence cannot.
The economic cost of defense spending shows up in the national debt and in a dislocation of potential jobs from the private sector to the public. There is an economic distortion of any industry that the military relies on as resources are diverted to produce better fighter planes and weapons.
All of these costs are necessary for a nation to bear if they are to defend themselves. We give up some butter to have guns.
The Big Question
The real question is what an “adequate” amount of military spending is, given that every extra dollar spent above the necessary level is a loss to public spending on any other purpose.
In a democracy, that issue is debated by publicly elected officials and changes from year to year. In recent years, military spending in the U.S. as a percentage of the overall budget has been declining as military engagements abroad wind down.
In non-democratic nations, however, the level of adequate spending is decided by a select few and may come at an even greater cost to the country’s citizens.
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e8b71c8f385485ea124dfa183c429801 | https://www.investopedia.com/articles/investing/072115/private-equity-management-fees-regulation.asp | Private Equity Management Fees and Regulations | Private Equity Management Fees and Regulations
Historically, private equity funds have had minimal regulatory oversight because their investors were mostly high-net-worth individuals (HNWI) who were better able to sustain losses in adverse situations and thus required less protection. Recently, however, private equity funds have seen more of their investment capital coming from pension funds and endowments. In the aftermath of the financial crisis of 2008, the multi-trillion dollar industry has come under increased government scrutiny.
Key Takeaways Private equity regulations have become stricter since the 2008 financial crisis.These funds have a similar fee structure to that of hedge funds, typically consisting of a management fee (generally 2%) and a performance fee (usually 20%).The performance fee, also known as carried interest, is taxed at the long-term capital gains rate. All private equity firms with more than $150 million in assets must register with the SEC as an investment adviser.
What Is Private Equity?
Private equity is capital—specifically, shares representing ownership of or an interest in an entity—that is not publicly listed or traded. It is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies with the intention to take them private.
Private Equity Fees
Private equity funds have a similar fee structure to that of hedge funds, typically consisting of a management fee and a performance fee. Private equity firms normally charge annual management fees of around 2% of the committed capital of the fund.
When considering the management fee in relation to the size of some funds, the lucrative nature of the private equity industry is obvious. A $2-billion fund charging a 2% management fee results in the firm earning $40 million every year, regardless of whether it is successful in generating a profit for investors. Particularly among larger funds, situations can arise where the management fee earnings exceed the performance-based earnings, raising concerns that managers are overly rewarded, despite mediocre investing results.
The performance fee is usually in the region of 20% of profits from investments, and this fee is referred to as carried interest in the world of private investment funds.
The method by which capital is allocated between investors and the general partner in a private equity fund is described in the distribution waterfall. The waterfall specifies the carried interest percentage that the general partner will earn and also a minimum percentage rate of return, called the “preferred return,” which must be realized before the general partner in the fund can receive any carried interest profits.
Carried Interest Tax Rate
An area of particular controversy relating to fees is the carried interest tax rate. The fund managers’ management fee income is taxed at income tax rates, the highest of which is 37%. But earnings from carried interest are taxed at the much lower 20% rate of long-term capital gains.
The provision in the tax code that makes the tax rate of long-term capital gains relatively low was intended to spur investment. Critics argue that it is a loophole that allows fund managers to pay an unfairly small tax rate on much of their earnings.
The numbers involved are not trivial. In an op-ed piece published in the New York Times, law professor Victor Fleischer estimated that taxing carried interest at ordinary rates would generate about $180 billion.
Private Equity Regulation
Since the modern private equity industry emerged in the 1940s, it has operated largely unregulated. However, the landscape changed in 2010 when the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into federal law. While the Investment Advisers Act of 1940 was a response to the 1929 market crash, Dodd-Frank was drafted to address the problems that contributed to the financial crisis of 2008.
Prior to Dodd-Frank, general partners in private equity funds had exempted themselves from the Investment Advisers Act of 1940, which sought to protect investors by monitoring the professionals who offer advice on investment matters. Private equity funds were able to be excluded from the legislation by restricting their number of investors and meeting other requirements. However, Title IV of Dodd-Frank erased the “private adviser exemption” that had allowed any investment advisor with less than 15 clients to avoid registration with the Securities And Exchange Commission (SEC).
Dodd-Frank requires all private equity firms with more than $150 million in assets to register with the SEC in the category of “Investment Advisers.” The registration process began in 2012, the same year the SEC created a special unit to oversee the industry. Under the new legislation, private equity funds are also required to report information covering their size, services offered, investors, and employees, as well as potential conflicts of interest.
Widespread Compliance Violations
Since the SEC started its review, it has found that many private equity firms pass on fees to clients without their knowledge, and the SEC has highlighted the need for the industry to improve disclosure.
At a private equity industry conference in 2014, Andrew Bowden, the former director of the SEC’s Office of Compliance Inspections and Examinations, said, "By far, the most common observation our examiners have made when examining private equity firms has to do with the adviser’s collection of fees and allocation of expenses.
When we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in controls over 50% of the time." As a result, compliance staffs at both small and large private equity firms have grown to adapt to the post-Dodd-Frank regulatory environment.
The Bottom Line
Despite the widespread compliance shortfalls revealed by the SEC, investors’ appetite for investing in private equity funds has so far remained strong. However, the Federal Reserve has signaled its intent to continue raising interest rates, which could diminish the appeal of alternative investments such as private equity funds. The industry may face challenges in the form of a tougher fundraising environment, as well as from increased oversight from the SEC.
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f695db1ab29dc778b10cfc07db39c3c9 | https://www.investopedia.com/articles/investing/072215/can-fracking-survive-60-barrel.asp | Can Fracking Survive at $50 a Barrel? | Can Fracking Survive at $50 a Barrel?
Fracking, or hydraulic fracturing, is a method of extracting oil from dense rock or sand where traditional drilling is not an option. Due to the nature of fracking, costs are higher than regular oil extraction. With falling oil prices dipping below the highs of recent years, can fracking survive?
What Is Fracking?
Traditionally, oil is extracted from natural underground oil reservoirs. These reservoirs are reached by drilling a deep hole into the earth, and the oil is extracted through oil wells and platforms. When oil is in the ground but not in a liquid reservoir, it has to be extracted through other means.
Oil can exist in many underground conditions. Some formations contain shale, a rocky and dense substance, or oil sands. This type of oil is referred to as shale oil or tight oil.
Extracting shale oil and tight oil requires hydraulic fracturing. The fracking process is complex. A drilling team drills into the ground until they reach the shale, which is filled with small fissures. The team then injects a chemical fluid into the fissures at very high pressures, causing the shale below to fracture. The fracturing releases the oil from the sand and rock allowing the team to extract the oil and natural gas from the ground.
As one would expect, the cost of the equipment, process and cleanup from fracking is higher than drilling into liquid crude oil for extraction.
Oil Price Trends
Oil and natural gas prices fluctuate on a daily basis. These commodities are traded on public markets, such as the NYMEX, and the price rises and falls with supply and demand. As more people in the world own cars and developing countries like China demand more energy, prices are expected to increase.
On the other side of the equation, an increase in supply can push oil prices down. As new sources of oil and gas are discovered and accessed around the world, the total supply increases. In the last year, oil prices have dramatically decreased because of supply and demand. (For more, see: What Determines Oil Prices?)
As of this writing, the current price per barrel of oil is around $70 per barrel. You can see the latest energy and oil prices at Bloomberg.
Breaking Even on Oil Production
In 2011, crude oil was trading at nearly $120 per barrel on the NYMEX. High oil prices were sustained until mid-2014, when prices crashed from $100 per barrel down to less than $50. While consumers rejoiced at lower gas prices, oil and gas producers scrambled to stay profitable.
At $120 per barrel, fracking is a very profitable business. At lower prices, companies are forced to weigh the cost of expensive fracking compared to less expensive extraction methods.
The most expensive oil produced in the United States today comes from older wells known as “stripper wells.” These are aging oil and gas wells that only produce a few barrels per day. The maintenance cost on the wells does not decline with oil prices, and these wells become unprofitable around $40 per barrel. Other high-cost oil comes from Canada’s tar sands and the United Kingdom’s North Sea oil fields; these become unprofitable around $30 per barrel and $50 per barrel, respectively.
Fracking is expensive, but still less costly than the methods used to obtain oil from the wells mentioned above. According to Reuters, estimates put the break-even point for fracking at around $50 per barrel, but other estimates put it as low as $30 per barrel. This $30 per barrel figure is much lower than the total cost per barrel more widely published, but there is an important distinction between the estimates that put fracking costs at the $50 per barrel range.
At less than a price point around $50 per barrel, oil and gas companies are less likely to explore and drill for new oil accessible through fracking, but existing operations may still be cash-flow positive. Once the expensive exploration and initial drilling are complete, existing wells can continue to operate and stay cash-flow positive even as prices fall below $50 per barrel. (For more, see: How Fracking Affects Natural Gas Prices.)
Environmental Concerns and Opposition
Oil and gas companies have other costs to consider when it comes to fracking outside of the direct costs to find, drill and extract. Fracking comes with a negative stigma, and environmental advocates around the world are pressuring government officials and oil companies to end fracking operations completely.
Both sides have strong arguments and quote scientific reasons for and against fracking. Opponents argue that the chemicals used in fracking cause serious health risks to nearby residents as the chemicals can leak into groundwater used as drinking water. Fracking has also been linked to small earthquakes.
Proponents argue that health and environmental concerns are unproven and that fracking is completely safe. The truth likely lies somewhere in between, but the pressure from communities and government officials leave oil and gas companies with expensive costs for lobbying that other types of oil and gas extraction do not require.
The Bottom Line
While falling oil and gas prices leave producers scrambling to cut costs, fracking can survive below $50 per barrel. New exploration and production may decrease, and some higher cost wells have already been shut down. However, fracking as a whole continues to survive, and will do so for the foreseeable future.
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d062424bcdd768a3dbace878f85fde95 | https://www.investopedia.com/articles/investing/072313/investment-tax-basics-all-investors.asp | Tax Basics for Investors | Tax Basics for Investors
Investors need to understand that the federal government taxes not only investment income—dividends, interest, and rent on real estate—but also realized capital gains.
Key Takeaways When calculating capital gains taxes, the holding period matters. Long-term investments are subject to lower tax rates. The tax rate on long-term (more than one year) gains is 0%, 15%, or 20%, depending on taxable income and filing status. Interest income from investments is usually treated like ordinary income for federal tax purposes.
Tax on Dividends
Companies pay dividends out of after-tax profits, which means the taxman has already taken a cut. That’s why shareholders get a break—a preferential maximum tax rate of 20% on “qualified dividends” if the company is domiciled in the U.S. or in a country that has a double-taxation treaty with the U.S. acceptable to the IRS.
Non-qualified dividends paid by other foreign companies or entities that receive non-qualified income (a dividend paid from interest on bonds held by a mutual fund, for instance) are taxed at regular income tax rates, which are typically higher.
Shareholders benefit from the preferential tax rate only if they have held shares for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date, according to the Internal Revenue Service.
In addition, any days on which the shareholder's risk of loss is diminished (through a put option, a sale of the same stock short against the box, or the sale of most in-the-money call options, for example) do not count toward the minimum holding period.
For instance, an investor who pays federal income tax at a marginal 35% rate and receives a qualified $500 dividend on a stock owned in a taxable account for several years owes up to $100 in tax. If the dividend is non-qualified or the investor did not meet the minimum holding period, the tax is $175.
Investors can reduce the tax bite if they hold assets, such as foreign stocks and taxable bond mutual funds, in a tax-deferred account like an IRA or 401(k) and keep domestic stocks in their regular brokerage account.
Tax on Interest
The federal government treats most interest as ordinary income subject to tax at whatever marginal rate the investor pays. Even zero-coupon bonds don’t escape: Although investors do not receive any cash until maturity with zero-coupon bonds, they must pay tax on the annual interest accrual on these securities, calculated at the yield to maturity at the date of issuance.
The exception is interest on bonds issued by U.S. states and municipalities, most of which are exempt from federal income tax. Investors may get a break from state income taxes on interest, too. U.S. Treasury securities, for example, are exempt from state income taxes, while most states do not tax interest on municipal bonds issued by in-state entities.
Investors subject to higher tax brackets often prefer to hold municipal bonds rather than other bonds in their taxable accounts. Even though municipalities pay lower nominal interest rates than corporations of equivalent credit quality, the after-tax return to these investors is usually higher on tax-exempt bonds.
Let's say an investor who pays federal income tax at a marginal 32% rate and receives $1,000 semi-annual interest on $40,000 principal amount of a 5% corporate bond owes $320 in tax. If that investor receives $800 interest on $40,000 principal amount of a 4% tax-exempt municipal bond, no federal tax is due, leaving the $800 intact.
Tax on Capital Gains
Investors cannot escape taxes by investing indirectly through mutual funds, exchange-traded funds, real estate investment trusts, or limited partnerships. The tax character of their distributions flows through to investors, who are still liable for tax on capital gains when they sell.
Uncle Sam’s levy on realized capital gains depends on how long an investor held the security. The tax rate on long-term (more than one year) gains is 0%, 15%, or 20% depending on taxable income and filing status. Just like the holding period for qualified dividends, days do not count if the investor has diminished the risk using options or short sales. Short-term (less than one year of valid holding period) capital gains are taxed at regular income tax rates, which are typically higher.
For instance, an investor in the 24% tax bracket sells 100 shares of XYZ stock, purchased at $50 per share, for $80 per share. If they owned the stock more than one year and they fall into the 15% capital gains bracket, the tax owed would be $450 (15% of ($80 - $50) x 100), compared with $720 tax if the holding period is a year or less.
Tax Losses and Wash Sales
Investors can minimize their capital gains tax liability by harvesting tax losses. That is, if one or more stocks in a portfolio drop below an investor’s cost basis, the investor can sell and realize a capital loss for tax purposes.
Investors may offset capital gains against capital losses realized either in the same tax year or carried forward from previous years. Individuals may deduct up to $3,000 of net capital losses against other taxable income each year, too. Any losses in excess of the allowance can be used to offset gains in future years.
The federal income tax brackets for 2020, depending on annual income: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
There’s a catch. The IRS treats the sale and repurchase of a “substantially identical” security within 30 days as a “wash sale," for which the capital loss is disallowed in the current tax year. The loss increases the tax basis of the new position instead, deferring the tax consequence until the stock is sold in a transaction that isn’t a wash sale. A substantially identical security includes the same stock, in-the-money call options, or short put options on the same stock—but not stock in another company in the same industry.
An investor in the 35% tax bracket, for example, sells 100 shares of XYZ stock, purchased at $60 per share, for $40 per share, realizing a $2,000 loss; that investor also sells 100 shares of ABC stock purchased at $30 per share for $100 per share, realizing a $7,000 gain. Tax is owed on the $5,000 net gain. The rate depends on the holding period for ABC—$750 for a long-term gain (if taxed at 15%) or $1,750 for a short-term gain.
If the investor buys back 100 shares of XYZ within 30 days of the original sale, the capital loss on the wash sale is disallowed and the investor owes tax on the full $7,000 gain.
The Bottom Line
Taxes are always changing and can have a significant impact on the net return to investors. Detailed tax rules for dividends—and for capital gains and wash sales—are on the IRS website. Given the complicated nature of these rules, investors should consult their own financial and tax advisors to determine the optimum strategy consistent with their investment objectives and to make sure they are filing their taxes in accordance with regulations.
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5df90920ae28403349a14c15c05275cf | https://www.investopedia.com/articles/investing/072415/todays-top-young-investors.asp | Today's Top Young Investors | Today's Top Young Investors
Back to school is here again in the fall, and new college students are eager to make their mark on the world. For young investors, it’s easy to name Warren Buffett or George Soros as idols; both have absolutely dominated the investment world for decades.
But the world we live in is very different from the one that both men encountered after college graduation. Young, hopeful investors should be looking up to people closer to their own age.
Here are the top seven young investors.
Ryan Israel
Ryan Israel is a 29-year-old partner at Pershing Square Capital Management. He came to the firm from Goldman Sachs, where he worked as an investment banker and has an economics degree from the Wharton School. Ryan works under Bill Ackman, a man famous for hiring anyone he thinks can get the job done, regardless of education or age.
The two investors share a love for Warren Buffett's investing style, and Israel was instrumental in the hedge fund’s investment in Burger King (QSR) and subsequent takeover of Tim Horton’s (QSR) as a tax-saving strategy.
Sam Altman
Sam Altman is the cofounder of Loopt, a social network that shares a users’ location with friends. Loopt’s initial funding came from Y Combinator, a company that would, in 2014, hire Altman as its president. Y Combinator is a venture capital company that has invested in more than 800 companies, including Airbnb, Dropbox, Reddit, Pinterest, and WePay.
Alex Banayan
Alex Banayan is a 22-year-old university student and venture capital associate with Alsop Louis Partners. He was named the youngest venture capitalist ever when he surprised even himself by landing an associate position at the age of 19.
He is currently writing a book based on his experiences. It will include interviews from wildly successful people.
Katherine Chan
Katherine Chan studied at Harvard and had years of experience as an investment analyst before cofounding Anandar Capital. Anandar Capital is a hedge fund that had almost $400 million in holdings as of March 2015.
Brett Berson
Brett Berson is a vice president at First Round, a company that provides start-ups with seed money. He got his start at the company as an intern while a student at New York University. First Round has invested in companies like Birchbox, FlightCar, Uber, ModCloth, and Square.
CeCe Cheng
CeCe Cheng, also at First Round, joined the venture capital company in 2011. There she is the director of the Dorm Room Fund, a project that provides college start-ups with seed money and guidance to make their ideas reality. The fund, while still in its infancy, already has a number of strong companies in its portfolio.
Lucy Baldwin
Lucy Baldwin has been called the "next Big Thing" at Goldman Sachs Group Inc. (GS). She has an economics degree and was a former mergers and acquisitions analyst before deciding to work in equity research. Currently, she is the managing director of Goldman Sachs European retail and consumer goods equity research team and is the go-to person for luxury goods industry knowledge.
The Bottom Line
Current university students looking to get into the tech, finance or investing world should look up to these seven top investors when trying to emulate a career path. Hard work, good luck and a passion for investing in start-ups seem to be the recipe for success these days, and young people would be smart to look towards nontraditional ways of investing.
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beae28ab440ce657fa88de552c72f443 | https://www.investopedia.com/articles/investing/072514/how-does-goodwill-affect-stock-prices.asp | How Does Goodwill Affect Stock Prices? | How Does Goodwill Affect Stock Prices?
Warren Buffett once said: “If a business does well, the stock eventually follows.”
Stock prices, more than anything, are affected by how a company is doing its business. Is it making profits, growing, expanding? In an attempt to become bigger, companies are always on the lookout for profitable mergers and acquisitions. These deals involve a lot of money and risk, as future profits sometimes don't justify the price paid for such deals.
Every kind of buy and sell involves several factors that figure into the price, especially deals that run into millions of dollars. The tangible assets (such as land, buildings, machinery, and so on) have a price tag on them. So do most of the identifiable intangible assets (such as licenses, patents et cetera). But what about the unidentifiable intangible assets such as goodwill? How does one calculate the value of reputation or brand loyalty? The value is pretty subjective, especially when a company is trying to estimate its own goodwill. Its value is revealed when a company is bought or sold, as it is the extra amount paid over and above the fair value of assets.
Goodwill Defined
Thus, goodwill can be defined as the premium paid over and above the book value of assets during the acquisition of a company by another. If the company being bought has a strong brand name, customer loyalty, and good reputation, the goodwill value paid for it will be at a premium.
Goodwill cannot be sold or purchased independently of the company, and its value is tagged to a company’s performance and market events, which in turn steer investor confidence along with guiding the evaluation of stock prices. A company with high goodwill tends to attract investors, as it makes them believe that the company is capable of generating higher profits in the future.
Analyzing trends and cases from the past reveals an ambiguous relationship between a company’s goodwill and its stock prices. Company share prices have at different times, and situations responded differently to news related to goodwill—it may be due to its write-down, impairment, positive expectations of goodwill value or other factors.
FASB Actions
Back in 2001, FASB (the Financial Accounting Standards Board) abolished the amortization of goodwill, which led to an increase in a given company’s EPS, a factor that boosted the average share prices but only for a short time. Investors soon realized that amortization doesn’t really affect cash flow or operations, and thus things returned to normal. Of course, a few companies' share prices dropped on the news. In early 2014, FASB announced new alternative rules for private companies according to which goodwill will be amortized and also tested for impairment when the need arises. The effect of amortization changes in goodwill on share prices is usually temporary and not severe.
The outcome of impairment loss and write-downs on share prices depends on whether the market has already factored in the likelihood of such an event based on any management disclosures. In January 2002, Time Warner announced a massive $54 billion write-off in goodwill. The stock price was slightly higher on the day of the announcement, as the market had already anticipated such an event. But the company's stock had corrected by 37% of its value over the six-month period preceding the announcement. This proves that investors did not take the news positively. However, the response was spread over time and was triggered when such news was brewing.
Interestingly, this process also works the other way around, where stock price declines can trigger the need for an impairment test of goodwill. This is mainly because in goodwill testing for impairment, the market capitalization of the company is relevant and decreases with a fall in share prices.
The Bottom Line
Investors react differently to every situation. No strong or clear-cut evidence links goodwill to stock price movement. But in general, news of an acquisition, which means expansion for a company, tends to boost stock prices. Conditions that show loss of goodwill tend to act as a dampener. The “visible reaction” of investors to such announcements is usually short-lived, and the “real impact” is seen over a period of time. Overall, it is best to conclude that investors tend to look at companies beyond the “goodwill factor” and focus on cash flows, revenue generation, and dividends.
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46076b8e4a8f68b25e0160b3117b1257 | https://www.investopedia.com/articles/investing/072515/top-factors-reports-affect-price-oil.asp | Top Factors That Affect the Price of Oil | Top Factors That Affect the Price of Oil
Crude oil, or “black gold,” is one of the world's most precious commodities. Price changes in the commodity can affect the economic ecosystem at every level, from family budgets to corporate earnings to the nation's GDP. Indeed, sudden price drops or unexpected spikes can send global financial markets into a tizzy.
Crude oil prices change quickly in response to news cycles, policy changes, and fluctuations in the world's markets. Since 2014, oil prices have experienced a downward journey, falling from highs of around $115 per barrel. In February and March of 2020, crude prices accelerated their decline in reaction to the coronavirus pandemic and an expected sharp drop in demand for oil. In addition, major oil producers failed to come to an agreement on production cuts, exacerbating the problem. By mid-March 2020, the price of U.S. crude oil was fluctuating just around $19 per barrel. So, what causes these dramatic swings in the price of oil, and what can we expect going forward?
In the Spring of 2020, oil prices collapsed amid the COVID-19 pandemic and economic slowdown. OPEC and its allies agreed to historic production cuts to stabilize prices, but they dropped to 20-year lows.
Supply
For several decades, the Organization of Petroleum Exporting Countries (OPEC) has been the elephant on the world's trading floors, with its oil-producing member nations working together to determine prices by boosting or reducing crude oil production. While OPEC's grip on the market has loosened some in past years, its decisions continue to play a dominant role. OPEC's every move is watched closely by governments, oil companies, speculators, hedgers, investors, traders, policymakers, and consumers.
Key Takeaways Crude oil prices can vary greatly, with a price near $115 per barrel in 2014 and $19 in 2020.Crude oil prices react to many variables, including economic news, overall supplies, and consumer demand.OPEC is an international oil producing cartel that plays an important role in determining global oil supplies.Economic growth and increased industrial production can drive up the demand for crude oil.Key reports that affect crude oil prices in the short term are weekly inventory statistics from the American Petroleum Institute and U.S. Energy Information Administration.
OPEC's policies are affected, in turn, by geopolitical developments. Some of the world's top oil producers are politically unstable or at odds with the West (issues pertaining to terrorism or compliance with international laws, in particular, have been problematic). Some have faced sanctions by the U.S. and the United Nations.
In the past, supply disruptions triggered by political events have caused oil prices to shift drastically; the Iranian revolution, Iran-Iraq war, Arab oil embargo, and Persian Gulf wars have been especially notable. The Asian financial crisis and the global economic crisis of 2007-2008 also caused fluctuations.
The supply crude oil is also determined by external factors, which might include weather patterns, exploration and production (E&P) costs, investments, and innovations. For example, thanks to advances in technology that allow companies to extract oil from rock—so-called shale oil—the United States became the world's largest producer of oil in 2018 and a major source of global oil supplies.
Demand
Strong economic growth and industrial production tend to boost the demand for oil—as reflected in changing demand patterns by non-OECD nations, which have grown rapidly in recent years. According to the U.S. Energy Information Administration,
“Oil consumption in the Organization for Economic Cooperation and Development (OECD) countries declined between 2000 and 2010, [while] non-OECD oil consumption increased more than 40%. China, India, and Saudi Arabia had the largest growth in oil consumption among the countries in the non-OECD during this period.”
Other important factors that affect demand for oil include transportation (both commercial and personal), population growth, and seasonal changes. For instance, oil use increases during busy summer travel seasons and in the winters, when more heating fuel is consumed.
Derivatives and Reports
More and more, market participants are buying and selling crude oil, not in its physical form, but in the form of contracts. For example, airlines and oil producers use derivatives, like futures and options, to a hedge against swings in the price of oil, while speculators drive those prices upwards or downwards when there are waves of buying or selling amid incoming news.
Reports on production figures, spare capacity, target pricing, and investments can be a crucial factor in the setting of crude oil prices. Some of the most keenly followed reports are OPEC's monthly oil report, International Energy Agency (IEA) oil market report, and weekly inventory data from both the American Petroleum Institute (API) and the U.S. Energy Information Administration (EIA).
The Bottom Line
Oil has long been the engine of the world's economy, and even today—as the search for alternative energy sources gains ground—life without crude oil is hard to imagine. Carbon-based fuels are used in heavy and light manufacturing, in the production process (chemicals, textiles, detergents, and medicines), and in every sector of our transportation industries. For now, at least, oil companies and oil-rich nations will surely weather dips, deeper plunges, and sudden spikes in crude oil prices.
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3402733cbb0c178e1f88e58f1eb03ab7 | https://www.investopedia.com/articles/investing/072715/dummies-guide-iran-nuclear-deal.asp | A Guide to the Iran Nuclear Deal | A Guide to the Iran Nuclear Deal
The Iran nuclear deal made headlines across the globe as a landmark historical agreement between extreme opponents. The accord came after months of preparation and two weeks of final intensive discussions in Vienna, and with eight parties involved, the final result was an agreement with five annexes. However, the agreement has been challenging to keep intact and appears that it could be dead altogether.
The Beginnings of the Deal
The deal laid out a lengthy process spanning over 15 to 25 years that would be supervised by an eight-member committee, including Iran, the United States of America, the United Kingdom, France, Germany, Russia, China, and the European Union. In a nutshell, the agreed-upon nuclear deal aimed at limiting Iran's ability to produce a nuclear weapon, in exchange for the removal of various sanctions imposed on the country internationally.
However, the deal got a significant shake-up under U.S. President Donald Trump, who on May 8, 2018, announced that the U.S. would be pulling out of the deal and issuing fresh sanctions against Iran.
Key Takeaways The Iran nuclear deal was designed to curb Iran's ability to produce nuclear weapons, in exchange for the removal of sanctions on Iran. In May 2018, former U.S. President Donald Trump announced that the U.S. would be pulling out of the deal and issuing sanctions on Iran. After then-President Trump ordered the killing of Iranian General Qasem Soleimani in early 2019, Iran announced its withdrawal from the nuclear deal.
Iran Nuclear Deal Background
Based on the revelations of an Iranian exile group in 2002, Iran was suspected of having nuclear facilities. Following inspections by the International Atomic Energy Agency (IAEA) and subsequent discoveries, Iran continued to proceed with nuclear developments despite international opposition. In 2006, the United Nations imposed sanctions on Iran, which were followed by similar actions from the U.S. and the EU. Bitter confrontations then broke out between Iran and the world powers.
These sanctions—primarily on Iran's oil business, weapons sales, and financial transactions—had severely hurt Iran’s economy. As one of the largest producers of crude oil, prices went through a volatile period as the outcome was largely unknown.
The Parties Involved
The deal was negotiated between Iran and a group of counterparts that included the U.S., Russia, the U.K., Germany, France, China, and the European Union (EU).
The supporters of the nuclear deal affirm benefits, which include the best-possible guarantee from Iran that it will refrain from producing a nuclear arsenal. It was, at the time, an important step toward establishing peace in the Middle East region, particularly in the context of ISIS and the role of oil in Middle East economies.
The Main Points
To make nuclear bombs, the uranium ore mined from earth needs enrichment to either uranium-235 or plutonium. Uranium ore mined from the earth is processed via devices called centrifuges to create uranium-235. Uranium ore is processed in the nuclear reactors, which transform it into plutonium.
Under the deal, Tehran would reduce the number of centrifuges to 5,000 at the Natanz uranium plant—about half the number at the time. Nationwide, the number of centrifuges would reduce from 19,000 to 6,000. The enrichment levels would be brought down to 3.7%, which was much lower than the 90% needed to make a bomb. The stockpile for the low-enrichment uranium would be capped to 300 kilograms for the next 15 years, down from the then 12,000 kilograms.
All these measures served to restrict Iran's capability to make a nuclear bomb and would ensure nuclear power usage is limited to civilian use only.
Next Steps and Timeline
As the deal was finalized, a UN Security Council resolution was agreed upon.
By August 15, 2015, Iran would submit written responses to the questions raised by the International Atomic Energy Agency (IAEA) about its nuclear program and developments. Additionally, it allowed monitoring of its facilities by IAEA inspectors on or before October 15, 2015.
Removal of Sanctions
First, the oil embargo that prevented the import of oil from Iran was removed, which was not without its effects. The U.S. and EU lifted oil- and trade-related sanctions. Foreign companies began to purchase oil from Iran; U.S. companies located outside the United States were authorized to trade with Iran; and imports of selected items from Iran were permitted, which had a particular effect on international business.
Simultaneously, sanctions on Iran’s banking and financial systems were dropped. It enabled the immediate release of around $100 billion currently lying frozen in Iranian bank accounts overseas.
Other Benefits
Immediately after the announcement, government officials from major European countries began visits to Iran to explore business opportunities.
Some of the main challenges faced by Iran during the sanction period were Iran's shrinking GDP, high inflation (over 35% in 2013), and the nation being cut off from world economic systems. All such economic challenges drastically improved after the agreement.
Lifting sanctions would allow the movement of huge supplies of oil from Iran, which was thought to be sitting on large stockpiles due to years of imposed sanctions. International oil companies like France’s Total and Norway’s Statoil (now Equinor) operated in Iran for years before sanctions were imposed, changing the tide for those countries and other top oil producers in the world.
European car manufacturers like Peugeot and Volkswagen were market leaders in Iran prior to the sanctions. Although a few sectors like auto, oil, and infrastructure had significant interest from foreign companies in the pre-sanction era, the reality was that foreign businesses had limited presence in Iran since the 1979 Revolution. In essence, the Iranian markets had remained largely unexplored by international businesses across many other industry sectors.
Key Concerns
Former U.S. President Barack Obama claimed that the deal would make the U.S. and the world a safer place. However, concerns remained.
Challenges included administrating and monitoring the atomic facilities and developments in Iran. Complete awareness was required about the existing labs, establishments, underground sites, research centers, and military bases associated with nuclear developments. Though Iran agreed to provide the IAEA higher levels of information and deeper levels of access to all nuclear programs and facilities in the country, the picture remained murky.
Opposition to the Iran Nuclear Deal
The deal, although welcomed by a larger group of nations across the globe, also had opposition from a few prominent world leaders. Israeli leader Netanyahu said the deal "paves Iran's path to the bomb." His vehement opposition to the deal came on the basis of Iran’s history of being a nuclear-capable challenge for the Middle East region.
Additionally, Netanyahu said the deal was a platform to fund and nurture a nuclear-capable, religious-extremist country, saying a strengthened Iran could hinder peace and security in the region.
President Donald Trump and Iran
After Donald Trump was elected president in November 2016, proponents of the deal feared the agreement, which they saw as a win for world peace, would be in jeopardy.
2018
In May of 2018, President Trump announced that the U.S. would pull out of the deal and by the end of the year had reinstated sanctions on Iran. European countries, including Germany, France, and the U.K. disagreed with the sanctions.
As a result, Iran's economy struggled, leading to protests in the streets. Iran responded when Iranian President Hassan Rouhani announced that the country was rolling back some of the restrictions that had been previously agreed to under the 2015 deal.
Iran would stop complying with the caps for stockpiles of enriched uranium. The Iranian president also announced the country would also halt any sales of surplus supplies overseas.
2019
In early 2019, President Trump ordered the killing of General Qasem Soleimani, who was one of Iran's top military leaders. In response, Iran announced it would no longer comply with the nuclear deal that President Obama had signed in 2015.
In May 2019, Iran's Atomic Energy Organization stated that they would quadruple the production or output of low-enriched uranium, which was later confirmed by the IAEA as reported by BBC news.
The Bottom Line
The pros and cons of such a landmark deal were hotly debated. Most views, claims, and allegations were often politically tuned. European leaders still hold out hope that a deal can be reimplemented in an effort to constrain Iran's nuclear ambitions. However, for the time being, it appears that the Iran nuclear deal is on life support.
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0acb44548b11324d421423840f9e8a4d | https://www.investopedia.com/articles/investing/072816/what-best-age-get-life-insurance.asp | Best Age to Get Life Insurance | Best Age to Get Life Insurance
The right time to buy life insurance varies from person to person, depending on family and financial circumstances. Generally, you need life insurance if other people depend on your income, or if you have debt that will carry on after your death. After all, you don't want to leave your loved ones without money to live on... or on the hook for your credit card debt.
Key Takeaways If others depend on you financially—or you have debt—it's crucial to have life insurance.The sooner you purchase life insurance, the better, as it becomes more expensive with each passing year.Permanent life insurance has a cash value component. Holding the policy for longer lets that cash value grow over time.
Why Younger Is Better
When it comes to timing, the younger you are when you buy life insurance, the better. This is because at a younger age, you'll qualify for lower premiums. And as you get older, you could develop health problems that make insurance more expensive or even disqualify you from purchasing a plan.
However, younger people faced with mortgages, car payments, and student loan debt tend to put off buying life insurance. While paying off current debt is critical, missing out on buying life insurance at a young age has a significant economic impact, much like delaying saving for retirement. The sooner it is purchased, the better.
The Ideal Age to Have Term Insurance
Term life insurance covers you for the term of the policy. While younger is generally better, when that term should start may also be based on when you anticipate other people depending on your income. You'll want the term of the policy to last as long as your dependents will need your income. For parents, this is often until their children are grown. People in couples who own property together may want to be covered until their mortgage is paid off. If both people in a couple are earning income that is crucial to the family, then each should be covered. Parents who don't earn income may also want to consider coverage, as their unpaid labor (childcare, etc.) might need to be replaced by paid services (like daycare) in the event of their death.
Life insurance may be prudent even before you have dependents if you have unsecured debt, such as credit card debt or some private student loans. (Credit card balances require payment upon the death of the holder.)
When to Buy Permanent Life Insurance
With a permanent life insurance plan, the cash value grows tax-deferred. Premium contributions to whole life policies purchased at an early age can accumulate considerable value over the long-term time, as the cost of insurance is fixed for the entire term of the policy. Cash value can even be used as a down payment for a first home purchase. If held long enough, what you accumulate may be able to supplement retirement income. However, the money needs time to grow, which is why an early start is best.
A whole life insurance policy can be prepaid via a lump sum for a minor (even an infant!). When the minor turns 18, the policy can be transferred to the insured, at which point the policy can be funded further, or cashed in if it holds any equity.
Regardless of which type of policy is right for your circumstances, make sure to thoroughly research the companies you're considering working with to get the best life insurance policy possible.
Cost of Waiting
Forgoing life insurance purchases at a young age can be costly. The average cost of a 20-year level term policy with a $250,000 face amount is about $214 per year for a healthy 30-year-old male. In contrast, the annual premium for a 40-year-old male is about $486. The overall cost of delaying the purchase for 10 years is $2,720 over the life of the policy.
Additionally, waiting to purchase life insurance can have a greater impact on an attempt to purchase a policy. Medical conditions are more likely to develop as an individual grows older. If a serious medical condition arises, a policy can be rated by the life underwriter, which could lead to higher premium payments or the possibility that the application for coverage can be declined outright.
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aa3e4c5aac0dddac9c3bbee0eaf6432b | https://www.investopedia.com/articles/investing/072913/what-brokerdealer-and-why-should-you-care.asp | What Is a Broker-Dealer and Why Should You Care? | What Is a Broker-Dealer and Why Should You Care?
For many investors, the financial services industry is a strange and mysterious place filled with a language all on its own. Terms like alpha, beta, and Sharpe ratio don’t exactly roll off the tongue, nor does their use by industry insiders serve to lift the veil and make things less opaque. Of course, the language fits the medium, as the financial services arena is a complex world. To participate in that world, investors generally engage the services of a broker or dealer in some form or fashion, making a review of those terms an interesting place to begin exploring. Let's dive into the difference between brokers and dealers.
Key Takeaways A broker executes orders on behalf of clients and can be either a full-service broker or a discount broker that only executes trades. Meanwhile, a dealer facilitates trades on behalf of itself. Some dealers, also called primary dealers, also facilitate trades on behalf of the U.S. Federal Reserve to help implement monetary policy. Broker-dealers are those that perform both responsibilities, such as traditional Wall Street organizations, as well as large commercial banks among others.
Brokers
Broker and dealer are U.S. regulatory terms and, as is often the case with legal terms, they are not very intuitive to many people. While the words are often seen together, they actually represent two different entities. A broker executes orders on behalf of clients. To the regulators, this means the entity through which investors hold a brokerage account. To investors, it generally means the person who helps them buy and sell securities. A bit of confusion occurs here, as the industry also has lots of terms for a person who helps investors buy and sell securities, including financial advisor, investment advisor, and registered representative. For the moment, we’ll stick with the strict legal definitions to provide a baseline for further exploration.
Think of the legal entity that facilitates security trading as an agent acting on behalf of investors. When you want to buy or sell a security, the entity (in the case of online brokerage accounts for example) that helps you make that transaction is your agent. When you pay a commission to make a trade, you are making that payment to an agent. The terms agent and broker can be used interchangeably.
1:35 TradeStation's Evolution into Online Broker Dealer
Full-Service vs. Discount Brokers
Brokers come in two general types: full service and discount. Full-service brokers provide one-on-one personal service. This includes providing specific investment recommendations in addition to planning and advice services that range from retirement planning, long-term care planning, and estate planning to the formulation of a personal investment strategy that will help cover the cost of a child’s education, a home purchase, or other financial goals. Ongoing assistance can include face-to-face meetings and periodic checkups to revisit progress toward goals. For novice investors or those too busy to plan for themselves, full-service brokers offer an array of useful services and information.
Discount brokers, on the other hand, provide trade execution. Online brokers are perhaps the best example of this arrangement, as investors can log on, select a security, and purchase it without ever speaking to another person. Discount brokers offer an inexpensive way to purchase securities for investors who know exactly what they what to buy. Some of these firms also offer online tools and research designed to help do-it-yourself investors generate ideas and research securities they may be interested in purchasing. The limited service offering provided by discount brokers is significantly less expensive than the cost of working with a full-service broker. Still, it's wise to clarify any misconceptions about discount brokers before hiring one.
Dealers
While a broker facilitates security trades on behalf of investors, a dealer facilitates trades on behalf of itself. The terms “principal” and “dealer” can be used interchangeably. So, when you hear about big financial firms trading in their house accounts, they are acting as dealers.
Some of these dealers, known as primary dealers, also work closely with the U.S. Federal Reserve to help implement monetary policy. Primary dealers are obligated to participate in the auction of debt issued by the U.S. government. By bidding on Treasury bonds and other securities, these dealers facilitate trading by creating and maintaining liquid markets. They assist in the smooth functioning of domestic securities markets as well as transactions with foreign buyers.
Dealers also play a self-governing role, to ensure the correct functioning of securities markets. They are regulated by the Financial Industry Regulatory Authority (FINRA), which is responsible for administering exams for investment professionals. Some of the better-known exams include the Series 7, the Series 6, and Series 63. The Series 7 permits financial services professionals to sell securities products, with the exception of commodities and futures. The primary focus of the Series 7 exam is on investment risk, tax implications, equity and fixed-income securities, mutual funds, options, retirement plans, and working with investors to oversee their assets. The Series 6 designation enables investment professionals to sell mutual funds, variable annuities, and insurance products. And the Series 63 enables them to sell any type of securities in a specific state. Obtaining these licenses is the first step financial services professionals need to take to get into the securities business.
Putting It All Together
Most firms investors would act as both brokers and dealers and are therefore referred to as broker-dealers by industry regulators. These firms include the primary dealers and other traditional Wall Street organizations, as well as large commercial banks, investment banks, and even small independent boutique firms that cater to the wealthy.
Broker-dealers play an important role in the financial markets, as these firms provide the infrastructure that facilitates stock trading. In fact, if you want to buy stock, you must open a brokerage account through a brokerage firm. The brokerage firm makes sure you have enough money in your account to conduct a trade, facilitates the trade by interacting with the stock exchange where the stock is traded, provides the computer systems that enact the trade, and keep records of the trade. It also handles the financial transaction between the buyer and the seller and facilitates future transactions (dividends, stock splits, corporate actions such as those that occur when preferred securities are called or stock splits take place).
The Bottom Line
With the depth and complexity of industry offerings and the ever-changing nature of the industry itself, knowledge is power. While there are pros and cons of partnering with a broker-dealer, the greater your grasp of the industry’s vocabulary, the better your starting point for understanding how the industry functions. This includes developing a better sense of how your investments work, the services you get in exchange for the fees that you pay, who or what provides those services, and what you can expect should a dispute end up in court.
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79254a784e1f4df5c7d358febc1783cd | https://www.investopedia.com/articles/investing/072915/how-protect-your-retirement-after-divorce.asp | How to Protect Your Retirement After a Divorce | How to Protect Your Retirement After a Divorce
Divorce can be one of the hardest and ugliest things to deal with in your life. The emotional and familial turmoil that typically comes with this process is often exacerbated by financial issues and the battle over the division of assets, which range from real estate and physical property and money and investments.
Retirement plans and pensions are often critical assets targeted by both spouses, mostly when a nonworking spouse is left without any savings if they cannot get anything from the former partner. But what can you do to protect your assets? Here’s what you can do to make sure your retirement savings or rights to benefits aren't lost if you face this unfortunate dilemma.
Key Takeaways Retirement plans and pensions are often key assets in a divorce decree. Debts taken out against retirement accounts count as a 50-50 liability. Communicate with your account custodians, make sure you're listed as a survivor on your spouse's accounts. Creating a prenuptial agreement may be useful to separate out assets ahead of marriage.
Plan Ahead
The first and most obvious thing you need to do is have a plan ahead of time. No one wants to admit the inevitable could happen. But let's be realistic—nothing lasts forever, and sometimes, that includes relationships. And it never hurts to keep the communication going between you and your spouse, even if it's about a topic you don't necessarily want to address.
Make sure you both decide how your assets will be split up in case you do end your relationship and file for divorce. A court-issued decree document can do this for you, and it should help identify how your retirement assets will be divided. To make sure things remain amicable, contact a professional—financial and/or legal—to ensure your decree agreement remains intact.
Learn the Rules of Your Retirement Plans
The first step in protecting your retirement assets is to know the rules that govern your plans, accounts, and pension payments. Most plans and accounts have specific procedures that must be followed when it comes to dividing retirement assets. Failure to follow these instructions may lead to forfeiture of some or all of those assets—even if they were accorded to you in the divorce decree.
For example, the Thrift Savings Plan—a defined-contribution plan for federal employees and members of the uniformed services—requires that the division of the plan's assets be clearly spelled out and referred to as the TSP balance directly in the divorce decree. A verbal agreement between the parting spouses will not suffice to process a rollover under the Qualified Domestic Relations Order (QDRO) rules.
The divorce decree itself must say something to the effect of “the spouse is entitled to X percent of the participant’s TSP balance” somewhere in the document or one of its appendices. If it does not, the participant's spouse receives nothing, regardless of any other agreement that was made.
Joint Obligation
Any debt that is owed inside a retirement plan also usually is considered to be a joint obligation. For example, if the participant spouse took out a $50,000 loan from their $200,000 401(k) plan, then a 50-50 split may be calculated on the remaining balance in the plan unless the divorce decree specifically states that the loan must be repaid before the division.
Pension Plans and Spousal Benefits
The division of individual retirement accounts (IRAs) and defined contribution plans is usually a relatively straightforward process. Either the divorce decree itself or a QDRO is used to move account balances from one spouse to the other as a rollover. Dividing guaranteed pension payouts can be another matter in many cases.
Although both types of retirement funds must usually be divvied up at the time of divorce by some form of a court order, there are several key factors that enter into how monthly benefits are allocated between spouses. Any pension earned while the divorcing spouses were married is typically considered joint property in most states and are subject to some form of division in a divorce. That said, there are several ways that this current or future payout can be divided.
Most pensions offer some form of survivor's benefit, and, in some cases, the ex-nonworking spouse may opt to retain this benefit. In other cases, the actual monthly benefit is divided between the spouses, and the survivor benefit may be waived, retained, or transferred depending upon the divorce decree.
Life Insurance Policies
In some cases, the nonworking spouse may come out ahead by waiving the survivor benefit and having the other spouse purchase a life insurance policy naming them as a beneficiary. This can be especially prudent if the survivor benefit will stop if the nonworking spouse remarries before a certain age.
For example, the pension paid to a retired member of the U.S. military has a survivor benefit that will cease if the spouse of the deceased service member remarries before age 55. Therefore, a spouse who divorces a service member receiving a pension should run the numbers to compare a life insurance death benefit against what they will receive from the survivor benefit plan if they remarry before age 55.
Seven Steps to Take Before Divorce Proceedings
If you get divorced or are seriously considering it, now is the time to get your ducks in a row about how your retirement assets will be divided up. The following steps can help ensure that you either acquire or retain your fair share of retirement plan assets during the divorce proceedings.
#1: Do Your Homework
As mentioned above, those who understand the general rules of how plans are divided are better prepared to assess whether they get or retain what they should. If the divorce decree states that a plan or account is to be split evenly, then a rollover order for the entire amount is obviously not correct. Nonparticipant or nonowner spouses have the right to obtain complete information about all retirement plan or account balances that the other spouse owns. They should be able to get current statements on all assets, retirement, or otherwise eligible for division.
You also need to be aware that many rules and laws about the division of pension and retirement assets vary from one state to another, so be sure to determine what rules apply in your state and locality.
The rules pertaining to the division of pension and retirement assets vary from state to state.
#4. Get Professional Representation
This is important, as we already mentioned above. Even if dividing the rest of your marital assets seems relatively straightforward, it is probably wise to at least consult a pension lawyer in order to review the division of retirement assets.
Divorcing spouses who are uneducated in this matter can both lose in some cases due to simple ignorance of how pensions work and which payout options may be the best for both parties even when they are divided.
#4 Communication Is Key
Send all court orders and divorce agreement documents to plan and account custodians immediately. If you delay too long in doing this, you may forfeit what is due to you because your paperwork is outdated and invalid. Although private pension plans are required under the Pension Protection Act of 2006 to accept any court order regardless of when it was issued, it is still critical to submit this paperwork before any of the plan or pension assets are distributed. If you don’t, you may be faced with the prospect of trying to recover those assets yourself, which can incur further legal fees and bureaucratic wrangling.
If your soon-to-be ex-spouse has serious health issues or is terminally ill, be sure to get your legal documents to plan custodians sooner rather than later. Settling the affairs of a deceased ex-spouse who died before this paperwork was submitted can be a real nightmare.
#5. Review Social Security Benefits
If you were married to your ex for at least 10 years, you might be eligible to get a portion of their Social Security benefits. Visit the Social Security website for what you will need to do to collect. If you are entitled to your own benefits as well, you are usually allowed to receive the larger of either your benefit or your share of your ex-spouse’s payments.
#6. Survivorship
Be sure you are specified as the survivor. If your ex gets a pension that you are dividing, make sure that you are listed as the survivor or beneficiary on the plan if you intend to continue collecting benefits after they are gone. Find out what forms you need to sign and keep copies of them in a safe place for future reference.
#7. Create a Prenuptial Agreement
This may be the most straightforward way to protect your retirement assets and interests if you split up. Just be sure to include plans for how pensions and other assets can be divided, and perhaps leave some room for certain adjustments that could benefit you both depending upon your circumstances at the time of divorce.
The Bottom Line
Divorce is never a fun process, but knowing the rules and anticipating the impact of retirement plan division and pension payouts can make things a great deal easier for both parties. If you have questions about what you need to be doing to make sure your assets are distributed correctly, visit the Pension Rights Center website or consult your financial advisor.
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11833a3cc9b7129a18eb57ab563b3108 | https://www.investopedia.com/articles/investing/072915/impact-chinese-economy-us-economy.asp | Impact of the Chinese Economy on the U.S. Economy in 2020 | Impact of the Chinese Economy on the U.S. Economy in 2020
In the first quarter of 2020, the People's Republic of China recorded their first contraction in gross domestic product (GDP) since official records began in 1992. The National Bureau of Statistics of China reported a year-over-year GDP decline of 6.8% for the quarter. However, bolstered by its efforts to contain the COVID-19 pandemic and reopen its factories, China experienced a GDP rebound, with the government reporting a 3.2% GDP increase in the second quarter of 2020. This was followed by a 4.9% GDP increase in the third quarter.
What impact has China's swift ability to restart its economic engines had on the U.S. economy and the global economy? To answer these questions, you need to first assess the economic position of China within the world economy.
Key Takeaways The economies of the United States and China are intricately linked, due to the two nations sharing a large trading partnership of goods and services. In 2020, China started the year with a historic GDP decline of 6.8% caused by the impact of the COVID-19 pandemic. After reopening its factories, China's growth rebounded dramatically; the International Monetary Fund (IMF) predicts China will be the only major world economy to experience growth in 2020. China's economic growth in 2020 is attributed to its ability to meet the world's demand for medical equipment, electronics, and other items needed during the pandemic.
The Size of China's Economy
The International Monetary Fund (IMF) predicts China will be the only major economy to grow in 2020, with projected real GDP growth of about 1.9% for the year. This is in stark contrast to the U.S. economy, which is expected to shrink by 4.3% in 2020. The IMF expects European nations to post negative growth numbers in 2020 as well, with the United Kingdom estimated to contract by 9.8%, Germany by 6%, and France by 9.8%.
The sheer size of China's economy has had a lot to do with its ability to regain positive momentum. China, the most populous country in the world, had the second-largest economy, ranked below the United States with a GDP of $14.3 trillion in 2019. However, this high GDP did not necessarily indicate the wealth of the country. The country's GDP per capita was only $16,785 as of 2019, compared to the U.S., which had a per capita GDP of $65,118.
Over the decades, many global manufacturing companies have located their manufacturing units in China, attracted by the nation's low labor costs and cheap supply materials. This allowed companies to produce goods cheaply, and it explains why many of the products we use in our daily lives are made in China.
Relationship With the U.S. Economy
China is the third-largest trading partner (the first and second being Canada and Mexico, respectively) of the United States, with $558.1 billion in total goods traded in 2019. Of that amount, export goods accounted for $106.4 billion and import goods were $451.7 billion, bringing the U.S. trade deficit with China to $345.3 billion.
This deficit is financed partly by capital flows from China. China holds more U.S. Treasury securities than any other foreign country except Japan. According to the Treasury, China owns $1.06 trillion in U.S. debt securities as of Sept. 2020.
All of these statistics show the importance of the Chinese economy and why any developments in China, be they negative or positive, can influence the world’s largest economy, the United States.
$14 billion The value of U.S. agricultural products exported to China in 2019. The top domestic export categories included soybeans ($8.0 billion); pork and pork products ($1.3 billion); and cotton ($706 million).
The Chinese Slowdown
Starting in 2010, China's economic growth rate began to gradually decline. The GDP growth rate dropped from 9.6% in 2011 to 7.4% in 2014 (see graph below). The rate continued its decline to 6.1% in 2019.
Economists have raised concerns that this slowdown in the Chinese economy would have negative impacts on the markets that are closely related to this economy, such as the United States.
Effect on Unemployment Rates
U.S. companies that generate an important portion of their revenues from China are likely to be negatively affected by lower domestic demand in China. This is bad news for both shareholders and employees of such companies. When cost-cutting is necessary to remain profitable, layoffs are usually one of the first options to consider, which increases the unemployment rate.
China's Silver Lining in 2020
China's role as "the world's factory" has been a key factor in its ability to quickly rebound in 2020. The nation is well-known for its abundance of lower-wage workers, a strong network of suppliers, lower tax rates that keep the cost of production low, competitive currency practices, and government support that reduces regulatory hurdles.
While the rest of the world struggled to regain its economic footing, China's ability to reopen its factories and post impressive GDP numbers in the second and third quarters of 2020 proved that the nation's economy was still growing.
If anything, the COVID-19 pandemic has cemented China's importance in the global supply chain. Much of China's 2020 growth has been attributed to its factories meeting the world's demand for personal protective equipment (PPE), medical equipment, electronics (such as laptops), and other items that have been in short supply as the rest of the world shuttered its factories while complying with mandatory stay-at-home orders.
The Bottom Line
China, with its giant economy, has a huge influence on world economies. In 2020, the nation proved its resilience and was able to reopen its factories relatively early in the year, supplying the U.S. and other global economies with much-needed exports.
However, one of the biggest long-term risks to China's economy could come in the form of economic decoupling. Throughout the year, tensions between the United States and China have escalated over a number of issues, including Hong Kong, the prolonged trade war, and increased tech rivalry. An economic decoupling could mean a reduction or severance of ties between the world's two largest economies. China, for its part, has taken steps to reduce its dependence on the U.S. economy, building partnerships with other nations through its One Belt One Road (OBOR) initiatives.
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9b4ba68341743fa65156848f7537087c | https://www.investopedia.com/articles/investing/072916/how-buy-gold-your-401k-fsagx-iau.asp | How to Buy Gold With Your 401(k) | How to Buy Gold With Your 401(k)
For many investors, the allure of precious metals is hard to resist—most notably, gold. It is one of the most sought-after and popular investments in the world because it can offer lucrative returns in any investment portfolio. Gold is generally considered to be a safe investment and a hedge against inflation because the price of the metal goes up when the U.S. dollar goes down.
One thing investors need to consider is that most 401(k) retirement plans do not allow for the direct ownership of physical gold or gold derivatives such as futures or options contracts. However, there are some indirect ways to get your hands on some gold in your 401(k).
Key Takeaways The vast majority of 401(k) plans do not allow individuals to directly invest in physical gold. However, gold IRAs do exist that specialize in holding precious metals for retirement savings. Investors can nonetheless find specific mutual funds or ETFs that hold gold or gold mining stocks through their 401(k)s.Rolling over a 401(k) to a self-directed IRA may give investors greater access to more varied types of investment in gold.
The Basics of a 401(k)
A 401(k) plan is a self-directed employer-sponsored retirement savings plan. Offered by many employers, millions of Americans rely on these tax-advantaged investment plans to help them live out their retirement years comfortably.
People can divert part of their salary on a pre-tax basis toward long-term investments, with many employers offering to make partial or even 100% matching contributions to the money invested in the plan by employees. For instance, if an employee invests $100 per paycheck into her 401(k), an employer that matches 100% would contribute another $100 to her plan.
Plans come with contribution limits set by the Internal Revenue Service (IRS). For instance, employees are allowed to put away $19,500 from their salary into a 401(k) for 2020 and 2021. Anyone 50 and older can also make catch-up contributions of up to $6,500 each year into their plans.
These plans are typically handled by a fund manager or financial services group. Companies generally offer employees a number of different investment options so they can diversify their investments, usually through a selection of mutual funds. Enrollees can choose from a variety of funds, including small- and large-cap funds, bond funds, index funds—all with different growth potential.
Because these plans are so important, enrollees can take advantage of major market opportunities. That's why investors may be interested in shifting a portion of their 401(k) investment portfolio assets to profit from precious metals prices and the gold industry.
401(k)s and Gold Investing
One of the best ways to ride the gold wave is to invest directly in the physical commodity. But there's a catch when it comes to 401(k)s: Very few plans actually allow investors the choice of investing directly in gold bullion. In fact, the vast majority of 401(k) plans do not allow individuals to make any direct investments into the precious metal. This means you can't go out and purchase gold bullion or gold coins as part of your retirement plan portfolio. But if you're disappointed, don't be, because all is not lost.
The vast majority of 401(k) plans don't allow enrollees to invest directly in gold.
For investors who are eager to put their money into gold, there are still options. If your 401(k) does not offer ready access to investments in gold, you may still have some flexibility to invest in gold through, or mutual funds or exchange-traded funds (ETFs).
Gold Mutual Funds
If you can't put your money into tangible gold, you can invest in the precious metal by buying what the industry calls paper gold, or through mutual funds. By looking through the fund descriptions provided with your 401(k) plans, investors can find one or more potential mutual funds that offer significant exposure to gold by virtue of holding stocks of companies engaged in the gold mining industry.
For example, Fidelity Investments offers the Fidelity Select Gold Fund (FSAGX). This is an actively managed, low-cost, value-oriented fund. As of May 18, 2020, the fund had roughly $1.98 billion in assets under management (AUM) and an expense ratio of 0.79%. The fund is primarily invested in gold exploration, mining, and production companies such as Barrick Gold, Newmont Goldcorp, Newmont Mining, Franco-Nevada, and Agnico-Eagle Mines.
Gold ETFs
A 401(k) plan with a brokerage option gives individual investors the freedom to invest in a much wider range of assets through a regular brokerage account, thus providing access to all types of gold investments. For employees enrolled in such a plan, one of the simplest, lowest-cost means of getting exposure to gold is by investing in exchange-traded funds (ETFs).
ETFs offer investors the ability to invest in shares of a fund that holds actual gold bullion such as the iShares Gold Trust ETF (IAU) from BlackRock. Launched in January 2005, this ETF has over $24.5 billion in net assets under management as of May 2020. Another option is the Sprott Gold Miners ETF (SGDM) with $240 million in assets.
Employees enrolled in a 401(k) with the brokerage option also have the choice of investing in individual stocks of gold industry firms.
Self-Directed IRA Rollover
Employees whose 401(k) plan does not offer the kind of free access to gold investing that meets their investment goals can choose to opt-out of their 401(k) into a self-directed investment retirement account (IRA). This option gives plan holders access to virtually any type of investment in gold, including stocks, mutual funds, ETFs, commodity futures, and options.
A Gold IRA, also known as a Precious Metals IRA, is a special type of individual retirement account that specifically allows investors to add gold bullion or coins or other approved precious metals as qualified investments.
When someone with a 401(k) plan leaves their job—as in the case of a retired employee—there is the option to simply roll over the 401(k) money into an IRA. If the 401(k) plan is with a current employer, the employee can ask the employer for the option to take what is termed an in-service withdrawal, where the employee can obtain his 401(k) funds prior to retirement or another triggering event.
There is no tax penalty as long as the employee re-invests the funds in either an IRA or alternate 401(k) plan within 60 days. But traditional IRAs do not usually allow investments in physical gold. The only choice is to put your money directly in gold stocks or funds. But if you're looking to hold physical gold in your portfolio, self-directed IRAs allow for this type of investment.
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1e81f042a668ed25ee46461eea7d4180 | https://www.investopedia.com/articles/investing/080113/understanding-leverage-ratios.asp | How Investors Use Leverage Ratios to Gauge Financial Health | How Investors Use Leverage Ratios to Gauge Financial Health
While some businesses are proud to be debt-free, most companies have, at some time, borrowed money to buy equipment, build new offices, and/or issue payroll checks. For the investor, the challenge is determining whether the organization’s debt level is sustainable.
Is having debt harmful? In some cases, borrowing may be a positive indicator of a company's health. Consider a company that wants to build a new plant because of increased demand for its products. It may have to take out a loan or sell bonds to pay for the construction and equipment costs; however, its future sales are expected to be more than the associated costs. And because interest expenses are tax-deductible, debt can be a cheaper way to increase assets than equity.
The problem is when the use of debt, also known as leveraging, becomes excessive. With interest payments taking a large chunk out of top-line sales, a company will have less cash to fund marketing, research and development, and other important investments.
Large debt loads can make businesses particularly vulnerable during an economic downturn. If the corporation struggles to make regular interest payments, investors are likely to lose confidence and bid down the share price. In more extreme cases, the company may become insolvent.
For these reasons, seasoned investors scrutinize the company's liabilities before purchasing corporate stock or bonds. Traders have developed a number of ratios that help separate healthy borrowers from those swimming in debt.
Debt and Debt-to-Equity Ratios
Two of the most popular calculations—the debt ratio and debt-to-equity ratio—rely on information readily available on the company’s balance sheet. To determine the debt ratio, simply divide the firm’s total liabilities by its total assets:
Debt ratio=Total liabilitiesTotal assets\text{Debt ratio} = \frac{ \text{Total liabilities} }{ \text{Total assets} }Debt ratio=Total assetsTotal liabilities
A figure of 0.5 or less is ideal. In other words, no more than half of the company’s assets should be financed by debt. In reality, many investors tolerate significantly higher ratios. Capital-intensive industries like heavy manufacturing depend more on debt than service-based firms, and debt ratios in excess of 0.7 are common.
As its name implies, the debt-to-equity ratio, instead, compares the company’s debt to its stockholder equity. It’s calculated as follows:
Debt-to-equity ratio=Total liabilitiesShareholders’ equity\text{Debt-to-equity ratio} = \frac{ \text{Total liabilities} }{ \text{Shareholders' equity} }Debt-to-equity ratio=Shareholders’ equityTotal liabilities
If you consider the basic accounting equation (Assets – Liabilities = Equity), you may realize that these two equations are really looking at the same thing. In other words, a debt ratio of 0.5 will necessarily mean a debt-to-equity ratio of 1. In both cases, a lower number indicates a company is less dependent on borrowing for its operations.
While both of these ratios can be useful tools, they’re not without shortcomings. For example, both calculations include short-term liabilities in the numerator. Most investors, however, are more interested in long-term debt. For this reason, some traders will substitute “total liabilities” with “long-term liabilities” when crunching the numbers.
In addition, some liabilities may not even appear on the balance sheet and don’t enter into the ratio. Operating leases, commonly used by retailers, are one example. Until recently, Generally Accepted Accounting Principles (GAAP) didn't require companies to report these on the balance sheet, but they did show in the footnotes. Investors who want a more accurate look at debt will want to comb through financial statements for this valuable information.
Interest Coverage Ratio
Perhaps the biggest limitation of the debt and debt-to-equity ratios is that they look at the total amount of borrowing, not the company’s ability to actually service its debt. Some organizations may carry what looks like a significant amount of debt, but they generate enough cash to easily handle interest payments.
Furthermore, not all corporations borrow at the same rate. A company that has never defaulted on its obligations may be able to borrow at a three percent interest rate, while its competitor pays a six percent rate.
To account for these factors, investors often use the interest coverage ratio. Rather than looking at the sum total of debt, the calculation factors in the actual cost of interest payments in relation to operating income (considered one of the best indicators of long-term profit potential). It’s determined with this straightforward formula:
Interest coverage ratio=Operating incomeInterest expense\text{Interest coverage ratio} = \frac{ \text{Operating income} }{ \text{Interest expense} }Interest coverage ratio=Interest expenseOperating income
In this case, higher numbers are seen as favorable. In general, a ratio of 3 and above represents a strong ability to pay off debt, although the threshold varies from one industry to another.
Analyzing Investments Using Debt Ratios
To understand why investors often use multiple ways to analyze debt, let’s look at a hypothetical company, Tracy’s Tapestries. The company has assets of $1 million, liabilities of $700,000 and stockholders' equity totaling $300,000. The resulting debt-to-equity ratio of 2.3 might scare off some would-be investors.
$700,000÷$300,000=2.3\$700,000 \div \$300,000 = 2.3$700,000÷$300,000=2.3
A look at the business’ interest coverage, though, gives a decidedly different impression. With an annual operating income of $300,000 and yearly interest payments of $80,000, the firm is able to pay creditors on time and have cash left over for other outlays.
$300,000÷$80,000=3.75\$300,000 \div \$80,000 = 3.75$300,000÷$80,000=3.75
Because reliance on debt varies by industry, analysts usually compare debt ratios to those of direct competitors. Comparing the capital structure of a mining equipment company to that of a software developer, for instance, can result in a distorted view of their financial health.
Ratios can also be used to track trends within a particular company. If, for example, interest expenses consistently grow at a faster pace than operating income, it could be a sign of trouble ahead.
The Bottom Line
While carrying a modest amount of debt is quite common, highly leveraged businesses face serious risks. Large debt payments eat away at revenue and, in severe cases, put the company in jeopardy of default. Active investors use a number of different leverage ratios to get a broad sense of how sustainable a firm’s borrowing practices are. In isolation, each of these basic calculations provides a somewhat limited view of the company’s financial strength. But when used together, a more complete picture emerges—one that helps weed out healthy corporations from those that are dangerously in debt.
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124f74dec9ab3140988813dfbfe0ee46 | https://www.investopedia.com/articles/investing/080114/these-sri-funds-focus-empowering-women.asp | Socially Responsible Investment for Gender Empowerment | Socially Responsible Investment for Gender Empowerment
Socially responsible investment (SRI) funds can take on a variety of mandates. They often look to invest in companies that do business in an environmentally responsible manner and that pay attention to fair supply chain practices. Still, others make a point not to invest in companies that are involved in the sale of tobacco, weapons or gambling. Less known is that many of these SRI funds have also made it their business to invest in companies that strive to empower women in the workplace. Below is a list of a few that do just that.
Calvert Investments
Calvert Investments has long been an advocate for diversity and the promotion of women worldwide. In 2004, in partnership with the United National Development Fund for Women (UNIFEM), it created Calvert’s Women's Principles (CWP), which defined a global code of corporate conduct on empowering and investing in women.
In 2010, those principals were used as the basis for the UN's Women's Empowerment Principles. The fund was also instrumental in developing a model charter language on board diversity, recommending companies abide by it when creating an independent and inclusive board.
Calvert made much headway on this front in 2010, when it filed 14 resolutions on women and diversity in the workplace. As a result, eight companies have since changed their board of director’s selection criteria to include race and gender diversity. Additionally, Calvert has been advocating for women’s empowerment by actively voting its proxies, initiating shareholder resolutions and holding discussions with corporate management.
Domini Social Investments
Domini Social Investments, LLC. looks to invest in companies that are committed to workplace diversity. That means they expect to see a substantial representation of women and minorities in management-level positions, including as senior line executives, when evaluating a company.
Its funds also look to invest in companies that provide an open work environment for minorities and for gay and lesbian employees. Additionally, it seeks out companies that offer sexual harassment training and programs that promote respect for diversity.
In that vein, Domini makes sure to stay away from companies that have a history or record of controversies related to lack of diversity, sexual harassment or discrimination. Domini’s Proxy Voting Guidelines note that it will vote against boards of trustees that do not include women or people of color.
Neuberger Berman
Neuberger Berman’s NB Socially Responsive Fund (NBSRX) looks to invest in companies that are ahead of the fray in promoting diversity in the workplace. To that end, the fund seeks corporations that make a point of promoting women and minorities to senior-level positions, as well as putting them on their boards of directors. The fund also likes companies that offer diversity training programs and that make support groups available. It makes an effort to buy stock in companies that purchase goods and services from women- and minority-owned firms.
Additionally, this fund looks for companies that have taken broad and innovative steps toward hiring and training women and minorities and that have a reputation for promoting diversity in the workplace. The NB fund also avoids investment in companies that have recently been brought up or named in discrimination lawsuits related to gender, race, disability, or sexual orientation. The $734.21 million NBSRX has returned 6.63% year-to-date 2017.
Parnassus Investments
Parnassus Investments is devoted to finding those companies that promote diversity in the workplace and that make it a priority to have women and minorities represented at all levels of the company ladder, in particular at the executive level.
The fund managers make a point of voting for resolutions that aim to improve the representation of women and ethnic minorities in the workforce and to increase diversity and equal pay for equal work. The firm's oldest offering, the $851 million Parnassus Fund (PARNX), was created in 1984 and has returned 5.07% year-to-date 2017.
Pax World Investments
Pax World Investments has been promoting women’s empowerment and diversity through investing for years and has been an advocate in disseminating the mounting evidence that gender diversity has positive financial consequences. Its Pax World Global Women’s Equality Fund focuses on investing in companies that continue to advance gender equality and women’s empowerment.
The Pax funds managers always make sure to vote proxies, file shareholder resolutions, and engage in corporate dialogs that are geared toward issuing corporate diversity and women’s empowerment. Pax's flagship fund, which went live in 1971 and now holds $1.62 billion, is the Pax World Individual Investor (PAXWX) and it has returned 3.8% year-to-date 2017.
Praxis Mutual Funds
Praxis Mutual Funds make sure to review a company’s core social values and issues related to women’s empowerment before investing in it. The funds’ managers pursue shareholder actions against practices of modern slavery, such as the trafficking of women or girls.
In 2010, Praxis engaged in a shareholder dialog with hotel company Wyndham Worldwide Corp. (WYN) to push for better training and procedures to be put in place that would help stop human trafficking from taking place at the company’s hotels. Praxis also took part in shareholder conversations with Delta Air Lines, Inc. (DAL), resulting in Delta’s signing of the tourism Code of Conduct, an initiative designed with the ECPAT International, a global network dedicated to protecting children from commercial sexual exploitation.
The code works to protect women and girls from sexual exploitation in the travel and tourism industries. Praxis' flagship fund, the Intermediate Income A (MIAAX), was created in 1999 and has returned 1.13% year-to-date 2017.
Walden Asset Management
Walden Asset Management strives to invest in companies that offer vibrant equal employment opportunity programs and policies and that show diverse management teams and boards of directors. It offers a variety of equity, debt and balanced funds that focus on investing in companies that offer above-average employment policies with benefits packages and devotion to a work-life balance.
It avoids companies that show a history of discrimination. Additionally, Walden dedicates time to active shareholder engagement initiatives and advocates for inclusive non-discrimination policies.
The Bottom Line
If you are looking to invest in companies that promote gender equality and diversity, the creation of open workplaces for minorities and gay and lesbian employees, promoting minority-owned business, and opposing modern slavery there are many SRI funds to choose from.
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9dd4961a47b769a6d8ec5cfb3edd25f7 | https://www.investopedia.com/articles/investing/080315/how-expedia-makes-money.asp | How Expedia Makes Money | How Expedia Makes Money
Expedia Group Inc. (EXPE) is a global online travel platform that enables business and leisure travelers to plan, book, and enhance their travel experiences. The company makes available a variety of services provided by lodging properties, airlines, car rental companies, and cruise lines. Expedia operates an extensive portfolio of brands to respond to travelers' needs, including Expedia.com, Hotels.com, Vrbo, Egencia, trivago, and CarRentals.com.
Expedia competes with companies offering services to both leisure and corporate travelers. These competitors include travel agencies, tour operators, consolidators and wholesalers of travel products and services, travel metasearch websites, mobile travel applications, and social media websites. Major rivals include TripAdvisor Inc. (TRIP), Trip.com Group Ltd. (TCOM), American Express Global Business Travel, Airbnb Inc. (ABNB), and Booking Holdings Inc. (BKNG).
Key Takeaways Expedia offers online tools to help travelers plan and book travel.The Retail segment, focused on travel and advertising services, generates most of the company's revenue and all of its adjusted EBITDA.Expedia faces significant challenges as the coronavirus pandemic sharply slows the pace of global leisure and business travel.
Expedia's Financials
The decline in travel due to the COVID-19 pandemic and related government restrictions has had a significant adverse impact on Expedia's business. The company posted a net loss of $2.7 billion on revenue of $5.2 billion in its 2020 fiscal year (FY), which ended December 31, 2020. The net loss was a significant change from the net income of $572 million posted in FY 2019. Revenue fell 56.9% compared to the previous year.
Expedia generated revenue from four specific types of service during the year. It received about 78% of total revenue from Lodging, which includes revenue generated through the facilitation of hotel and alternative accommodations. Air, which includes airline ticket sales, comprised just 2% of revenue. Advertising and media, which primarily includes ad revenue generated by trivago, comprised 8%. Expedia received 12% of its revenue from car rental, insurance, destination, and other services.
Expedia's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), a non-GAAP metric used by the company to gauge the profitability of its different business segments was -$368 million in FY 2020 compared to $2.1 billion in the previous year.
Expedia's Business Segments
Starting in Q1 2020, Expedia's reportable business segments include: Retail, B2B, and trivago. The company provides a breakdown of revenue and adjusted EBITDA for these three segments. The breakdown excludes revenue generated through intersegment transactions.
Retail
The Retail segment aggregates a variety of operating segments and is focused on the provision of a range of travel and advertising services to global customers through a number of different brands. Those brands include: Expedia.com and Hotels.com in the U.S., as well as localized websites throughout the world. Retail also includes other brands such as Vrbo, Orbitz, Travelocity, CheapTickets, CarRentals.com, CruiseShipCenter, and more. Revenue for the segment fell 54.7% in FY 2020 to $4.0 billion, comprising about 78% of Expedia's total revenue. Adjusted EBITDA fell 88.0% to $254 million, making up 100% of the total as the other two segments posted negative adjusted EBITDA.
B2B
The B2B segment consists of the company's Expedia Business Services organization. It includes Expedia Partner Solutions, which provides travel services to leisure travelers via third-party company branded websites, and Egencia, a travel management company that offers travel services to businesses and their corporate customers. Revenue for the B2B segment plunged 63.5% in FY 2020 to $942 million, comprising about 18% of Expedia's total revenue. The segment posted an adjusted loss before interest, taxes, depreciation, and amortization of $208 million for the year, a significant change from the adjusted EBITDA of $447 million posted in FY 2019.
trivago
Expedia's trivago segment is comprised of its hotel metasearch, or search aggregator, websites. The segment generates ad revenue primarily by sending referrals from those sites to online travel companies and travel service providers. Revenue for the segment sank 67.0% in FY 2020 to $205 million, comprising about 4% of Expedia's total revenue. The segment posted an adjusted loss before interest, taxes, depreciation, and amortization of $14.0 million during the year, a significant change from the adjusted EBITDA of $85 million in FY 2019.
(Note: Expedia also provides a separate breakdown for a "Corporate and Eliminations" category, which includes certain shared expenses among its different segments, such as accounting, human resources, and other costs. It also includes business from Bodybuilding.com, which Expedia sold in May 2020. The financial results for this category were immaterial during FY 2020 and are not included in the pie charts above.)
Expedia's Recent Developments
Expedia noted in its Q4 2020 earnings report that, although there are some signs of hope in the form of vaccine approvals, it did not experience any real sequential progress in its business besides some signs of modest improvement around the holidays. Under the current unpredictable travel environment, the company remains focused on reshaping and simplifying its business.
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da999b09f80f0d880d7c94bf9766de1a | https://www.investopedia.com/articles/investing/080316/historical-guide-goldsilver-ratio.asp | A Historical Guide to the Gold-Silver Ratio | A Historical Guide to the Gold-Silver Ratio
Investors who begin to trade or follow the gold and silver markets aren't likely to go long without reading or hearing about the gold-silver ratio. The gold-silver ratio is an expression of the price relationship between gold and silver. The ratio shows the number of ounces of silver it takes to equal the value of one ounce of gold. For example, if the price of gold is $1,000 an ounce and the price of silver is $20 an ounce, then the gold-silver ratio is 50:1.
The gold-silver ratio is the oldest continuously tracked exchange rate in history. The primary reason the ratio is followed is that gold and silver prices have such a well-established correlation and have rarely deviated from one another.
Key Takeaways The gold-silver ratio expresses the price relationship between gold and silver.The ratio shows the number of ounces of silver it takes to equal one ounce of gold.Throughout history, the ratio has remained fairly stable with increased volatility beginning in the 20th century.Traders and investors trade the gold-silver ratio for hedging purposes as well as to realize profits.
The History of the Gold-Silver Ratio
Historically, the gold-silver ratio has only evidenced substantial fluctuation since just before the beginning of the 20th century. For hundreds of years prior to that time, the ratio, often set by governments for purposes of monetary stability, was fairly steady.
The Roman Empire officially set the ratio at 12:1. The ratio reached 14.2:1 in Venice in 1305 and remained at this level up until 1330 when it fell to 10:1. In 1350 it fell to 9.4:1 in some places across Europe. It climbed back to 12:1 in the 1450s. The U.S. government fixed the ratio at 15:1 with the Coinage Act of 1792.
The discovery of massive amounts of silver in the Americas, combined with a number of successive government attempts to manipulate gold and silver prices, led to substantially greater volatility in the ratio throughout the 20th century.
When President Roosevelt set the price of gold at $35 an ounce in 1934, the ratio began to climb to new, higher levels, peaking at 98:1 in 1939. Following the end of World War II, and the Bretton Woods Agreement of 1944, which pegged foreign exchange rates to the price of gold, the ratio steadily declined, in the 1960s and again in the late 1970s after the abandonment of the gold standard. From there, the ratio rose rapidly through the 1980s, peaking at 94.8:1 in 1991 when silver prices declined to a low of less than $4 an ounce.
For the whole of the 20th century, the average gold-silver ratio was 47:1. In the 21st century, the ratio has ranged mainly between the levels of 50:1 and 70:1, breaking above that point in 2018 with a peak of 104.98:1 in 2020. The lowest level for the ratio was 40:1 in 2011.
The Importance of the Gold-Silver Ratio for Investors
The practice of trading the gold-silver ratio is common among investors in gold and silver. The most common method of trading the ratio is that of hedging a long position in one metal with a short position in the other.
For example, if the ratio is at historically high levels and investors anticipate a decline in the ratio that would reflect a decline in the price of gold relative to the price of silver, investors should simultaneously buy silver while selling short an equivalent amount of gold, looking to realize a net profit from a relatively better price performance of silver compared to that of gold.
Investors trading gold and silver look to the gold-silver ratio as an indicator of the right time to buy or sell a certain metal.
The advantage of such a strategy is that, as long as the gold-silver ratio moves in the direction an investor anticipates, then the strategy is profitable regardless of whether gold and silver prices generally are rising or falling.
Here is an example showing the outcome of such a trading strategy. From around the end of 2008 to the middle of 2011, the gold-silver ratio declined from approximately 80:1 to around 45:1.
During that period, the price of silver rose from around $11 an ounce to approximately $30 an ounce. The price of gold rose from approximately $850 an ounce to $1,400 an ounce. A 2008 buy of 80 ounces of silver against a short sell of one ounce of gold would have resulted in a profit of $1,520 in silver against a loss of $550 in gold, for a net profit of $970.
The Bottom Line
The gold-silver ratio measures the amount of silver it takes to equal an ounce of gold. The ratio remained fairly stable throughout most of history, starting to fluctuate in the 20th century.
The ratio is important to investors as they trade it with the purpose of hedging certain metal positions as well as the ability to generate profits from their positions.
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7f92c97e5c69d641e7b4aa4c90347b93 | https://www.investopedia.com/articles/investing/080415/5-biggest-etf-companies.asp | 5 Biggest ETF Companies | 5 Biggest ETF Companies
The exchange-traded fund (ETF) industry has seen explosive growth since the these funds were first introduced in the early 1990s. Investors have a wide selection of ETFs to choose from with thousands of them currently trading globally. There is no shortage of companies that offer these funds, which have similar characteristics to mutual funds, but trade on an exchange like ordinary stocks. However, the largest ETF companies dominate the ETF market.
The 5 biggest ETF companies control the vast majority of total assets under management (AUM) in the ETF universe. We take a closer look at these companies below, which are rank by AUM. Data is courtesy of ETFdb.com. The revenue figures cited below are based on ETFdb.com's estimates of each issuer's revenue generated from its own ETF business. All figures are as of September 9.
iShares
Assets Under Management (AUM): $1.8 trillion Number of ETFs Offered: 372 Revenue: $3.5 billion 3-Month Fund Flow: $35.2 billion Average AUM-Weighted ETF Expense Ratio: 0.19%
iShares is a subsidiary of BlackRock Inc. (BLK), the world's largest asset management firm that's primarily a mutual fund and ETF management company. BlackRock is a publicly-traded company and issues its family of ETFs under the iShares name. The largest iShares ETFs include: iShares Core S&P 500 ETF (IVV), which tracks the S&P 500 Index and has $209.6 billion in AUM; and iShares Core U.S. Aggregate Bond ETF (AGG), which tracks the U.S. investment grade bond market and has $79.4 billion in AUM.
Vanguard
Assets Under Management (AUM): $1.3 trillion Number of ETFs Offered: 80 Revenue: $769.3 million 3-Month Fund Flow: $45.0 billion Average AUM-Weighted ETF Expense Ratio: 0.06%
Vanguard, a provider of investment management and advisory services, is primarily a mutual fund and ETF management company. The company is uniquely structured: it is owned by its funds, which are owned by shareholders. Thus, Vanguard is owned by its shareholders and there are no outside investors. This structure allows the company to charge very low expenses on its funds. Its largest ETFs include: Vanguard Total Stock Market ETF (VTI), which tracks thousands of U.S. stocks of various market caps and has $158.5 billion in AUM; and Vanguard S&P 500 ETF (VOO), which tracks the S&P 500 Index and has $158.1 billion in AUM.
State Street SPDR
Assets Under Management (AUM): $771.7 billion Number of ETFs Offered: 139 Revenue: $1.3 bilion 3-Month Fund Flow: -$567.1 million Average AUM-Weighted ETF Expense Ratio: 0.17%
State Street SPDR ETFs are issued by State Street Global Advisors, which is the asset management division of State Street Corp. (STT), the publicly-traded financial services company. State Street's products and services include custody, accounting, administration, international exchange services, cash management, asset management, securities lending, investment advisory services, and more. The largest SPDR funds include: SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index and has $293.5 billion in AUM; and SPDR Gold Trust (GLD), which tracks the spot price of gold bullion and has $76.8 billion in AUM.
Invesco
Assets Under Management (AUM): $260.2 billion Number of ETFs Offered: 218 Revenue: $764.4 million 3-Month Fund Flow: $9.7 billion Average AUM-Weighted ETF Expense Ratio: 0.29%
Invesco ETFs are issued by Invesco Ltd. (IVZ), a publicly-traded company involved in a broad range of investment management activities for individual and institutional customers. In addition to ETFs, the firm offers mutual funds, unit trusts, closed-end funds, and retirement plans. Its largest ETFs include: Invesco QQQ (QQQ), which tracks the 100 largest non-financial companies listed on the Nasdaq and has $128.2 billion in AUM; and Invesco S&P 500 Equal Weight ETF (RSP), which tracks an equal-weighted allocation of the 500 companies that make up the S&P 500 Index and has $12.8 billion in AUM.
Charles Schwab
Assets Under Management (AUM): $170.2 billion Number of ETFs Offered: 25 Revenue: $125.3 million 3-Month Fund Flow: $1.1 billion Average AUM-Weighted ETF Expense Ratio: 0.07%
Charles Schwab ETFs are issued by The Charles Schwab Corp. (SCHW), a publicly-traded savings and loan holding company. The firm provides wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. The largest Schwab ETFs include: Schwab U.S. Large-Cap ETF (SCHX), which tracks large-cap U.S. stocks listed on the Dow Jones Industrial Average (DJIA) and has $22.1 billion in AUM; and Schwab International Equity ETF (SCHF), which tracks large- and mid-cap stocks from various developed markets outside the U.S. and has $19.5 billion in AUM.
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f16f192670c1a8514ad9729c88166914 | https://www.investopedia.com/articles/investing/080415/top-coffee-etfs.asp | Top Coffee ETFs (JO, CAFE) | Top Coffee ETFs (JO, CAFE)
Coffee is nearly as popular with commodity traders as it is with sleepy people first thing in the morning. Coffee is by far the most widely traded of the "breakfast commodities" group, which is composed of coffee, sugar, cocoa and orange juice. It is also the most actively traded agricultural crop among tropical commodities.
The United States is the largest consumer of coffee at nearly half a billion cups per day, but Canada, Mexico and Europe are not far behind. The number one producer of coffee is Brazil, accounting for nearly 60% of total worldwide coffee production. Because of this fact, coffee prices, which are notoriously volatile on a seasonal basis, are significantly affected by the weather in Brazil and, to a lesser extent, by the relative value of the Brazilian currency, the real. A one-month period in 2014 saw coffee futures prices rise, and then fall, approximately 20%.
The number two and three coffee-producing countries are Vietnam and Colombia. Vietnam produces primarily the robusta variety of coffee that has a higher caffeine level than the more popular arabica variety produced in Brazil, Colombia and other major coffee-producing nations such as Ethiopia.
Worldwide supply and demand are primary drivers of coffee prices. The demand for coffee, slightly on the increase since the year 2000, is relatively stable, although it can be impacted by the level of discretionary income of consumers. The supply, or perceived future supply, of coffee can and does vary greatly from year to year. In similar fashion to factors that affect orange juice, good weather and bumper crops typically send prices tumbling, while drought or other natural disasters that threaten the world's coffee crops usually cause prices to skyrocket. It is not unusual to see coffee futures double in price or fall by half in the course of a single year.
There are two exchange-traded funds, or ETFs, available to U.S. investors and other investors that directly track the performance of the coffee market: the iPath Dow Jones-UBS Coffee Subindex Total Return ETN (JO) and the iPath Pure Beta Coffee ETN (CAFE).
The iPath Dow Jones-UBS Coffee ETN
The iPath Dow Jones-UBS Coffee Subindex Total Return ETN offers the potential returns available through an unleveraged ETF investment in coffee futures contracts. It is intended to reflect the performance of the Dow Jones Coffee Index, by holding coffee futures contracts in the most nearby month. The fund also includes the rate of interest earned from cash collateral invested in U.S. Treasury bills (T-bills).
The fund's expense ratio is 0.75%. Since the fund's holdings are futures contracts rather than stocks, there is no dividend yield. JO is the largest and most liquid coffee ETF, with total assets of over $100 million.
The iPath Pure Beta Coffee ETN
The iPath Pure Beta Coffee ETN, which is intended to reflect the performance of the Barclays Capital Coffee Pure Beta Total Return Index, differs from the iPath Dow Jones-UBS Coffee Subindex ETN primarily by investment strategy. Both seek to profit through investment in coffee futures contracts, but while the JO fund maintains investment in the front trading month for coffee futures, the strategy employed by the Pure Beta Coffee ETN follows no such standardized rollover practice from one trading month to the next. The choice of trading months is at the discretion of the fund manager, who may choose to invest in a number of different trading months in an effort to avoid the negative effects of contango and profit from normal backwardation of futures prices.
This fund also has an expense ratio of 0.75%. With only $5 million in assets and a correspondingly lower average daily trading volume, the Pure Beta fund offers less liquidity than JO. Both of these funds are exchange-traded notes issued by Barclays Bank. Either fund may appeal to investors seeking to use ETFs to speculate on coffee futures prices.
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bdc26150a0dcfafb459b53c82578b0e6 | https://www.investopedia.com/articles/investing/080515/5-developed-countries-without-minimum-wages.asp | 5 Developed Countries without Minimum Wages | 5 Developed Countries without Minimum Wages
What Are 5 Developed Countries Without Minimum Wages?
There is much debate in the United States about the minimum wage. Many people feel it should be higher since those who earn the current federal minimum wage of $7.25 per hour are often just barely making enough from full-time jobs to cover their basic necessities.
Others feel any minimum wage discourages businesses from hiring more employees, so the issue of how much employees are compensated should be left to the free market to determine.
Advocates of both options often cite the minimum wage laws of other nations as evidence of the validity of their views. One oft-cited fact is many developed nations without minimum wages have drastically lower unemployment rates.
Proponents of repealing the minimum wage in the U.S. believe this points to the fact that countries that abolish baseline salary requirements have thereby encouraged companies to increase hiring.
Key Takeaways Most developed countries with no legal minimum wage still have wage minimums set by industry through collective bargaining contracts.Some such countries with no legal minimum wages but extremely robust union memberships are Sweden, Iceland, Norway, Denmark, and Switzerland.
However, the truth is most developed countries with no legal minimum wage still have minimum wages set by industry through collective bargaining contracts. The majority of their working populations are unionized. These unions negotiate a fair baseline pay rate on behalf of the participating workers so the government does not have to do it.
Since each industry may require vastly different things from its employees, it makes sense the minimum wage varies from business to business. Five developed nations without legal minimum wage requirements are Sweden, Denmark, Iceland, Norway, and Switzerland.
Understanding Developed Countries Without Minimum Wages
Sweden
Sweden is often touted as the poster-child for abolishing the minimum wage. However, the Nordic nation using a Nordic model is certainly no free-market free-for-all. Instead, minimum wages are set by sector or industry through collective bargaining. Their currency of choice is the krona.
Nearly all Swedish citizens belong to one of about 60 trade unions and 50 employers' organizations that negotiate wage rates for regular hourly work, salaries, and overtime. The minimum wage tends to hover near 60% to 70% of the average wage in Sweden.
Swedish law limits the workweek to 40 hours, just like in the U.S. However, it also dictates that all workers are entitled to 25 paid vacation days and 16 additional public holidays each year, far more generous than the U.S. standard.
Denmark
Relations between workers and employers in Denmark have been deemed downright harmonious due to the lack of a federally mandated minimum wage.
Once again, trade unions take care of ensuring that workers are paid a reasonable wage and seem to be doing a fine job of it, keeping the average minimum wage across industries at a healthy $20 per hour.
Iceland
Iceland does not receive very much attention except for its breathtaking scenery. However, this tiny island nation consistently ranks among the happiest countries on earth, along with every other nation listed here, because of its low crime rates, high wages, and happy, healthy populace. People like to retire there.
Employees in Iceland are automatically enrolled in trade unions, which are responsible for negotiating baseline salaries for the industries they represent.
A recent Gallup poll showed nearly unanimous support for a plan put forward by the Icelandic Professional Trade Association to increase the negotiated minimum monthly wage to ISK 300,000, or roughly $2,233, within the next three years.
Norway
Norway is yet another northern nation that has eschewed a federally mandated minimum wage in favor of having union-negotiated wages set by industry. Norwegians enjoy good job security, healthy wages, and ample vacation time.
Basic hourly wages vary by industry. However, unskilled workers in the agriculture, construction, freight transport, and cleaning industries, for example, earn minimum rates ranging from $16 to $21 per hour, with increases based on experience and skill level.
Switzerland
Switzerland saw a proposal for a legally enforced minimum wage soundly rejected in 2014. The decisive vote against a $25 per hour base salary was touted as evidence the Swiss do not want or need government intervention, which might cause low-wage workers to lose jobs if employers are unable to pay more.
However, Switzerland also relies heavily on trade unions and employee organizations to negotiate fair wages for each industry, meaning 90% of the Swiss earn more than the proposed minimum anyway.
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d2e88f2a756c1ea431835b99e94e6624 | https://www.investopedia.com/articles/investing/080515/minimum-wages-can-raise-unemployment.asp | How Minimum Wages May Raise Unemployment | How Minimum Wages May Raise Unemployment
Minimum wage laws have been in effect in the United States since 1938. The rate has changed nationally more than 20 times since then. But some feel the increases haven't been enough, leading to heated debates over whether or not federal and state governments should raise the minimum wage.
The minimum wage is the minimum amount employers are legally required to pay their employees. Advocates who push for increases say those who work minimum wage jobs just can't afford to keep up with the rising cost of living; many of whom are living below the poverty level.
But according to leading economists—including famed billionaire investor Warren Buffett—minimum wages can actually raise unemployment by giving employers less incentive to hire and more incentive to automate and outsource tasks that were previously performed by low-wage employees.
Higher mandated minimum wages also force businesses to raise prices to maintain desired profit margins. Higher prices can lead to less business, which means less revenue and, therefore, less money to hire and pay employees.
Key Takeaways Although the federal minimum wage is $7.25, the rate in many states and cities is higher. Those pushing for an increase in the minimum wage say the current rate keeps people below the poverty line and doesn't keep up with the cost of living. Some economists argue that minimum wage increases may lead employers to hire fewer workers. Other potential setbacks to wage increases include automation and outsourcing.
Minimum Wage Rates
The United States federal government set the national minimum wage rate at $7.25 per hour in July 2009. But many states have minimum wage rates that are much higher, with the national average hovering around $11.80 per hour.
For example, Washington, D.C. steadily raised its minimum wage incrementally each year, setting the rate at $15 per hour effective July 1, 2020. Some states have adopted laws that would raise their minimum wage to $15 by target dates including New Jersey (by 2024), Florida (by 2026), and Illinois (by 2025). Several large U.S. cities, including Seattle and New York, have also responded by raising their local minimum wages to $15 per hour or higher.
So if there's a discrepancy between the federal and state rates, how do employees get paid? According to the U.S. Department of Labor, employees receive the highest minimum rate in cases where they are subject to both state and federal wage laws.
One important point to note, though, is that minimum wage rates are slightly different for employees who receive tips. Employers are only required to pay these employees $2.13 per hour if that rate plus tips equals the $7.25 federal minimum wage. If their hourly earnings are less than the federal rate, the employer has to make up the difference.
The Push for a Higher Minimum Wage
There is no question just how tough it can be to make a living and support a family on a minimum-wage income. Compounding the issue is the fact that minimum wage increases have not kept pace with the cost of living since the 1960s. Relative to living costs, the value of the minimum wage in the United States peaked in 1968 and has been on a downward trend ever since.
Here's an example to demonstrate. Let's say single-father Adam works a minimum wage job in Tennessee. The state's minimum wage is the same as the federal rate: $7.25 an hour. Adam earns $290 working 40 hours each week, or $1,160 each month.
This figure, of course, doesn't factor in any taxes or deductions from Adam's paycheck. According to SmartAsset, the average rent for a two-bedroom apartment in the state is $854 per month, while the average monthly utility bill is $123.30. After he's paid his rent and utilities, he has less than $200 for food and other expenses. This doesn't leave him with much money to save or to spend on any emergencies.
Feeling the pinch of lowered real income, minimum wage employees and their advocates have gone to great lengths since the 2010s to raise awareness about the plight of low-wage workers.
How Companies Respond to Higher Minimum Wages
In a perfect world, a higher minimum wage would mean nothing more than the lowest-paid workers at fast-food restaurants, grocery stores, and so forth making $15 per hour instead of $7.25 per hour. Everything else about these companies' business models would remain the same.
Most economists agree that the world is imperfect and confounded by many other variables that are affected by a minimum wage increase. Most businesses set their budgets at least a year in advance, designating a fixed amount of money to wage expenses. Changes in business volume throughout the year can obviously necessitate on-the-fly adjustments to wage expenses. For the most part, companies have a set idea of how much they want to spend on hiring workers.
When forced to pay workers more per hour, companies have to hire fewer workers or assign the same number of workers fewer hours to keep from going over their predetermined wage expense limits. Many companies do just that or, when possible, they ship jobs overseas, where the per-hour expense of an employee is significantly lower.
Automation is another alternative that many companies turn to in order to avoid higher wage expenses. This is particularly true in large cities like Los Angeles and Seattle. Rather than giving their order to a live employee at the counter, fast-food customers input what they want into a computer, which also accepts payment and even deposits the paper sack full of food when it comes out of the kitchen.
Higher Wages, Higher Prices, Fewer Employees
One of the most important metrics for a business is margin; another word for profit. Margin is the difference between revenues and expenses, and any successful business has a target margin it tries to maintain.
When expenses increase, which happens when a higher mandated minimum wage pushes up a company's wage expense, revenues must also rise for the company to maintain its margin. Therefore, many businesses respond to higher wages by raising prices.
When the cost of a fast-food hamburger increases to cover higher wages, many customers respond by not buying hamburgers. After all, most people don't eat fast food because it's delicious, they eat it because it's cheap. When customers jump ship, companies struggle to stay in business. Many Seattle restaurants have folded since the city's $15 minimum wage went into effect. When that happens, those $15 per hour jobs disappear as quickly as they came.
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8085607e8ff6004662df7a269416e95c | https://www.investopedia.com/articles/investing/080515/top-3-aluminum-etfs.asp | Top 2 Aluminum ETFs (IYM, JJU) | Top 2 Aluminum ETFs (IYM, JJU)
Exchange-traded funds, or ETFs, provide an alternative means of access for investors seeking potential profits within the aluminum market. Physical aluminum is not available as an investment asset in the same way as metals such as gold, silver, and platinum. Aluminum futures are traded; however, many investors are unfamiliar with trading in the futures markets and are wary of using such highly leveraged investments. Some aluminum Exchange-traded funds provide access to aluminum futures using an unleveraged investment that is traded like common stock on an exchange.
ETFs also provide a means of obtaining a globally diversified portfolio. One of the major advantages of ETFs is they provide much easier access to foreign equity markets than is traditionally available. This can be especially important to investors looking for opportunities in a commodity such as aluminum, where the bulk of the mining and production occurs in countries outside the United States. The world’s largest producers of aluminum ore include China, Australia, and Russia.
Aluminum is most widely used in the industries of construction and packaging and in the automotive sector. Increased demand for lightweight aluminum in autos to improve fuel efficiency is one market price driver.
There are both commodity futures-based and equity-based ETFs offering exposure to the aluminum market. One of the primary ETFs available in this asset class is actually an exchange-traded note (ETN). ETNs, although included with traditional ETFs, are debt securities, and therefore subject to credit risk in accord with the financial stability of the issuer.
Among the most popular ETFs investors use to obtain exposure to the aluminum market are the iShares U.S. Basic Materials ETF (IYM) and the iPath Series B Bloomberg Aluminum Subindex Total Return ETN (JJU).
In March 2018, President Trump imposed a 10% tariff on aluminum imports and a 25% tariff on steel imports, with exemptions for Canada and Mexico.
1. iShares U.S. Basic Materials ETF (IYM)
The iShares U.S. Basic Materials ETF is not exclusively focused on aluminum but does offer the advantage of giving investors an equity-based ETF that contains some exposure to the aluminum market through fund holdings such as Alcoa (AA) and Newmont Mining (NEM). This ETF aims to track the investment results of an index composed of U.S. equities in the basic materials sector. The fund is designed to provide exposure to U.S. companies involved with raw materials production, including metals, chemicals, and forestry products.
The ETF has an expense ratio of 0.43% and offers a modest dividend yield of 1.42%. It is most appropriate for investors who desire some diversified exposure to aluminum along with other stocks in the basic materials sector but prefer to maintain solely equity-based investments.
2. iPath Series B Bloomberg Aluminum Subindex Total Return ETN (JJU)
For investors seeking a more direct investment in aluminum, there is the iPath Series B Bloomberg Aluminum Subindex Total Return ETN. This ETN aims to mirror returns potentially available through an unleveraged investment in aluminum futures contracts. The underlying index represents one aluminum futures contract that is continually rolled over into the next nearby trading month.
The fund has an investor fee rate of 0.45% per year. Since this is a futures-based product, there is no dividend yield. Barclays Bank PLC is the issuer of this ETN.
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0ca02eb815bae11579b5e2a4fe04cfca | https://www.investopedia.com/articles/investing/080515/top-4-us-government-bonds-etfs.asp | Best Treasury ETFs for Q1 2021 | Best Treasury ETFs for Q1 2021
Treasury exchange-traded funds (ETFs) provide investors with a way to gain exposure to the U.S. government bond market through investing in a stock-like instrument. Unlike individual bonds that are sold by bond brokers, bond ETFs trade on market exchanges. Treasury ETFs offer investors a way to gain passive, and often broad, exposure to U.S. Treasury bonds. They are composed of a basket of Treasury securities, typically with a focus on a particular maturity or range of maturities.
Key Takeaways Treasurys have underperformed the broader market over the past year.The Treasury ETFs with the best 1-year trailing total return are EDV, ZROZ, and TLT.All three of these ETFs are composed of long-dated U.S. Treasury securities.
There are 27 distinct Treasury ETFs, excluding inverse and leveraged ETFs that trade in the U.S. and as funds with less than $50 million in assets under management (AUM). Treasurys, as measured by the Bloomberg Barclays U.S. Treasury Index, have underperformed the broader market. The index posted a total return of 7.6% over the past 12 months compared to the Russell 1000's total return of 19.5%, as of November 27, 2020. The best Treasury ETF, based on performance over the past year, is the Vanguard Ext Duration Treasury ETF (EDV). We examine the top 3 best Treasury ETFs below. All numbers below are as of November 30, 2020.
Vanguard Ext Duration Treasury ETF (EDV)
Performance over 1-Year: 20.0%Expense Ratio: 0.07%Annual Dividend Yield: 2.80%3-Month Average Daily Volume: 268,725Assets Under Management: $1.4 billionInception Date: December 6, 2007Issuer: Vanguard
EDV offers exposure to long-dated Treasurys in the form of STRIPS. The fund tracks the Bloomberg Barclays U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index, which gauges the return of STRIPS with maturities ranging from 20 to 30 years. The ETF is passively managed and aims to provide current income with high credit quality. It can be an attractive source of return for investors who believe that rates will either hold steady or decline. EDV also has a low expense ratio compared to many government bond ETFs.
PIMCO 25+ Year Zero Coupon US Treasury Index Fund (ZROZ)
Performance over 1-Year: 19.8%Expense Ratio: 0.15%Annual Dividend Yield: 1.79%3-Month Average Daily Volume: 57,535Assets Under Management: $407.5 millionInception Date: October 30, 2009Issuer: PIMCO
ZROZ offers exposure to long-dated Treasurys, allowing investors to extend the effective duration of their fixed-income portfolios. The fund tracks the BofA Merrill Lynch Long Treasury Principal STRIPS Index, which is comprised of long-term Treasurys with at least $1 billion in outstanding face value and whose coupon cash flows have been removed, leaving only the final principal as payment. ZROZ is composed of effectively zero-coupon bonds known as STRIPS, but only ones with at least 25 years to maturity. The fund is very sensitive to interest rate changes, performing well when interest rates fall but struggling when interest rates start to climb.
iShares 20+ Year Treasury Bond ETF (TLT)
Performance over 1-Year: 15.7%Expense Ratio: 0.15%Annual Dividend Yield: 1.57%3-Month Average Daily Volume: 10,506,554Assets Under Management: $17.8 billionInception Date: July 26, 2002Issuer: iShares
TLT, like the two ETFs above, also offers exposure to long-dated Treasurys. The fund tracks the ICE U.S. Treasury 20+ Year Bond Index, which measures the performance of Treasurys with a remaining maturity of at least 20 years. TLT is a good option for investors seeking to extend the duration of their portfolio and possibly enhance its return. It is also relatively cost efficient and highly liquid compared to many similar ETFs, allowing investors the ability to execute trades quickly.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.
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4225bb3641e142a1308ec89b02afe914 | https://www.investopedia.com/articles/investing/080613/road-creating-ipo.asp | The Road To Creating An IPO | The Road To Creating An IPO
Through an Initial Public Offering, or IPO, a company raises capital by issuing shares of stock, or equity in a public market. Generally, this refers to when a company issues stock for the first time. But as we will see below, there are ways a company can go public more than once. The IPO process is the locomotive of capitalism. This is because throughout history, the IPO has let the investing public own a small share in many companies that have grown large and hugely successful since they first went public.Issuing shares through an IPO is one of the primary reasons that stock markets exist. It lets the company raise capital for a variety of reasons, such as to grow further, let initial and early-stage investors cash out some of their investment, or create a currency (such as common stock) to acquire rivals, or even sell shares at a later date. The entire process is referred to as the primary market and happens when an investor buys stock directly from the company. A secondary market is more common, and it exists when investors trade among themselves with shares that have already been issued by a firm.
2:16 How Do IPOs Work?
The Process to Taking a Company PublicAs you might imagine, the process to get a company through to its IPO takes time, is expensive and must pass many regulatory hurdles. A very important component of going public is opening a firm’s books to public scrutiny, as well as the oversight of the Securities & Exchange Commission (SEC). An investment banker, or underwriter, will help a company through this process, and the younger associates at an investment banking firm will bear the brunt of the grunt work. Those associates will spend many sleepless nights preparing a preliminary prospectus for the SEC and investors, which has come to be referred to as a red herring.Through many revisions and discussions between the company and its bankers, the red herring will eventually become the final prospectus, which is the formal legal document filed with the SEC that lets the IPO process go through. One of the more common prospectus documents is referred to as form S-1, the formal registration statement under the Securities Act of 1933. Other “S” versions exist and refer to different securities acts, such as those related to investment trusts, employee plans or real estate companies. The prospectus may sound dull and can include hundreds of pages of seemingly mundane and redundant information. But it is extremely important for investors to use to understand what the company does, why it is issuing shares through an IPO and what type of ownership structure is being offered.PwC provides a summary of costs that a company can expect to incur to go public. It also illustrates the steps needed to complete an IPO. For starters, the underwriters, which generally include a lead underwriter and multiple other underwriters (also referred to as the sell side firm and the lead “book runner”, with “co-managers”), can take a cut of 4% to 7% of the gross IPO proceeds to distribute shares to investors. For example, Goldman Sachs (NYSE:GS) was Twitter (NYSE:TWTR)'s lead underwriter when Twitter went public in 2013. Together with other underwriters including Morgan Stanley (NYSE:MS) and JPMorgan (NYSE:JPM), they shared about $59.2 million, 3.25% of the $1.82 billion that Twitter raised in its IPO, for managing the sale. There will also be legal, accounting, distribution and mailing, and road show expenses that can easily total in the millions of dollars. A road show is just as it sounds, and it occurs when company executives, including the CEO, CFO and investor relations individual (if it already exists) hit the road to build enthusiasm for investing in the IPO and explain their motivations for doing so. A successful road performance can drive demand for the stock and result in more capital raised.
In rarer circumstances a road show can have the opposite effect. Back when Groupon went public, it came under fire from the SEC for an accounting term it referred to as “Adjusted Consolidated Segment Operating Income". The SEC, as well as other investors, questioned the manner in which it adjusted for marketing and advertising expenses, and called into question how fast the company could grow or generate ample profits in the future.The Role of IPO UnderwritersReturning briefly to the role of the underwriters, there are other terms to be familiar with in the IPO process. Through a greenshoe option, underwriters can have the right to sell additional shares, or an overallotment of shares. This can occur if an IPO ends up having strong demand and lets the bankers make additional profits, which are earned by selling the shares off at a higher price. It can also let the company earn additional capital. A tombstone refers to a summary advertising document that underwriters issue to prospective investors (and sometimes themselves to commemorate that the IPO process has been completed). It basically summarizes a prospectus and briefly introduces a company.Underwriters also help companies determine price, or how to best balance the supply of shares being offered with investor demand. Of course, most companies will happily increase supply (such as through a greenshoe option) to meet higher demand, but a difficult balance must be reached. A stock exchange, such as the New York Stock Exchange (NYSE), can help the process and indicate what an opening price on the IPO day is likely to be. Market makers and floor brokers help in this process, as does the syndicate of underwriters, to gauge the overall level of investor interest.
Deciding which exchange to use is also of the utmost importance. Most firms would prefer the NYSE or Nasdaq markets given their ability to transact billions of dollars of daily trading activity and a solid guarantee of market liquidity, trading execution and follow-up reporting.The Process from the Company’s PerspectiveIn addition to the cost considerations, a company must make many changes to survive when public. The prospectus stipulates many of the new financial, regulatory and legal burdens, and PwC estimates that there are between $1 million and $1.9 million in additional ongoing costs to the average firm that goes public. Hiring and paying a board of directors, or at least a higher profile board, can be expensive. Sarbanes Oxley regulation also imposed cumbersome duties on public companies that must still be met by most larger firms. Learning to deal with analysts, holding conference calls and communicating with shareholders may also be a new experience.Is Buying an IPO a Good Idea?For investors in general, it pays to be careful when investing in an IPO. Most importantly, the company and underwriters have control over the timing of an IPO and will try to take the firm public under the most opportune circumstances. This could include during a rising or bull market, or after the firm posts very favorable operating results. A higher price is great for the company and bankers, but it can mean the investment potential in the future is less bright. The shares of many companies surge above the IPO price during the first day of trading, particularly those considered "hot." A great strategy to consider may be to buy into an IPO later in the secondary market after the excitement has died down. A stock that falls in value following an IPO could indicate a pricing miscue by the underwriter, or potentially a lower price to invest in a solid company.
An IPO usually refers to selling shares to the public for the first time. But a company can be taken private (such as by a private equity firm) and then be taken public again, which is also an IPO. This has occurred with Burger King several times.The Bottom LineSince capitalism has existed, investing in public companies has been an engine of capitalism that lets individuals invest in large firms that have created vast wealth for shareholders. The process is complex, and investors need to be aware of IPO timing, but understanding the road to creating an IPO can be lucrative for companies, underwriters and investors alike.
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e7071a869ca2655e1c6648528102740f | https://www.investopedia.com/articles/investing/080614/boomers-slow-down-will-economy-follow.asp | As Boomers Slow Down, Will the Economy Follow? | As Boomers Slow Down, Will the Economy Follow?
Music icons Patti Smith, Carlos Santana, and Steven Tyler all share one thing in common—and it’s not just rock and roll. They’re baby boomers, the longest-living generation in the history of the United States. According to records from the U.S. Census Bureau, baby boomers—those born, more or less, in the two decades following the end of World War II, or between 1946 and 1964—number 73 million. Also notable: 2031 marks the year that the youngest boomers, those born in 1964, will turn 67, making them eligible to receive Social Security benefits.
In addition to concerns about the general aging of the U.S. population—over-65s are projected to make up 20% of the U.S. population by 2029—economists have expressed concern about the trickle-down economic effects as boomers reach their later years. In this article, we take a look at the impact on the economy and the labor force baby boomers are expected to have as they reach retirement age.
Key Takeaways The baby boomer generation encompasses those individuals born in the two decades following World War II, roughly between 1946 and 1964.Baby boomers lived through economically stable decades that have seen the country experience—with relatively few exceptions—high growth and economic prosperity. The Great Recession of 2008, however, has caused many baby boomers to work extra years to make up for the losses they experienced in their retirement portfolios.As more baby boomers retire from the workforce, economic growth could be impacted as retirees not only produce less but also consume and spend less.
The Lucky Ones
Boomers have proven to be an astoundingly productive cohort. Part of their success comes down to luck: Economically speaking, they were born at the right time. After enjoying childhoods during the high-growth and economically stable decades following World War II, they rode the crest of relative prosperity into middle age with just a handful of economic blips, like the 1979 energy crisis and the early 1980s recession.
Consider the height of the Clinton era: During the 1990s, labor force participation soared to an all-time high. That kid who worked two paper routes in 1965 would have been well-positioned to cash in on the dotcom boom of the 1990s at the peak of their earning years.
What will happen as more than 250,000 Americans celebrate their 65th birthdays each month? As these boomers head toward retirement, the impact on the labor force and consumer spending are already showing profound effects.
But There Were Bad Times
The devastating Great Recession that struck in 2008 has been widely blamed for a low workforce participation rate in the ensuing years. Another cause of lower labor numbers can be chalked up to boomers who, though many were forced to work extra years to compensate for retirement investments lost in the 2008–09 market crash, are now retiring in significant numbers.
As boomers retire, expect wide-ranging effects: Not only do retirees produce and contribute less in an economic sense, they tend to spend less as well—not a recipe for economic growth.
One area where this generation is spending more? On their adult children. A substantial percentage of parents are providing some financial support for their adult children, with student loan assistance being a significant area of financial burden.
And for many boomers, that financial assistance goes beyond helping out with student loans to assist in providing housing. Prior to the COVID-19 pandemic, 47% of young adults aged 18 to 29 resided with one or both of their parents. As of July 2020, that number had surged to 52%—surpassing the previous peak last seen during the Great Depression.
Post-Boomer Bust?
Between bleak economic predictions, widespread post-recession losses of retirement savings, and the subprime mortgage debacle, no wonder some members of this generation are reluctant to retire. Even now, the generation that coined the phrase “live to work” is living up to its reputation.
According to the Bureau of Labor Statistics, nearly 40% of Americans age 55 and older remain active in the workforce.
This workplace longevity may prove a problem for younger workers who have struggled to find well-paid, stable work during levels of high unemployment. The upside? Retirement for this cohort is as inevitable as the boomerang effect that will eventually create job availability.
Ultimately, some boomers take the live-to-work ethos to an extreme. A 2013 Gallup poll, which investigated the consumer and workplace behaviors of baby boomers, posed this question: “At what age do you plan to retire?” For 10% of respondents, the answer was a succinct “Never.”
The Bottom Line
While baby boomers are working longer, their inevitable retirement will have widespread effects on the American economy. Expect high impacts on consumer spending, as retirees not only produce less but also consume and spend less. While the workforce participation rate already sits at historically low levels, the mass retirements of boomers could have a positive boomerang effect—essentially freeing up jobs for younger employees who are struggling to find work.
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9aef8286fd8b11ea71bd9ec39d2e3e63 | https://www.investopedia.com/articles/investing/080615/china-owns-us-debt-how-much.asp | How Much U.S. Debt Does China Own? | How Much U.S. Debt Does China Own?
It seems as if every American politician and talking head is expressing concern about the huge amount of debt that the U.S. government owes Chinese lenders. The Chinese do own a lot of U.S. debt—about $1.1 trillion as of early 2020.
Breaking Down Ownership of US Debt
By mid-2017, the total amount of official debt owed by the federal, state and local governments was more than $19.4 trillion. That figure was $23.4 trillion, as of March 17, 2020. Some experts insist on adding hundreds of trillions in unfunded future liabilities on the federal government balance sheet.
Key Takeaways China owns about $1.1 trillion in U.S. debt, or a bit more than the amount Japan owns. Whether you're an American retiree or a Chinese bank, American debt is considered a sound investment. The Chinese yuan, like the currencies of many nations, is tied to the U.S. dollar.
Of the $23.4 trillion in government debts, more than $6 trillion (a little less than one-third) is actually owned by the federal government in trust funds. These are accounts dedicated to Social Security, Medicare and other entitlements. In other words, the government wrote itself a really big IOU and bankrupted one account to finance another activity. IOUs are formed and financed through joint efforts of the U.S. Department of the Treasury and the Federal Reserve.
Much of the rest of the debt is owned by individual investors, corporations, and other public entities. This includes everyone from retirees who purchase individual U.S. Treasurys to the Chinese government.
5% The amount of U.S. debt that is held by Chinese entities.
China took the top spot among foreign creditors, following Japan, at $1.2 trillion.
Japan and China own about 5.2% and 4.6% of the U.S. debt, respectively. Japanese-owned debt doesn't receive nearly as much negative attention as Chinese-owned debt, ostensibly because Japan is seen as a friendlier nation and the Japanese economy hasn't been growing at a 7% clip year after year. The other countries that hold the most U.S. debt include the U.K., Brazil, and Ireland.
Why China Owns So Much US Debt
There are two main economic reasons Chinese lenders bought up so many U.S. Treasuries. The first and most important is that China wants its own currency, the yuan, pegged to the dollar. This has been common practice for many countries ever since the Bretton Woods Conference in 1944.
A dollar-pegged yuan helps keep down the cost of Chinese exports, which the Chinese government believes makes it stronger in international markets. This also reduces the purchasing power of Chinese earners.
Effects of Dollar-Pegging
Dollar-pegging adds stability to the yuan, since the dollar is still seen as one of the safest currencies in the world. This is the second reason the Chinese want Treasurys; they are essentially redeemable in dollars.
China drew some headlines in 2013 and 2014 for buying up a lot of gold to store in its bank vaults, but the real safety net for the yuan is the worldwide belief in the dollar.
Consequences of Owing Debt to the Chinese
It's politically popular to say that the Chinese "own the United States" because they are such a huge creditor. The reality is very different than the rhetoric.
While around 5% of the national debt isn't exactly insignificant, the Treasury Department has had no problems finding buyers for its products even after a rating downgrade. If the Chinese suddenly decided to call in all of the federal government's obligations (which isn't possible, given the maturities of debt securities), it is very likely that others would step in to service the market. This includes the Federal Reserve, which already owns nearly three times as much debt as China.
The Effects on Trade
Second, the Chinese rely on American markets to buy Chinese-produced goods. Artificially suppressing the yuan has made it difficult for a growing Chinese middle class, so exports are needed to keep businesses running.
Consider what the current arrangement means: The Chinese buy up dollar bills in the form of Treasuries. This helps inflate the value of the dollar. In return, American consumers get cheap Chinese products and incoming investment capital. The average American is made better off by foreigners providing cheap services and only demanding pieces of paper in return.
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111ccc675a6aa649072100cb6964d397 | https://www.investopedia.com/articles/investing/080916/corporate-bonds-advantages-and-disadvantages.asp | Corporate Bonds: Advantages and Disadvantages | Corporate Bonds: Advantages and Disadvantages
Investors considering fixed-income securities might want to research corporate bonds, which some have described as the last safe investment. As the yields of many fixed-income securities declined after the financial crisis, the interest rates paid by corporate bonds made them more appealing. Corporate bonds have their own unique advantages and disadvantages.
Key Takeaways Corporate bonds are made up of the debt securities that companies issue to bondholders in order to raise capital.Corporate bonds are often seen as the "yin" to stocks' "yang", and a key component of any diversified portfolio.Corporate bonds are diverse, liquid, and lower volatility than stocks, but also provide generally lower returns over time and carry credit and interest rate risk.
Advantages of Corporate Bonds
One major draw of corporate bonds is their strong returns, compared to other bond, such as government bonds. As of Dec. 4, 2020, the current rate on the U.S. Corporate Indexes Bloomberg Barclays Index was
Liquidity
Many corporate bonds trade in the secondary market, which permits investors to buy and sell these securities after they have been issued. By doing so, investors can potentially benefit from selling bonds that have risen in price or buying bonds after a price decline.
Some corporate bonds are thinly traded. Market participants looking to sell these securities should also know that numerous variables could affect their transactions, including interest rates, the credit rating of their bonds, and the size of their position.
Widespread Options
There are many types of corporate bonds, such as short-term bonds with maturities of five years or less, medium-term bonds that mature in five to 12 years and long-term bonds that mature in more than 12 years.
Beyond maturity considerations, corporate bonds may offer many different coupon structures. Bonds that have a zero-coupon rate do not make any interest payments. Instead, governments, government agencies, and companies issue bonds with zero-coupon rates at a discount to their par value. Bonds with a fixed coupon rate pay the same interest rate until they reach maturity, usually on an annual or semiannual basis.
The interest rates for bonds with floating coupon rates are based on a benchmark, such as the Consumer Price Index (CPI) or the London Interbank Offered Rate (LIBOR), adding a certain number of basis points (bps) to the benchmark. The interest payments change along with the benchmark.
A step coupon rate provides interest payments that change at predetermined times, and usually increase. Most of these securities come with a call provision, meaning that investors receive the initial interest rate until the call date. After reaching the call date, the issuer either calls the bond or hikes the interest rate.
Disadvantages of Corporate Bonds
One major risk of corporate bonds is a credit risk. If the issuer goes out of business, the investor may not receive interest payments or get his or her principal back. This contrasts with bonds that have been issued by a government with a high credit rating, as this entity could theoretically increase taxes to make payments to bondholders.
Another notable risk is event risk. Companies might face unforeseen circumstances that could undermine their ability to generate cash flow. The interest payments – or repayment of principal – associated with a bond depend on an issuer's ability to generate this cash flow. Corporate bonds can provide a reliable stream of income for investors. These debt-based securities became particularly attractive after the financial crisis, as central bank stimulus helped push the yields lower on many fixed-income securities. Interested investors can choose from many kinds of corporate bonds, and these securities frequently enjoy substantial liquidity. However, corporate bonds have their own unique drawbacks.
The Bottom Line
Like anything in life, and especially in finance, corporate bonds have both pros and cons:
Pros Tend to be less risky and less volatile than stocks. Wide universe of corporate issuers and bonds to choose from. The corporate bond market is among the most liquid and active in the world. Cons Lower risk translates to lower return, on average. Many corporate bonds must be purchased OTC. Corporate bonds expose to investors to both credit (default) risk as well as interest rate risk.
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7cdd17f9bd0650f7c9b8d5a29f886932 | https://www.investopedia.com/articles/investing/081115/why-google-became-alphabet.asp | Why Google Became Alphabet | Why Google Became Alphabet
There's no disputing the fact that Google (GOOGL) reinvented the way the world accesses information. The company has a whole host of apps and tools that many consumers use on a daily basis, from its search engine and Gmail to Google Drive, its file storage service.
The market now knows Google's parent company as Alphabet. But many people aren't aware of how the corporation ushered in this change. Keep reading to find out the reasons why the company's management decided to make the switch from Google to Alphabet.
Key Takeaways Known around the world, Google abruptly renamed itself Alphabet in 2015, making Google a subsidiary. As a parent company, Alphabet allowed Google to expand into domains outside of Internet search and advertising to become a technology conglomerate. The company now runs a lesser risk of antitrust violations and is also better able to account for income streams from various subsidiaries.
Google to Alphabet
Google's leadership gave Wall Street formal notice of its intentions to become Alphabet, a technology conglomerate by announcing a new parent entity that would unite its widening interests and product lines. Apart from Google's core search business, there are a number of companies (or "Other Bets") that make up Alphabet. They span a diverse array of industries, including robotics, life sciences, healthcare, and anti-aging.
In a blog post announcing the move, former chief executive officer (CEO) Larry Page said the new entity would help the company take a long-term view and improve the “transparency and oversight” of its actions. The new entity, he wrote, was an “alpha-bet (Alpha is investment return over benchmark), which we strive for!”
Not much changed for investors in the reorganization. According to the Securities and Exchange Commission (SEC) filing, each Google share was swapped for one Alphabet share. The change had minimal consequences on the company's bottom line and on its direction.
That then begs the question: Why did Google change its name to Alphabet?
The Wall Street Effect
When it debuted on the stock market, Google became Wall Street's darling. Its market capitalization increased by $27.2 billion, giving it a market cap bigger than that of Ford (F) and General Motors (GM) on its very first day of trading. That number was based on the market's assessment of the company's search business and turned out to be largely correct as Google's prowess in search powered its fortunes over the years.
The arrival of the social media brigade, however, blindsided Google. Even as the company was coping with Facebook's (FB) onslaught on its core business, the disintermediation of web search into mobile apps further eroded Google's bottom line. Google's foray into social media was pretty much a disaster.
Perhaps the thinking was that Google could pioneer other industries, just as it started the search industry.
But the absence of numbers related to the cost and operational expenses of Google's new or acquired ventures made Wall Street nervous. The company's chairman defended the moon shots to investors at the shareholder meeting in 2015.
The move was intended to help allay the market's fears by streamlining operations and providing investor visibility into the operations of Alphabet's new ventures and acquisitions. It helped Alphabet prove to investors that it can deliver profits even as it explores new markets and avenues for future profits.
The company's stock price jumped in record numbers after chief financial officer (CFO) Ruth Porat spoke about transparency in the company's 2018 earnings call.
In Alphabet We Trust
Through reorganization as a conglomerate, the move also lessens the glare of antitrust scrutiny on Alphabet. This is because each company within the Alphabet umbrella makes products for a different industry. Bunching all of them together under the search engine umbrella would have invited greater attention from regulators due to the unique nature of Google's business.
With the new corporate structure, Alphabet can always argue that each company within its organization operates independently of the search engine.
However, less obvious was the consolidation of power to be held by the two founders, versus the shareholders. The new entity was to be structured in a way that Page and Sergey Brin hold the majority of the voting rights, without the majority of the stock. This was done in order to prevent the company from drifting away from its vision due to pressure from investors to perform financially.
Inventing a New Company Within a Company
Google's founders, Larry Page and Sergey Brin, have always had a healthy disregard for the impossible. They imbued this thought process into their company's DNA, making Google a fount of innovation within Silicon Valley, where innovation is a byword instead of a buzzword.
But many of Alphabet's attempts at innovation have, in fact, flopped. The company's attempts to reinvent itself as a hardware and Internet of Things (IoT) player have also come under constant scrutiny by the media and Wall Street. Page, who returned as CEO in 2010, lashed out against the criticism, calling for a “safe place” for innovative companies to carry out experiments at Google I/O in 2013.
The separation between search, Alphabet's main business, and other companies provides the company with a “safe place” to carry out experiments. Each company within the Alphabet umbrella is headed by a CEO, who reports to the Alphabet CEO, who allows the respective head to determine the best course of action without worrying about the effect on the search engine cash cow.
It also avoids negative public relations (PR) through direct association with the search engine business, which makes money by inferring user interests. For example, Google's acquisition of the home security company Nest raised privacy concerns.
The Bottom Line
According to the author of Google's ten commandments, Larry Page and Sergey always had a bigger picture of technology's role in the world. “Larry's vision was always to be something like General Electric (GE), and Google was only his first proof-of-concept,” he is quoted in the New York Times. The reorganization was Page and Brin's attempt to streamline operations to focus energies on new ventures and evolve Google from a one-trick pony to a conglomerate.
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526f4db05cca15ed94984a10d04b9d47 | https://www.investopedia.com/articles/investing/081215/top-3-private-equity-etfs.asp | Top 3 Private Equity ETFs (PSP, PEX) | Top 3 Private Equity ETFs (PSP, PEX)
Private equity exchange-traded funds (ETFs) hold companies which can be financially complicated because they use leverage and are strongly transaction-oriented. However, they provide investors with exposure to private equity investments and can offer significant and attractive returns on investment.
Private equity firms have been increasingly active since 2000. This segment of the economy has experienced a surprising turnaround since the economic slump of 2008, largely due to a surplus of money inflow, and they rounded out 2014 with the highest global investment since 2007.
Private equity caters to the capital of high net worth entities. It obtains equity rights in companies with significant potential that are seeking capital to improve their cash flow positions or expand. Private equity firms provide finances and the financial knowledge to run the businesses they acquire. In 2018, the majority of the world’s private equity assets – 56% – are in North America. Europe has the next largest allocation at 29%, followed by Asia with 11%.
Private equity ETFs offer portfolio diversification from a geographical standpoint and in terms of investments. These firms utilize a variety of strategies for acquiring equity stakes or debt positions that are not generally accessible to individual investors. Private equity is typically considered a less volatile asset class that can offer both stable returns and relatively higher dividends.
Invesco Global Listed Private Equity Portfolio
The Invesco Global Listed Private Equity Portfolio (NYSE Arca: PSP) is the largest private equity ETF, with assets totaling over $151 million. It is the perfect option for investors looking for global exposure, as it provides access to 78 publicly listed private equity companies worldwide, including business development companies and financial institutions. This fund tracks the Red Rocks Global Listed Private Equity Index. The index incorporates between 40 and 75 publicly listed equity companies.
The expense ratio for this fund is 1.8% and it offers a high dividend yield of 3.95%. Holdings for this fund include 3I Group Ordinary Stock Chart (OTC Markets: TGOPF), the Onex Corporation (OTC Markets: ONEXF) and Partners Group Holdings (OTC Markets: PGPHF).
ProShares Global Listed Private Equity ETF
The ProShares Global Listed Private Equity Portfolio (BATS Trading: PEX) is a fund that aims to provide investors with results, excluding fees, similar to the performance of the LPX Direct Listed Private Equity Index. This index, similar to the underlying index of PSP, includes up to approximately 30 publicly listed private equity companies which share a primary purpose and function to invest in privately held companies and to lend capital.
Issued by ProShares, this fund has an asset base that totals $16.27 million as of June 2020. This fund is ideal for investors who are looking for global diversity. The fund has an expense ratio of 3.13% and offers a dividend yield of 11%. Holdings for this fund include the Ares Capital Corporation (Nasdaq: ARCC), the Onex Corporation and 3I Group PLC. (Nasdaq: III).
ETRACS Wells Fargo MLP Ex-Energy ETN
The ETRACS Wells Fargo MLP Ex-Energy ETN (NYSE Arca: FMLP) combines aspects of both ETFs and bonds. This exchange-traded note aims to provide investors with results that mimic the Wells Fargo Master Limited Partnership Ex-Energy Index. The index is designed to act as a metric for the performance of all non-energy master limited partnerships listed on the New York Stock Exchange (NYSE) or the Nasdaq stock exchange meeting various eligibility requirements, such as minimum market capitalization. The index is capitalization-weighted and composed of companies that are not energy-focused and have a minimum market capitalization of $100 million.
Issued by UBS, this fund provides investors with substantial exposure to private equity companies with a non-energy focus. FMLP has an expense ratio of 0.85% and a offers an attractive dividend yield of 5.96%. For investors who prefer debt security ETNs, this is useful investment access tool for gaining exposure to private equity investments.
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5f0cd059bd1d6c21d0adc5c75d3f2304 | https://www.investopedia.com/articles/investing/081315/5-reasons-why-radioshack-went-out-business.asp | 5 Reasons Why RadioShack Went out of Business | 5 Reasons Why RadioShack Went out of Business
In February 2015, RadioShack (RSHCQ), a renowned electronics store, filed for Chapter 11 bankruptcy protection following many financial and operational missteps. The company had too many stores that cannibalized revenues from each other and generated losses. RadioShack failed to adapt and stay relevant when most electronics sales shifted online, and the retailer was stuck in brick-and-mortar locations only.
By 2013 to 2014, RadioShack had a high sales concentration coming from cellphones, which accounted for over 50% of the total sales and generated poor profit margins. The company frequently changed its management and direction for the turnaround. In addition, RadioShack made a financial mistake by taking a loan from Salus Capital in 2013 that required the lender to close no more than 200 stores a year.
1. High Store Concentration
In 2014, RadioShack operated about 4,300 stores in North America. However, there were many stores that were located too close to each other. For example, there were 25 stores near Sacramento, California, located within a 25-mile radius, and seven stores within five miles around Brooklawn, New Jersey. With so many stores within close proximity to each other, RadioShack experienced a significant drop in profitability and inventory problems as the store traffic dried up. It became very costly to maintain so many stores with sometimes insufficient inventory in one area.
2. Online Competition
Relying solely on its brick-and-mortar sales network, RadioShack began experiencing significant profitability and sales pressure, as consumers were buying electronics parts and other gadgets from online retailers such as Amazon and eBay. For many consumers, RadioShack became irrelevant; any electronics part could be purchased cheaper with a click of a button and delivered anywhere within the United States. Moreover, consumers made numerous complaints that RadioShack lacked certain inventory, making it even less likely that shoppers would come back.
3. Product Concentration
In the early 2000s, the company made a strategic shift towards selling cell phones and accessories that proved to be lucrative for some time. By 2014, cellphones alone accounted for about 50% of the company's total sales, making it a very risky proposition of a high product concentration. Things began changing rapidly after the introduction of the iPhone in 2007. As the sales channels for cellphones began shifting towards buying phones through wireless operators, many carriers substantially reduced payments to RadioShack and similar resellers to mitigate the rising cost of subsidizing iPhones. As a result, RadioShack's profit margins and sales deteriorated significantly, precipitating the company's bankruptcy.
4. Management Problems
The constantly changing management did not help the company's efforts to turn itself around. From 2005 to 2014, the company changed its chief executive officers seven times. Joseph Magnacca joined RadioShack in 2013 as its CEO to speed up the turnaround. The company set a goal of restoring profitability by 2015 with a significant store, and product revamps changes in compensation structure, and aggressive marketing campaigns. However, as Magnacca's effort started rolling out, the results got worse due to rising costs, constantly shifting management orders on short notice, and confusing commission structures. The workers' morale and the company's profits slipped even further.
5. Financial Missteps
Because RadioShack had experienced negative earnings since 2012, the company needed significant capital infusions to stay solvent. In October 2013, RadioShack was able to obtain a $585 million line of credit from GE Capital and the $250 million term loan from Salus. The $250 million term loan came with the condition that RadioShack could not close more than 200 stores per year without Salus' consent.
As the RadioShack's cash burn accelerated in 2014, the company attempted to close over a quarter of its stores to stop the cash outflows; however, Salus thwarted the closure efforts due to a lack of confidence that the company's business plan would succeed. This accelerated the bankruptcy filing due to lackluster 2014-2015 holiday season sales and continuing cash burn.
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12068bb8421addf459f358846eaa1d61 | https://www.investopedia.com/articles/investing/081315/9-top-assets-protection-against-inflation.asp | 9 Top Assets for Protection Against Inflation | 9 Top Assets for Protection Against Inflation
What Are 9 Top Assets for Protection Against Inflation?
A dollar today will not buy the same value of goods in 10 years. This is due to inflation. Inflation measures the average price level of a basket of goods and services in an economy. It is the increase in prices over a period where a specific amount of currency will be able to buy less than before.
Inflation is a natural occurrence in the market economy, and a disciplined investor can plan for inflation by cultivating ideas for asset classes that outperform the market during inflationary climates.
Understanding 9 Top Assets for Protection Against Inflation
The level of inflation in an economy changes depending on current events. Rising wages and rapid increases in raw materials, such as oil, are two factors that contribute to inflation.
Key Takeaways Inflation occurs in market economies, but investors can plan for inflation by investing in asset classes that tend to outperform the market during inflationary climates. With any diversified portfolio, keeping inflation-hedged asset classes on your watch list, and then striking when you see inflation can help your portfolio thrive when inflation hits. Common anti-inflation assets include gold, commodities, various real estate investments, and TIPS.
Keeping inflation-hedged asset classes on your watch list, and then striking when you see inflation begin to take shape in a real, organic growth economy, can help your portfolio thrive when inflation hits.
9. Gold
Gold has often been considered a hedge against inflation. In fact, many people have looked to gold as an "alternative currency," particularly countries whose currency is losing value. These countries tend to utilize gold or other strong currencies when their own currency has failed. Gold is a real, physical asset, and tends to hold its value for the most part.
However, gold is not a true perfect hedge against inflation. When inflation rises, central banks tend to increase interest rates as part of monetary policy. Holding onto an asset like gold that pays no yields is not as valuable as holding onto an asset that does, particularly when rates are higher, meaning yields are higher.
There are better assets to invest in when aiming to protect yourself against inflation. But like any strong portfolio, diversification is key, and if you are considering investing in gold, the SPDR Gold Shares ETF (GLD) is a worthwhile consideration.
Net Assets 4/13/2020 $54.5 billion Expense Ratio 0.40% Average Daily Trading Volume 14,804,343 5-Year Trailing Returns 5.43%
8. Commodities
Commodities are a broad category that includes grain, precious metals, electricity, oil, beef, orange juice, and natural gas, as well as foreign currencies, emissions, and certain other financial instruments. Commodities and inflation have a unique relationship, where commodities are an indicator of inflation to come. As the price of a commodity rises, so does the price of the products that the commodity is used to produce.
Fortunately, it's possible to broadly invest in commodities via exchange traded funds (ETFs). The iShares S&P GSCI Commodity-Indexed Trust (GSG) is a commodity ETF worth considering.
Net Assets 4/13/2020 $513 million Expense Ratio 0.75% Average Daily Trading Volume 866,312 5-Year Trailing Returns -13.76%
7. 60/40 Stock/Bond Portfolio
A 60/40 stock/bond portfolio is considered to be a safe, traditional mix of stocks and bonds in a conservative portfolio. If you don’t want to do the work on your own and you're reluctant to pay an investment advisor to assemble such a portfolio, consider investing in Dimensional DFA Global Allocation 60/40 Portfolio (I) (DGSIX).
Net Assets 4/13/2020 $3.5 billion Expense Ratio 0.25% Average Daily Trading Volume N/A 5-Year Trailing Returns 2.25%
6. Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) are companies that own and operate income-producing real estate. Property prices and rental income tend to rise when inflation rises. A REIT consists of a pool of real estate that pays out dividends to its investors. If you seek broad exposure to real estate to go along with a low expense ratio, consider the Vanguard Real Estate ETF (VNQ).
Net Assets 4/13/2020 $67 billion Expense Ratio 0.12% Average Daily Trading Volume 8,945,461 5-Year Trailing Returns 0.47%
5. S&P 500
Stocks offer the most upside potential in the long-term. If you wish to invest in the S&P 500, an index of the 500 largest U.S. public companies, or if you favor an ETF that tracks it for your watch list, look into SPDR S&P 500 ETF (SPY).
Net Assets $252 billion Expense Ratio 4/13/2020 0.0945% Average Daily Trading Volume 166,614,512 5-Year Trailing Returns 6.66%
4. Real Estate Income
Real estate income is income earned from renting out a property. Real estate works well with inflation, as inflation rises, so do property values, and so does the amount a landlord can charge for rent, earning higher rental income over time. This helps to keep pace with the rise in inflation. For future exposure, consider VanEck Vectors Mortgage REIT Income ETF (MORT).
Net Assets 4/13/2020 $109 million Expense Ratio 0.42% Average Daily Trading Volume 200,780 5-Year Trailing Returns -9.20%
3. Bloomberg Barclays Aggregate Bond Index
The Bloomberg Barclays Aggregate Bond Index is a market index that measures the U.S. bond market. All bonds are covered in the index: government, corporate, taxable, and municipal bonds. To invest in this index, investors can invest in funds that aim to replicate the performance of the index. There are many funds that track this index, one of them being the iShares Core U.S. Aggregate Bond ETF (AGG).
Net Assets 4/13/2020 $69 billion Expense Ratio 0.04% Average Daily Trading Volume 8,941,358 5-Year Trailing Returns 3.28%
2. Leveraged Loans
A leveraged loan is a loan that is made to companies that already have high levels of debt or a low credit score. These loans have higher risks of default and therefore are more expensive to the borrower.
Leveraged loans as an asset class are typically referred to as collateralized loan obligations (CLOs). These are multiple loans that have been pooled into one security. The investor receives scheduled debt payments from the underlying loans. CLOs typically have a floating rate yield, which makes them a good hedge against inflation. If you're interested in this approach at some point down the road, consider Invesco Senior Loan ETF (BKLN).
Net Assets 4/13/2020 $3.8 billion Expense Ratio 0.65% Average Daily Trading Volume 10,769,067 5-Year Trailing Returns 1.04%
1. TIPS
Treasury inflation-protected securities (TIPS), a type of U.S. Treasury bond, are indexed to inflation in order to explicitly protect investors from inflation. Twice a year, TIPS pay out on a fixed rate. The principal value of TIPS changes based on the inflation rate, therefore, the rate of return includes the adjusted principal. TIPS come in three maturities: five-year, 10-year, and 30-year.
If you favor using an ETF as your vehicle, the three choices below might appeal to you.
The iShares TIPS Bond ETF (TIP)
Net Assets 4/13/2020 $19 billion Expense Ratio 0.19% Average Daily Trading Volume 3,251,967 5-Year Trailing Return 2.45%
The Schwab US TIPS ETF (SCHP)
Net Assets 4/13/2020 $8.6 billion Expense Ratio 0.050% Average Daily Trading Volume 1,259,164 5-Year Trailing Returns 2.58%
The FlexShares iBoxx 3-Year Target Duration TIPS Index ETF (TDTT)
Net Assets 4/13/2020 $1.1 billion Expense Ratio 0.18% Average Daily Trading Volume 107,043 5-Year Trailing Returns 1.62%
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35a873e38bdd64a8d1c5a6550ae2aae6 | https://www.investopedia.com/articles/investing/081716/understanding-apples-capital-structure-aapl.asp | Understanding Apple's Capital Structure | Understanding Apple's Capital Structure
Apple Inc. (AAPL) is the largest and arguably most successful company of the 21st century. From its humble start in a California garage in 1976 to the more $1.1 trillion company it is today, Apple’s success has come from being a leading innovator, not only in the field of technology but in finance as well. One only needs to examine the shift in the company’s capital structure to witness how quickly Apple can adapt to its environment.
Key Takeaways Equity capitalization is a measure of how much equity and/or debt a company utilizes to finance its operations. Apple’s debt-to-equity ratio determines the amount of ownership in a corporation versus the amount of money owed to creditors, Apple's debt-to-equity ratio jumped from 50% in 2016 to 112% as of 2019. Enterprise value measures a company's worth, where Apple's doubled in just two years to $1.12 trillion. Apple has $95 billion in cash and short-term investments, making its debt less of a concern.
Equity Capitalization
Capital structure is simply a measure of how much equity and/or debt a company utilizes to finance its operations. Equity represents ownership in a company and is calculated by finding the sum of the common stock and retained earnings, less the amount of treasury shares.
Apple’s total stockholder’s equity equals $96.5 billion, as of June 29, 2019. This consists of $43.4 billion of common stock at par value and additional paid-in capital, and $53.7 billion in retained earnings, less accumulated other comprehensive income of $639 million. Apple has roughly 4.57 billion shares outstanding.
Apple has been extremely successful with its capital structure by leveraging debt and increasing equity.
Debt Capitalization
The second component of a company’s capital structure is debt, representing how much the company owes to creditors. Debt is first classified by time period. Current liabilities encompass debt that matures within a year and is important for investors to consider when determining a company’s ability to stay solvent.
Apple’s current liabilities as of June 29, 2019, were $89.7 billion, consisting of $29.1 billion in accounts payable $13.5 billion in short-term notes and bonds. Long-term debt and other non-current liabilities amount to $136 billion, bringing Apple’s total liabilities to $225.8 billion, an increase of nearly 63% in the last three years.
Leverage
Due to the zero interest rate policy (ZIRP) environment, Apple began issuing its first bonds and notes in 2013, underwriting a total of $64.46 billion worth of debt. Apple made this move not because it needed the capital but because it was essentially receiving free money.
With much of Apple’s bonds having nominal interest rates of less than 3%, the real returns on these instruments barely beat inflation. However, the accumulation of debt by Apple has changed its capital structure considerably. Apple’s current and quick ratios have risen by 33% and 59%, respectively, over the last five years. Its long-term debt has nearly doubled in the last three years.
Debt vs. Equity
Additionally, the company’s debt-to-equity ratio has grown. This measurement is best used for determining the amount of ownership in a corporation versus the amount of money owed to creditors. It is calculated by dividing a company’s total liabilities by its shareholders’ equity. At the end of 2016, Apple had a debt-to-equity ratio of 50%. Over the course of three years, that ratio jumped to 112%, illustrating how quickly capital structure can change.
Enterprise Value
Enterprise value (EV) is a popular way of measuring a company’s worth and is often used by investment bankers to determine the cost of purchasing a business. EV is calculated by finding the sum of the company’s market cap and its total debt and subtracting that figure by total cash and cash equivalents.
Apple’s EV went from $600 billion at the end of 2017 to $1.12 trillion, doubling. This comes as the company’s market cap and cash have risen steadily. With that, Apple’s net debt has fallen from nearly $50 billion last year to $14 billion as of the second quarter of 2019.
Investors can’t forget that Apple is the most cash-rich corporation in America. With over $50 billion in cash and $45 billion in short-term marketable securities, as of June 29, 2019, Apple’s highly leveraged capital structure should not pose a threat to the company’s solvency for the foreseeable future.
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56268538958ce6ef9cb5dabb1481fe1f | https://www.investopedia.com/articles/investing/081815/emerging-markets-analyzing-thailands-gdp.asp | Emerging Markets: Analyzing Thailand's GDP | Emerging Markets: Analyzing Thailand's GDP
Thailand is a good example of a developing country that, with rapid economic growth, has graduated from the ranks of undeveloped countries in just a generation or two. It was a low-income country in the 1980s, but the World Bank upgraded it to "upper-middle-income" status in 2011. It grew by a breakneck 8% to 9% during the late 1980s and early 1990s, before it got caught up in the Asian Financial Crisis of 1997-98.
The economy recovered from that crisis in the following years, only to be hit by the global financial crisis of 2007-08. Since then, it has again slowed due to economic, natural and political events. In recent years it has grown at about the same rate as larger, more developed economies—meaning well below 5%.
In 2016, the military government announced what it’s calling “Thailand 4.0,” policies that aim to transform the economy by attracting investment in hi-tech manufacturing and services. (Thailand 1.0 through Thailand 3.0 represent the evolution from agricultural dominance to the development of heavy industry and energy.) The goal is to make Thailand a high-income nation, to reduce inequality, and promote environmentally sustainable growth.
Key Takeaways Thailand, Southeast Asia's second-largest economy, has grown in the past generation or two from an undeveloped country to what the World Bank calls a "middle-income" country. Its three main economic sectors are agriculture, manufacturing, and services. Thailand is noted for its economic volatility, partly a consequence of political instability dating to the 1930s.
Reasons for Volatility
The Thai economy has been roiled over the years by several factors, some beyond its borders and others within. Domestically, the country has a long history of political instability marked by military revolts against the civilian government. Thailand has endured a dozen coups and coup attempts since 1932, the most recent in 2014, when the current military junta was installed. Political instability is generally not good for business.
Environmental disasters have also taken a toll. As a low-lying coastal country, Thailand has suffered several catastrophic floods. One of the worst in decades struck in 2011, generating economic loss of approximately $46 billion.
Like many developing countries, Thailand has been the victim of its own asset bubbles, particularly in real estate. One of the worst occurred in the late 1990s, when excessive property lending and overbuilding made the whole economy vulnerable to a downturn. When Thailand’s central bank was forced to devalue the baht in 1997, property prices plunged and the whole economy went into a severe recession. The devaluation set off the Asian Financial Crisis that roiled world economies in 1997–98. By 2019, property prices were again reaching levels that stoked fears of a crash.
And of course, market and economic conditions elsewhere in the world impact Thailand. They include the effects of the 2000 dotcom bust, the downturn that followed the September 11 attacks, and the world financial crisis of 2007-08. Gross domestic product (GDP) bounced back by 2010, growing by 7.5%, but has been erratic since, falling to lower than 1% growth in some years. It grew by 4.1% in 2018, to $505 billion, according to the World Bank.
Thailand is the second-largest of the 10 ASEAN (for Association of South East Asian Nations) countries, a trading bloc formed in 1967. Its economy has three key sectors: agriculture, industry, and the service sector.
Agriculture
Agricultural development has played a major role in the transformation of Thailand’s economy. It has evolved in two phases, the first from the 1960s to the 1980s and driven by utilization of unused labor and land. Agriculture was the economy’s main driver during this period, employing about 70% of the working population.
During the second phase, while labor shifted to urban areas and no new land was utilized, there was nevertheless an increase in agricultural productivity, thanks to mechanization and availability of formal credit.
Agriculture’s share of output has fallen sharply over the years, to about 6.5% in 2018 from around 24% in 1980, though it still employs about 31% of the working population.
That compares with 2% or less for the world’s most advanced economies, though is comparable to other Southeast Asian countries. Thailand’s main agricultural output is rice, rubber, corn, sugarcane, coconuts, palm oil, pineapple, cassava (manioc, tapioca) and fish products.
Industry
The industrial sector—of which manufacturing is the biggest segment, along with mining, construction, electricity, water, and gas—generates about 35% of GDP and employs about 24% of the labor force.
The growth of manufacturing occurred over two periods under two strategies. The first, from 1960 to 1985, was governed by policies related to import substitution, a tactic common among developing countries.
The second, from 1986 to the present, focuses on exports. In the initial years, manufacturing in Thailand was highly intertwined with agriculture, especially as the country’s manufacturing started with the food-processing industry. Slowly, with changes in industrial policy, industries such as petrochemicals, electronics, automobile and automobile parts, computer equipment, iron and steel, minerals and integrated circuits got a boost and investment incentives.
Service Sector
The service sector accounts for about 56% of GDP and employs about 46% of the labor force. Within services, transportation, wholesale and retail trade (which includes repair of motor vehicles and motorcycles as well as personal and household goods), and tourism and travel-related activities have been prominent contributors to GDP and generators of employment.
The Importance of Exports
Thailand is becoming ever more reliant on exports, which accounted for 67% of GDP in 2018, up from 16% in 1960. This is one source of its economic volatility. The more Thailand relies on foreign markets, the more it is tied to the economies of its trading partners, making it vulnerable to recessions in those economies and to currency fluctuations.
Thailand’s major export destinations are China, Japan, the U.S., Indonesia, Malaysia, Australia, Hong Kong, Singapore, and India. Thailand’s main exports are manufactured goods, principally electronics, vehicles, machinery, and food.
The Bottom Line
Thailand’s economy is a blend of a strong agricultural sector with a developed manufacturing sector and a stable service sector. Although the agricultural sector has given way to others, it still employs a large part of the labor force and still bolsters exports, the engine of the country’s economy.
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8f9f42d8dd730b67c97cf524e8920201 | https://www.investopedia.com/articles/investing/081815/how-does-eurobond-work.asp | How Does a Eurobond Work? | How Does a Eurobond Work?
The eurobond is a type of bond that is issued in a currency that is different from that of the country or market in which it is issued. Despite its name, it has no particular connection to Europe or the euro currency.
Due to this external currency characteristic, these types of bonds are also known as external bonds.
Understanding the Eurobond
The "euro" in eurobond is meant to imply external. These eurobonds should not be confused with Eurobonds with a capital "E." When capitalized, the word defines bonds issued by the European Union and European governments.
Key Takeaways A eurobond issue may be used to finance a company's expansion into a foreign market. The bond raises the money needed in the currency that is needed, without the forex risk. An investor may gain exposure to a foreign market while investing in an established domestic company.
The names of eurobonds (small "e") reflect the currency in which they are denominated. For example, a U.K.-based company might issue a U.S. dollar-denominated eurodollar bond in Japan. Or, an international financial syndicate could issue euroyen bonds in Singapore, which are denominated in Japanese yen.
Who Issues Eurobonds?
Private organizations, international syndicates, and even governments in need of foreign-denominated money for a specified length of time find eurobonds suitable to their needs. Eurobonds are usually offered at fixed interest rates, even if they are issued for long periods of time.
An Example
For example, say a company like Molson Coors wants to enter a new market by establishing a manufacturing facility in India. Expenses for the facility will require a large amount of capital in the local currency, the Indian rupee (INR).
As it is new to India, the company may not have the necessary credit in the Indian markets, which can lead to a high cost for borrowing locally. Molson Coors decides to source the money locally and issues a rupee-denominated eurobond in the U.S. Investors with Indian rupees in their U.S.-based accounts may purchase the bond, effectively loaning money in Indian rupees to the company.
The eurobond is denominated in a foreign currency but launched in a nation with a strong currency. That keeps them highly liquid for their investors.
The North American company collects this capital and floats a subsidiary company locally in India. The collected capital, in rupees, is transferred to the local Indian subsidiary by the parent company. The plant becomes operational, and the proceeds are used to pay the interest to bondholders.
Benefits of Eurobonds for the Issuer
There are a number of benefits to issuing eurobonds rather than domestic bonds for a project of this type:
Companies can issue bonds in the country of their choice and the currency of their choice, depending on what is most beneficial for the planned use. The issuer can choose a country with an interest rate that is favorable to its own at the time of the issue, thus reducing the costs of borrowing. Eurobonds have particular appeal to certain investor populations. For example, many U.K. residents with roots in India, Pakistan, and Bangladesh view investments in their homelands favorably. The company reduces forex risk. In the example above, the company could have issued the domestic bonds in the U.S. in U.S. dollars, converted the amount to Indian rupees at the prevailing rates in order to move it to India, then exchanged rupees for U.S. dollars in order to pay interest to bondholders. This process adds transactional costs and forex rate risk. Although eurobonds are issued in a particular country, they are traded globally, which helps in attracting a large investor base.
Benefits of Eurobonds for Investors
For the investor, eurobonds can offer diversification with a smaller degree of risk. They are investing in a solid and familiar local company that is expanding its business into an emerging market.
Also, eurobonds are denominated in foreign currencies but launched in nations with strong currencies. That keeps them highly liquid for their local investors.
For example, an Indian rupee eurodollar bond issued in the U.K. with par value of 10,000 Indian rupees will cost a U.K. investor the equivalent of about 104 British pounds at the prevailing exchange rate.
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00d52d7258d74b07e72003224fdab258 | https://www.investopedia.com/articles/investing/081815/should-you-work-boutique-investment-bank.asp | Should You Work at a Boutique Investment Bank? | Should You Work at a Boutique Investment Bank?
Long gone are the days when an MBA or a Ph.D. from an Ivy League school would guarantee a coveted investment banking job at a large multinational firm.
Since the global financial crisis of 2008-09, even high-caliber candidates are finding it difficult to break into investment banking. Recently, smaller investment banking boutique firms have been gaining market share over the big investment banks. (See also: M&A Advisory Business Boutiques: How The Small Shops Are Capturing Large M&A Deals.)
Key Takeaways Bulge banks are often large multinational firms. Boutique firms are small and independent. Both bulge banking and boutique banking offer benefits.
Bulge vs. Boutique
Investment banking is dominated by large, well-established multinational firms, sometimes called bulge banks. These include Goldman Sachs Group Inc. (GS), Citigroup Inc. (C) and JP Morgan Chase & Co. (JPM). In contrast, investment banking boutiques are small, independent firms usually owned and operated by one or a few individuals.
Boutique firms offer services on a smaller scale. For example, they may focus on niche areas of investment banking like mergers and acquisitions, restructuring or leveraged buyouts. While bulge banks usually enter deals worth $500 million or more, boutiques handle deals worth $50 million to $500 million.
Better Experience at Boutiques? It Depends
At a boutique bank, there are enormous opportunities to do the entire deal on your own. A boutique bank may expect and allow bankers to operate more independently by scouting for opportunities, convincing prospects, structuring the deal, and taking it to closure. However, if the boutique bank specializes in a small area, the banker may find that they do not gain wide experience.
At bulge banks, especially at the entry level, bankers may find themselves confined to a limited role and dependent on processes, rules, approvals, and resources. For example, instead of scouting for opportunities, the banker may receive sales leads and pitches from an established team, making the defined job comparatively straightforward. (See also: What's the Role of an Investment Bank?)
Independence for Administration?
At a bulge bank, investment bankers can ask a dedicated quant team to develop and test quantitative models. There is a dedicated legal team to consult on legal matters, technical writers for documentation and a presales team to prepare the proposal. In a boutique, the banker may have to do everything including from simple tasks like drafting pitch books to complex ones like quantitative modeling and deal structuring. For some, a boutique bank may offer the experience of independence, independence, and creativity. Others might consider such experiences as administrative and unrewarding.
The Clientele
Though boutique investment banking has been gaining market share, the market is still dominated by bulge banks. Businesses tend to trust large established global firms more than the small shops, even if the latter charge lower fees. This results in bulge banks having a huge pool of readily available clientele. Boutiques may have to hunt down prospects, usually other small-sized companies. Boutiques have an advantage in that bulge banks don’t often intrude into their smaller-sized market. But at the same time, big-ticket deals are usually out of reach.
The Dynamic Environment
Boutique banks may shift their focus completely, for example by going from all leveraged buyouts to corporate restructuring. Large investment banks have diversified streams of work, making it possible for their employees to work in their desired areas. (See also: Top Things To Know For An Investment Banking Interview.)
Job Security
Few jobs are 100% secure and even the best performers may have to face the ax during bad times. However, given their diversified business divisions, large size, and global presence, a bulge bank has greater flexibility to shift people around, say from merger and acquisitions (M&A) to the equity research analyst department, or from Europe to Asia as business needs rise and fall. Boutiques do not have the same level of flexibility and opportunities, due to their smaller size and specialization.
It is easier to get information about bulge banks than boutiques.
Risk Level
A few individuals can make or break even a large, global, multinational investment bank. One merger and acquisition deal can go wrong on a legal technicality, or a case of interest rate rigging by one or two individual traders may incur fines in the millions. Large investment banks have the capacity to absorb these losses. Boutique banks run on personal rapport and network connections. In the absence of dedicated legal or audit departments, the risk is far higher in boutiques as one or two key individuals can break the entire business.
Size Does Matter (At Times)
Banking scandals happen. Even if an individual banker was not involved, their career can be seriously affected in the long term if associated with a boutique bank accused of wrongdoing. There are cases of individuals being denied visas or facing increased scrutiny at a new employer because of past association with a disgraced boutique bank. Bulge banks are not immune to irregularities or failures, but they have an advantage in an established brand value which can absorb a few such incidents.
Easy Access to Information
While it is easier to gain information about a bulge bank, the internals of boutiques remain hidden. Once selected, bulge banks are known to offer a uniform salary to associates with similar skills and experience levels. Salaries may vary more in boutiques based on personal preferences or very particular requirements. When switching jobs, especially to hedge funds and private equity firms, candidates with experience with bulge banks are preferred due to their better corporate exposure. (See also: Financial Careers With Excellent Salaries.)
The Bottom Line
Joining an investment banking boutique does offer some great advantages even though bulge banks offer a more classic career path. Ultimately, the choice between a boutique bank and a bulge bank must be decided by a candidate's temperament, aspirations, and expectations.
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9c8cdd47ff61062eb35c3276057ea36b | https://www.investopedia.com/articles/investing/081815/top-tips-picking-wealth-management-firm.asp | Top Tips for Picking a Wealth Management Firm | Top Tips for Picking a Wealth Management Firm
If you’ve been investing for a long time and want to turn the responsibility of running your portfolio over to someone else, choosing a wealth management firm is one way to do it.
Before you hire a firm, however, make sure you’ve chosen someone who really cares about your future and wants to protect your investments. Read our tips below to see what you need to look for in a wealth management firm.
Don’t Focus on Price
When you’re choosing a wealth management firm, it’s easy to judge the differences between companies by one category: price. It’s simple, straightforward, and you can’t argue that one number is smaller than the other.
Tyler Landes, CFP at Tandem Financial Guidance, LLC, says that instead of getting too fixated on price, you should focus on value. Price is what you pay, value is what you get.
“At the end of the day, I tell people to understand how an advisor gets paid, and what service or product they’re going to deliver in exchange,” he said. “Then decide if you think the value is in line with the cost. Cheaper isn’t better if the value isn't there.”
You should also ask other clients how their advisor treats them. Also make sure to ask the advisor who their ideal client is. Landes said that if the description doesn’t match your goals and ideas, the relationsip won’t likely work. You want to feel like your advisor will care about your portfolio as much as you do.
“I've gained clients because their former advisor didn't reach out to set regular meetings, and the client felt like small potatoes,” said Landes.
Ask about how often you’ll be able to meet with your advisor or how you’ll stay informed about your investments. You want to be in the loop on what’s going on.
Verify Credentials
When choosing a firm, sit down with the advisor who will potentially be working on your account. You don’t want to have an interview with one person, only to learn down the line that you’ve been handed over to someone else.
Also ask where they worked before, whether they are a Certified Financial Planner, what other qualifications they can boast. Keep in mind that you’re the client, so it’s up to the advisor to win you over so as to get your business.
You can verify whether an advisor is a CFP here, and look them up through the SEC here, or via Finra's BrokerCheck. Don’t be afraid to do the same kind of research you would perform on a potential hire. Ask what every credential and certification means, and see whether you can find any work history or talk to current and past clients. Do your due diligence before making a decision.
How Are They Paid?
There are different ways you can pay a CFP. Some charge a commission based on the products you buy from them, while others charge a set rate based on the size of your portfolio. You want someone who’s as invested in your portfolio’s growth as you are.
Be wary of hiring anyone who earns a commission on what they sell to you; they’ll be more interested in earning that extra money than making sure what they’re selling is the best fit for your needs.
The Bottom Line
Choosing a wealth management firm may be one of the most important decisions you’ll ever make. Whoever you choose to access your accounts may change the fate of your retirement. That’s not to scare you away from making any kind of decision, but it is important to know that advisors are all different. Don’t make your decision on impulse; ask around for referrals from people you trust, and do your own deep-dive research. (For related reading, see: Under What Circumstances Would I Require Private Wealth Management?)
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36df7e0b7c8a2ee5b9617532a60acd2a | https://www.investopedia.com/articles/investing/082015/3-biggest-canadian-banks.asp | The 3 Biggest Canadian Banks | The 3 Biggest Canadian Banks
The banking system in Canada is considered to be one of the safest in the world. Since 2010, it has consistently been ranked as the world's single largest banking system, as reported by the World Economic Forum. Among Canada's biggest banks are the Royal Bank of Canada, the Toronto Dominion Bank and the Bank of Nova Scotia.
Key Takeaways Banks established in Canada operate under charter and many have operations in the United States as well.The largest Canadian banks are known as the "big five", with the Royal Bank of Canada (RBS) the largest.The top three is rounded out by Toronto Dominion (TD) and the Bank of Nova Scotia (Scotiabank) in 2nd and 3rd, respectively.
Canadian Banks
Known also as chartered banks, Canada's banks have more than 8,000 branches and nearly 20,000 automated banking machines. Initially, banking in Canada operated via colonial overseas operations, but it transitioned to a local banking system in 1817 when the Bank of Montreal was founded. Other banks quickly followed. The Canadian dollar officially took form in 1871 and supplanted individual bank currencies. In the 1980s and 1990s, Canada's largest banks acquired nearly all trust and brokerage companies and began their own insurance and mutual fund businesses as well.
In regular commerce, Canadian banks are typically referred to in two categories: the five largest banks, known as the Big Five banks, and then a group of smaller, second-tier banks. In addition to the Royal Bank of Canada, the Toronto Dominion Bank and the Bank of Nova Scotia, the Big Five also includes the Bank of Montreal (NMO) and the Canadian Imperial Bank of Commerce (CIBC).
Royal Bank of Canada
The Royal Bank of Canada (RBC), commonly referred to as the RBC, is Canada’s largest financial institution, with a market capitalization of nearly CAD$150 billion. Worldwide, the bank has over 86,000 employees and serves approximately 16 million clients.
Founded in 1864 in Halifax, Nova Scotia, the company is now headquartered in Montreal, Quebec with its primary operational office in Toronto. In Canada, the bank is branded RBC Royal Bank or RBC Banque Royale in French.
There are approximately 1,210 RBC branches in Canada. In the United States, RBC Bank exists as a retail banking subsidiary with nearly 450 branches spanning six Southeastern states and serving nearly 1 million clients. The bank has a worldwide investment and corporate banking subsidiary, RBC Capital Markets, and an investment brokerage firm known as RBC Dominion Securities.
Toronto Dominion Bank
The Toronto Dominion Bank, commonly known by the initials TD, is headquartered in Toronto and is a multinational financial and banking services corporation. This bank was formed in 1955 from the merger of the Bank of Toronto, established in 1855, and the Dominion Bank, established in 1869. Based on its CAD$132.8 billion market capitalization, the TD Bank Group is among the top ten banks located in North America.
According to a report by Forbes, Toronto Dominion is ranked the 19th largest bank in the world. Among the bank and its subsidiaries, more than 85,000 individuals are employed and over 22 million clients are served worldwide. The bank operates as TD Canada Trust in Canada and serves more than 11 million clients at 1,150 branches. In the U.S., the bank operates as TD Bank, and it was created through the merger of TD Bank North and Commerce Bank. The U.S. subsidiary has almost 1,300 branches and serves nearly 6.5 million customers.
Bank of Nova Scotia
The Bank of Nova Scotia (BNS), more commonly known as Scotiabank, is Canada’s third largest bank in terms of deposits. It has a market capitalization of just under CAD$90.9 billion. Operating in more than 50 countries around the world, the bank serves more than 25 million customers and provides a vast range of services and products including commercial and personal banking, corporate and investment banking, and wealth management. Scotiabank shares are traded on both the Toronto and New York stock exchanges.
The bank was incorporated in 1832 in Halifax, later moving its executive offices to Toronto in 1900. Scotiabank has touted itself as being Canada's most international bank because of its acquisitions in Latin America, the Caribbean, India and Europe. It is a member of the London Bullion Market Association.
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01b47532d713fd58bae12c08eb199431 | https://www.investopedia.com/articles/investing/082015/4-biggest-chinese-banks.asp | The 4 Biggest Chinese Banks | The 4 Biggest Chinese Banks
The 21st century has seen China assume an increasingly large position in global finance. In fact, the biggest four banks in the world (by asset size) are Chinese, according to the 2019 annual rankings by S&P Global Market Intelligence: the Industrial & Commercial Bank of China, the China Construction Bank, the Bank of China and the Agricultural Bank of China. All four now individually have more than $3 trillion in assets and their collective worth is 1.07% higher compared to the previous year, according to S&P (the growth would have been even higher if not for the currency-rate impact of the yuan's decline).
China’s banking system has undergone major changes in the last two decades, allowing financial institutions to operate significantly more like their counterparts in the West. However, financial operations are still controlled tightly by the government—specifically, through the nation's central bank, the People’s Bank of China (PBOC). Not only is PBOC responsible for the planning and implementation of China’s monetary policy, but it also maintains all of the banking sector’s clearing, payment and settlement systems, in addition to overseeing the State Administration of Foreign Exchange, or SAFE, that establishes foreign exchange policies. Although they trade on public stock exchanges, each of the Big Four banks remains wholly or predominantly state-owned and headquartered in Beijing.
Here, we provide snapshot profiles of each of the four largest banks in China—and the world. All figures are accurate as of Jan. 5, 2020.
key takeaways The four largest banks in the world are all Chinese.China's Big Four banks, in order of asset size, are the Industrial & Commercial Bank of China, the China Construction Bank, the Agricultural Bank of China, and the Bank of China.
Industrial & Commercial Bank of China
Occupying the number one spot is the Industrial & Commercial Bank of China (ICBC). It is the largest multinational bank company in the world as measured by total assets—over $4 trillion as of 2019 —though it's no slouch in other areas either, employing roughly 449,000 people. The bank was established in 1984 as a limited company and, as the name implies, specializes in business loans to manufacturers, retailers, power companies, and other businesses.
In 2006, ICBC had what was at the time the world’s largest initial public offering (IPO) with a value of over $21 billion. It was the first company to ever be listed simultaneously on the Hong Kong Stock Exchange and the Shanghai Stock Exchange.
ICBC has more than 400 overseas subsidiaries. Chief among them is the branch it opened in Kuwait in 2014, the first and only Chinese bank there. It is the fourth branch of the bank in the Middle East, which also has branches in Abu Dhabi, Doha, and Dubai. The opening of this branch served to advance the bank’s service network in the Middle East and is considered a significant accomplishment in the bank’s strategy to expand operations internationally.
China Construction Bank Corp.
The China Construction Bank (CCB) has $3.38 billion in assets as of 2019. It operates nearly 15,000 branches as of 2018, with established subsidiaries in Luxembourg (which serves as the bank’s European headquarters), South Africa, South Korea, the United States, and Australia.
The bank, one of China's oldest, was founded in 1954 as the People’s Construction Bank of China, changing its name in 1996. Bank of America obtained a 9% stake in the bank in 2005, facilitating the bank's continuing rapid growth for the next several years (BOA sold its final stake in 2013).
$13.784 trillion The combined asset value of China's Big Four banks in 2019, according to S&P Global Market Intelligence.
Agricultural Bank of China
The Agricultural Bank of China (ABC), sometimes known as AgBank, was founded in 1951. As its name implies, it originally specialized in financing enterprises in rural China, but more recently it has diversified into corporate and consumer banking services and products—everything from currency trading to credit cards. The bank has over 300 million retail customers, nearly three million corporate clients and almost 25,000 branches around the world, including just about every major city: London, New York, Sydney, Singapore, Seoul, and Tokyo. In terms of lending, ABC is the world’s third-largest provider.
ABC holds $3.29 trillion in assets and employs a similar number of employees to ICBC—464,000 to 449,000.. When it went public in 2010, the last of the Big Four to do so, it broke ICBC's record as the world's largest IPO to date, racking up $22.1 billion.
Bank of China
Established in 1912 to replace the Imperial Bank of China, the Bank of China (BOC) is the native oldest bank still in existence on the mainland. In 2009, the bank was recognized as the second-largest loan provider in China, a position it continues to hold. Its total assets number $3.092 trillion. Its activities include corporate banking, personal banking, investment banking, and insurance. Though no longer the central bank, It is also licensed to issue banknotes in two of China's Special Administrative Regions.
The BOC is considered the most international of all China’s banks, as it has a branch in every inhabited continent in the world. It operates in 57 countries, including Canada, the United States, and throughout the United Kingdom. In 2010, the BOC branch in New York offered renminbi products to Americans, the first major Chinese bank to make such Chinese currency investments available in the U.S.
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61e6a21d14cf5c88282e08364af0a3e6 | https://www.investopedia.com/articles/investing/082115/how-twitchtv-works-and-its-business-model.asp | How Twitch.tv Works and Its Business Model | How Twitch.tv Works and Its Business Model
Video games are generally perceived as solitary engagements for the gamers, or at the most engaging others in multiplayer games. However, the reality is different. People like to watch others play games, which is something nobody saw coming in the early days of video gaming. Twitch's business model works on the addictive appeal of video gaming personalities and the viewers who pay to watch them.
Key Takeaways Twitch.tv is a video-game broadcasting and viewing platform where viewers can "donate" to their favorite players.Twitch.tv, referred to as simply Twitch, was acquired by Amazon in 2014.Video game players broadcast themselves playing the game, usually with an audio commentary. A chat box helps them connect with their audience.The platform accepts payments via Amazon and Paypal.
How Does Twitch.tv Work?
Twitch.tv, owned by Amazon.com (AMZN), is an online service used for watching or broadcasting live or prerecorded videos of gameplays. The broadcasting player usually includes audio commentary. The broadcaster's own video may optionally appear on the corner of the screen via a webcam, and there is also a chat feature where viewers can comment or ask questions.
Almost any video game of any genre can be broadcast and viewed on Twitch. Twitch regularly hosts E-tournaments where various players fight it out for millions of other viewers to watch with live commentary and news. Twitch also hosts events and demos of new upcoming games.
Accessing Twitch
Viewing games on Twitch is registration-free. Broadcasting and chatting require free-of-cost registration. The real-time interactive chatting makes Twitch a real-life social experience in the virtual world. This interaction is how many broadcasters develop a personal connection with their audience. Broadcasters can also archive videos forever, making them available for viewing later. (See related: How to Game the Video Game Industry)
Twitch content is accessible through multiple devices and mediums including PCs, gaming consoles, and mobile devices. Twitch offers access through a web browser and dedicated Twitch apps, also offering dedicated software for improved streaming of videos.
Twitch also offers a software development kit (SDK) and Application Programming Interface (API) to integrate Twitch with game devices, websites, and web applications. For example, using the Twitch API, multiple viewers can play a game by issuing commands through chat. It results in millions of page-views and increased subscriptions to Twitch. (See related: Can Games Make You A Better Investor?)
Business Development and Funding
Justin.tv was founded in 2007, which had video content in several categories. It raised $7 million in funding from angel investors. The popularity of the gaming category increased tremendously, which led to a dedicated spin-off called twitch.tv in June 2011. It successfully raised $15 million in Sept. 2012, and then another $20 million in Sept. 2013.
In Feb. 2014, the original justin.tv was renamed to Twitch Interactive as Twitch maintained its prominence. There were rumors of a possible acquisition by Google’s YouTube (GOOGL) in mid-2014, but it was Amazon.com that acquired Twitch in August 2014 for $970 million. As of today, Twitch continues to operate independently as a wholly-owned subsidiary of Amazon with their CEO carried over from when they were independent.
Ustream.tv, YouTube, and Dailymotion are the primary competitors for Twitch. Youtube is the most prominent one, as it recently announced a dedicated YouTube Gaming platform in June 2015.
How Does Twitch Make Money?
Twitch makes money by advertising and subscription fees. Advertisers include various gaming companies, game portals, game developers, and game event organizers that get a highly targeted audience-base who are practically addicted to video games.
Twitch offers Turbo membership for $8.99 per month, which allows users ad-free viewing of Twitch content, and other enhanced features for using Twitch.
Its revenue-sharing model with broadcasters is an attractive option that brings lots of talented gamers to its platform. It ultimately results in increased revenue for Twitch. (See related: 5 Video Game Stocks to Power Up Your Portfolio)
How Do Twitch Users Make Money?
Twitch broadcasters can apply for the Twitch partnership program, which enables them to get a cut from the advertisement and subscription revenue received by Twitch. Acceptance into the program requires approval, which is based on certain requirements like having a minimum number of viewers, and a minimum of broadcasts per week.
Twitch also allows users to accept PayPal donations from other users, which can be received for sharing game-tips, cheats, and hacks.
Twitch has also partnered with game development companies that offer rewards to outstanding gamers, including scholarships. E-tournaments are regularly conducted on the Twitch platform, which allows reward opportunities for winning players.
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e33458c19276178b2b62dd31b2aa4d8c | https://www.investopedia.com/articles/investing/082313/introduction-strips.asp | Introduction To STRIPS | Introduction To STRIPS
Separate Trading of Registered Interest and Principal Securities (STRIPS) was created to provide investors with another alternative in the fixed-income arena that could meet certain investment objectives that were difficult to achieve using traditional bonds and notes.
Traditional bonds and fixed-income securities pay interest according to a set schedule and then return the investor’s principal amount at maturity. However, they are only available as single securities that pay both interest and principal. A new type of bond was eventually introduced that separated the repayment of the principal from the interest payments.
History of STRIPS
STRIPS were first introduced by investment dealers in the U.S. in the 1960s. They were initially created by physically stripping the paper coupons from bearer bonds and selling them as separate securities. The disadvantages of bearer bonds, such as the investor being unable to receive an interest payment if the coupon was lost or stolen, leading to issuing STRIPS in electronic book-entry form.
How They Work
As is stated in the acronym, STRIPS are simply bonds that have had the interest payments stripped away and sold separately, while the principal amount is still paid out at maturity. The U.S. government does not issue STRIPS directly to investors in the same manner as treasury securities or savings bonds. Instead, they are created by financial institutions such as investment banks, which purchase conventional Treasury securities and then strip the interest payments away from the principal to be sold to investors as separate securities with separate CUSIP numbers. However, STRIPS are still backed by the full faith and credit of the U.S. government, even though they have been disassembled. (STRIPS are also sold, issued, and backed by many other countries' governments as well.)
Example
The U.S. Treasury issues a 30-year bond with a 3.5% coupon rate. An investment bank purchases $100 million of these securities and peels off the 60 semiannual interest payments of $3.5 million each. The bank then registers and sells each interest payment as separate securities along with the principal repayment to create 61 new securities.
Coupon STRIPS are the bonds created from each interest payment, while principal STRIPS represents the claim to repayment of principal from the original bond. Neither coupon nor principal STRIPS have a coupon rate and are thus considered to be zero-coupon bonds, which are issued at a discount and mature at par value. STRIPS are also created from Treasury Inflation-Protected Securities (TIPS) that do not have a set coupon rate and pay a floating interest rate. Because zero-coupon STRIPS do not pay actual interest, their durations are always equal to their maturities. A fixed-rate or inflation-adjusted bond that is stripped must have a face value of at least $100 and can only exceed this amount in increments of $100. A financial institution can also reassemble a STRIP into whole securities if it is able to acquire the principal STRIP plus all the remaining coupon STRIPS.
Tax Treatment
Zero-coupon STRIPS are taxed in a somewhat different manner than most bonds. Traditional bond issuers report the interest that was actually paid on their offerings to investors during the year, but STRIPS does not pay actual interest of any kind, depending on the date it was acquired.
Because STRIPS are issued at a discount and mature at par value, the Original Issue Discount (OID) applies. This requires investors to report phantom interest income that is equal to the increase in the value of the bond for that year. OID that is less than a nominal de minimus amount may be ignored until maturity when it would instead be reported as a capital gain.)
For each year the STRIP is held, the cost basis will increase, and a capital gain or loss could be generated if the bond is sold at a price different from the cost basis. If the bond is held until maturity, the entire discount will be classified as interest income. Investors who purchased STRIPS on TIPS must also report any inflationary adjustment amount every year. The phantom interest from STRIPS is reported by the issuer on Form 1099-OID; however, this figure cannot always be taken at face value and must be recalculated in many cases, such as when the STRIP was purchased at a premium or discount in the secondary market. The tax rules for these calculations are outlined in IRS Pub. 550.
Advantages and Disadvantages
Except for those that are adjusted by inflation, STRIPS always pay out the exact amount of their original coupon or principal amounts at maturity, which makes them ideal funding vehicles for when a definite amount of money is needed at a specific time. However, investors who wish to sell their STRIPS before maturity must often dump them at a loss, if they can sell them at all because the secondary market for these securities is often sparsely traded and sometimes nonexistent. As with other types of bonds, STRIPS can also yield capital gains or losses if they are sold before maturity. However, investors who sell STRIPS before maturity may still have to pay taxes on the OID interest that accrued until the sale date.
Who Buys STRIPS
STRIPS are appropriate instruments for many different types of investors. Many types of institutions buy these securities because of their guaranteed cash flows at maturity. Pension funds, insurance companies, and banks all hold STRIPS in their portfolios for this reason. Retail investors often buy them for the same reason. The phantom tax issue can be avoided by purchasing STRIPS inside IRAs and tax-deferred retirement plans, where they can grow until maturity with no tax consequence.
Conclusion
STRIPS provides an alternative to traditional bonds for investors who need to rely on definite amounts of money coming due at a specific future date. Although they post negative cash flows until maturity, they may also provide superior yields to traditional bonds in some cases and will always mature at face value. For more information on these versatile instruments, visit the U.S. Treasury website at www.treasurydirect.gov or consult your investment advisor.
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195b6c96cdcbd7ef8af05d69536ebadd | https://www.investopedia.com/articles/investing/082415/how-wework-works-and-makes-money.asp | How WeWork Works and Makes Money | How WeWork Works and Makes Money
What Is WeWork?
As one of the most popular shared co-working spaces and hottest startups, WeWork has made a name for itself by giving small businesses and ambitious entrepreneurs a way to pursue the new American Dream. With coworking spaces all around the world, WeWork is also leaving its mark in the heart of New York City, where it purchased the iconic Lord & Taylor building, a Fifth Avenue Manhattan landmark, to house its new headquarters. So how does the company function--and more importantly, how does it makes its money?
History
Founded in 2010, WeWork Companies, Inc. provides a shared workspace to startups at lower costs than they would spend on space of their own. With shared offices gaining popularity, WeWork was valued as high as $47 billion at its highest point. However, when the company filed to go public in the summer of 2019, its S-1 filing revealed mounting losses, long-term lease obligations in the tens of billions of dollars, and significant risks to its ability to ever turn a profit.
Key Takeaways WeWork is a company offering shared co-working spaces for entrepreneurs, remote workers, and freelancers by charging rent. WeWork members benefit from networking opportunities, a host of perks and amenities, and not having to take care of office administrative tasks such as paying utility bills or replenishing the printer ink. Once valued at $47 billion, WeWork has suffered increased scrutiny of its mounting losses and quickly burned through cash and indefinitely postponing its initial public offering announced in August 2019.
How WeWork Makes Money
WeWork is simply an office-leasing company. It makes money by renting office space. WeWork purchases real estate space—sometimes just a floor or two in an office building—and transforms it into smaller offices and common areas. It rents desks to individuals or groups who want the benefits of a fully stocked office without the expense of a full office.
Members include independent freelancers and remote workers who need an occasional office away from home. They may want unlimited Wi-Fi to focus on a deadline. Other customers are small businesses with multiple employees who need a consistent place to work, have meetings, and build their budding empires, but without the high cost.
Those leases don't come cheap. The company reported long-term lease obligations of $17.9 billion in its IPO filing, a number that is likely to increase as the company continues to expand globally.
Shared Office Costs
The shared office culture created companies like Uber and Airbnb. This growing business culture is undoubtedly a large component of WeWork's success. But WeWork’s business model is what makes it thrive.
The most basic membership costs only $45 per month and includes access to WeWork offices in 833 open or coming-soon locations in 120 cities worldwide. It also includes access to WeWork's social network, WeWork Commons, which enables entrepreneurs to interact and exchange ideas. However, the actual use of the facilities costs an additional $50 per day, so it is best suited to those who are primarily interested in networking and only have occasional need for office space.
The company offers several plans to workers and businesses with varying prices, depending on the location. For example, in Los Angeles, a worker can get a “Hot Desk” starting at $320 per month, which will give them guaranteed workspace in a common location. For a desk of your own in the same spot each day, the Dedicated Desk fee starts at $400. Meanwhile, standard private office space in Los Angeles starts at $630 per month. The spaces come with high-speed internet, printers, bike storage, coffee, and shared front desk service. Other amenities include office supplies, water, and daily cleaning services.
$45/month The cost of a basic WeWork membership.
Plans to Go Public in 2019
The company filed for an initial public offering on August 14th, 2019, revealing mounting losses as it attempts to scale its business and global locations. According to the prospectus, WeWork, which has rebranded itself as the We Company, attempted to raise $3 to $4 billion through the IPO to find future growth. For the six months ended June 30, 2019, the company reported revenue of $1.54 billion, but a net income loss of more than $900 million. WeWork's billion-dollar meltdown is now a cautionary business case study.
CEO Adam Neumann Steps Down
On September 24, 2019, Adam Neumann, the company's founder and chief executive officer, stepped down as CEO after weeks of scrutiny over his leadership style, the peculiar arrangement he had with the company wherein he would lease office space to WeWork from properties he had purchased using loans against his equity stake, and mounting losses. In a statement released to the press, Neumann said, "While our business has never been stronger, in recent weeks, the scrutiny directed toward me has become a significant distraction, and I have decided that it is in the best interest of the company to step down as chief executive." He was replaced by senior executives Arthur Minson and Sebastian Gunningham, who will act as co-CEOs.
IPO Withdrawn
WeWork indefinitely postponed its plans for an IPO on September 30th, 2019, as its $47 billion valuation looked increasingly doubtful. On October 22nd, 2019, it announced a funding deal with SoftBank. This deal will give WeWork $5 billion in new loans, accelerate a $1.5 billion investment SoftBank pledged to make next year, and launch a tender offer for $3 billion in shares from other shareholders. SoftBank would get an 80% stake in WeWork, but it would not hold a majority of voting rights. The deal values WeWork at approximately $8 billion.
Why WeWork Works
Of course, WeWork's model wouldn't function if it didn't offer value commensurate with its pricing. One of the chief benefits of using a WeWork space is that everything is taken care of, from utility bills to replenishing the ink in the printer. The WeWork staff keep everything running smoothly so members can focus on their work.
In addition to providing state-of-the-art office space to a generation of workers, WeWork has developed its properties into more than workspaces. Each office location is outfitted with stylishly designed common areas that include numerous leisure activities, such as foosball, screening rooms, arcade games, and bocce greens.
WeWork also provides regular opportunities for its members to meet, socialize, and network, both online and offline. In addition to its popular WeWork Commons online platform, each office site hosts a number of social events, launch parties, and workshops to help its members connect.
WeWork gives its members access to numerous discounts on professional services to help them grow their businesses and live healthier lives. WeWork partners with other companies to offer insider deals to its members on everything from health insurance and gym memberships to human resources and printing services.
Ongoing Expansion
Though it may pose a threat to more traditional office leasing companies, some in the industry see WeWork as more of an opportunity. In fact, the chairman of Boston Properties, Inc.—the largest publicly traded office landlord—personally invested in the rounds of fundraising after talking with Neumann and touring one New York location. WeWork has signed on to be the main tenant in a $300 million redevelopment co-owned by Boston Properties.
Even smaller landlords don't seem overly threatened by this up-and-comer. Some assume WeWork's business model won't be sustainable if the economy takes a downturn. Others see WeWork as a sort of incubator where small businesses can grow until they're ready to move into traditional office space.
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48de5374e5aeef7608d7bba1f935da8c | https://www.investopedia.com/articles/investing/082415/what-are-federal-reserve-chairmans-responsibilities.asp | The Federal Reserve Chairman's Responsibilities | The Federal Reserve Chairman's Responsibilities
The chairman of the Federal Reserve Board is the public face of the Federal Reserve Bank. Officially, the chairman is the active executive officer of the Federal Reserve Board. The chairman's main responsibility is to carry out the mandate of the Fed, which is to promote the goals of maximum employment, stable prices, and moderate long-term interest rates.
The Fed is composed of 12 Federal Reserve banks located in regions around the United States. The banks of the Fed carry out the day-to-day operations and policies of the Fed.
Key Takeaways The chairman of the Federal Reserve Board is the active and most visible executive officer at the Federal Reserve Board. The chairman provides leadership and executes the mandate of the central bank, pushing for maximum employment, stable prices, and long-term interest rates in the moderate range. The chairman and vice-chairman are both chosen by the president from among the seven members of the Board of Governors and then confirmed by the Senate; both initially serve a four-year term and can be reappointed. The chair is also the chair of the Federal Open Markets Committee (FOMC) and is responsible for determining short-term U.S. monetary policy.
Current Fed Chairman
Jerome Powell took over the role of chairman on February 5, 2018. He was nominated by former President Trump in November 2017. Powell was previously a partner at The Carlyle Group, a private investment firm, and served as an assistant secretary and undersecretary of the Treasury during the administration of President George H.W. Bush.
The position of chairman was previously held by Janet Yellen, who took over the post in 2014 under President Obama.
Appointment of the Chairman
The chairman is picked from one of the seven members of the Board of Governors. As set forth in the Banking Act of 1935, the president appoints the seven members of the Board of Governors, who are then confirmed by the Senate.
Members of the Fed serve staggered terms of 14 years and may not be removed for their policy opinions. The president nominates a chairman and vice-chair, both of whom the Senate must also confirm. The chairman and vice-chairman are appointed to four-year terms and can be reappointed, subject to term limitations.
Duties of the Chairman
By statute, the chairman testifies before Congress twice a year on issues that include the Fed’s monetary policy and objectives. The chairman also meets regularly with the secretary of the Treasury, who is a member of the president's Cabinet.
One of the chairman's most important duties is to serve as the chair of the Federal Open Markets Committee (FOMC), which is critical in setting short-term U.S. monetary policy. The chairman's salary is set by Congress.
The Board of Governors currently has six members and one vacancy: Jerome Powell (R), Vice Chairman Richard Clarida (R), Vice Chairman for Supervision Randal Quarles (R), Lael Brainard (D), Michelle Bowman (R), and Christopher J. Waller.
The Federal Open Markets Committee (FOMC)
The FOMC meets eight times a year and is composed of the seven members of the Board of Governors along with five reserve presidents of the Fed. The president of the New York reserve bank serves continuously while the other four bank presidents rotate regularly.
The FOMC determines near-term monetary policy at its meetings. Its main monetary tools are the federal funds rate, the discount rate, and the buying and selling of government securities.
How the Federal Funds Rate Works
The federal funds rate is the interest rate at which member depository institutions lend each other money held at the Fed overnight. It is the key interest rate for the U.S. economy because it is the base rate that determines the level for all other interest rates. A higher federal funds rate makes it more expensive to borrow money.
The effects of the COVID epidemic forced the FOMC to lower the federal funds rate to 0.25%, which is effectively zero, at its most recent meeting on March 16, 2020, from a rate of 1.50% set on March 3, 2020. The last time the rate was so low was during the 2008 financial crisis.
The FOMC kept the federal funds rate at 0.25% for seven years after the crisis to increase the money supply and help achieve the Fed's official mandate. As the economy recovered, the FOMC began raising rates again in late 2015.
Between December 2015 and December 2018, the FOMC raised the fed funds rate one-quarter percentage point at a time, from 0.25% to 2.50%. The last time the rate was at 2.50% was in December 2018.
The discount rate is the interest rate charged to banks that receive loans from regional Federal Reserve Banks. It is also known as the discount window. There are three types of discount windows: primary credit, secondary credit, and seasonal credit.
Quantitative Easing
The FOMC also buys and sells government treasuries to increase and decrease the money supply as necessary. The Fed undertook the largest economic stimulus in history during the 2008 financial crisis by buying massive amounts of U.S. Treasurys and mortgage-backed securities (MBS). The program, called quantitative easing (QE), added around $3.5 trillion to the Fed’s balance sheet. This controversial program ended in 2014 after three large rounds of bond buying.
Since the onset of the coronavirus pandemic, in addition to cutting its key interest rate to 0% and embarking on quantitative easing, the Fed has introduced or reintroduced nine emergency lending facilities.
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0c11547ccd286f710f7fc412685a40da | https://www.investopedia.com/articles/investing/082416/will-there-be-45g-network-5g.asp | Will There Be a 4.5G Network Before a 5G? | Will There Be a 4.5G Network Before a 5G?
The second half of 2016 and early 2017 could witness a minor transformation in high-speed network technology years before the suspected jump between 4G LTE networks and 5G networks. This so-called 4.5G could be big news for the telecommunications industry, individual data plans and even entire corporate operating systems.
Explaining “G” and “LTE”
As it pertains to network technology, the acronym "G" stands for "generation," as in third generation (3G) or fourth generation (4G). While the definitions for first and second-generation phones are pretty clear-cut, the 3G and 4G monikers became marketing tools for all sorts of new innovations. This is why the combination of 4G and LTE is important.
LTE stands for Long Term Evolution, an advanced piece of network technology in the Universal Mobile Telecommunications System (UMTS). In short, LTE allows network consumers to enjoy faster connections while simplifying the infrastructure for network operators, thereby reducing operating costs for providers. By 2016, major providers such as Verizon Communications Inc. (NYSE: VZ), T-Mobile US Inc. (NASDAQ: TMUS) and AT&T Inc. (NYSE: T) all provided broad LTE coverage.
For the average user, 4G LTE represents an upgrade in download speeds from 3G and early 4G networks. The next step, 4.5G LTE, is actually a rebranding of what was previously known as LTE-Advanced Pro (LTE-A or LTE-A Pro).
Why 4.5G and Not 5G?
Half-Gs or even quarter-Gs are not new. Before 3G, the General Packet Radio Service (GPRS) was touted as 2.5G and Enhanced Data Rates for GSM Evolution (EDGE) became known as 2.75G. New technologies that do not constitute entire overhauls are simply differentiated by a sub-1G jump.
Jumping between different generations of network technology typically requires significant hardware changes. This means that mobile consumers frequently must purchase new devices to enjoy the jump from 3G to 4G or from 4G LTE to 5G. One of the reasons that the 4.5G technology only receives a 0.5G distinction is because 4.5G is based on 4G evolution. Many devices with 4G LTE compatibility will only require software upgrades or minor hardware changes when switching to 4.5G.
Most carriers are not expected to deploy a fully functional 5G LTE until 2020 or perhaps even later. That can seem like quite a long time for a progress-hungry technology sector and its headline-watching investor base. The introduction of 4.5G creates a bridge between commonplace 4G technology and the distant benefits of 5G.
What 4.5G LTE Means for Consumers
Some projections suggest 4.5G coverage enables download speeds two or three times faster than most basic 4G. This should be very valuable to consumers and especially businesses that want a leg up on their competitor's operating systems. The first 4.5G launch occurred in late 2015, when Chinese vendor Huawei Culture Co. Ltd (002502.SZ) joined forces with TeliaSonera Norway for a live network demonstration in Oslo.
The list of projected benefits of 4.5G includes additional public safety features, potential for increased carrier aggregation, several features to reduce latency and download speeds in excess of 1 gigabit per second (Gbps). Huawei was able to achieve download speeds of 1.41Gbps during another live trial in February 2016. Alex Ai, director of the Wireless Network Solution Department at Huawei, says that 4.5G is being designed to support virtual reality (VR), augmented reality (AR), 2K/4K video streaming and other internet-of-things (IoT) services.
Video Distribution and Cellular Technology
One of the most anticipated aspects of 4.5G is enhanced video distribution capabilities. Businesses and consumers show a very strong appetite for anytime-ready video distribution, especially high-quality videos. Telecommunication companies see 4.5G as a vehicle for delivering huge data loads that would be cumbersome or impossible on a standard 4G network.
Additionally, IoT applications are rapidly changing the way that businesses communicate and operate. Under 4G and even 4G LTE technologies, however, IoT operations are very low speed and use up a lot of battery. 4.5G may promise some key 5G improvements, only years ahead of schedule.
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7f23f69fafd5cb4e7c196e586f8dfb1c | https://www.investopedia.com/articles/investing/082515/argentina-socialist-country.asp | Is Argentina a Socialist Country? | Is Argentina a Socialist Country?
There is a prominent Socialist Party of Argentina, and the Argentine economy is often criticized for its socialist policies. However, Argentina does not meet the criteria of a full-blown socialist country. Massive inflation problems and sovereign defaults in Argentina during the 1980s and in 2000 to 2001 have caused populist economic sentiment among many Argentinean voters.
After yet another sovereign debt default and restructuring in 2013 and 2014, many were quick to blame the socialist policies implemented by the Argentine government, but there were many other factors, such as political corruption and an irresponsible monetary policy, that were culpable and not necessarily part of a socialist platform.
Key Takeaways Socialism describes an economic and political system of centralized and shared production and ownership lacking free markets, often directed by a central government.Argentina has seen socialist movements since the 1980s, along with other countries in South America, often in response to failed efforts at global integration.Argentine bond failures in the 2000s and 2010s and again in May 2020, coupled with high inflation, have put a critical eye on some of the country's socialist policies.
The Rise of New Latin American Socialism
Argentina could be considered one of the more socialist countries in Central or South America. Other countries, notably Ecuador, Cuba, Bolivia, and Venezuela, have strong ties to socialist movements. Some of Argentina's neighbors are less socialist, and these include Chile, Uruguay, Colombia, and Saint Lucia.
The Latin American region has a long history of populist, socialist, and communist movements. For example, the political waves led by Salvador Allende in Chile, the National Liberation Army in Colombia, and Che Guevara and Fidel Castro in Cuba. By the fall of the Soviet Union in 1991, however, most of these movements had petered out.
This modern wave of Latin American socialism can be seen as a direct response to failed attempts at international development efforts by supranational organizations such as the International Monetary Fund, or IMF, in the 1980s and 1990s. During this period, many countries in the region leaned on foreign loans, printed large quantities of money, and focused on their respective balances of trade. These policies were subsequently blamed for poor economic performance and rising levels of inequality, according to the Gini index.
No country declined as rapidly or as severely as Argentina. In 1989 the average inflation rate in Argentina approached 5,000%, and in March 1990 it peaked at over 20,000%. The country defaulted on its loan obligations, and international investing dried up.
The Socialist Tendencies of Argentina
Many people confuse socialism with a strain of equitable egalitarianism, which advocates the belief that everyone should have equal outcomes. Many socialists might agree with this, but socialism is a public policy platform that argues for government control over the production and distribution of resources; it is not necessarily egalitarian.
If you consider socialism to be the absence of private economic freedom and subjugation of private property to the state, then Argentina is the most restrictive as it pertains to property rights and the least restrictive as it pertains to freedom of trade.
Some areas of Argentinian life are becoming more socialist. In response to new inflation problems , Argentina's President Cristina Fernández de Kirchner confiscated private pension plans to be added to the country's Social Security fund in 2008 and then applied more than 30 new restrictions on capital and monetary freedom from 2011 to 2014. These included high taxes on foreign product purchases, limits on purchases of foreign currencies, and restrictions on airline tickets to foreign destinations.
But many fundamental Argentinean problems, such as massive debt and irresponsible monetary policy, are not part of an official socialist agenda. Some argue that socialist policies lead to larger government deficits, but there are many indebted countries in the world that do not have strong socialist movements.
The Bottom Line
Few countries can be considered explicitly socialist. Even countries such as China and Sweden allow for private property, profitable business enterprises, and freedom of labor movement. There are many in Argentina who would like a more socialist country; a fact that highlights the concept that avowed socialists believe there is still work to be done.
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ab1a5cd87e36085c02182dfcfaef952f | https://www.investopedia.com/articles/investing/082614/how-stock-market-works.asp | How Does the Stock Market Work? | How Does the Stock Market Work?
If the thought of investing in the stock market scares you, you are not alone. Individuals with very limited experience in stock investing are either terrified by horror stories of the average investor losing 50% of their portfolio value—for example, in the two bear markets that have already occurred in this millennium —or are beguiled by "hot tips" that bear the promise of huge rewards but seldom pay off. It is not surprising, then, that the pendulum of investment sentiment is said to swing between fear and greed.
The reality is that investing in the stock market carries risk, but when approached in a disciplined manner, it is one of the most efficient ways to build up one's net worth. While the value of one's home typically accounts for most of the net worth of the average individual, most of the affluent and very rich generally have the majority of their wealth invested in stocks. In order to understand the mechanics of the stock market, let's begin by delving into the definition of a stock and its different types.
Key Takeaways Stocks, or shares of a company, represent ownership equity in the firm, which give shareholders voting rights as well as a residual claim on corporate earnings in the form of capital gains and dividends. Stock markets are where individual and institutional investors come together to buy and sell shares in a public venue. Nowadays these exchanges exist as electronic marketplaces. Share prices are set by supply and demand in the market as buyers and sellers place orders. Order flow and bid-ask spreads are often maintained by specialists or market makers to ensure an orderly and fair market.
Definition of 'Stock'
A stock or share (also known as a company's "equity") is a financial instrument that represents ownership in a company or corporation and represents a proportionate claim on its assets (what it owns) and earnings (what it generates in profits).
Stock ownership implies that the shareholder owns a slice of the company equal to the number of shares held as a proportion of the company's total outstanding shares. For instance, an individual or entity that owns 100,000 shares of a company with one million outstanding shares would have a 10% ownership stake in it. Most companies have outstanding shares that run into the millions or billions.
Common and Preferred Stock
While there are two main types of stock—common and preferred—the term "equities" is synonymous with common shares, as their combined market value and trading volumes are many magnitudes larger than that of preferred shares.
The main distinction between the two is that common shares usually carry voting rights that enable the common shareholder to have a say in corporate meetings (like the annual general meeting or AGM)—where matters such as election to the board of directors or appointment of auditors are voted upon—while preferred shares generally do not have voting rights. Preferred shares are so named because they have preference over the common shares in a company to receive dividends as well as assets in the event of a liquidation.
Common stock can be further classified in terms of their voting rights. While the basic premise of common shares is that they should have equal voting rights—one vote per share held—some companies have dual or multiple classes of stock with different voting rights attached to each class. In such a dual-class structure, Class A shares, for example, may have 10 votes per share, while the Class B "subordinate voting" shares may only have one vote per share. Dual- or multiple-class share structures are designed to enable the founders of a company to control its fortunes, strategic direction and ability to innovate.
Why a Company Issues Shares
Today's corporate giant likely had its start as a small private entity launched by a visionary founder a few decades ago. Think of Jack Ma incubating Alibaba Group Holding Limited (BABA) from his apartment in Hangzhou, China, in 1999, or Mark Zuckerberg founding the earliest version of Facebook, Inc. (FB) from his Harvard University dorm room in 2004. Technology giants like these have become among the biggest companies in the world within a couple of decades.
However, growing at such a frenetic pace requires access to a massive amount of capital. In order to make the transition from an idea germinating in an entrepreneur's brain to an operating company, they need to lease an office or factory, hire employees, buy equipment and raw materials, and put in place a sales and distribution network, among other things. These resources require significant amounts of capital, depending on the scale and scope of the business startup.
Raising Capital
A startup can raise such capital either by selling shares (equity financing) or borrowing money (debt financing). Debt financing can be a problem for a startup because it may have few assets to pledge for a loan—especially in sectors such as technology or biotechnology, where a firm has few tangible assets—plus the interest on the loan would impose a financial burden in the early days, when the company may have no revenues or earnings.
Equity financing, therefore, is the preferred route for most startups that need capital. The entrepreneur may initially source funds from personal savings, as well as friends and family, to get the business off the ground. As the business expands and capital requirements become more substantial, the entrepreneur may turn to angel investors and venture capital firms.
Listing Shares
When a company establishes itself, it may need access to much larger amounts of capital than it can get from ongoing operations or a traditional bank loan. It can do so by selling shares to the public through an initial public offering (IPO). This changes the status of the company from a private firm whose shares are held by a few shareholders to a publicly traded company whose shares will be held by numerous members of the general public. The IPO also offers early investors in the company an opportunity to cash out part of their stake, often reaping very handsome rewards in the process.
Once the company's shares are listed on a stock exchange and trading in it commences, the price of these shares will fluctuate as investors and traders assess and reassess their intrinsic value. There are many different ratios and metrics that can be used to value stocks, of which the single-most popular measure is probably the Price/Earnings (or PE) ratio. The stock analysis also tends to fall into one of two camps—fundamental analysis, or technical analysis.
What is a Stock Exchange?
Stock exchanges are secondary markets, where existing owners of shares can transact with potential buyers. It is important to understand that the corporations listed on stock markets do not buy and sell their own shares on a regular basis (companies may engage in stock buybacks or issue new shares, but these are not day-to-day operations and often occur outside of the framework of an exchange). So when you buy a share of stock on the stock market, you are not buying it from the company, you are buying it from some other existing shareholder. Likewise, when you sell your shares, you do not sell them back to the company—rather you sell them to some other investor.
The first stock markets appeared in Europe in the 16th and 17th centuries, mainly in port cities or trading hubs such as Antwerp, Amsterdam, and London. These early stock exchanges, however, were more akin to bond exchanges as the small number of companies did not issue equity. In fact, most early corporations were considered semi-public organizations since they had to be chartered by their government in order to conduct business.
In the late 18th century, stock markets began appearing in America, notably the New York Stock Exchange (NYSE), which allowed for equity shares to trade. The honor of the first stock exchange in America goes to the Philadelphia Stock Exchange (PHLX), which still exists today. The NYSE was founded in 1792 with the signing of the Buttonwood Agreement by 24 New York City stockbrokers and merchants. Prior to this official incorporation, traders and brokers would meet unofficially under a buttonwood tree on Wall Street to buy and sell shares.
The advent of modern stock markets ushered in an age of regulation and professionalization that now ensures buyers and sellers of shares can trust that their transactions will go through at fair prices and within a reasonable period of time. Today, there are many stock exchanges in the U.S. and throughout the world, many of which are linked together electronically. This in turn means markets are more efficient and more liquid.
There also exists a number of loosely regulated over-the-counter exchanges, sometimes known as bulletin boards, that go by the acronym OTCBB. OTCBB shares tend to be more risky since they list companies that fail to meet the more strict listing criteria of bigger exchanges. For example, larger exchanges may require that a company has been in operation for a certain amount of time before being listed, and that it meets certain conditions regarding company value and profitability. In most developed countries, stock exchanges are self-regulatory organizations (SROs), non-governmental organizations that have the power to create and enforce industry regulations and standards. The priority for stock exchanges is to protect investors through the establishment of rules that promote ethics and equality. Examples of such SRO’s in the U.S. include individual stock exchanges, as well as the National Association of Securities Dealers (NASD) and the Financial Industry Regulatory Authority (FINRA).
How Share Prices Are Set
The prices of shares on a stock market can be set in a number of ways, but most the most common way is through an auction process where buyers and sellers place bids and offers to buy or sell. A bid is the price at which somebody wishes to buy, and an offer (or ask) is the price at which somebody wishes to sell. When the bid and ask coincide, a trade is made.
The overall market is made up of millions of investors and traders, who may have differing ideas about the value of a specific stock and thus the price at which they are willing to buy or sell it. The thousands of transactions that occur as these investors and traders convert their intentions to actions by buying and/or selling a stock cause minute-by-minute gyrations in it over the course of a trading day. A stock exchange provides a platform where such trading can be easily conducted by matching buyers and sellers of stocks. For the average person to get access to these exchanges, they would need a stockbroker. This stockbroker acts as the middleman between the buyer and the seller. Getting a stockbroker is most commonly accomplished by creating an account with a well established retail broker.
Stock Market Supply and Demand
The stock market also offers a fascinating example of the laws of supply and demand at work in real time. For every stock transaction, there must be a buyer and a seller. Because of the immutable laws of supply and demand, if there are more buyers for a specific stock than there are sellers of it, the stock price will trend up. Conversely, if there are more sellers of the stock than buyers, the price will trend down.
The bid-ask or bid-offer spread—the difference between the bid price for a stock and its ask or offer price—represents the difference between the highest price that a buyer is willing to pay or bid for a stock and the lowest price at which a seller is offering the stock. A trade transaction occurs either when a buyer accepts the ask price or a seller takes the bid price. If buyers outnumber sellers, they may be willing to raise their bids in order to acquire the stock; sellers will, therefore, ask higher prices for it, ratcheting the price up. If sellers outnumber buyers, they may be willing to accept lower offers for the stock, while buyers will also lower their bids, effectively forcing the price down.
Matching Buyers to Sellers
Some stock markets rely on professional traders to maintain continuous bids and offers since a motivated buyer or seller may not find each other at any given moment. These are known as specialists or market makers. A two-sided market consists of the bid and the offer, and the spread is the difference in price between the bid and the offer. The more narrow the price spread and the larger size of the bids and offers (the amount of shares on each side), the greater the liquidity of the stock. Moreover, if there are many buyers and sellers at sequentially higher and lower prices, the market is said to have good depth. Stock markets of high quality generally tend to have small bid-ask spreads, high liquidity, and good depth. Likewise, individual stocks of high quality, large companies tend to have the same characteristics.
Matching buyers and sellers of stocks on an exchange was initially done manually, but it is now increasingly carried out through computerized trading systems. The manual method of trading was based on a system known as "open outcry," in which traders used verbal and hand signal communications to buy and sell large blocks of stocks in the "trading pit" or the floor of an exchange.
However, the open outcry system has been superseded by electronic trading systems at most exchanges. These systems can match buyers and sellers far more efficiently and rapidly than humans can, resulting in significant benefits such as lower trading costs and faster trade execution.
Benefits of Stock Exchange Listing
Until recently, the ultimate goal for an entrepreneur was to get his or her company listed on a reputed stock exchange such as the New York Stock Exchange (NYSE) or Nasdaq, because of the obvious benefits, which include:
An exchange listing means ready liquidity for shares held by the company's shareholders. It enables the company to raise additional funds by issuing more shares. Having publicly traded shares makes it easier to set up stock options plans that are necessary to attract talented employees. Listed companies have greater visibility in the marketplace; analyst coverage and demand from institutional investors can drive up the share price. Listed shares can be used as currency by the company to make acquisitions in which part or all of the consideration is paid in stock.
These benefits mean that most large companies are public rather than private; very large private companies such as food and agriculture giant Cargill, industrial conglomerate Koch Industries, and DIY furniture retailer Ikea are among the world's most valuable private companies, and they are the exception rather than the norm.
Problems of Stock Exchange Listing
But there are some drawbacks to being listed on a stock exchange, such as:
Significant costs associated with listing on an exchange, such as listing fees and higher costs associated with compliance and reporting. Burdensome regulations, which may constrict a company's ability to do business. The short-term focus of most investors, which forces companies to try and beat their quarterly earnings estimates rather than taking a long-term approach to their corporate strategy.
Many giant startups (also known as "unicorns" because startups valued at greater than $1 billion used to be exceedingly rare) are choosing to get listed on an exchange at a much later stage than startups from a decade or two ago. While this delayed listing may partly be attributable to the drawbacks listed above, the main reason could be that well-managed startups with a compelling business proposition have access to unprecedented amounts of capital from sovereign wealth funds, private equity, and venture capitalists. Such access to seemingly unlimited amounts of capital would make an IPO and exchange listing much less of a pressing issue for a startup.
The number of publicly traded companies in the U.S. is also shrinking—from more than 8,000 in 1996 to around to between 4,100 and 4,400 in 2017.
Investing in Stocks
Numerous studies have shown that, over long periods of time, stocks generate investment returns that are superior to those from every other asset class. Stock returns arise from capital gains and dividends. A capital gain occurs when you sell a stock at a higher price than the price at which you purchased it. A dividend is the share of profit that a company distributes to its shareholders. Dividends are an important component of stock returns—since 1956, dividends have contributed nearly one-third of total equity return, while capital gains have contributed two-thirds.
While the allure of buying a stock similar to one of the fabled FAANG quintet—Facebook, Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX), and Google parent Alphabet Inc. (GOOGL)—at a very early stage is one of the more tantalizing prospects of stock investing, in reality, such home runs are few and far between. Investors who want to swing for the fences with the stocks in their portfolios should have a higher tolerance for risk; such investors will be keen to generate most of their returns from capital gains rather than dividends. On the other hand, investors who are conservative and need the income from their portfolios may opt for stocks that have a long history of paying substantial dividends.
Market Cap and Sector
While stocks can be classified in a number of ways, two of the most common are by market capitalization and by sector.
Market capitalization refers to the total market value of a company's outstanding shares and is calculated by multiplying these shares by the current market price of one share. While the exact definition may vary depending on the market, large-cap companies are generally regarded as those with a market capitalization of $10 billion or more, while mid-cap companies are those with a market capitalization of between $2 billion and $10 billion, and small-cap companies fall between $300 million and $2 billion.
The industry standard for stock classification by sector is the Global Industry Classification Standard (GICS), which was developed by MSCI and S&P Dow Jones Indices in 1999 as an efficient tool to capture the breadth, depth, and evolution of industry sectors. GICS is a four-tiered industry classification system that consists of 11 sectors and 24 industry groups. The 11 sectors are:
Energy Materials Industrials Consumer Discretionary Consumer Staples Health Care Financials Information Technology Communication Services Utilities Real Estate
This sector classification makes it easy for investors to tailor their portfolios according to their risk tolerance and investment preference. For example, conservative investors with income needs may weight their portfolios toward sectors whose constituent stocks have better price stability and offer attractive dividends – so-called "defensive" sectors such as consumer staples, health care, and utilities. Aggressive investors may prefer more volatile sectors such as information technology, financials, and energy.
Stock Market Indices
In addition to individual stocks, many investors are concerned with stock indices (also called indexes). Indices represent aggregated prices of a number of different stocks, and the movement of an index is the net effect of the movements of each individual component. When people talk about the stock market, they often are actually referring to one of the major indices such as the Dow Jones Industrial Average (DJIA) or the S&P 500.
The DJIA is a price-weighted index of 30 large American corporations. Because of its weighting scheme and that it only consists of 30 stocks—when there are many thousand to choose from—it is not really a good indicator of how the stock market is doing. The S&P 500 is a market cap-weighted index of the 500 largest companies in the U.S., and is a much more valid indicator. Indices can be broad such as the Dow Jones or S&P 500, or they can be specific to a certain industry or market sector. Investors can trade indices indirectly via futures markets, or via exchange traded funds (ETFs), which trade like stocks on stock exchanges.
A market index is a popular measure of stock market performance. Most market indices are market-cap weighted—which means that the weight of each index constituent is proportional to its market capitalization—although a few like the Dow Jones Industrial Average (DJIA) are price-weighted. In addition to the DJIA, other widely watched indices in the U.S. and internationally include:
S&P 500 Nasdaq Composite Russell Indices (Russell 1000, Russell 2000) TSX Composite (Canada) FTSE Index (UK) Nikkei 225 (Japan) Dax Index (Germany) CAC 40 Index (France) CSI 300 Index (China) Sensex (India)
Largest Stock Exchanges
Stock exchanges have been around for more than two centuries. The venerable NYSE traces its roots back to 1792 when two dozen brokers met in Lower Manhattan and signed an agreement to trade securities on commission; in 1817, New York stockbrokers operating under the agreement made some key changes and reorganized as the New York Stock and Exchange Board.
1:43 How The Stock Market Works
The NYSE and Nasdaq are the two largest exchanges in the world, based on the total market capitalization of all the companies listed on the exchange. The number of U.S. stock exchanges registered with the Securities and Exchange Commission has reached nearly two dozen, though most of these are owned by either CBOE, Nasdaq or NYSE. The table below displays the 20 biggest exchanges globally, ranked by total market capitalization of their listed companies.
Domestic Market Capitalization (USD millions) Exchange Location Market Cap.* NYSE U.S. 22,987,587 Nasdaq U.S. 13,286,825 Japan Exchange Group Japan 6,000,171 Shanghai Stock Exchange China 5,037,349 Euronext France 4,821,103 Hong Kong Exchanges and Clearing Hong Kong 4,595,366 LSE Group U.K. 4,024,164 Shenzhen Stock Exchange China 3,454,965 TMX Group Canada 2,386,066 Saudi Stock Exchange (Tadawul) Saudi Arabia 2,333,838 BSE India Limited India 2,181,351 National Stock Exchange of India Limited India 2,162,693 Deutsche Boerse AG Germany 2,020,041 SIX Swiss Exchange Switzerland 1,775,268 Nasdaq Nordic and Baltics Sweden 1,594,481 Australian Securities Exchange Australia 1,497,599 Korea Exchange South Korea 1,402,716 Taiwan Stock Exchange Taiwan 1,143,210 B3 - Brasil Bolsa Balcão Brazil 1,118,281 Moscow Exchange Moscow 772,189 * as of January 2020
Source: World Federation of Exchanges
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32dd93d2fbaf86f233065e965b8fa73b | https://www.investopedia.com/articles/investing/082813/how-value-insurance-company.asp | How To Value An Insurance Company | How To Value An Insurance Company
Most investors avoid trying to value financial firms due to their complicated nature. However, a number of straightforward valuation techniques and metrics can help them quickly decide whether digging deeper into valuation work will be worth the effort. These straightforward techniques and metrics also apply to insurance companies, though there are also a number of more specific industry valuation measures.
A Brief Introduction to Insurance
On the face of it, the concept of an insurance business is pretty straightforward. An insurance firm pools together premiums that customers pay to offset the risk of loss. This risk of loss can apply to many different areas, which explains why health, life, property and casualty (P&C) and specialty line (more unusual insurance where risks are more difficult to evaluate) insurers exist. The difficult part of being an insurer is properly estimating what future insurance claims will be and setting premiums at a level that will cover these claims, as well as leave an ample profit for shareholders.
Beyond the above core insurance operations, insurers run and manage investment portfolios. The funds for these portfolios come from reinvesting profits (such as earned premiums, where the premium is kept because no claim occurred during the policy's duration) and from premiums before they get paid out as claims.
This second category is a concept known as float and is important to understand. Warren Buffett frequently explains what float is in Berkshire Hathaway’s annual shareholder letters. Back in 2000 he wrote: "To begin with, float is money we hold but don't own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money. This pleasant activity typically carries with it a downside: The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an "underwriting loss", which is the cost of float. An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is higher than market rates for money."
Buffett also touches on what makes valuing an insurance company difficult. An investor has to trust that the firm’s actuaries are making sound and reasonable assumptions that balance the premiums they take in with the future claims they will have to pay out as insurance payments. Major errors can ruin a firm, and risks can run many years out, or decades in the case of life insurance.
Insurance Valuation Insight
A couple of key metrics can be used to value insurance companies, and these metrics happen to be common to financial firms in general. These are price to book (P/B) and return on equity (ROE). P/B is a primary valuation measure that relates the insurance firm’s stock price to its book value, either on a total firm value or a per-share amount. Book value, which is simply shareholders’ equity, is a proxy for a firm’s value should it cease to exist and be completely liquidated. Price to tangible book value strips out goodwill and other intangible assets to give the investor a more accurate gauge on the net assets left over should the company close shop. A quick rule of thumb for insurance firms (and again, for financial stocks in general) is that they are worth buying at a P/B level of 1 and are on the pricey side at a P/B level of 2 or higher. For an insurance firm, book value is a solid measure of most of its balance sheet, which consists of bonds, stocks and other securities that can be relied on for their value given an active market for them.
ROE measures the income level an insurance firm is generating as a percentage of shareholders equity, or book value. An ROE around 10% suggests a firm is covering its cost of capital and generating an ample return for shareholders. The higher the better, and a ratio in the mid-teens is ideal for a well-run insurance firm.
Other comprehensive income (OCI) is also worth a look. This measure shows the implications of investment portfolio on profits. OCI can be found on the balance sheet, but the measure is also now on its own statement in an insurance firm’s financial statements. It gives a clearer indication of unrealized investment gains in the insurance portfolio and changes in equity, or book value, that are important to measure.
A number of valuation metrics are more specific to the insurance industry. The Combined Ratio measures incurred losses and expenses as a percentage of earned premiums. A ratio above 100% means the insurance firm is losing money on its insurance operations. Below 100% suggests an operating profit.
One investment banking report advocated a focus on premium growth potential, the potential to introduce new products, the projected combined ratio for the business, and the expected payout of future reserves and associated investment income in regard to the new business an insurance firm is generating (because of the difference in timing between premiums and future claims). Therefore, the liquidation scenario and emphasis on book value is most valuable. Also, comparable approaches that compare a firm to its peers (such as ROE levels and trends) and buyout transactions are useful in valuing an insurer.
Discounted cash flow (DCF) can be used to value an insurance firm, but it is less valuable because cash flow is more difficult to gauge. This is due to the influence of the investment portfolio, and resulting cash flows on the cash flow statement, which make it harder to gauge the cash being generated from the insurance operations. Another complication mentioned above is that these flows require many years to generate.
A Valuation Example
Below is an example to give a clearer picture of the above valuation discussion. Life insurer MetLife (NYSE:MET) is one of the largest in the industry. It is the 2nd largest U.S.-based insurer based on total assets, and its market capitalization level as of April 2020 was over $34 billion, which is dwarfed by China Life Insurance Co. (NYSE:LFC) at $130 billion. Prudential plc (of the U.K.) is another large player with a market cap at $38 billion.
MetLife’s ROE has only averaged 6.84% over the last ten years and 2017 was a difficult year that they have recovered from. This was below the industry average of 9.43% during this period, but MetLife’s ratio is projected to reach 12% to 14% over the near-term. China Life’s ten year average ROE is currently 10.78%, and Prudential's is 0.57%. MetLife is currently trading at a P/B of 0.5, which is below the industry average of 0.91. China Life’s P/B is 1.32, and Prudential's is 1.68.
Based on the above, MetLife looks like a reasonable bet. Its ROE is returning to double digits and is above the industry average. Its P/B is also below 1, which is generally a good entry point for investors based on historical P/B trends. MetLife has higher ROE than Prudential but less than China Life, and both P/B are much higher. This is where it becomes important to dig deeper into each firm’ financial statements. OCI is important in investigating the investment portfolios, and analyzing growth trends will be needed to decide if paying a higher P/B multiple is warranted. If these firms outgrow the industry, they could be worth paying a premium.
Bottom Line
As with any valuation exercise, there is as much art as science in getting to a reasonable value estimate. Historical numbers are easy to calculate and measure, but valuation is about making a reasonable estimate of what the future holds. In the insurance space, accurate predictions of metrics such as ROE are important, and paying a low P/B can help put the odds in investors' favor.
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b7196dcfc6006efe699f292f421f1b0f | https://www.investopedia.com/articles/investing/082814/companies-succeeded-bootstrapping.asp | Companies That Succeeded With Bootstrapping | Companies That Succeeded With Bootstrapping
Bootstrapping is likely to be part of the history of nearly every successful company. In many cases, these companies are entirely bootstrapped before management accepts venture capital or other means of outside funding.
Entrepreneurs who are self-made—that is, they bootstrapped their way to success—are a rare breed. To start a business and bring it to successful fruition takes a sound mix of confidence, risk tolerance, self-discipline, determination, and competitiveness. Bootstrappers take an idea—and using talent and professionalism—build a worthwhile business without the backing from investors and having little or no starting capital. It takes great dedication, sound work ethics, and pure single-mindedness to achieve success this way. Some of the greatest entrepreneurs—such as Sam Walton and Steve Jobs—exemplify these characteristics.
Key Takeaways Entrepreneurs who bootstrap their companies start with very little money and no outside investments to build their business. Instead, these entrepreneurs might rely on sweat equity, customer funding, personal debt, or personal savings to provide initial capital. For new companies, bootstrapping might be an effective model because it encourages simplicity and flexibility during the early-growth phase. Software development platform company, GitHub, launched as a bootstrapped startup in 2008 and was bought by Microsoft for $7.5 billion in 2018.
The Origin of Bootstrapping
The origin of bootstrapping is unclear, but a couple of sayings that apply are:
"Pull oneself over a fence by one's bootstraps." This saying originated in the early 19th century United States and implies that it is an impossible action, “Pulling oneself up by one’s bootstraps.” This refers to 19th-century high-top boots that were pulled on by tugging at ankle straps. It generally means doing something on your own, without outside help, and in many cases, the hard way.
This definition provides additional insight:
Bootstrapping is the minimalistic business culture approach to starting a company, which is characterized by extreme sparseness and simplicity. It usually refers to the starting of a self-sustaining process that is supposed to proceed without external input.
In other words, bootstrapping is a process whereby an entrepreneur starts a self-sustaining business, markets it, and grows the business by using limited resources or money. This is accomplished without the use of venture capital firms or even significant angel investment.
Bootstrapping Methods
By using a collection of methods to minimize the amount of outside debt and equity financing needed from banks and investors, companies that are bootstrapping will look at:
Owner Financing: The use of personal income and savings. Personal Debt: Usually incurring personal credit card debt. Sweat Equity: A party's contribution to the company in the form of effort. Operating Costs: Keep costs as low as possible. Inventory Minimization: Requires a fast turnaround of inventory. Subsidy Finance: Government cash payments or tax reductions. Selling: Cash to run the business comes from sales.
Bootstrapping a Business/Company
A bootstrapped company usually grows through three funding stages: 1) beginning stage, 2) customer-funded stage, and 3) credit stage.
Beginning Stage
This stage normally starts with some personal savings, or borrowed or investment money from friends and family, or as a side business—the founder continues to work a day job as well as start the business on the side.
Customer-Funded Stage
In this stage, money from customers is used to keep the business operating and, eventually, funds growth. Once operating expenses are met, growth will speed up.
Credit Stage
In the credit stage, the entrepreneur must focus on the funding of specific activities, such as improving equipment, hiring staff, etc. At this stage, the company takes out loans or may even find venture capital, for expansion.
What's Needed to Bootstrap a Company
To run a successful bootstrapped company, an entrepreneur must execute a big idea, focus on profits, develop skills, and become a better business person.
Execute on Big Idea
With a big idea, it is best to break it into a series of ideas, and then execute the startup on the best portion. Then you follow up on other sections later. In most instances, a company will be successful in its execution of a business idea, rather than the idea itself.
Focus on Profits
This is what funds the business. A very different mindset must be employed for bootstrapped startups compared to the management mindset in a venture-funded or angel-funded company. Usually bootstrapped businesses expect to be around for a long time, slowly and quietly growing, developing paying customers to meet the business costs; whereas, companies involved with outside funding will be expected to have high growth so that the investor can have a profitable exit strategy.
Development of Skills
People starting a business must develop a wide variety of skills, as well as passion, resilience, perseverance, and courage. These are usually required to make a bootstrapped company workable.
Becoming a Better Business Person
Improving one's core values matters too, including being resourceful, accountable, and careful, as well as enthusiastic, passionate, and relentless in the advancement of the company.
Companies Suitable for Bootstrapping
There are generally two types of companies that can bootstrap:
Early-stage companies, which do not require large influxes of capital, particularly from outside sources, which therefore allows for flexibility and time to grow. Serial entrepreneur companies, where the founder has money from the sale of a previous company to invest.
Advantages of Bootstrapping
Low Cost of Entry
Bootstrapping is cheap—working with your own money means that super-efficiency is necessary. You are more aware of the costs involved in the day-to-day running of the business and start operating your company on a "lean" business model.
Having to solve problems without external funding means that bootstrappers have to become resourceful and develop a versatile skill set.
You Call the Shots
Without any external investors (as only founders are investing in the business), the founders’ equity and control over the company is not diluted. The founders are their own bosses and are responsible for all crucial decisions in operating and growing the company. This can ensure that the business is moving in the direction desired, according to the founders’ vision and cultural values, without any investor influence, and when successful, ultimately means keeping the profits for themselves.
Concentrate on Building the Business
The fact that raising external finance is not an issue, which can be a very stressful and time-consuming task, allows for full concentration on the core aspects of the business such as sales and product development. Additionally, due to the limited cash supply—alternative options, such as factoring, asset re-financing, and trade finance—become part of the norm with bootstrapping.
Building the financial foundations of a business, on your own, is a huge attraction to future investors. Investors, such as banks and venture companies are much more confident funding businesses that are already backed and have shown promise and commitment by their owners. Business glitches can be rectified with growth, such as product and service—therefore, perfection at the launch of the business is not a necessity.
Disadvantages of Bootstrapping
Cash Flow Issues
Because of the lack of capital and cash flow, problems can arise if a company doesn’t generate the capital it needs to develop products and grow. An entrepreneur's lack of experience and know-how—particularly in the fields of business acumen and leads—can cause stagnation and disaster.
Equity Issues Among Multiple Founders
When there is more than one founder, equity issues can become a problem. If there is an imbalance between the founders regarding the amount of capital invested, experience, or time, this could cause disharmony as well as adverse tax consequences.
Commingling company funds and personal funds can defeat one of the major reasons to incorporate or set up an LLC. A record of founders’ capital provided to the business will help alleviate this problem. Also, consulting an attorney is beneficial for company startups.
Risk of Failure Can Be High
Although bootstrapping allows for greater control and the profits are yours, it also involves much more risk where losses and failures may be experienced. One reason some bootstrapped companies are unsuccessful is due to the lack of revenue: Profit is not sufficient to meet all costs.
Starting a business most often requires very long hours of work just to keep your business going, let alone the fact that in many cases, there is no paycheck to go with this effort. All problems are yours, as hiring staff is not usually applicable; therefore solutions are limited to your ability or the abilities of friends and relatives who might be willing to help.
Personal Stress
You'll need to become adept at handling stressful situations that might crop up if you finance your company using debt to another person, such as family members and friends. Understanding what is expected of you and communicating this clearly to others can help you cope with the stress of the situation.
Successful Bootstrapped Companies
Building a strong business with a sound foundation and value takes time and many bootstrapped companies have achieved this by providing amazing products or services. Eventually, they reach the point, through solid strategies and sustainable profit, where the company grows to have a powerful position within their industry.
Many of the successful companies that we see today had their humble beginnings as a bootstrapped enterprise. Examples of these include:
Dell Computers (DELL) Facebook Inc. (FB) Apple Inc. (AAPL) Clorox Co. (CLX) Coca Cola Co. (KO) Hewlett-Packard (HPQ) Microsoft Corp. (MSFT) Oracle Corp. ( ORCL) eBay Inc. (EBAY) Cisco Systems Inc. (CSCO) SAP (SAP)
Obviously, there are entrepreneurs behind the scenes of successfully bootstrapped companies, such as Bill Gates, Steve Jobs, Michael Dell, and Richard Branson.
Example of a Bootstrapped Company
GoPro, Inc. (GPRO), which was formerly Woodman Labs, Inc, is an American corporation that develops, manufactures, and markets high-definition personal cameras. The company manufactures small, body-worn cameras that record the user's experiences. These cameras became popular among sports enthusiasts because of their ability to record hands-free, high-definition footage.
Nick Woodman, an American from California, conceived the idea of a wrist strap that could tether already-existing cameras to surfers. His inspiration came after a 2002 Australia surfing trip where he was hoping to capture quality action photos of his surfing. But he found he was unsuccessful as an amateur photographer because he could not obtain quality equipment at accessible prices. He tested his first makeshift models but came to the realization that these were not good enough, therefore concluding that he would have to manufacture the camera, its housing, and the strap himself.
The initial money Woodman raised to found the company—$10,000 dollars in bootstrapped cash—came from selling bead and shell belts out of his VW van. He moved back in with his parents at age 26 and worked many long hours to develop his product. He scraped by doing many different types of work—from emailing to truck driving—so that he could design his product, which he did by hand because he didn’t have enough computer design experience to do so electronically.
In 2004, the company sold its first camera system, which was a 35mm analog camera, which eventually evolved to digital. As new adopters discovered the product, the cameras branched out from the surf scene to be used for auto racing, skiing, bicycling, snowboarding, skydiving, base jumping, white-water rafting, and skateboarding.
Sales Drive Growth
At the end of 2004, GoPro had $150,000 in revenue. At the end of 2005, GoPro made $350,000 in sales. The company consistently grew revenue and in 2014 GoPro went public with an initial public offering (IPO) valued at $2.96 billion.
Although it took 10 years for GoPro to reach its zenith, there had been a great deal of aggressive marketing, social media strategy, as well as constant consumer technology advancements going on throughout this time. And, of course, the company benefitted from being in the right place at the right time by taking advantage of a situation when smartphones were making traditional digital cameras and camcorders obsolete.
However, Woodman was not a success the first time around. Previously, he had built two companies. The first was a website called “EmpowerAll.com,” selling electronic products. The second, “Funbug," (funded to the tune of $3.9 million) was a gaming and marketing platform. Both failed. Determined to succeed, Woodman came back a third time to pursue his dreams with GoPro.
The Ups and Downs of Business
It's important to note that like all businesses, a company that starts out as a bootstrap venture will face the same headwinds that all companies face once they mature past the early stages. GoPro is no exception to this. Since trading at a high of around $93 a share in Oct. 2014, the company's stock has plummetted to around $4.60 a share as of June 2020.
The business model that made the company successful began to falter when GoPro faced competition from other action-camera companies and from the new technology that made smartphones the camera of choice for many consumers. Over the years, GoPro's competitive advantage over its rivals has decreased. Going forward, the company looks to recapture market share by introducing new cameras that feed the demand for high-quality social media content.
Other Bootstrapped Companies
Most companies have a bit of bootstrap in their past before moving to the next step and accepting outside funding. The decision to go the road of bootstrapping and create a self-funding business has been known to provide rewards that can be both immediate and lasting.
Basecamp
Basecamp (which started out as 37Signals) is a web application company that produces simple, focused software. It has become a highly successful business that started as a cash-strapped startup. It was founded in 1999 by Jason Fried and David Heinemeier Hansson (or DHH), who have co-written three bestselling books: Getting Real, Rework, and Remote.
In the early years up until around 2004, the company was primarily a consulting agency, basically helping to create and improve company website designs for companies such as Panera Bread and Meetup.com.
Since its launch, the company has developed many new products—producing both free and paid versions. In 2004, Basecamp—a powerful business tool for large and small businesses looking to get a project management app—became the flagship product of the company.
GitHub
GitHub, a web-based hosting service for software development projects that uses the Git revision control system, was founded by Tom Preston-Werner, Chris Wanstrath, and PJ Hyett.
This started as a weekend project, with the founders covering the costs involved to buy a domain, and when the decision was made to bring GitHub into fulltime operation they funded the setup costs themselves.
This platform for developers—which functions as a social network, portfolio space, and co-working space—took off. By 2013, GitHub had hit the 3 million user mark.
As the platform became accepted by programmers, requests for private repositories, or safe places to store their codes where others couldn’t view or steal them, were being received. After this, the founders left their day jobs and focused full-time on the business by working various hours and locations, and began to release products that may not have been perfect at the start, but with customer feedback, they corrected the issues and the business grew. As of April 2020, 50 million developers worldwide use the company's software development platform.
On Oct. 26, 2018, Microsoft closed on a deal to acquire GitHub for $7.5 billion.
TechCrunch
TechCrunch, a technology website, was founded in 2005 by a successful serial entrepreneur, Mike Arrington, along with Keith Teare. TechCrunch became the epitome of technology blogs online and basically transformed the space of blogging into great works of journalism. The site achieved enormous growth and a loyal readership by putting out high quality, consistent content and by sharing stories about the latest happenings in the tech and entrepreneurship worlds.
To further enhance their presence, TechCrunch also created its powerful CrunchBase database with over half a million startups and high caliber entrepreneurs. In 2010, TechCrunch was sold to AOL for a rumored $25 to 40 million. At the time, Arrington personally owned 85% of the company.
Plenty of Fish
Plenty of Fish, one of the largest and most popular dating sites in the world, founded by Markus Frind, became a full-time business in 2004. Until 2008, Frind conducted his startup from his apartment, and then eventually acquired a new Vancouver, Canada headquarters where he began hiring other employees.
As of June e2020, Plenty of Fish had over 150 million registered users worldwide and is adding an average of 65,000 new users every day. The free app is available in 11 languages and more than 20 countries on iOS and Android devices. The company makes money via advertising as well as offering premium services as part of their upgraded membership. In 2015, Plenty of Fish was acquired by Match Group.
The Bottom Line
There are many companies that have been successfully bootstrapped: Braintree, TechSmith, Envato, AnswerLab, Litmus, iData, BigCommerce, Campaign Monitor, Indeed, Behance, Thrillist, Lead411, Office Divvy, Goldstar, Carbonmade, FastSpring, SparkFun Electronics, Grasshopper, Clicky, WooThemes, AppSumo, MailChimp, Burt’s Bees, Patagonia, and Craigslist are just a few.
Bootstrapping companies, when seemingly doing the impossible, must constantly be looking for ways to improve their processes, even without hindsight or millions of dollars at hand. One area to take particular note of is the financial management of a growing company, as cash-flow surprises can be the-nail-in-the-coffin of a startup company. Sloppy practices and shortcuts will, at times, be disastrous.
When building a business from the bottom-up, it is always preferable to be prepared for anything, which is not impossible as seen by the number of successful bootstrapped companies surrounding us. Bootstrapping is likely to continue to be part of the history of many successful companies.
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871fc9b2f2fdc4dd3e9cd5bba4456d24 | https://www.investopedia.com/articles/investing/082815/top-2-etfs-targeting-startups.asp | Top 2 ETFs Targeting Startups | Top 2 ETFs Targeting Startups
Since the Great Recession, technology startups have been the source of the greatest value creation and opportunity. Some of the areas with the most exciting growth include smartphones, the sharing economy, cloud computing, and biotechnology. Select companies have handsomely profited off these trends.
Technological developments allow new companies to gain exposure to millions of people through the internet. Additionally, for many technology companies, the cost of developing and maintaining software does not change dramatically based on the number of customers, giving these companies the potential to scale up. Thus, these companies can deliver exceptional returns to investors, as they tend to have high margins with the potential for fast growth.
Startup Investing
Unfortunately for most investors, startups are not available via public markets. One trend since the Great Recession is huge swaths of money pouring into private markets. Thus, companies are able to grow to large sizes without having to access public markets. Uber has grown to a $50 billion valuation as a private company.
Startups are inclined to stay private as long as possible so that founders can exercise a more significant deal of control in terms of equity and vision. Once companies are public, their valuation is prone to the whims and desires of Wall Street, which tend to be short-term focused.
However, a few vehicles exist on the public markets that give investors exposure to startups.
Renaissance IPO ETF
The Renaissance IPO ETF (NYSEARCA: IPO) allows investors to gain exposure to a broad, diversified mix of companies that have just become public. Of course, this is not direct exposure to startups, but the same trends driving startup valuation in private markets also drive valuations for newly listed companies.
Therefore, IPO is an effective proxy for risk appetites in startup investing. When investors are bullish on IPO, it bodes well for startup valuations. The inverse is also true as private startup investors hold onto shares of newly public companies or acquire them if valuations are comparable to private markets. Given the froth in private markets, many are finding better opportunities in public markets through exchange-traded funds (ETFs) such as IPO.
GSV Capital
GSV Capital (Nasdaq: GSVC) is not technically an ETF since its decisions are not based on an index or a formula but rather its management team's discretion. In some ways, it is superior to an ETF, as there is no expense ratio. However, it provides the same function as an ETF, giving investors low-cost, diversified exposure to a sector of the economy. GSVC gives investors exposure to some of the fastest-growing innovative startups.
As of August 2015, some of GSVC's major holdings included Dropbox, SugarCRM, Coursera, Dataminr, Palantir, Spotify, and Jawbone. All of these companies have demonstrated strong growth in terms of users or revenue, and their IPOs are highly anticipated. An investor who expects continued inflation in private markets relative to public markets could play this theme by purchasing GSVC.
Fitting as a stock that invests in early-stage startups, GSVC has been quite volatile. The stock made its debut on June 2011 at $15. At this time, it became a hot property, as it held Facebook and Twitter shares, allowing investors to gain exposure before their IPOs. However, once these companies debuted, demand cooled for GSVC, and the stock was halved. Since then, it has slowly recovered to $10 as of August 2015.
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47fe03a8f67d8c24a5fc36414c7f0d7e | https://www.investopedia.com/articles/investing/082914/basics-buying-and-investing-bitcoin.asp | How to Buy Bitcoin | How to Buy Bitcoin
Investing in Bitcoin can seem complicated, but it is much easier when you break it down into steps. Buying Bitcoin is getting easier by the day and the legitimacy of the exchanges and wallets is growing as well.
Key Takeaways The value of Bitcoin is derived from its adoption as a store of value and payment system, as well as its finite supply and decreasing inflation. While it is nearly impossible for Bitcoin itself to be hacked, it is possible for your wallet or exchange account to be compromised. This is why practicing proper storage and security measures is imperative. Investing or trading Bitcoin only requires an account on an exchange, though further safe storage practices are recommended.
Before You Begin
There are several things that every aspiring Bitcoin investor needs. A cryptocurrency exchange account, personal identification documents if you are using a Know Your Customer (KYC) platform, a secure connection to the Internet, and a method of payment. It is also recommended that you have your own personal wallet outside of the exchange account. Valid methods of payment using this path include bank accounts, debit cards, and credit cards. It is also possible to get Bitcoin at specialized ATMs and via P2P exchanges. However, be aware that Bitcoin ATMs were increasingly requiring government-issued IDs as of early 2020.
To buy bitcoin you need a digital wallet, personal identifying documents, a secure internet connection, a cryptocurrency exchange, and a form of payment. Getty Images/sorbetto
Privacy and security are important issues for Bitcoin investors. Even though there are no physical Bitcoins, it is usually a bad idea to brag about large holdings. Anyone who gains the private key to a public address on the Bitcoin blockchain can authorize transactions. While it is obvious that the private key should be kept secret, criminals may attempt to steal private keys if they learn of large holdings. Be aware that anyone can see the balance of a public address that you use. That makes it a good idea to keep significant investments at public addresses that are not directly connected to ones that are used for transactions.
Anyone can view a history of transactions made on the blockchain, even you. But while transactions are publicly recorded on the blockchain, identifying user information is not. On the Bitcoin blockchain, only a user's public key appears next to a transaction—making transactions confidential but not anonymous. In a sense, Bitcoin transactions are more transparent and traceable than cash, but Bitcoin can be used anonymously.
That is an important distinction. International researchers and the FBI have claimed that they can track transactions made on the Bitcoin blockchain to users' other online accounts, including their digital wallets. For example, if someone creates an account on Coinbase they must provide their identification. Now, when that person purchases Bitcoin it is tied to their name. If they send it to another wallet it can still be traced back to the Coinbase purchase which was connected to the account holder's identity. This should not concern most investors because Bitcoin is legal in the U.S. and most other developed countries.
Step One: Choose an Exchange
Signing up for a cryptocurrency exchange will allow you to buy, sell, and hold cryptocurrency. It is generally best practice to use an exchange that allows its users to also withdrawal their crypto to their own personal wallet for safer keeping. There are many exchanges and brokerage platforms that do not allow this. For those looking to consistently trade Bitcoin or other cryptocurrencies, this feature may not matter.
There are many types of cryptocurrency exchanges that exist. With the ethos of Bitcoin being decentralization and individual sovereignty, some exchanges allow users to remain anonymous and do not require users to enter personal information. Exchanges that allow this operate autonomously and are typically decentralized which means there is no central point of control. In other words, there is no CEO and no person or group for any regulatory body to pursue should it have concerns over illegal activity taking place.
While these types of systems do have the potential to be used for nefarious activities, they also provide services to the unbanked world. People like this may include refugees or those living in countries where there is little to no government or banking infrastructure to provide a state identification required for a bank or investment account. Some believe the good in these services outweigh the potential for illegal use as unbanked people now have a means of storing wealth and can use it to climb out of poverty.
Right now, the most commonly used type of exchanges are not decentralized and do require KYC. In the United States, these exchanges include Coinbase, Kraken, Gemini, and Binance U.S., to name a few. Each of these exchanges has grown significantly in the number of features they offer. Coinbase, Kraken, and Gemini offer Bitcoin and a growing number of altcoins. These three are probably the easiest on-ramp to crypto in the entire industry. Binance caters to a more advanced trader, offering more serious trading functionality and numerous altcoins to choose from.
An important thing to note when creating a cryptocurrency exchange account is to use safe internet practices. This includes using two-factor authentication and using a password that is unique and long, including a variety of lowercase letters, capitalized letters, special characters, and numbers.
Step Two: Connect Your Exchange to a Payment Option
Once you have chosen an exchange, you now need to gather your personal documents. Depending on the exchange, these may include pictures of a driver's license, social security number, as well as information about your employer and source of funds. The information you may need can depend on the region you live in and the laws within it. The process is largely the same as setting up a typical brokerage account.
By linking a bank account to your wallet, you can buy and sell bitcoin and deposit that money directly into your account. sorbetto / Getty Images
After the exchange has ensured your identity and legitimacy you may now connect a payment option. With the exchanges listed above, you can connect your bank account directly or you can connect a debit or credit card. While you can use a credit card to purchase cryptocurrency, it is generally something that should be avoided due to the volatility that cryptocurrencies can experience.
While Bitcoin is legal in the United States, some banks do not take too kindly to the idea and may question or even stop deposits to crypto-related sites or exchanges. While most banks do allow these deposits, it is a good idea to check to make sure that your bank allows deposits at your chosen exchange.
There are varying fees for deposits via a bank account, debit, or credit card. Coinbase, for example, which is a solid exchange for beginners, has a 1.49% fee for bank accounts and a 3.99% fee for debit and credit cards. It is important to research the fees associated with each payment option to help choose an exchange or to choose which payment option works best for you.
Step Three: Place an Order
Once you have chosen an exchange and connected a payment option you can now buy Bitcoin and other cryptocurrencies. Over recent years cryptocurrency and their exchanges have slowly become more mainstream. Exchanges have grown significantly in terms of liquidity and their breadth of features. What was once thought of as a scam or questionable has developed into something that could be considered trustworthy and legitimate.
Now, cryptocurrency exchanges have gotten to a point where they have nearly the same level of features as their stock brokerage counterparts. Once you have found an exchange and connected a payment method you are ready to go.
Crypto exchanges today offer a number of order types and ways to invest. Almost all crypto exchanges offer both market and limit orders and some also offer stop-loss orders. Of the exchanges mentioned above, Kraken offers the most order types. Kraken allows for market, limit, stop-loss, stop-limit, and take-profit limit orders.
Aside from a variety of order types, exchanges also offer ways to set up recurring investments allowing clients to dollar cost average into their investments of choice. Coinbase, for example, lets users set recurring purchases for every day, week, or month. Getting an account on an exchange is really all you need to do to be able to buy Bitcoin or other cryptocurrencies, but there are some other steps to consider for more safety and security.
Step Four: Safe Storage
Bitcoin and cryptocurrency wallets are a place to store digital assets more securely. Having your crypto outside of the exchange and in your personal wallet ensures that only you have control over the private key to your funds. It also gives you the ability to store funds away from an exchange and avoid the risk of your exchange getting hacked and losing your funds.
Bitcoins are not physical coins, and they must be stored in digital wallets. GrafVishenka / iStock / Getty Images Plus
While most exchanges offer wallets for their users, security is not their primary business. We generally do not recommend using an exchange wallet for large or long-term cryptocurrency holdings.
Some wallets have more features than others. Some are Bitcoin only and some offer the ability to store numerous types of altcoins. Some wallets also offer the ability to swap one token for another.
When it comes to choosing a Bitcoin wallet, you have a number of options. The first thing that you will need to understand about crypto wallets is the concept of hot wallets (online wallets) and cold wallets (paper or hardware wallets).
Hot Wallets
Online wallets are also known as “hot” wallets. Hot wallets are wallets that run on internet-connected devices like computers, phones, or tablets. This can create vulnerability because these wallets generate the private keys to your coins on these internet-connected devices. While a hot wallet can be very convenient in the way you are able to access and make transactions with your assets quickly, storing your private key on an internet-connected device makes it more susceptible to a hack.
This may sound far-fetched, but people who are not using enough security when using these hot wallets can have their funds stolen. This is not an infrequent occurrence and it can happen in a number of ways. As an example, boasting on a public forum like Reddit about how much Bitcoin you hold while you are using little to no security and storing it in a hot wallet would not be wise. That said, these wallets can be made to be secure so long as precautions are taken. Strong passwords, two-factor authentication, and safe internet browsing should be considered minimum requirements.
These wallets are best used for small amounts of cryptocurrency or cryptocurrency that you are actively trading on an exchange. You could liken a hot wallet to a checking account. Conventional financial wisdom would say to hold only spending money in a checking account while the bulk of your money is in savings accounts or other investment accounts. The same could be said for hot wallets. Hot wallets encompass mobile, desktop, web, and exchange account custody wallets.
As mentioned previously, exchange wallets are custodial accounts provided by the exchange. The user of this wallet type is not the holder of the private key to the cryptocurrency that is held in this wallet. If an event were to occur where the exchange is hacked or your account becomes compromised, your funds would be lost. The phrase “not your key, not your coin” is a heavily repeated concept within cryptocurrency forums and communities.
Cold Wallets
The simplest description of a cold wallet is a wallet that is not connected to the internet and therefore stands at a far lesser risk of being compromised. These wallets can also be referred to as offline wallets or hardware wallets.
These wallets store a user’s private key on something that is not connected to the internet and can come with software that works in parallel so that the user can view their portfolio without putting their private key at risk.
Perhaps the most secure way to store cryptocurrency offline is via a paper wallet. A paper wallet is a wallet that you can generate off of certain websites. It then produces both public and private keys that you print out on a piece of paper. The ability to access cryptocurrency in these addresses is only possible if you have that piece of paper with the private key. Many people laminate these paper wallets and store them in safety deposit boxes at their bank or even in a safe in their home. These wallets are meant for high security and long-term investments because you cannot quickly sell or trade Bitcoin stored this way.
A more commonly used type of cold wallet is a hardware wallet. A hardware wallet is typically a USB drive device that stores a user’s private keys securely offline. This has serious advantages over hot wallets as it is unaffected by viruses that could be on one’s computer. With hardware wallets, private keys never come in contact with your network-connected computer or potentially vulnerable software. These devices are also typically open source, allowing the community to determine its safety through code audits rather than a company declaring that it is safe to use.
Cold wallets are the most secure way to store your Bitcoin or other cryptocurrencies. For the most part, however, they require a bit more knowledge to set up.
A good way to set up your wallets is to have three things: an exchange account to buy and sell, a hot wallet to hold small to medium amounts of crypto you wish to trade or sell, and a cold hardware wallet to store larger holdings for long-term durations.
Alternate Ways of Buying Bitcoin
While exchanges like Coinbase or Binance remain some of the most popular ways of purchasing Bitcoin, it is not the only method. Below are some additional processes Bitcoin owners utilize.
Bitcoin ATMs
Bitcoin ATMs act like in-person Bitcoin exchanges. Individuals can insert cash into the machine and use it to purchase Bitcoin that is then transferred to a secure digital wallet. Bitcoin ATMs have become increasingly popular in recent years; Coin ATM Radar can help to track down the closest machines.
P2P Exchanges
Unlike decentralized exchanges, which match up buyers and sellers anonymously and facilitate all aspects of the transaction, there are some peer-to-peer (P2P) exchange services that provide a more direct connection between users. Local Bitcoins is an example of such an exchange. After creating an account, users can post requests to buy or sell Bitcoin, including information about payment methods and price. Users then browse through listings of buy and sell offers, choosing those trade partners with whom they wish to transact.
Local Bitcoins facilitates some of the aspects of the trade. While P2P exchanges do not offer the same anonymity as decentralized exchanges, they allow users the opportunity to shop around for the best deal. Many of these exchanges also provide rating systems so that users have a way to evaluate potential trade partners before transacting.
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175fd7d06e586d2a76de2692215a3449 | https://www.investopedia.com/articles/investing/083115/how-rupert-murdoch-became-media-tycoon.asp | How Rupert Murdoch Became a Media Tycoon | How Rupert Murdoch Became a Media Tycoon
At the age of 22, Rupert Murdoch inherited a chain of Australian newspapers following the death of his father in 1952. Fifteen years after taking over the family business and following a series of acquisitions, Murdoch had amassed a portfolio of newspapers worth more than $50 million.
Today, Murdoch is one of the most influential people in the media industry, with business interests that span television broadcasting and entertainment content to newspapers and book publishing. The two empires that he built over the last six decades—News Corp (NWS) and Fox Corporation (FOX)—own well-established media properties that operate in five continents including The Wall Street Journal, Fox News, HarperCollins, and the New York Post.
According to Forbes' 2019 list of wealthiest Americans, Rupert Murdoch and his family rank number 24 with an estimated net worth of $19.1 billion. Here's how Murdoch turned a small family newspaper company into two separate multibillion-dollar media conglomerates.
Key Takeaways A native of Australia and a naturalized U.S. citizen, Rupert Murdoch began building his media empire in 1952 when he inherited the family newspaper company. Murdoch is credited for creating the modern tabloid, encouraging his newspapers to publish human interest stories focused on controversy, crime, and scandals. Murdoch's media empire includes Fox News, Fox Sports, the Fox Network, The Wall Street Journal, and HarperCollins. In March 2019, Murdoch sold the majority of 21st Century Fox's entertainment assets to the Walt Disney Company for $71.3 billion.
Inheriting a Newspaper Company
Murdoch's path to entrepreneurial success started at an early age when he was exposed to the ins and outs of journalism. In Jerome Tuccille’s book Rupert Murdoch: Creator of a Worldwide Media Empire, Murdoch explained, “I was brought up in a publishing home, a newspaper man's home, and was excited by that, I suppose. I saw that life at close range and, after the age of ten or twelve, never really considered any other."
His father, Sir Keith Murdoch, took control of News Corp Australia, known as News Limited at the time, in 1949. The company was originally founded in 1923 by James Edward Davidson, and it published a handful of popular newspapers in Australia.
Shortly after graduating from Oxford University in the United Kingdom, Rupert Murdoch inherited the business following the unexpected death of his father. Before returning to Australia, he took on an apprenticeship role at the Daily Express in London. There he developed a better understanding of the entire operations of a regular newspaper. Murdoch became the managing director of News Corp Australia at the age of 22.
Selling Controversy
Murdoch did not take long to implement changes to the newspapers he had taken over. Once referred to as the inventor of the ''modern tabloid'' by The Economist, his newspapers began to focus on more eye-catching headlines that principally centered around stories of scandal and controversy. This new approach to journalism resulted in a spike in the circulation of his papers.
Expanding Through Global Acquisitions
Murdoch's newspaper holdings grew over time as a result of multiple acquisitions. In 1956, he purchased The Sunday Times, a newspaper distributed in Western Australia, four years after he bought a failing daily newspaper in Sydney called The Mirror. Under Murdoch's management, the paper became the region's most circulated afternoon newspaper. When Murdoch was 34, he founded Australia's first national daily newspaper, The Australian.
Murdoch began to expand his business interest outside of Australia in 1968. He moved to the United Kingdom and acquired several tabloids including the News of the World and The Sun. He then moved to the United States in 1973 and once again conducted a series of acquisitions. His first purchase was the San Antonio News, followed by the Star in 1974. Later in his career, he bought New York magazine, the Chicago Sun-Times, and The Times of London, which was founded in 1785.
Harper & Row, a book publishing company, became part of the News Corp family in 1987. News Corp acquired another book publisher, Collins, a couple of years later. Both publishers were subsequently merged and formed HarperCollins.
Murdoch made his biggest purchase when he bought Wall Street Journal parent company, Dow Jones, in 2007 for $6 billion, ending a century of ownership by the wealthy Bancroft family. Under Murdoch, the Journal has shifted away from focusing exclusively on business and now has become more of a general-interest publication.
One of Murdoch's first major U.S. acquisitions was his purchase of the New York Post, which he bought in 1976 and subsequently sold for a profit in 1988; he repurchased the Post in 1993 and has owned it since.
Television
In 1981, Marc Rich and Marvin Davis bought 20th Century FOX Film Corporation. Rich was indicted with more than 60 counts of criminal charges that ranged from tax evasion and wire fraud to trading with Iran during an oil embargo. As a result, he fled the United States as a fugitive. Murdoch seized that opportunity and acquired Rich's stake in the company in 1984 for $250 million. He later purchased Davis’s remaining interest in FOX for another $325 million. Murdoch also bought a number of independent television stations. These companies later came together to form the Fox Broadcasting Company. Fox is also responsible for a few cable channels, including FX and FXX.
In 1988, Murdoch announced that he was planning to launch a television network in the United Kingdom. Those plans became a reality on Feb. 5, 1988, when Sky News went live. Until 1997, Sky News was the only 24-hour news broadcasting station in Britain. Since its inception, the company has burned through a lot of money, most of which was financed with debt from a number of banks. In an effort to mitigate the company’s losses, Murdoch agreed to merge Sky News with British Satellite Broadcasting to form BSkyB in November 1990. BSkyB, now Sky UK Limited, became the largest digital subscription television company in the United Kingdom.
Around the same time as the Sky merger, he bought a Hong Kong-based television company called STAR TV for $1 billion. The station is viewed by more than 320 million people across Asia.
The Bottom Line
Rupert Murdoch is the heavyweight champion in the world of journalism and media. He built his empire primarily by conducting a series of strategic acquisitions around the world. As the son of a successful and highly respected media proprietor, Murdoch grew up knowing that he would follow in his father's footsteps.
He spent the majority of his life expanding and diversifying the business interests of the newspaper company he inherited. For decades Murdoch has used his conglomerate News Corp to acquire a number of internationally recognizable media brands. He has had a tremendous amount of success with purchasing failing news companies and turning them around. Murdoch also built the broadcasting giant, 21st Century Fox, from scratch, and was responsible for creating the Fox News Channel, the dominant cable news network in the United States.
In March 2019, Murdoch's empire got a bit smaller. Walt Disney Company (DIS) announced it had successfully completed its merger with 21st Century Fox, a deal valued at $71.3 billion. Disney acquired a wide range of Fox's entertainment assets, including Fox's movie and TV studios, a library of films such as Avatar and X-Men, along with a slew of popular TV productions such as The Simpsons and Modern Family. Disney also acquired Fox's networks, including National Geographic, and gained a controlling interest in streaming service Hulu. After the merger, a new company was formed, Fox Corp, comprised of the assets not included in the Disney acquisition—Fox News, Fox Network, Fox Sports, and the Fox TV stations.
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84e978cdeb6917a2361276bcfaa288dd | https://www.investopedia.com/articles/investing/090115/7-best-etf-trading-strategies-beginners.asp | 7 Best ETF Trading Strategies for Beginners | 7 Best ETF Trading Strategies for Beginners
Exchange traded funds (ETFs) are ideal for beginner investors due to their many benefits such as low expense ratios, abundant liquidity, range of investment choices, diversification, low investment threshold, and so on. These features also make ETFs perfect vehicles for various trading and investment strategies used by new traders and investors. Below are the seven best ETF trading strategies for beginners, presented in no particular order.
Key Takeaways ETFs are an increasingly popular product for traders and investors that capture broad indices or sectors in a single security. ETFs also exist for various asset classes, as leveraged investments that return some multiple of the underlying index, or inverse ETFs that increase in value when the index falls. Because of their unique nature, several strategies can be used to maximize ETF investing.
1. Dollar-Cost Averaging
We begin with the most basic strategy: dollar-cost averaging. Dollar-cost averaging is the technique of buying a set fixed-dollar amount of an asset on a regular schedule, regardless of the changing cost of the asset. Beginner investors are typically young people who have been in the workforce for a year or two and have a stable income from which they are able to save a little each month.
Such investors should take a few hundred dollars every month and, instead of placing it into a low-interest saving account, invest it in an ETF or a group of ETFs.
Advantages
There are two major advantages of periodic investing for beginners. The first is that it imparts discipline to the savings process. As many financial planners recommend, it makes eminent sense to pay yourself first, which is what you achieve by saving regularly.
The second advantage is that by investing the same fixed-dollar amount in an ETF every month—the basic premise of dollar-cost averaging—you will accumulate more units when the ETF price is low and fewer units when the ETF price is high, thus averaging out the cost of your holdings. Over time, this approach can pay off handsomely, as long as one sticks to the discipline.
For example, say you had invested $500 on the first of each month from September 2012 to August 2015 in the SPDR S&P 500 ETF (SPY), an ETF that tracks the S&P 500 Index. Thus, when the SPY units were trading at $136.16 in September 2012, $500 would have fetched you 3.67 units, but three years later, when the units were trading close to $200, a monthly investment of $500 would have given you 2.53 units.
Over the three-year period, you would have purchased a total of 103.79 SPY units (based on closing prices adjusted for dividends and splits). At the closing price of $209.42 on Aug. 14, 2015, these units would have been worth $21,735, for an average annual return of almost 13%.
2. Asset Allocation
Asset allocation, which means allocating a portion of a portfolio to different asset categories—such as stocks, bonds, commodities and cash for the purposes of diversification—is a powerful investing tool. The low investment threshold for most ETFs makes it easy for a beginner to implement a basic asset allocation strategy, depending on their investment time horizon and risk tolerance.
As an example, young investors might be 100% invested in equity ETFs when they are in their 20s because of their long investment time horizons and high-risk tolerance. But as they get into their 30s and embark on major lifecycle changes such as starting a family and buying a house, they may shift to a less aggressive investment mix such as 60% in equities ETFs and 40% in bond ETFs.
3. Swing Trading
Swing trades are trades that seek to take advantage of sizeable swings in stocks or other instruments like currencies or commodities. They can take anywhere from a few days to a few weeks to work out, unlike day trades, which are seldom left open overnight.
The attributes of ETFs that make them suitable for swing trading are their diversification and tight bid/ask spreads. In addition, because ETFs are available for many different investment classes and a wide range of sectors, a beginner can choose to trade an ETF that is based on a sector or asset class where they have some specific expertise or knowledge.
For example, someone with a technological background may have an advantage in trading a technology ETF like the Invesco QQQ ETF (QQQ), which tracks the Nasdaq-100 Index. A novice trader who closely tracks the commodity markets may prefer to trade one of the many commodity ETFs available, such as the Invesco DB Commodity Index Tracking Fund (DBC).
Because ETFs are typically baskets of stocks or other assets, they may not exhibit the same degree of upward price movement as a single stock in a bull market. By the same token, their diversification also makes them less susceptible than single stocks to a big downward move. This provides some protection against capital erosion, which is an important consideration for beginners.
4. Sector Rotation
ETFs also make it relatively easy for beginners to execute sector rotation, based on various stages of the economic cycle. For example, assume an investor has been invested in the biotechnology sector through the iShares Nasdaq Biotechnology ETF (IBB). An investor may wish to take profits in this ETF and rotate into a more defensive sector such as consumer staples via The Consumer Staples Select Sector SPDR Fund (XLP).
5. Short Selling
Short selling, the sale of a borrowed security or financial instrument, is usually a pretty risky endeavor for most investors and not something most beginners should attempt. However, short selling through ETFs is preferable to shorting individual stocks because of the lower risk of a short squeeze—a trading scenario in which a security or commodity that has been heavily shorted spikes higher—as well as the significantly lower cost of borrowing (compared with the cost incurred in trying to short a stock with high short interest). These risk-mitigation considerations are important to a beginner.
Short selling through ETFs also enables a trader to take advantage of a broad investment theme. Thus, an advanced beginner (if such an oxymoron exists) who is familiar with the risks of shorting and wants to initiate a short position in the emerging markets could do so through the iShares MSCI Emerging Markets ETF (EEM). However, note that beginners stay away from double-leveraged or triple-leveraged inverse ETFs, which seek results equal to twice or thrice the inverse of the one-day price change in an index, because of the significantly higher degree of risk inherent in these ETFs.
6. Betting on Seasonal Trends
ETFs are also good tools for beginners to capitalize on seasonal trends. Let's consider two well-known seasonal trends. The first one is called the sell in May and go away phenomenon. It refers to the fact that U.S. equities have historically underperformed over the six-month May-October period, compared with the November-April period.
The other seasonal trend is the tendency of gold to gain in the months of September and October, thanks to strong demand from India ahead of the wedding season and the Diwali festival of lights, which typically falls between mid-October and mid-November. The broad market weakness trend can be exploited by shorting the SPDR S&P 500 ETF around the end of April or the beginning of May, and closing out the short position in late October, right after the market swoons typical of that month have occurred.
A beginner can similarly take advantage of seasonal gold strength by buying units of a popular gold ETF, like the SPDR Gold Trust (GLD), in late summer and closing out the position after a couple of months. Note that seasonal trends do not always occur as predicted, and stop-losses are generally recommended for such trading positions to cap the risk of large losses.
7. Hedging
A beginner may occasionally need to hedge or protect against downside risk in a substantial portfolio, perhaps one that has been acquired as the result of an inheritance.
Suppose you have inherited a sizeable portfolio of U.S. blue chips and are concerned about the risk of a large decline in U.S. equities. One solution is to buy put options. However, since most beginners are not familiar with option trading strategies, an alternate strategy is to initiate a short position in broad market ETFs like the SPDR S&P 500 ETF or the SPDR Dow Jones Industrial Average ETF (DIA).
If the market declines as expected, your blue-chip equity position will be hedged effectively since declines in your portfolio will be offset by gains in the short ETF position. Note that your gains would also be capped if the market advances, since gains in your portfolio will be offset by losses in the short ETF position. Nevertheless, ETFs offer beginners a relatively easy and efficient method of hedging.
The Bottom Line
Exchange traded funds have many features that make them ideal instruments for beginning traders and investors. Some ETF trading strategies especially suitable for beginners are dollar-cost averaging, asset allocation, swing trading, sector rotation, short selling, seasonal trends, and hedging.
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9838c67c6d0c115e90ee6d6005efd3bc | https://www.investopedia.com/articles/investing/090115/top-5-bear-market-mutual-funds.asp | Three Bear Market Mutual Funds | Three Bear Market Mutual Funds
With stocks plunging into a steep bear market in 2020 amid the global COVID-19 pandemic, many investors are looking for ways to cushion their losses or even exploit the next downturn in stocks. However, short-selling individual stocks can be very risky, as predicting their movements is difficult, and there is no limit on the size of losses. Instead, investors can purchase mutual funds that make bearish bets and profit when the broader market falls.
Below, we look at three such mutual funds, which experienced the best performance during the previous market downturn, in Fall of 2018. Data are from Morningstar, and all data is as of 6/3/2020.
Key Takeaways In a down market, investors can turn to bear mutual funds to get diversified, professional asset management that profits from falling prices.A bear fund may provide a more accessible and less risky way to bet against the market than selling short or directly trading derivatives, although they generally carry higher expense ratios than long mutual funds or short ETFs.Here, we look at three popular bear funds that performed especially well during the Fall 2018 market correction.
Bear Mutual Funds
One way to manage this risk is by investing in so-called bear market mutual funds, which are funds that short a basket of stocks or an entire stock index. These funds can post rising returns as the broader market falls. Because the current bear market isn't over, and stocks are incredibly volatile, we looked at the performance of mutual funds during the last major market downturn. During that prior downturn the S&P 500 declined from a high of 2930.75 on September 20, 2018 to a low of 2351.10 on December 24, 2018, a total decline of 19.8%, just short of the 20% drop required to be considered a bear market.
Bear funds typically follow several different strategies to generate returns when markets fall. The fund may bet against the broader market by purchasing put options on an index while selling short futures in the same index. Another strategy is to sell specific securities short in the hope that their share values dip. In addition, the fund may invest in assets that have a tendency to gain value during periods of when the market falls, such as gold or other precious metals. Overall, there is an element of volatility to several of the strategies that bear fund managers deploy. A bear mutual fund may be a way for investors to find alpha during turbulent times, but this type of should never be an investor's only holding.
Rydex Inverse Nasdaq-100 (RYAIX)
Total Return During 2018 Downturn: 25.9%YTD Return Jan 1 - June 3, 2020: -18.5%Expense Ratio: 1.59%Assets Under Management: $29.3 millionBenchmark Index: Nasdaq-100 IndexInception Date: September 3, 1998Fund Adviser/Distributor: Security Investors/Guggenheim Funds Distributors
The Rydex Inverse Nasdaq 100 fund tries to replicate the inverse daily performance of the Nasdaq 100 Index. This means that if the Nasdaq 100 goes up 5% in a day, this fund will go down 5%, and it the Nasdaq 100 goes down 5% in a day, the fund will go up 5%. The fund attempts to do this by holding a variety of investments including mutual funds, federal agency notes, and repurchase agreements. The Nasdaq 100 Index, not to be confused with the Nasdaq Composite Index, is an index of the largest 100 non-financial companies listed on the Nasdaq stock exchange.
According to Morningstar, "The fund employs as its investment strategy a program of engaging in short sales of securities included in the underlying index and investing to a significant extent in derivative instruments. It will invest at least 80% of its net assets, plus any borrowings for investment purposes, in financial instruments with economic characteristics that should perform opposite to the securities of companies included in the underlying index."
Grizzly Short (GRZZX)
Total Return During 2018 Downturn: 24.0%YTD Return Jan 1 - June 3, 2020: -11.99%Expense Ratio: 1.74%Assets Under Management: $154.3 millionBenchmark Index: N/AInception Date: June 19, 2000Fund Adviser/Distributor: Leuthold Weeden Capital Management/Rafferty Capital Markets
The Grizzly Short fund, unlike the other two funds on this list, is an actively-managed fund. This mean's the fund's two portfolio managers choose specific stocks to sell short. The fund aims to short 60-100 stocks at any one time, all of which need to be large-cap stocks traded in the U.S.
According to Morningstar, "The fund sells stocks short. Short selling involves the sale of borrowed securities. When the fund sells a stock short, it incurs an obligation to replace the stock borrowed at whatever its price may be at the time it purchases the stock for delivery to the securities lender. The fund generally will have outstanding approximately 60 to 100 stocks that it has sold short."
Rydex Inverse S&P 500 Strategy (RYURX)
Total Return During 2018 Downturn: 23.6%YTD Return Jan 1 - June 3, 2020: -6.61%Expense Ratio: 1.54%Assets Under Management: $113.3 millionBenchmark Index: S&P 500Inception Date: January 7, 1994Fund Adviser/Distributor: Security Investors/Guggenheim Funds Distributors
The Rydex Inverse S&P 500 Strategy fund tries to replicate the inverse daily performance of the S&P 500 index. This means that if the S&P 500 goes up 5% in a day, this fund will go down 5%, and it the S&P 500 goes down 5% in a day, the fund will go up 5%. The fund attempts to do this by holding a variety of investments including mutual funds, federal agency notes, and repurchase agreements. The S&P 500 is an index of 505 large-cap U.S. stocks.
According to Morningstar, "The fund employs as its investment strategy a program of engaging in short sales of securities included in the underlying index and investing to a significant extent in derivative instruments. It will invest at least 80% of its net assets, plus any borrowings for investment purposes, in financial instruments with economic characteristics that should perform opposite to the securities of companies included in the underlying index."[cite]
We point out to readers that the list above excludes: funds closed to new investors; funds with under $50 million in assets under management because their size makes them too illiquid to invest in; and leveraged funds, which are extraordinarily risky and not recommended for the average investor.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.
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1140b2f8277b6f25560f093a552817de | https://www.investopedia.com/articles/investing/090213/explaining-amortization-balance-sheet.asp | Explaining Amortization in the Balance Sheet | Explaining Amortization in the Balance Sheet
A few years ago the U.S. Bureau of Economic Analysis announced a change to the way it estimates gross domestic product (GDP). Going forward, it was going to include intangible assets in its calculations of investments in the economy.
The change significantly boosted economic growth over the last 50 years and made the economy nearly $560 billion larger than previously estimated. Now that intangible assets are considered long-lived assets in the economy, accountants will have to amortize their amount over time when preparing financial statements.
Amortization is an important concept not just to economists, but to any company figuring out its balance sheet.
Amortization
Amortization refers to capitalizing the value of an intangible asset over time. It's similar to depreciation, but that term is meant more for tangible assets.
Amortization occurs when the value of an asset, usually an intangible asset, like research and development (R&D) or a trademark, is reduced over a specific time period, which is usually the asset's estimated useful life.
A good way to think of this is to consider amortization to be the cost of an asset as it is consumed or used up while generating sales for a company. Along with the useful life, major inputs into the amortization process include residual value and the allocation method, the last of which can be on a straight-line basis.
A more specialized case of amortization takes place when a bond that is purchased at a premium is amortized down to its par value as the bond reaches maturity. When a bond is purchased at a discount, the term is called accretion. The concept is again referring to adjusting value overtime on a company’s balance sheet, with the amortization amount reflected in the income statement.
A rule of thumb on this is to amortize an asset over time if the benefits from it will be realized over a period of several years or longer. With a short expected duration, such as days or months, it is probably best and most efficient to expense the cost through the income statement and not count the item as an asset at all.
1:37 Explaining Amortization In The Balance Sheet
Examples of Intangible Assets
Other examples of intangible assets include customer lists and relationships, licensing agreements, service contracts, computer software, and trade secrets (such as the recipe for Coca-Cola). Goodwill is another major intangible asset. It used to be amortized over time but now must be reviewed annually for any potential adjustments.
A good example of how amortization can impact a company’s financials in a big way is the purchase of Time Warner in 2000 by AOL during the dot-com bubble. AOL paid $162 billion for Time Warner, but AOL's value plummeted in subsequent years, and the company took a goodwill impairment charge of $99 billion. In previous years, this amount would have been amortized over time, but it must now be evaluated annually and written down if, as in the case of AOL, the value is no longer there.
GAAP vs. IFRS
Firms must account for amortization as stipulated in major accounting standards. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) both have similar definitions of what qualifies as an intangible asset, but there are differences in how their values must be adjusted over time.
For instance, development costs to create new products are expensed under GAAP (in most cases) but capitalized (amortized) under IFRS. GAAP does not allow for revaluing the value of an intangible, but IFRS does. This means that GAAP changes in value can be accounted for through changing amortization schedules, or potentially writing down the value of an intangible, which would be considered permanent. Finally, GAAP stipulates that advertising expenditures be expenses as incurred, but IFRS does allow recognizing a prepayment of these expenses as an asset, which would be capitalized or amortized as they are used at a later date.
The Bottom Line
Amortization reflects the fact that intangible assets have a value that must be monitored and adjusted over time. The amortization concept is subject to classifications and estimates that need to be studied closely by a firm’s accountants, and by auditors that must sign off on the financial statements.
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d7f2b0f1727038958d6136976e7402c8 | https://www.investopedia.com/articles/investing/090215/4-mutual-funds-hold-apple-stock.asp | Top 4 Mutual Fund Holders of Apple (AAPL) | Top 4 Mutual Fund Holders of Apple (AAPL)
Apple Inc. (AAPL) is one of the largest technology companies in the world and the first U.S. company to reach a market valuation of $1 trillion. As of Feb. 22, 2020, the company's market capitalization had grown to $1.37 trillion.
Here are the four largest mutual funds betting on Apple, Inc.
Vanguard Total Stock Market Index (VTSMX)
The Vanguard Total Stock Market Index Fund is known on Wall Street as a one-stop shop for a wide range of small- and large-cap stocks. The fund seeks to capture returns on the entire stock market and therefore holds more than 3,680 stocks. While the composition of VTSMX is not much different from that of S&P 500 ETFs, its investments in many small-cap stocks has kept it above others for several years.
Key Takeaways VTSMX holds small- and large-cap stocks.VFINX tracks the S&P 500.SPY is an ETF that mirrors the S&P 500.VINIX is weighted in technology, financials, and healthcare.
About 20.1% of the fund's assets are invested in technology stocks, with Microsoft edging out Apple for the top position as of the end of January 2020. The fund owns more than 114.6 million shares of Apple, amounting to 2.62% of the company's outstanding stock as of its latest filing in June 2019.
The fund's expense ratio is 0.14%, just a few points below the category average. The fund's three-year annualized return is 14.43%.
Vanguard 500 Index Fund (VFINX)
Another fund tracking the S&P 500, the Vanguard 500 Index Fund gives weights to the stocks it invests in based on their positions in the S&P list. With net assets of $459.3 billion as of June 2019, the fund's asset allocation skews in favor of information technology and financials, forming 21% and 13.3% of its portfolio, respectively. The company holds about 86 million shares of Apple, just under 2% of the company, making it the second-largest mutual fund investor in Apple.
All of these funds have comparatively low expense ratios.
The expense ratio for VFINX is 0.14%. The fund has a three-year annualized return of 15.12 as of the end of 2019.
SPDR S&P 500 ETF (SPY)
The Standard and Poor's depository receipts, also known as a SPDR or "spider," was put into the market in 1993 by State Street Global Advisors. The ETF's main function is to replicate the performance of the S&P 500. Each share of SPY owns a small portion in all 500 stocks in the S&P 500. SPY is bought and sold much like a stock, but instead of making a bet on one particular company you're making a bet on the market as a whole. SPY is invested heavily in technology, with 24.63% of its holdings dedicated to the sector. The fund holds 46.2 million shares, about 1.06%, of all Apple stock as of October 2019, making it the company's third-largest mutual fund holder. Apple shares account for 4.79% of the fund's $337 billion portfolio.
The expense ratio for SPY is 0.09%, well below category average for other funds.
Vanguard Institutional Index Fund I (VINIX)
This large-blend Vanguard Group fund, launched in 1990, seeks capital appreciation and dividend income by investing in all 500 stocks that make up the S&P 500 benchmark index. VINIX remains fully invested in equities at all times. The top market sector represented in the underlying index and in the fund’s holdings is information technology at about 24%, with financials and heathcare also heavily represented. With about 41 million shares of Apple as of June 2019, the fund weighs in as the company's fourth-largest mutual fund holder. VINIX's bet on Apple accounts for 4.20% of the fund's $240 billion portfolio.
The fund’s expense ratio is very low, at 0.03%. The three-year annualized return is 15.24% as of the end of 2019.
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58db92ec07cde684d0e5dcfcd325e61a | https://www.investopedia.com/articles/investing/090215/unintended-consequences-selfdriving-cars.asp | The Unintended Consequences of Self-Driving Cars | The Unintended Consequences of Self-Driving Cars
The question of when self-driving cars will gain mass acceptance is not a matter of if, but when. Google (GOOG), DARPA, auto-makers, and universities around the world are all hard at work making this a reality. The prospect of widespread use of driverless cars brings with it many benefits: fewer traffic accidents and the economic toll caused by property damage, injury or death that results. Energy costs will also be saved as these autonomous vehicles maximize driving efficiency and reduce traffic congestion. The net economic benefit has the potential to be enormous.
But that doesn't mean there won't be some unintended consequences that will result from a driverless car revolution.
Key Takeaways Driverless cars are fast becoming a reality, with engineers at top tech and auto companies racing to produce a safe and affordable autonomous vehicle. While driverless cars have been lauded as innovations that will cut down on road accidents, traffic time, and the hassle of driving, for every good thing there are always unintended negative consequences. Here we consider some possible negative impacts of driverless cars, from unemployed drivers to car sick passengers.
Unintended Consequence #1: Unemployment
If cars, trucks, and buses start driving themselves, people who earn their living from driving these vehicles will suddenly find themselves out of a job. According to the U.S. Bureau of Labor Statistics, in 2018 more than 1.9 million people were employed as tractor-trailer truck drivers. Taxi and delivery drivers account for 370,400 jobs, and more than 680,000 Americans are employed as bus drivers. Taken together, that represents a potential loss of more than 2.9 million jobs—which is the more than number of jobs lost during 2008 due to the Great Recession. Add in delivery and light truck drivers (1.5 million) and the total number of potential jobs lost grows to a staggering 4.5 million. Now account for all the supervisory staff, management and support staff for these driving jobs and that number could double.
Many of these workers are classified as low-skilled workers, with their main skill being the ability to drive. It will be difficult for such unemployed workers to quickly find new work, and the cost of re-training them could be high. One interesting consequence is that after a few generations, very few people will even know how to drive a car anymore. (For more, see also: 20 Industries Threatened by Tech Disruption.)
Unintended Consequence #2: Hackers Taking Over Vehicles
Recently, security experts looking to exploit flaws in modern automobiles successfully hacked and were able to take control of a Tesla Model S and a Jeep Cherokee. A driverless car would be entirely controlled by computer hardware and software. A malicious attacker could find and exploit security holes in any number of complex systems to take over a car or even cause it to crash purposefully. The FBI has gone so far as to caution that driverless cars could be turned into weapons, striking objects or pedestrians.
Furthermore, driverless cars of the future will likely be networked in order to communicate with each other and send and receive data about other vehicles on the road. Attacks on such a network could grind all these robotic cars on the road to a halt.
Of course, the makers of driverless cars are hiring people to try to identify and patch any security gaps that they can find now, but enterprising hackers are sure to find new and novel ways to circumvent existing security measures. (For more, see: How Internet Connected Cars Work.)
Unintended Consequence #3: The Auto Industry
Another potential consequence of a world with driverless cars is that people will rely more and more on calling a driverless car from a shared fleet similar to calling an Uber, causing a decline in the private ownership of cars. Why own an expensive machine prone to breaking down when you can simply summon a driverless car to take you wherever you please upon your request? In many parts of the developed world, there are more cars than people. If private car ownership became a thing of the past it would destroy the automobile industry, representing the loss of many jobs both directly and indirectly, as well as billions of dollars in economic output.
Traditional automakers such as General Motors (GM) and Ford (F) have typically been slow to adapt to change and may find themselves in financial trouble once again if this plays out as some predict. (For more, see: Self-Driving Cars Could Change the Auto Industry.)
Unintended Consequence #4: The Auto Insurance Industry
Auto insurers already exist in a highly competitive market with razor-thin margins. Insurance is priced depending on the chances that some risk, such as an accident or a drunk driving incident. Driverless cars promise to greatly reduce the occurrence of both risks, as well as accidents involving pedestrians. The result is that the cost of insurance will collapse as the risks associated with human driving are eliminated by technology. There could be potential bankruptcies amongst auto insurers as their traditional business model will become out of date.
Keep an eye on some of the largest auto insurers which are publicly traded on U.S. stock exchanges: Allstate (ALL), Progressive (PGR), Travelers (TRV) and GEICO to see how this industry's bottom line may be affected in the future. (For related reading, see: A Beginner's Guide to Auto Insurance.)
Unintended Consequence #5: Car Sickness
A study put out by researchers at the University of Michigan suggests that 6 – 12% of all American passengers of a driverless car will experience motion sickness, resulting in nausea and perhaps even vomiting. Motion sickness tends to become more severe if people undertake activities such as reading, which is exactly what bored passengers in self-driving cars are apt to do.
The Bottom Line
The advent of driverless cars is going to disrupt and revolutionize the way people get around. While there is likely to be a net positive benefit to society, there will also be unintended consequences to consider. These negative effects range from the serious—the potential loss of millions of driving jobs along with a collapse of the traditional auto industry—to the silly (more people will be puking). It seems apparent that the momentum in the development of self-driving vehicles is only going to pick up steam. As a result, it is important to be prepared for these, and any other, unintended negative consequences that may materialize as a result of this disruptive technology. (For related reading, see: How Google's Self-Driving Cars Will Change Everything.)
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982aa8f558e4b95579a81baa641b791a | https://www.investopedia.com/articles/investing/090314/how-invest-toronto-stock-exchange-equities.asp | How To Invest In Toronto Stock Exchange Equities | How To Invest In Toronto Stock Exchange Equities
The Canadian equity marketplace, previously viewed rather dismissively by overseas investors as a staid market dominated by “hewers of wood and drawers of water,” has come into its own in the 21st century. In the first decade of this millennium, rampant demand for commodities fuelled by rapid growth in China, India and other emerging economies led to unprecedented interest in Canadian equities, as a result of which the benchmark Toronto Stock Exchange (TSX) Composite soared to a record high by June 2008. The subsequent global market crash did not spare the TSX as it plunged 50% in a matter of months, but the ensuing recovery cemented Canada’s reputation as one of the more resilient economies in the world.
Canada has fared better in boom and bust
While the savage worldwide recession of 2007-09 took a toll on most major economies, Canada escaped relatively unscathed for a couple of reasons. Firstly, the Canadian economy was in much better shape than most nations as the global economy was slipping into recession in 2008; thanks to the commodity boom, Canada was one of only two G-7 nations at that time to enjoy twin budget and current account surpluses. Secondly, the largest Canadian banks and financial institutions did not load up on toxic mortgage-backed securities during the 2003-07 U.S. housing boom. As a result, the Canadian financial sector did not witness the cascading bank failures seen in the U.S. and Europe from 2007 to 2009. In the aftermath of the global recession, the Canadian economy also endured a relatively short-lived correction in housing.
Why invest in TSX stocks
Canadian stocks collectively had a value of $3.2 trillion as of December 2020, accounting for approximately 4% of global market capitalization. Although only one-tenth of the size of the $35.5-trillion U.S. equity market, Canada has a disproportionate number of world-leading companies clustered in three critical sectors – financials, energy and materials. Most of these companies have solid balance sheets, sound management, and long-term records of growth and profitability. While the benchmark TSX Composite index has approximately 250 stocks, a sub-set of this index – the TSX-60 – consists of the best Canadian blue-chips.
Some of the world’s best companies
Overseas investors may be familiar with a handful of Canadian companies such as Blackberry (whose mobile devices ruled the roost before it was crushed by Apple and Samsung), TC Energy (TRP.TO, the pipeline giant whose Keystone XL project has been the subject of much controversy in the U.S.), and Bausch Health Companies (BHC.TO, which initiated a failed takeover of Botox-maker Allergan in 2014). But the TSX is also home to some of the world’s best run banks (such as Royal Bank of Canada RY.TO, Toronto-Dominion Bank TD.TO, Bank of Nova Scotia BNS.TO) and insurers (Manulife MFC.TO, Sun Life Financial SLF.TO), giant energy companies (Suncor SU.TO, Canadian Natural Resources CNQ.TO), the biggest commodity producers (Nutrien NTR.TO, Barrick Gold ABX.TO), and some of the most profitable railways (Canadian National Railway CNR.TO, Canadian Pacific CP.TO).
So how does one invest in TSX stocks?
There are two basic avenues of investing in TSX equities –
Interlisted stocks: Interlisted stocks are those that are dually listed on a Canadian exchange like the TSX and on a U.S. exchange such as the New York Stock Exchange or Nasdaq. The major benefit of interlisted stocks to the U.S. investor is that it they can be purchased in U.S. dollars. More than three-quarters of the 60 stocks that comprise the TSX-60 blue-chip index are interlisted (including all the ones mentioned in the previous section). In fact, many of these interlisted stocks have the same ticker symbols on Canadian and U.S. exchanges. Altogether, almost 180 Canadian stocks are interlisted on U.S. exchanges. Exchange-traded funds and mutual funds: ETFs and mutual funds are another popular method of investing in a basket of TSX equities. For example, the iShares MSCI Canada ETF is a $3.6-billion ETF that has been around since March 1996. This ETF’s investment objective is to track the investment results of an index composed of Canadian equities. Its top ten holdings as of October 6, 2020 were – Shopify, Royal Bank of Canada, Toronto-Dominion Bank, Canadian National Railway, Enbridge, Bank of Nova Scotia, Barrick Gold Corp, Brookfield Asset Management, Canadian Pacific Railway, and Bank of Montreal. The ETF has an expense ratio of about 0.49%, making it an efficient way to invest in TSX stocks.
These stocks and funds can be purchased either through your online account or a full-service brokerage. As with any investment, ensure that these stocks are suitable for your investment objectives and risk tolerance, and seek qualified advice if necessary. Also note that as investing in Canadian stocks may have certain tax implications for overseas investors, familiarize yourself with these tax aspects and discuss them with your advisor.
The Bottom Line
One criticism of the TSX is that it is too heavily weighted to cyclical stocks whose fortunes depend on the domestic and global economies. As of December 2020, the three biggest sectors on the TSX were Financials (comprising 30.3% of the index), Materials (13.6%), and Industrials (12.2%). With over 55% of the index consisting of these cyclical sectors, there is merit to the claim that the TSX may be overly susceptible to swings in the economic cycle. But if you believe that the long-term prognosis for the global economy is positive, and economic growth will translate into rising demand for commodities, TSX stocks are certainly worth considering for inclusion in diversified portfolios.
Disclosure: The author owned shares of Manulife and Suncor at the time of publication.
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fb53d6cb4cb6bcc20299f53423cf5cc1 | https://www.investopedia.com/articles/investing/090315/10-major-companies-tied-apple-supply-chain.asp | 9 Major Companies Tied to the Apple Supply Chain | 9 Major Companies Tied to the Apple Supply Chain
Apple (AAPL) is one of the most valuable companies in the U.S. with a market cap of over $1.3 trillion as of April 2020. A big part of its success has come from its ability to be a true innovator in personal technology. Millions of customers are willing to pay top dollar for the quality, design, and features of Apple devices, making products like the iPhone, iPad, Mac, iPod, and Apple Watch top sellers.
To achieve this greatness though, Apple doesn't depend on its own manufacturing alone. It has over 200 suppliers that it relies on for procuring components for assembly.
Key Takeaways Apple releases a supplier list annually. Apple has established high standards for managing supplier relationships. Apple’s 2019 suppliers list reports on 200 suppliers and shows over 800 production facilities.
Apple puts a great deal of effort into the monitoring of its suppliers. Relationships that help to make the tech giant a manager of one of the most efficient supply-chain management systems on the market right now. Each year it releases a progress report outlining its supplier relationship efforts as well as a list of its top 200 suppliers, which account for 98% of its procurement. Below discusses nine of the most prominent.
Taiwan
Taiwan is Apple’s number one supplier region, but this is somewhat of a smokescreen.
1 Hon Hai Precision Industry: Foxconn (HNHPF)
Hon Hai Foxconn is one of the major reasons that Taiwan is on the map for Apple. Foxconn is one of Apple’s oldest and largest suppliers. The company has its headquarters in Tucheng, New Taipei City.
However, while being based in Taiwan, Foxconn is often thought of as Apple’s largest China supplier because of its vast number of Chinese supplier locations. In 2018, Foxconn had 35 supplier locations servicing Apple from Taiwan, China, India, Brazil, Vietnam, and the United States, and 29 of its 35 locations are in China. Foxconn has also helped Apple to branch out to India with one location there.
2 Wistron
Wistron is another Taiwan-based company that’s also helping Apple expand into India. Wistron has five supplier locations with three in China and two in India. A focus for Wistron in India has been printed circuit boards for iPhones.
3 Pegatron
Pegatron is another company rounding out the Taiwan lineup. It has its headquarters in Taiwan with only one Taiwan supplier location in Taoyuan. Pegatron’s other 17 locations include 12 sites in China along with sites in the Czech Republic, Singapore, Korea, Japan, and the United States. Pegatron is similar to Foxconn in that it provides iPhone assembly.
China
In general, China is a very important global region for Apple. The 2019 suppliers list shows Chinese and Hong Kong-based suppliers growing to account for a larger share than America and Japan, second only to the region of Taiwan. By physical location, China accounts for 380 of the total 809 production facilities. However, Apple has shared some concern over its dependence on China given the 2020 Coronavirus outbreak as well as the Trump Administration’s new tariff rules.
4 Goertek
Goertek and Luxshare are two Chinese companies that have been in the Apple supplier spotlight. Both companies agreed to set up productions in Vietnam to improve the manufacturing cost efficiency of the Airpod. Goertek has three supplier locations, two in China and one in Vietnam. The company has its headquarters in Weifang, China.
5 Luxshare
Luxshare is also in partnership with Apple for the production of the Airpods. It has eight supplier locations with seven in China and one in Vietnam.
United States
Despite its reliance on an international supply chain, Apple is also still very dependent on many companies in the U.S., including 3M (MMM), Broadcom (AVGO), Qualcomm (QCOM), Intel (INTC), Jabil (JBL), On (ON), Micron (MU), and Texas Instruments (TXN). Other U.S. companies also include Finisar (FNSR), Qorvo (QRVO), Skyworks (SWKS), and Corning (GLW).
6 Qualcomm (QCOMM)
Qualcomm and Intel have made U.S. headlines over fierce legal actions. NASDAQ-listed Qualcomm is a world leader in semiconductor, mobile, and telecom products and services. It is known to supply multiple electronic components to Apple, including envelope power trackers, baseband processors, power management modules, and GSM/CDMA receivers and transceivers. These are various instruments used in device power management systems and in mobile signaling. Qualcomm has also come through for Apple devices, offering necessary modem technology.
Modem technology is however at the core of the Apple, Intel, and Qualcomm 504 disputes. Apple announced it was buying Intel’s smartphone modem business. This led to a lawsuit by Qualcomm which resulted in maintenance of the modem manufacturing relationship for Qualcomm even after the Intel acquisition.
7 Intel (INTC)
In July 2019, Apple announced its agreement with Intel to acquire the majority of its smartphone modem business. With the acquisition, Apple broadened its patent ownership and setup a strong plan for 5G development. Moreover, after the acquisition, the Mac now uses Intel processors. On the 2019 supplier list, Intel reports nine supplier locations, with three locations in the U.S. and others in China, Israel, Vietnam, Ireland, and Malaysia.
Other Countries
8 Murata Manufacturing Ltd. (MRAAY)
Murata is based in Kyoto, Japan. It supplies to Apple from 26 manufacturing facilities spread across Malaysia, Japan, Thailand, Vietnam, China, and Singapore. It has 16 supplier sites in Japan.
Apple and Samsung are Murata’s top two clients, procuring ceramic capacitors from the company. These electronic parts are used to control the flow of electricity in electronic devices.
9 Samsung
Samsung has its headquarters in South Korea. It supplies multiple components, including flash memory used for storing data content, the mobile DRAM used for multi-tasking various applications in devices, and the application processors responsible for controlling and keeping devices running.
Despite being a competitor to Apple in the mobile phone market, Samsung uses its supplier status to reduce its own component manufacturing costs via bulk production.
Supplier Relationships
Apple is known to maintain one of the best-managed supply-chains in the world. Using its stature and global reach, the tech giant is able to demand high-quality products and impose stricter terms on its suppliers. When one of Apple's Chinese suppliers of "tactic engines" for the iPhone 7 proved unreliable, for example, the company quickly procured them from Japanese firm Nidec Corp.
Apple has hundreds of such suppliers willing to abide by the terms Apple sets forth. What's more, by outsourcing its supply-chain and assembly operations, Apple can do what it does best—concentrate on designing great products that offer rich functionality and are easy-to-use.
On the flip side, being associated with a brand like Apple can be a remarkable boon for a supplier firm. Apart from the small novice firms, who may derive much of their business from Apple, even larger companies like Samsung use the relationship to their advantage. As noted, Samsung continues to compete with Apple in the mobile phone market; however, large orders from Apple allow Samsung to increase bulk production, which reduces manufacturing costs for its own mobile phone components.
Another advantage for suppliers is that Apple has a reputation for innovation. Regardless of how specific products have performed and despite missteps that have occurred, people expect Apple to come out with something new on a regular basis and eagerly anticipate these products. To a certain extent, this shields Apple suppliers, who will continue to see new demands for their goods and services.
It should be noted, however, that failing to please Apple can spell doomsday for a small or medium-sized supplier that has built its business around Apple product sales. If suppliers do not maintain high-quality goods at the right price, Apple has the positioning to replace them with another competitor.
The Bottom Line
Apple needs suppliers, and suppliers need Apple. It's a streamlined relationship that is often mutually beneficial, though, at times, it can create tension. Suppliers have major exposure to Apple and its overall market performance. Financial reports of supplier companies are frequently used by market analysts to project sales for Apple products, and Investors also often look to Apple’s underlying suppliers for insights on Apple’s performance as well as more granular investment opportunities independently.
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3906b6776a193a7ee4f84eb670787258 | https://www.investopedia.com/articles/investing/090414/sp-500-index-you-need-know.asp | The S&P 500: The Index You Need To Know | The S&P 500: The Index You Need To Know
If you had to use a single quantity to indicate the strength of the economy, what would it be? The consumer confidence index is too subjective. The unemployment rate overstates under-the-table workers and understates discouraged workers. Even though the Dow Jones Industrial Average is the best known and most quoted stock index in the world, it’s so selective as to be misleading. Comprised of only 30 stocks, the Dow is less representative of the economy as a whole than are several other indices. Paramount among those is the S&P 500, the daily de facto numerical indicator of the U.S. economy. While the S&P 500 gets second billing even in the financial media, and little recognition elsewhere, its importance is vital.
What's in a Name?
First, the etymology of the term. "S&P" is Standard and Poor’s. Henry Poor was a 19th century financial analyst who compiled an annual book that listed publicly held railroad companies. His publication merged with those of the "Standard" Statistics Bureau in 1941. And "500" is the number of stocks that comprise the index.
That’s it. The index includes 500 of the largest (not necessarily the 500 largest) companies whose stocks trade on either the NYSE or NASDAQ. Like popes and Oscar winners, the components of the S&P 500 are selected by committee. And, like the College of Cardinals and the Academy of Motion Picture Arts & Sciences, the S&P 500 committee operates within specific criteria. To qualify for the index, a company must have:
a market cap of $8.2 billion (as of Feb. 2019 guidance) its headquarters in the U.S. the value of its market capitalization trade annually at least a quarter-million of its shares trade in each of the previous six months most of its shares in the public’s hands at least a year since its initial public offering the sum of the previous four quarters of earnings must be positive as well as the most recent quarter.
Between them, the NYSE and NASDAQ list several thousand companies. But the first criterion alone reduces that number to less than a thousand. Add a few more benchmarks, and it’s easy to see how the S&P can get down to 500 large-cap stocks suitable for inclusion.
Complex Math
Unlike the Dow, which you calculate by just adding up the prices of the component stocks and multiplying by a constant, the S&P 500 is more complex. Instead of adding the constituents stocks’ prices, the S&P 500 adds the companies’ float-adjusted market capitalization. “Float-adjusted” means counting only the shares available to us ordinary folk, excluding those held by management, by governments and by other companies. There are hundreds of ostensibly “publicly traded” companies that keep most of their shares in-house.
Shown The Door
With so many components, and such stringent criteria, the S&P 500 is dynamic. S&P Dow Jones Indices, the subsidiary of S&P Global, Inc. that determines the components of the index, has little patience for slackers. United States Steel Corp. (X), one of the stalwarts of 20th century industry, had been listed on the S&P 500 since its inception. In fact, at one point U.S. Steel was the largest company in the world. Alas, it hasn’t turned a profit in years. When it fell below the $4 billion threshold in 2013, the index booted it out and made room for Martin Marietta Materials Inc. (MLM), a construction aggregate producer. Only on Wall Street does the Iron Age give way to the Stone Age.
Low Turnover
But even technologically adept companies have to meet the S&P 500’s list of requirements or perish. Advanced Micro Devices Inc. (AMD) was the second-largest microprocessor producer in the world, but fell off the index in 2013. It was added again in 2017. Again, due to market cap issues. Turnover in the S&P 500 has been lower than you might think, but the length of time companies stay on the list is shrinking.
Sometimes companies buy a company it replaces on the index, or a company spins off a large chunk of itself. S&P 500-listed companies Forest Labs, Beam, and Life Technologies were all purchased by larger companies in 2014. Other companies leave the list when it can no longer reach the market cap requirement. Typically, when that happens, the company is then relegated to the index that its replacement was promoted from. For instance, in 2014 Rowan took Mallinckrodt’s place on the S&P MidCap 400.
Is there a survivorship bias here? Sure, but there’s also a survivorship bias in the economy at large. The remaining stocks flourish by virtue of remaining. One study even claims that over the decades, stocks deleted from the S&P 500 have ended up outperforming their replacements.
The Bottom Line
For the most part, the S&P 500 doesn’t convey information that differs drastically from comparable indices. It largely tracks (or vice versa) the more exclusive Dow, and the more inclusive Russell 2000. The S&P 500 represents a happy medium of sorts: comprehensive enough to indicate the relative strength or weakness of the larger economy, but not so exhaustive as to include too much noise with the signal. On balance, the S&P 500 is the index of indices — the bellwether adopted by analysts, policymakers, and ordinary market participants alike.
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9b68607e51b1cc21d25893139e46cb81 | https://www.investopedia.com/articles/investing/090815/3-best-investments-george-soros-ever-made.asp | George Soros: 3 Best Investments Ever | George Soros: 3 Best Investments Ever
George Soros has made a number of impressive investments and trades over the years. He is one of the most famous investors in the financial community and is known for making massive currency bets on a global economic scale. It is believed he made up to $1 billion in a single day on a trade when he bet against the British pound.
Soros lived in Hungary during World War II, emigrated to England to study at the London School of Economics, and later moved to New York City. Eventually, he formed Soros Fund Management, which included the prominent hedge fund called Quantum Fund. By the time that Soros converted his hedge fund into a family office in 2011, he had generated an average annualized return of 20% for over 40 years. The following are three of his largest currency trades.
Bet Against the Pound
Soros’ bet against the British pound has been called one of the greatest currency trades of all time. Britain joined the European Exchange Rate Mechanism, or ERM, in 1991 during a period of high inflation and low interest rates. As part of that agreement, Britain vowed to keep the pound within a certain band in relation to the German mark and, in order to keep the two currencies within the range, it was forced to keep raising interest rates to attract buyers for its currency. Soros recognized the pound was overvalued versus the German mark and started to bet against the British currency.
Key Takeaways George Soros is a famous hedge fund manager and generated years of exceptional returns running the Quantum Fund.One of the largest profits in the world of currency trading was a large bet made by George Soros against the British pound in 1991.The hedge fund manager also made large profits betting against the Thai baht in early 1997 before the Asian financial crisis.More recently, Soros shorted the Japanese yen while betting on Japanese stocks for substantial profits.
It was during the summer of 1992 when Soros began building a short position in the British pound. According to his colleagues, he carried a $1.5 billion short position for most of the summer. The British government defended the pound by raising interest rates more and more. The government soon realized it would pay out massive amounts of money to defend the pound. German officials also made public statements that realignment within the ERM might be possible in mid-September.
In response to these comments by German officials, Soros decided to increase the size of his bet massively. He went from a $1.5 billion position to a massive $10 billion in the middle of September. He knew that the British government was having trouble keeping the currency propped up. Either the pound stayed relatively stable, in which case Soros and his investors would lose a little money, or the alternative was their bet would pay off. Thus, this was a low-risk, high-opportunity trade.
The British government was forced to abandon the ERM and begin allowing its currency to float freely on the evening of Sept. 16, 1992. The next day the pound fell 15% versus the German mark and 25% against the U.S. dollar. It is estimated Soros made around $1 billion on the trade.
Bet Against the Baht
Soros also allegedly made a massive bet against the Thai baht during the Asian financial crisis in 1997. It is estimated that he bet $1 billion of a $12 billion portfolio that the currency would implode, which eventually happened when the Bank of Thailand had run out of ammunition to support its currency and fend off short sellers.
The Malaysian Prime Minister later accused Soros of attacking Southeast Asian currencies, making a number of anti-Semitic comments against the hedge fund manager as well. Soros later clarified that he had sold those Asian currencies short early in 1997, months before the crisis. "By selling the Thai baht short in January 1997, the Quantum Fund managed by my investment company sent a market signal that the baht may be overvalued," according to Soros.
Bet Against the Yen
More recently, Soros made another large bet against the yen in 2013 and 2014. These bets once again netted Soros around $1 billion. Soros knew the Japanese Prime Minister Shinzo Abe was engaging in extensive monetary easing to jump-start Japan’s stagnant economy. These economic policies are known as Abenomics.
The easing had the effect of devaluing the yen. At the same time, Soros was long the Nikkei, the Japanese stock market. The yen weakened around 17% during the time of Soros’ wager, while the Japanese stock market rallied around 28% before eventually selling off. For 2013, the Soros family investment fund managed over $24 billion and posted a roughly 24% return for the year.
Heading into 2018, Soros managed $27 billion and had notable investments in Liberty Broadband and Caesars Entertainment, as well a 15% stake in Justify, the 2018 American Triple Crown winner.
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3c09234bdadf698ca5a566cdd7e368bf | https://www.investopedia.com/articles/investing/090815/buying-your-first-investment-property-top-10-tips.asp | 15 Tips for Buying Your First Rental Property | 15 Tips for Buying Your First Rental Property
Thinking about purchasing an investment property? Real estate has produced many of the world's wealthiest people, so there are plenty of reasons to think that it is a sound investment. Experts agree, however, that as with any investment, it's better to be well-versed before diving in with hundreds of thousands of dollars. Here are the things you should consider and investigate.
Key Takeaways Purchasing an investment property to earn rental income can be risky. Buyers will usually need to secure at least a 20% downpayment. Being a landlord requires a broad array of skills, which could be as diverse as understanding basic tenant law to being able to fix a leaky faucet. Experts recommend having a financial cushion, in case you don't rent out the property, or if the rental income doesn't cover the mortgage.
1. Are You Cut out to Be a Landlord?
Do you know your way around a toolbox? How are you at repairing drywall or unclogging a toilet? Sure, you could call somebody to do it for you or your could hire a property manager, but that will eat into your profits. Property owners who have one or two homes often do their own repairs to save money.
Of course, that changes as you add more properties to your portfolio. Lawrence Pereira, president of King Harbor Wealth Management in Redondo Beach, Calif., lives on the West Coast but owns properties on the East Coast. As someone who says he's not at all handy, he makes it work. How? "I put together a solid team of cleaners, handymen, and contractors," says Pereira.
This isn't advisable for new investors, but as you get the hang of real estate investing you don't need to remain local.
If you're not the handy type and don't have lots of spare cash, being a landlord may not be right for you.
2. Pay Down Personal Debt
Savvy investors might carry debt as part of their portfolio investment strategy, but the average person should avoid it. If you have student loans, unpaid medical bills, or children who will attend college soon, then purchasing a rental property may not be the right move.
Pereira agrees that being cautious is key, saying, "It's not necessary to pay down debt if your return from your real estate is greater than the cost of debt. That is the calculation you need to make." Pereira suggests having a cash cushion. "Don't put yourself in a position where you lack the cash to make payments on your debt. Always have a margin of safety."
3. Secure a Downpayment
Investment properties generally require a larger downpayment than do owner-occupied properties; they have more stringent approval requirements. The 3% you may have put down on the home where you currently live isn't going to work for an investment property. You will need at least a 20% downpayment, given that mortgage insurance isn't available on rental properties. You may be able to obtain the downpayment through bank financing, such as a personal loan.
4. Find the Right Location
The last thing you want is to be stuck with a rental property in an area that is declining rather than stable or picking up steam. A city or locale where the population is growing and a revitalization plan is underway represents a potential investment opportunity.
When choosing a profitable rental property, look for a location with low property taxes, a decent school district, and plenty of amenities, such as parks, malls, restaurants, and movie theaters. In addition, a neighborhood with low crime rates, access to public transportation, and a growing job market may mean a larger pool of potential renters.
5. Should You Buy or Finance?
Is it better to buy with cash or to finance your investment property? That depends on your investing goals. Paying cash can help generate positive monthly cash flow. Take a rental property that costs $100,000 to buy. With rental income, taxes, depreciation, and income tax, the cash buyer could see $9,500 in annual earnings, or a 9.5% annual return on the $100,000 investment..
On the other hand, financing can give you a greater return. For an investor who puts down 20% on a house, with compounding at 4% on the mortgage, after taking out operating expenses and additional interest, the earnings add up to roughly $5,580 per year. Cash flow is lower for the investor, but a 27.9% annual return on the $20,000 investment is much higher than the 9.5% earned by the cash buyer.
6. Beware of High Interest Rates
The cost of borrowing money might be relatively cheap in 2020, but the interest rate on an investment property is generally higher than a traditional mortgage interest rate. If you do decide to finance your purchase, you need a low mortgage payment that won't eat into your monthly profits too much.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
7. Calculate Your Margins
Wall Street firms that buy distressed properties aim for returns of 5% to 7% because, among other expenses, they need to pay staff. Individuals should set a goal of a 10% return. Estimate maintenance costs at 1% of the property value annually. Other costs include homeowners' insurance, possible homeowners' association fees, property taxes, monthly expenses such as pest control, and landscaping, along with regular maintenance expenses for repairs.
8. Invest in Landlord Insurance
Protect your new investment: In addition to homeowners insurance, consider purchasing landlord insurance. This type of insurance generally covers property damage, lost rental income, and liability protection —in case a tenant or a visitor suffers injury as a result of property maintenance issues.
To lower your costs, investigate whether an insurance provider will let you bundle landlord insurance with a homeowner's insurance policy.
9. Factor in Unexpected Costs
It's not just maintenance and upkeep costs that will eat into your rental income. There's always the potential for an emergency to crop up—roof damage from a hurricane, for instance, or burst pipes that destroy a kitchen floor. Plan to set aside 20% to 30% of your rental income for these types of costs so you have a fund to pay for timely repairs.
10. Avoid a Fixer-Upper
It's tempting to look for the house that you can get at a bargain and flip into a rental property. However, if this is your first property, that's probably a bad idea. Unless you have a contractor who does quality work on the cheap—or you're skilled at large-scale home improvements—you likely would pay too much to renovate. Instead, look for a home that is priced below the market and needs only minor repairs.
11. Calculate Operating Expenses
Operating expenses on your new property will be between 35% and 80% of your gross operating income. If you charge $1,500 for rent and your expenses come in at $600 per month, you're at 40% for operating expenses. For an even easier calculation, use the 50% rule. If the rent you charge is $2,000 per month, expect to pay $1,000 in total expenses.
12. Determine Your Return
For every dollar that you invest, what is your return on that dollar? Stocks may offer a 7.5% cash-on-cash return, while bonds may pay 4.5%. A 6% return in your first year as a landlord is considered healthy, especially because that number should rise over time.
13. Buy a Low-Cost Home
The more expensive the home, the greater your ongoing expenses will be. Some experts recommend starting with a $150,000 home in an up-and-coming neighborhood. In addition, experts advise never to buy the nicest house for sale on the block, ditto for the worst house on the block.
14. Know Your Legal Obligations
Rental owners need to be familiar with the landlord-tenant laws in their state and locale. It's important to understand, for example, your tenants' rights and your obligations regarding security deposits, lease requirements, eviction rules, fair housing, and more in order to avoid legal hassles.
15. Weigh the Risks vs. the Rewards
In every financial decision, you must determine if the payoff is worth the potential risks involved. Does investing in real estate still make sense for you?
Rewards Because your income is passive, notwithstanding the initial investment and upkeep costs, you can earn money while putting most of your time and energy into your regular job. If real estate values increase, your investment also will rise in value. You can put real estate into a self-directed IRA (SDIRA). Rental income is not included as part of your income that's subject to Social Security tax. The interest you pay on an investment property loan is tax-deductible. Short of another crisis, real estate values are generally more stable than the stock market. Unlike investing in stocks or other financial products that you cannot see or touch, real estate is a tangible physical asset. Risks Although rental income is passive, tenants can be a pain to deal with unless you use a property management company. If your adjusted gross income (AGI) is more than $200,000 (single) or $250,000 (married filing jointly), then you may be subject to a 3.8% surtax on net investment income, including rental income. Rental income may not cover your total mortgage payment. Unlike stocks, you can't instantly sell real estate if the markets go sour or you need cash. Entry and exit costs can be high. If you don’t have a tenant, you still need to pay all the expenses.
A Final Word
Be realistic in your expectations. As with any investment, rental property isn't going to produce a large monthly paycheck right away, and picking the wrong property could be a catastrophic mistake.
For your first rental property, consider working with an experienced partner. Or, rent out your own home for a period to test your proclivity for being a landlord.
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10be6cc04ab8fa67519f8fc116ef5779 | https://www.investopedia.com/articles/investing/090815/how-does-taxfree-exchange-work.asp | How Does a Tax-Free Exchange Work? | How Does a Tax-Free Exchange Work?
Benjamin Franklin said, "Nothing is certain but death and taxes." No matter how hard you try to avoid them, there comes a time when you'll have to face one, and then the other. Taxes are generally an obligation most people prefer to pay on a minimal basis. Taxpayers will give their best effort to reduce the portion of their income payable to Uncle Sam.
While it is possible to discover loopholes that will reduce your total tax owed, maximizing after-tax income can take a considerable amount of time, expense, and creativity. And that rings just as true if you own property. But when it comes to property sales, there is a way you can help yourself put off paying a high tax bill to the Internal Revenue Service (IRS). It's called a 1031 exchange, which is increasingly being recognized for its tax benefits to investors of all levels. Read on to find out more about this rule and how it can help.
Key Takeaways A 1031 Exchange is an exchange of like-kind properties that are held for business or investment purposes in the United States. The exchange allows for the deference of any taxable gains on the property that is first sold. Taxpayers have 45 days from the time the property is sold to identify possible replacement properties. The replacement property must be secured, and the exchange finalized no later than 180 days after the sale of the original asset.
What Is a 1031 Exchange?
A 1031 Exchange is an exchange of like-kind properties in the United States. Put simply, a property being sold is not subject to capital gains tax until it is eventually sold without reinvestment of the proceeds. Essentially, this allows not for the avoidance, but the deference of any taxable gains on the property that is first sold.
In a 1031 exchange, both properties must be held for business or investment purposes and must be located in the United States. Although they must be similar in nature, the quality of the properties is irrelevant. Corporations, partnerships, limited liability companies, and trusts are eligible tax-paying entities that can establish an exchange under Section 1031.
But what about personal property? The sale of a residential home for another wouldn't be allowed under the 1031 exchange guidelines. Moreover, there are specific types of property that aren’t eligible, and therefore, don't qualify for a 1031 exchange. These include:
Business inventory Stocks and bonds Debt notes Securities Interests in partnerships Certificates of trusts
For many people, the subject of taxes can become confusing awfully fast. Taxes can go from simple to highly complex by simply adding a few pieces of property to the equation. However, being educated on what effective tax rules are available can be an asset in itself. A 1031 Exchange is a section of the tax code that can reward individuals engaged in certain business and investment activities.
Rule 1031 Changes
The passing of the Tax Cuts and Jobs Act (TCJA) in December 2017 made some changes to the definition of property. Prior to the changes, property like aircraft, equipment, and franchise licenses were eligible for a 1031 exchange. But the new law limited the definition of property to real estate. Tenancies in common (TICs) also apply. These are arrangements involving two or more people who share ownership in a piece of property or land.
The passing of the Tax Cuts and Jobs Act eliminated certain kinds of property from the 1031 exchange rule including aircraft, equipment, and franchise licenses
Required Guidelines
To be authorized as a 1031 exchange, the transaction must be contingent on the attainment and relinquishment of each respective property. The parties involved typically use exchange facilitation companies which assist in managing deals of this nature to ensure they are carried out properly. Fortunately, a like-kind exchange doesn’t have to be completed simultaneously, but it does have a few time limitations that must be followed.
First, the taxpayer has 45 days from the time the property is sold to identify possible replacement properties. A written notice of this identification must be signed and delivered to the seller or qualified agent of the desired property. For real estate, the documentation must include specific details about the property such as the address and legal description. Next, the replacement property must be secured, and the exchange finalized no later than 180 days after the sale of the original asset or the deadline of the income tax return for the tax year the original asset was sold—whichever comes first. The property must be of very similar description to the one mentioned during the initial 45-day timeframe.
Reverse Exchanges
Now that you know more about a regular 1031 exchange, it is important to know that a reverse exchange is also possible. The appeal of this type of exchange is that the taxpayer can take as much time as needed to purchase a property as deadlines aren’t enforced until the property is officially acquired and recorded with an Exchange Accommodation Titleholder. Technically, this is an agent who holds the legal titles of property until the swap is completed. The real estate investor has 45 days to specify which property they want to sell, which is often already known. The investor has another 135 days to complete the sale of the renounced property. The reverse exchange provides yet another method for taking advantage of this unique tax benefit.
Paperwork Requirements
With all of the previous conditions being satisfied, there are also administrative requirements that must be documented and tracked. The gain from the original sale of the first asset must be recorded so if the replacement asset is sold, both gains are taxed with a few adjustments. The IRS requires that 1031 exchanges be tracked on Form 8824 which specifies details about the transaction. The form itself requests descriptions of the properties that were exchanged, dates of the acquisition and transfer, how the two parties of the exchange are related, and the value of both properties.
Additionally, the form requires the declaration of the gain or loss on the property sold as well as the cash received or paid along with any liabilities, if any, from the transaction. Finally, the basis—or cost with necessary additions and deductions—of the original property must be listed. IRS Publication 544 also provides additional details about the sale and disposition of assets and their appropriate tax treatment.
The Bottom Line
The unique channel of tax-deferred growth through 1031 exchanges can empower individuals by allowing them to exponentially grow their wealth if used correctly. Rather than paying taxes when a capital gain is realized, these proceeds can be reinvested into an asset of similar or higher value. Ideally, this process can be repeated by using the funds for the acquisition of property instead of paying the IRS, resulting in accelerated growth. Reverse exchanges offer even further flexibility of this rule, opening up more options for investors.
The paperwork necessary to track this type of transaction is thorough, but don’t let that be a detractor. Lastly, be mindful of the timeframes and deadlines during which property can be bought and sold. Missing these crucial windows can be the difference of paying more in taxes or increasing your net worth. Ultimately, the 1031 exchange is a completely legal tax-deferred strategy that any taxpayer in the United States can use. Over the long term, consistent and proper use of this strategy can pay substantial dividends for years to come.
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586d86b3059150e1a33128b21f816967 | https://www.investopedia.com/articles/investing/091015/5-reasons-why-dividends-matter-investors.asp | 5 Reasons Why Dividends Matter to Investors | 5 Reasons Why Dividends Matter to Investors
Five of the primary reasons why dividends matter for investors include the fact they substantially increase stock investing profits, provide an extra metric for fundamental analysis, reduce overall portfolio risk, offer tax advantages, and help to preserve purchasing power of capital.
Key Takeaways Companies that issue dividends can provide inherent fidelity to the financial state of the company; unhealthy companies are generally not in a position to provide dividends to their shareholders. Qualified dividends paid are taxed at rates lower than the ordinary income tax rate—15% in lieu of 25% or 0% in lieu of 15%. Even during periods of recession, dividend stocks have historically shown growth. Over the past 93 years dividend stocks traded on the S&P 500 have provided investors returns close to twice those of stocks without dividends.
Growth and Expansion of Profits
One of the primary benefits of investing in dividend-paying companies is dividends tend to steadily grow over time. Well-established companies that pay dividends typically increase their dividend payouts from year to year. There are a number of "dividend aristocrats,” or companies that have continuously increased their dividend payouts for more than 25 years consecutively. Since 1980, the dividend average compounded annual growth rate for S&P 500 companies that offer dividends has been 3.2%.
One of the basics of stock market investing is market risk, or the inherent risk associated with any equity investment. Stocks may go up or down, and there is no guarantee they increase in value. while investing in dividend-paying companies is not guaranteed to be profitable, dividend stocks offer at least a partial return on investment that is virtually guaranteed. It is very rare for dividend-paying companies to ever stop paying dividends, in fact, most of these companies increase the amount of their dividends over time.
Many investors fail to appreciate the huge impact dividends have on stock market profits. Since 1926, dividends have accounted for almost half of stock investing profits in the companies that make up the S&P 500 Index. This means the inclusion of dividend payments has roughly doubled what stock investors have realized in returns on investment as compared to what their returns would have been without dividend payments.
Additionally, in this low-interest-rate environment, the dividend yield offered by dividend-paying companies is substantially higher than rates available to investors in most fixed-income investments such as government bonds.
Dividend-paying stocks can also improve the overall stock price, once a company declares a dividend that stock becomes more attractive to investors. This increased interest in the company creates demand increasing the value of the stock.
Dividends Are Helpful in Equity Evaluation
Just as the impact of dividends on total return on investment, or ROI, is often overlooked by investors, so too is the fact that dividends provide a helpful point of analysis in equity evaluation and stock selection. Evaluation of stocks using dividends is often a more reliable equity evaluation measure than many other more commonly used metrics such as price-to-earnings, or P/E ratio.
Most financial metrics used by analysts and investors in stock analysis are dependent on figures obtained from companies' financial statements. The potential problem with evaluating stocks solely based on a company's financial statements is companies can, and unfortunately sometimes do, manipulate their financial statements through misleading accounting practices to improve their appearance to investors. Dividends, however, offer a solid indication of whether a company is performing well. In short, a company has to have real cash flow to make a dividend payment.
Examining a company's current and historical dividend payout gives investors a firm reference point in basic fundamental analysis of the strength of a company. Dividends provide continuous, year-to-year indications of a company's growth and profitability, outside of whatever up-and-down movements may occur in the company's stock price over the course of a year. A company consistently increasing its dividend payments over time is a clear indication of a company that is steadily generating profits and is less likely to have its basic financial health threatened by temporary market or economic downturns.
An additional benefit of using dividends in evaluating a company is that since dividends only change once a year, they provide a much more stable point of analysis than metrics that are subject to the day-to-day fluctuations in stock price.
Reducing Risk and Volatility
Dividends are a major factor in reducing overall portfolio risk and volatility. In terms of reducing risk, dividend payments mitigate any losses that occur from a decline in stock price. But the risk reduction benefit of dividends goes beyond that basic fact. Studies have consistently shown that dividend-paying stocks significantly outperform non dividend-paying stocks during bear market periods. While an overall downmarket generally drags down stocks across the board, dividend-paying stocks usually suffer significantly less decline in value than non dividend-paying stocks.
A stark example of this fact was displayed during the overall market downturn in 2002, when non dividend-paying stocks fell by an average of 30%, while dividend-paying stocks only declined on average by 10%. Even during the severe 2008 financial crisis that precipitated a sharp fall in stock prices, dividend stocks held up noticeably better than non dividend stocks.
Owning stocks of dividend-paying companies also substantially reduces overall portfolio volatility. A 2000-2010 comparison of dividend-paying companies versus non dividend-paying companies in the S&P 500 Index shows a marked contrast in levels of volatility. The beta of dividend-paying companies over this period of time was 0.98, slightly less than the overall market average. The beta of non dividend-paying companies for the same time period was 1.48, showing a much higher volatility rate than the overall market average.
Dividends Offer Tax Advantages
The way dividends are treated in regard to taxes makes dividends a very tax-efficient means of obtaining income. Qualified dividends are taxed at substantially lower rates than ordinary income. Per IRS regulations as of 2011, for individuals whose ordinary income tax rate is 25% or higher, qualified dividends are taxed at only a 15% rate. And for individuals whose ordinary income tax rate is below 25%, qualified dividends are completely tax-free.
Dividends Preserve Purchasing Power of Capital
Dividends also help out in another area that investors sometimes fail to consider: the effect of inflation on investment returns. For an investor to realize any genuine net gain from an investment, the investment must first provide enough of a return to overcome the loss of purchasing power that results from inflation.
If an investor owns a stock that increases in price 3% over the course of a year, but inflation is at 4%, then in terms of the purchasing power of his capital, the investor has actually suffered a 1% loss. However, if that same stock that increased 3% in price also offers a 3% dividend yield, the investment has successfully returned a profit that outpaces inflation and represents an actual gain in purchasing power for the investor. The good news for investors in dividend-paying companies is that many dividend yields outpace inflation.
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62dfeae87a08bc7cbe971f3c90e019d9 | https://www.investopedia.com/articles/investing/091415/top-4-municipal-bond-etfs.asp | Best Municipal Bond ETFs for Q2 2021 | Best Municipal Bond ETFs for Q2 2021
Municipal bond exchange-traded funds (ETFs) provide investors with diversified access to the municipal bond market. Municipal bonds, or munis, are debt instruments issued by states, municipalities, or counties for the purpose of financing public capital expenditures, such as the construction of highways, bridges, and schools. For investors, munis generally offer tax-free interest income. While many of these bonds are rated "investment grade" by ratings agencies, indicating a relatively low degree of credit risk, they are not risk-free. The perceived risk of munis was heightened last year amid the COVID-19 pandemic, which has placed enormous financial strain on state and municipal budgets. The Federal Reserve took measures early in the pandemic in order to help calm the municipal bond market. A municipal bond ETF can help to reduce risk through holding debt issued by a broad range of states, municipal governments, or agencies.
Key Takeaways Municipal bonds underperformed the broader market over the past year.The ETFs with the best 1-year trailing total return are MMIN, FLMB, and MUST.The top respective holdings of these ETFs are bonds issued by: the Metropolitan Transportation Authority of New York; the Iowa Finance Authority; and the New York City Municipal Water Finance Authority.
There are 39 distinct municipal bond ETFs that trade in the U.S., excluding inverse and leveraged ETFs, as well as funds with less than $50 million in assets under management (AUM). Municipal bonds, as measured by the Bloomberg Barclays Municipal Bond Index, have underperformed the broader market with a total return of 4.5% over the past 12 months compared to the S&P 500's total return of 18.9%, as of February 10, 2021. The best-performing municipal bond ETF for Q2 2021, based on performance over the past year, is the IQ MacKay Shields Municipal Insured ETF (MMIN). We examine the top 3 best municipal bond ETFs below. All numbers below are as of February 11, 2021.
IQ MacKay Shields Municipal Insured ETF (MMIN)
Performance over 1-Year: 6.4%Expense Ratio: 0.31%Annual Dividend Yield: 1.99%3-Month Average Daily Volume: 173,933Assets Under Management: $379.6 millionInception Date: October 18, 2017Issuer: IndexIQ
MMIN is an actively-managed ETF that aims to provide investors with current income that is exempt from federal income taxes by investing primarily in insured municipal bonds. It mostly invests in investment-grade munis that are accompanied by an insurance policy guaranteeing the payment of both principal and interest. The fund follows a relative value strategy based on credit analysis, yield curve positioning, and sector rotation. Its top three holdings include bonds issued by the Metropolitan Transportation Authority of New York; the West Contra Costa Unified School District of California; and the Medford Oregon Hospital Facilities Authority Revenue Refunding Asante Health System.
Franklin Liberty Federal Tax-Free Bond ETF (FLMB)
Performance over 1-Year: 6.4%Expense Ratio: 0.30%Annual Dividend Yield: 2.22%3-Month Average Daily Volume: 38,995Assets Under Management: $117.0 millionInception Date: August 31, 2017Issuer: Franklin Templeton Investments
FLMB, formerly called the Franklin Liberty Municipal Bond ETF, is an actively managed ETF that seeks to provide current income exempt from federal income taxes. It provides exposure to municipal securities rated in the top four ratings categories at the time they are purchased. The fund is comprised of 210 holdings with an average duration of 8.45 years and a weighted average maturity of 13.31 years. Its top three holdings include bonds issued by the Iowa Finance Authority; the state of New Jersey; and the state of California.
Columbia Multi-Sector Municipal Income ETF (MUST)
Performance over 1-Year: 5.7%Expense Ratio: 0.23%Annual Dividend Yield: 2.30%3-Month Average Daily Volume: 16,425Assets Under Management: $71.9 millionInception Date: October 10, 2018Issuer: Columbia Threadneedle Investments
MUST tracks the performance of the Beta Advantage Multi-Sector Municipal Bond Index, which employs a rules-based, multi-sector strategic beta approach to gauging the performance of the U.S. tax-exempt bond market. It focuses on five sectors of the municipal debt market with a focus on yield, quality, maturity, liquidity, and interest rate sensitivity. The ETF uses a representative sampling approach, which results in a smaller number of holdings than found in the index. It seeks to provide tax-exempt income by following a rules-based approach and offers a highly diversified portfolio of municipal bonds in a range of sectors. Its top three holdings include bonds issued by the New York City Municipal Water Finance Authority; the New Jersey Transportation Trust Fund Authority; and the Metropolitan Transportation Authority of New York.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.
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cc21c620e746914ea34ff58cbbcf9058 | https://www.investopedia.com/articles/investing/091515/3-industries-driving-chinas-economy.asp | The 3 Industries Driving China's Economy | The 3 Industries Driving China's Economy
China is the world's largest emerging market economy, both in terms of population and total economic product. The country is arguably the world's most important manufacturer and industrial producer, and those two sectors alone account for more than 40% of China's gross domestic product or GDP. China is also the world's largest exporter and the second-largest importer, and it contains the fastest-growing consumer market. Major industries include manufacturing, agriculture and telecommunication services. As of 2015, the Asian giant is among the most important economic powers on a global scale. It was not always this way, however, and as little as 50 years ago, China was a struggling nation of extreme hunger, poverty, and repression.
China's communist government began to institute capitalist market reforms in 1978, and over subsequent years, the Chinese have taken a sharp turn away from state-owned enterprises, or SOEs. As of 2013, SOEs only accounted for 45% of all Chinese industrial output. That figure was nearly 80% in 1978; the remaining 22% were "collectively owned" enterprises. The result is an economic explosion that catapulted China to the second-largest economy in the world, trailing only the United States.
Between 1978 and 2008, the size of the Chinese economy multiplied nearly 50 times over, and the average annual GDP growth was approximately 10%. The initial reforms focused on agriculture but soon spread to the services and light manufacturing sectors. All of these were precursors to banking reforms, which led to perhaps the most important transformations in the Chinese economy in the 20th century.
1. Manufacturing
China makes and sells more manufacturing goods than any other country on the planet. The range of Chinese goods includes iron, steel, aluminum, textiles, cement, chemicals, toys, electronics, rail cars, ships, aircraft, and many other products. As of 2015, manufacturing is the largest and most diverse sector in the country.
China is a world leader in many types of goods. For example, almost 80% of all air conditioner units are created by Chinese businesses. China manufactures more than 45 times as many personal computers per person than the rest of the world combined. It is also the biggest producer of solar cells, shoes, cellphones, and ships.
Though it does not receive the same kind of credit as Sweden, Germany, Japan or the U.S., China has a thriving automobile manufacturing industry. Most investors are surprised to learn China is the world's third-largest car manufacturer, though the Chinese government claims it is the world leader.
The Chinese car industry grew out of a national focus on automobiles in the 1990s, a decade when Chinese manufacturers nearly tripled total car output. Though car consumption eventually caught up after 2005, most of these early cars were destined for the export markets because the vast majority of Chinese citizens were too poor to purchase the products themselves.
This is a common theme in the Chinese manufacturing sector. Products are frequently churned out for government use or are immediately put on boats and shipped to foreign consumers. Compared to other nations, Chinese workers historically buy relatively little of their own high-end manufactured products, which is a problem exacerbated when the government devalues the Chinese currency, having the effect of lowering real Chinese wages.
2. Services
As of 2013, only the United States and Japan boasted a higher service output than China, which represents a significant shift for the country. A healthy services sector is a sign of healthy domestic consumption and per capita wealth increases; in other words, the Chinese people are gaining the capacity to afford their own output.
A 2010 world study found the services sector accounted for 43% of total Chinese production, slightly less than its manufacturing sector. However, there are still more Chinese employed in agriculture than in services, which is a rarity for more developed countries.
Before economic reform in 1978, shopping malls and private retail markets did not exist in China. As of 2015, however, there is a young and burgeoning services market. This has bolstered tourism and led to a proliferation of Internet and phone products.
Large foreign companies, such as Microsoft and IBM, have even entered the Chinese service markets. These kinds of moves help to jumpstart the telecommunications industry, cloud computing, and e-commerce.
3. Agriculture
Another area where the Chinese set the global standard is in agriculture. There are nearly 300 million Chinese farmers, larger than the entire population of every country except China, India and the U.S. Rice is the dominant agricultural product in China, but the country is also very competitive in wheat, tobacco, potatoes, peanuts, millet, pork, fish, soybeans, corn, tea, and oilseeds. Farmers also export large amounts of vegetables, fruits and novel meats to nearby countries and regions, Hong Kong in particular.
As productive as the aggregate agricultural industry in China is, comparative statistics show that Chinese farms are among the least productive in the world on a per capita basis. Some analysts attribute this, in part, to unfavorable climate. Yet, a 2012 Deutsche Bank study concluded that South Korean farmers are 40 times more productive than Chinese farmers despite facing similar topographical and environmental conditions.
Others point to a large degree of state control over Chinese farms as the problem. Farmers are not allowed to own and mortgage farmland and cannot get credit to purchase better capital equipment, two functions that promote innovation and development.
Up and Coming Industries
The 12th five-year economic plan by the Chinese government for the fiscal years 2011-2015 identifies seven strategic industries as high priority: biotechnology, information technology, new energy, environmental maintenance, new materials, high-end manufacturing, and alternative fuels. Large government investments are being made into these areas.
One industry not identified but worthy of note is the Chinese health care sector. The rise of middle-class households and urbanization has sparked a huge demand for health care services, which is a hopeful sign for a developing economy. Reforms were passed in 2011 to allow competition into the health care market, including wholly foreign-owned entities. This drew investment from major international players such as Pfizer, Merck, and GlaxoSmithKline. China boasts one of the fastest-growing health care sectors in the world.
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20beaa8f30c27e66952deb5cff9f1c98 | https://www.investopedia.com/articles/investing/091515/chinas-economic-collapse-good-us.asp | Is China's Economic Collapse Good For the U.S.? | Is China's Economic Collapse Good For the U.S.?
Almost seven years after the 2008 financial crisis, many global economies have returned to a condition of modest stability and growth. In fact, the U.S. Federal Reserve and other leading economies had anticipated by the end of 2015 raising interest rates and abandoning quantitative easing. Apart from Greece, even areas of the Eurozone have begun to exhibit strong growth spurts. However, what many expected to be a fruitful economic climate may be coming to a halt, because growth in China, the second-biggest economy in the world, has fallen to its lowest level since 2009.
After a plunge in July on what was called “Black Friday” in China, pundits have begun to examine how China's economic turbulence could impact the U.S. and global economies. (For more, see: Is Now the Time For Chinese Stocks?) The relationship between the U.S. and China has been built on extensive trade, and following the 2008 crisis, China has financed a majority of U.S. debt. It's too soon to tell whether China’s troubles will spark a new global downturn. However if things persist, there could be significant ramifications for foreign trade, financial markets and economic growth in the U.S. and around the world.
Is China Collapsing?
For the past 30 years, China has grown at a rate of 10% per year, with annual peaks of 13%. A large part of China’s rapid growth is owed to its 1970s economic reform. In 1978, after years of state control of all productive assets, China started introducing market principles to stimulate its economy. Over the following three decades, China encouraged the formation of rural enterprises and private businesses, liberalized foreign trade and investment and invested heavily in production. Although capital assets and accumulation have heavily influenced the nation’s growth, China also has sustained a high level of productivity and worker efficiency, which continues to be the driving force of its economic success. As a result, per capita income in China has quadrupled over the past 15 years.
However, it seems that even China's rapid growth couldn't last forever. Over the past five years, its growth has slowed to 7%. Still, to put this in perspective, the U.S. economy grew 3.7% in second-quarter 2015 while the IMF projects global growth at 3.1% over the course of 2015. Even having a slower rate of growth than prior years, China still outpaces a majority of countries, including many advanced economies.
Regardless, it has become a growing belief among some market analysts that China is showing signs of a possible economic collapse, pointing to recent events to substantiate their point. Over the course of 2015, China has suffered from sinking oil prices, a shrinking manufacturing sector, a devalued currency and a plummeting stock market. For the latter, over August 2015, the Nikkei 225 (N225) index declined almost 12%, with a near 9% dive posted on a single day. The pain extends beyond the stock markets, however. Oil prices, which have been declining for months, reached a six-year low in August, which has had an impact on the Chinese stock exchange. In turn, losses in the Chinese stock market triggered global sell-offs and prompted China to devaluate the yuan. (For more, read: What China Devaluating Its Currency Means to Investors.) Chinese demand for oil is further decelerating, which, to close the circle, is one of many pressures keeping global oil prices low. Adding to the slowdown, Chinese manufacturing has declined to its lowest level in three years. The official purchasing manager’s index for August fell to 49.7, implying a contraction.
This chain of events is becoming a source of alarm for some global economists. Worries of a continued freefall in China have raised concerns whether a spillover effect could hit the U.S. and the global markets.
The U.S. Dependency on China
While the United States and China haven't always seen eye to eye on diplomatic issues, particularly human rights and cyber security, the two counties have built a strong economic relationship, with significant trade, foreign direct investment and debt financing. Two-way trade between China and the United States has grown from $33 billion in 1992 to $590 billion in 2014. After Mexico and Canada, China is the third-largest export market for U.S. goods, accounting for $123 billion in U.S. exports. As for imports, the U.S. imported $466 billion in Chinese goods in 2014, primarily consisting of machinery, furniture, toys and footwear. As a result, the United States is China’s largest export market.
Alongside an extensive amount of foreign trade, China has been a popular destination for U.S. foreign direct investments. The stock of foreign investment from the U.S. into China exceeded $60 billion in 2013, primarily in the manufacturing sector.
That being said, the U.S. has a significant trade deficit with China due to U.S. Treasury bonds. Currently, China is one of the largest holders of U.S. debt, amounting to $1.2 trillion. For China, Treasuries are a safe and stable way to maintain an export-led economy and creditworthiness in the global economy. As long as China continues to hold a massive amount of forex reserves and U.S. debt, some market observers believe the U.S. economy could be essentially at the mercy of China.
Various Scenarios
Given that the China's current turmoil has been followed by a downturn in U.S. and global stock markets, a pessimistic reader might wonder if much more chaos should be expected if China's economy continues to deteriorate. With China holding a great deal of Treasury debt, one worst-case scenario would be for China to dump their Treasury holdings, which could have fearsome implications for the U.S. dollar.
That said, while this makes for an intriguing doomsday scenario, there's little actual evidence of any such forthcoming catastrophe. After all China, who's no longer the largest holder of U.S. debt, has already been selling Treasuries, in a bid to prevent the yuan from weakening beyond the level that the Chinese government wants. At China's current rate of Treasury selling, we haven’t seen any pressure being exerted on the U.S. economy. In fact, even if China really wanted to dump all of its U.S. debt, the move could easily backfire: they would find it extremely difficult to find any alternative asset as stable or liquid as Treasuries.
The Bottom Line
Recent happenings in China suggest that the Chinese economy, lauded for its rapid expansion over the past 30 years, is no longer what it used to be. With slower-than-expected growth for the next coming years, the world's second-biggest economy could become more subject to pressures that other advanced economies have long had to contend with. As China continues to transition into having more aspects of a market economy, it may be more exposed to the ups and down of the normal business cycle. And though the world is becoming more financially intertwined, turmoil in one of the world's biggest economies may have short-term spillover effects but still not pose any real threat to the economy’s long-term prospects.
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47b53b49ee5842ab53a56997b1e2b417 | https://www.investopedia.com/articles/investing/091615/are-reits-beneficial-during-highinterest-era.asp | Are REITs Beneficial During a High-Interest Era? | Are REITs Beneficial During a High-Interest Era?
When interest rates rise, investors run for cover towards any good asset that they can find. Alternative investments, like real estate investment trusts (REITs), can be a good option, depending on the market cycle. Let's see how REITs performed during periods with high and low-interest rates.
REIT Recap
A REIT is a publicly traded security that invests in real estate through properties or mortgages, and are available on major exchanges like stocks. As a result, REITs offer high levels of liquidity (a rare quality when dealing with real estate). The trusts often specialize in specific property types, such as residential apartments, commercial buildings, warehouses, or hotel facilities. REITs are also available in regional variants, concentrating on real estate in specific countries/regions like the U.S., Europe, China, or Japan.
REITs offer many benefits, including diversification, the aforementioned liquidity, a small amount of investment, income distribution, and tax benefits (depending upon local laws). (For more, see: Key Tips for Investing in REITs.)
REIT Returns vs. Interest Rates
During periods of economic growth, REIT prices tend to rise along with interest rates. The reason is that a growing economy increases the value of REITs because the value of their underlying real estate assets increases. In a growing economy, the demand for financing also increases, resulting in increased interest rates. Conversely, in a slowing economy, when the Fed is tightening money, the relationship turns negative. This relationship can be seen in the following chart, which details the correlation between REIT total returns and the yields on 10-year Treasuries from 2000-2019.
Source: REIT.com. https://www.reit.com/news/blog/market-commentary/reits-and-interest-rates-positive-shift-market
For the most part, REIT returns and interest rates had a positive correlation, moving in the same direction. This is evidenced primarily between 2001-2004 and 2008-2013. The periods of inverse correlation, right after 2004, 2013, and 2016, all relate to Fed monetary tightening policies, reversing the actions of monetary stimulus actions that were put into place mainly after recessions. Here interest rates rose but REIT values decreased.
Further bolstering this argument is a study done by the S&P, which analyzed six periods beginning in the 1970s where the yield of the 10-year Treasury grew significantly. The study compared the increased interest rates to REIT and stock performance during those periods. The information is presented in the following table.
Source: S&P Dow Jones Indices LLC, Bloomberg, The Federal Reserve. https://ssd2.s3.amazonaws.com/tmp/2018-07-23/1532386146501-image.png
Of these six periods of interest rate increases, REIT returns increased during four of them and outpaced the stock market during three of them.
However, there are other factors and other detailed observations to consider, which may indicate positive or negative returns for REIT investments depending on the interest rate environment.
The biggest factor is that not all REITs are created equal. First and foremost, REITs operate in many types of industries. These include healthcare, hotel, residential, industrial, and many more. Each of these industries has different variables in play that react differently to the economic environment. Another important factor is the debt profile of a REIT; how much financing they take on to grow their business. The debt profile determines a REITs ability and timeframe to pay down debt, which will be impacted by different interest rate environments.
The observations discussed indicate that REITs may not really have any dependency on interest rates scenarios and that there are many other factors at play in determining how a REIT will perform during times of different interest rates. The returns from REIT investments may actually remain free from interest rate variations. As with any investment, it is crucial to look at the specific REIT in question, its performance, dividend payout history, and debt levels.
REIT Benefits to Investors
There are other benefits of REITs, which make them a good investment choice during varying interest periods:
Income Opportunity
REITs are considered yield-based securities. While they can appreciate in price, a considerable portion of REIT returns is from dividends. REITs avoid having to pay corporate tax if they distribute at least 90% of their income to their unitholders. This tax break results in a regular distribution of dividend income to REIT shareholders, and the effective net yields are often higher than the ones from bonds (or stocks), even in cases of high-interest rates.
Global Diversification
REITs offer exposure to global markets. Since the 1990s, the U.K., Singapore, Japan, Australia, the Netherlands, South Africa, and many others countries have enabled REIT listings, allowing investors to take exposure in real estate markets of foreign nations. For example, if the local real estate market in the U.S. tanks due to the effects of higher interest rates, a U.S. investor with exposure to the Singapore real estate market can benefit if he holds REITs in Singapore in his portfolio.
Sector Specific Exposure
In the event of rising interest rates, not all the sub-sectors within real estate may get hit adversely. For example, residential rents may suffer, but shopping centers in prime locations may not. Careful study of the real estate market, the impacts of interest rates on a specific sub-sector, and on specific REITs based on its underlying property holdings, can make REIT investments profitable no matter the interest rate impact.
The Bottom Line
After looking at correlation patterns and historical data, it appears that returns from REITs vary during different interest rate periods, but for the most part have shown a positive correlation during increasing interest rates. After careful study and proper selection of real-estate sub-sectors and geographic regions, investors can consider REITs a good investment for diversification alongside traditional stocks and bonds.
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62ff485589825656e19efef1a29e6af4 | https://www.investopedia.com/articles/investing/091615/how-invest-farming-without-owning-farm.asp | How to Invest In Farming Without Owning a Farm | How to Invest In Farming Without Owning a Farm
Investing in farming can seem like a good strategic move. After all, whether the overall economy's in a recession or booming, people still have to eat. Because of this, many investors regard agriculture and farming investments as being recession-proof. Further, as the world's population increases, farming will play an increasingly important role in sustaining global societies.
That said, literally buying a farm isn't a feasible strategy for the average investor. Buying a farm can require a large capital commitment and the time and costs of operating or leasing a farm are often substantial. Fortunately, investors have many other means to gain exposure to the sector beyond sinking money into a farm.
Key Takeaways Investing in agriculture means putting your money behind food and crop production, processing, and distribution.As the world needs to feed a growing population and with less land, interest in agriculture production as an investment has grown right along with the world population.There are several ways to invest indirectly in agriculture, from farm REITs to agricultural ETFs to the commodities markets.
Farm REITs
The closest that an investor can get to owning a farm without actually doing so is by investing in a farming-focused real estate investment trust (REIT). Some examples include Farmland Partners Inc. (FPI) and Gladstone Land Corporation (LAND).
These REITs typically purchase farmland and then lease it to farmers. Farmland REITs offer many benefits. For one thing, they provide much more diversification than buying a single farm, as they allow an investor to have interests in multiple farms across a wide geographic area.
Farmland REITs also offer greater liquidity than does owning physical farmland, as shares in most of these REITs can be quickly sold on stock exchanges. And farmland REITs also decrease the amount of capital needed to invest in farmland, as a minimum investment is just the price of one REIT share.
Agriculture Stocks
Investors also have access to an assortment of publicly-traded companies that operate in the farming sector. These companies range from those that directly grow and produce crops to those working in a variety of industries that support farmers.
Crop Production
One potential investment opportunity is in firms that plant, grow, and harvest crops. Many of these firms also engage in such supporting activities as distribution, processing, and packaging. Unfortunately, there are a limited number of publicly-traded crop production firms, which include Fresh Del Monte Produce Inc. (FDP), Adecoagro S.A. (AGRO), and Cresud (CRESY).
Supporting Industries
Investors can also buy shares in a variety of industries that support farming. Three of the largest industries are companies that sell fertilizer and seeds, farm equipment manufacturers, and crop distributors and processors.
Fertilizer and seeds. Many firms are involved in the production and sale of fertilizer and seeds, and investors will want to determine how much of each firm's revenue is actually derived from agriculture, as some also service a number of other sectors. Among the publicly-traded companies selling fertilizer or seeds are Nutrien Limited (NTR) and The Mosaic Co. (MOS).Equipment. Farming's an equipment-intensive activity, so investors can gain exposure to the sector by making investments in equipment manufacturers with an agricultural focus. Two firms heavily involved in farming equipment are Deere & Co. (DE) and AGCO Corp. (AGCO).Distribution and processing. Many companies provide the infrastructure that moves crops from the farm to the local grocery store. Among those that transport, process, and distribute crops are Archer Daniels Midland Co. (ADM) and Bunge Limited (BG). As with equipment manufacturers, some of these distributors only derive a portion of their revenues from agriculture-related activities.
Ag ETFs
Exchange traded funds (ETFs) are a good tool for investors to gain diversified exposure to the agriculture sector. The Market Vectors Agribusiness ETF (MOO), for example, offers access to a diversified set of businesses, investing in companies that derive at least 50% of their revenues from agriculture. The best-performing agricultural commodity ETF, based on performance over the 2020 performance is the Teucrium Soybean ETF (SOYB).
Like investing in any type of ETF, investors should carefully consider each ETF's management fees and the performance of the index that the fund tracks.
Ag Mutual Funds
There are also mutual funds that invest in the farming and agriculture industries. If this sounds appealing, you should first determine whether the fund invests in agriculture-related firms or invests in commodities. Also, keep in mind that many of these funds have exposure to other sectors along with agriculture. So if you're more interested in making a pure farming or agriculture investment, you're likely better off going with other types of asset classes.
When investing in mutual funds, investors need to consider fees and past performance, and compare these to those of ETFs, for example. Mutual funds with exposure to agricultural firms or commodities include the Fidelity Global Commodity Stock Fund (FFGCX) and the North Square Oak Ridge Global Resources & Infrastructure Fund (INNAX).
Soft Commodities
More speculative investors may be intrigued by the idea of directly investing in commodities, hoping to take advantage of price changes in the marketplace. While you can gain exposure to commodities just by purchasing futures contracts, there are also a number of ETFs and exchange traded notes (ETNs) that provide more diverse access to commodities.
While some ETFs and ETNs give investors exposure to a specific commodity (such as corn (CORN), livestock (COW), coffee (JO), grains (GRU), cocoa (NIB), and sugar (SGG)), others offer a basket of commodities. As an example of the latter, the Invesco DB Agriculture ETF (DBA) invests in corn, wheat, soybeans, and sugar futures contracts.
There's also the iPath Bloomberg Agriculture Subindex ETN (JJA), which invests in corn, wheat, soybeans, sugar, coffee, and cotton futures contracts, and the Rogers International Commodity Agriculture ETN (RJA), which invests in a basket of 20 agricultural commodity futures contracts.
The Bottom Line
Investors looking to invest in the farming sector have plenty of alternatives to actually purchasing a farm. Investors who hope to most closely replicate the returns of owning farmland can purchase a farmland REIT. For those looking for wider exposure to the agriculture sector, making equity investments in crop producers, supporting firms or ETFs could be their best option. And those looking to profit from price changes in agricultural commodities have a range of futures contracts, ETFs, and ETNs at their disposal. With all of these options, investors should be able to find an investment vehicle and strategy that fits their needs.
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53a844e327ff5b0531e64a47fd843762 | https://www.investopedia.com/articles/investing/091615/movie-vs-tv-industry-which-most-profitable.asp | Movie vs. TV Industry: Which Is Most Profitable? | Movie vs. TV Industry: Which Is Most Profitable?
Movies vs. Television Industry: An Overview
These days, it seems like it is all about the small screen. More and more people are gathering around to binge-watch shows like “Stranger Things” and “Game of Thrones,” while fewer and fewer people are heading out to movie theaters to plunk down a hefty fee for two hours of entertainment.
So which entertainment sector is more profitable: movies or TV? Let’s take a look. You might be surprised by the results.
Key Takeaways Visual media entertainment is a multi-billion business, concentrated in film and television production.The film industry, represented colloquially by 'Hollywood,' produces movies that can rake in as much as $250 million in profits in a single film, earning money from ticket sales and branding deals.Television series can also be lucrative for hit shows, earning revenue from advertisement spots.New digital entrants like Netflix, Amazon, and Hulu produce both TV shows and films, delivered via internet streaming.
The Movie Industry
For many people, it is tough to justify spending forty or fifty bucks to see a movie, when you factor in popcorn and drinks with the hefty ticket price. Hollywood studios have been churning out more big-budget tentpole films (films whose earnings are expected to bolster the company financially), 3D movies, and action-adventure tales since audiences are more likely to splurge on a flashy, explosion-heavy movie than they are on a small, intimate drama. Filmmaking is also a very risky investment, since most movies, even those small, intimate dramas, take several million dollars to make. Still, it’s definitely a hugely profitable business—if you hit the jackpot (aka the target audience).
According to Deadline Hollywood, the most profitable studio films of 2014 were “Transformers: Age of Extinction” with $250.155 million, “American Sniper” with $242.58 million, “The Lego Movie” with $229.008 million and “The Hunger Games: Mockingjay Part I” with $211.609 million. Those numbers take into account factors such as domestic and overseas box office, merchandise and domestic and foreign TV rights. Not a bad payday, all things considered.
Most of the films on the list, predictably, were big-budget studio films (“Guardians of the Galaxy,” “Maleficent” and “Big Hero 6” were also huge moneymakers), but it is not just Paramount and Walt Disney Company (DIS) and Warner Bros. that are putting out hits. It is important to take a look at independent films as well. In that same year, Fox Searchlight’s Academy Award-nominated Wes Anderson film “The Grand Budapest Hotel” took in over $59 million, The Weinstein Company’s Bill Murray dramedy “St. Vincent” earned over $43 million and Open Road’s surprise sleeper hit “Chef” earned over $31 million (all figures are North American grosses). Those numbers might not be close to what a big studio movie makes, but it’s still a healthy profit. Obviously, though, not all indie films are moneymakers.
Going back to studio numbers, as far as overall profits, Disney netted $1.7 billion on revenues of $7.2 billion in 2014. NBCUniversal celebrated its most profitable year to date that year, earning $711 million in profit on $5 billion in revenue. A movie that isn’t considered a huge box office hit in the U.S. can still be wildly profitable when you factor in overseas earnings and TV.
When the theatrical run of a film ends, studios earn money from home video, streaming, and video on demand (VOD). In 2014, Rupert Murdoch’s 21st Century Fox Inc. (FOX) saw the second-highest profit of the publicly traded studios, earning $1.5 billion. It measured revenue of $10.3 billion, thanks in large part to huge bestselling books-turned-films like “Gone Girl” and “The Fault in Our Stars.” Similarly, sequels like “Dawn of the Planet of the Apes,” “X-Men: Days of Future Past” and “Rio 2” were big earners. Warner Bros.’ movies grossed $4 billion in 2014, but the studio got $1.2 billion in profit from $12.5 billion in revenue, up 23% from the previous year. These studios deal with box office bombs, but a few wild successes mean huge profits, despite the flops.
The Television Industry
So which medium is more profitable, movies or TV? One of cable’s most successful brands, HBO, saw enormous profit margins with now-classic shows like “The Sopranos” and “Sex and the City.” When those shows came to an end, the cable network experienced a bit of a drop in viewers and earnings. Then along came “Game of Thrones,” “Last Week Tonight With John Oliver,” and the critical darling “Girls,” and HBO saw profits soaring again. Competition with Netflix Inc. (NFLX) and Amazon.com Inc. (AMZN) inspired HBO to roll out its standalone subscription service HBO Now because many people were choosing to cut the cable cord due to rising cable prices. HBO is one of the most recognizable, stable, and respected brands in entertainment. It is consistently earning Emmy nominations and Golden Globe nods for the shows they produce. But are they as financially successful as a Disney or Paramount?
HBO’s parent company Time Warner Inc. (TWX) reported that second-quarter net income rose 14% to $971 million, as all major business avenues, including Turner and HBO, reported revenue gains in the second quarter of 2015. HBO Now is still in the red because of marketing and development/technology costs, and many people got a free month before their pay subscription would start, so time will tell how the service impacts profits. The company did not disclose how many HBO Now subscribers it has gained, but it is estimated that they have as many as 1.9 million customers.
Netflix reported that domestic subscribers soared 900,000 to 42.3 million in the second quarter of 2015. The company reported a second-quarter profit of $26.3 million, down 63% from $71 million a year earlier. The decrease was in large part due to the costs of buying and creating content and the value of the dollar on revenue generated outside of the U.S.
As far as broadcast networks, let’s first look at ABC’s hit show “Modern Family,” which reportedly sees advertising revenue per half an hour at $2.13 million. A reality show like “Dancing With the Stars” sees advertising revenue per half an hour at $ 2.72 million, and CBS’s megahit “Big Bang Theory” sees advertising revenue per half an hour at $2.75 million. Over time, such hit shows can bring in enormous profits for a network or studio, but not every show turns out to be “Modern Family.” Each year, networks pay millions of dollars on pilots and new shows that are canceled after only a quick run, so for every “Big Bang Theory,” there could be four or more flops.
The Bottom Line
Major Hollywood studios can bring in $250 million in profits from a single film, while a respected cable network like HBO can make money off a huge hit like “Game of Thrones,” which costs millions to shoot. Since unsuccessful projects and financial flops are par for the course in both film and TV, there is no guarantee which shows or potential franchise will be the year’s great moneymaker. When it comes to who makes the most money, it’s tough to compete with a company like Disney, which can earn tens of billions—not millions—in a fiscal year.
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55b4c750f9cca87a1fcd86176c19b41c | https://www.investopedia.com/articles/investing/091615/mysterious-life-trading-legend-wd-gann.asp | The Mysterious Life of Trading Legend W.D. Gann | The Mysterious Life of Trading Legend W.D. Gann
William Delbert Gann is perhaps the most mysterious of all the famous traders in history. Known for using geometry, astrology and ancient mathematics to predict events in the financial markets and historical events, Gann's trading strategies are still widely used today, long after his death in 1955.
Gann's disciples claim he was one of the most successful stock and commodity traders who ever lived, while critics argue there's no concrete proof he ever made a great fortune from speculation. Was Gann a great trader, or was he merely a guru who profited from selling books and running seminars?
Early Life of W.D. Gann
W.D. Gann was born in 1878 in Lufkin, Texas, the first of 11 children in an impoverished cotton-farming family. He neither graduated from grammar school nor attended high school as he was needed at home to work on the farm. His education mainly came from the Bible (he was raised a Baptist), which he used to learn to read and in the cotton warehouses, where he learned about commodities trading. Gann started his career working at a brokerage firm in Texarkana and attending business school at night.
New York
In 1903, a year after he began trading in the stock and commodity markets, Gann moved to New York City to work at a Wall Street brokerage firm. He soon opened his own brokerage firm, W.D. Gann & Company. He further developed his investment strategy as a broker as he observed the mistakes made by his clients and learned from them.
Key Takeaways William Delbert Gann created trading strategies that are still widely used today, long after he died in 1955. Gann placed substantial importance on 60- and 90-year cycles. There are supporters and doubters of Gann's trading theories. Some of Gann's ideas on trading are used in technical analysis tools and integrated into current charting and trading software platforms.
Newsletters, Books, and Courses
In 1919, Gann began publishing a daily market letter called The Supply and Demand Newsletter, covering stocks and commodities and making yearly forecasts. In 1923, he started another publication called The Busy Man’s Service, in which he gave specific trading recommendations. He also wrote a number of books throughout his life, including The Tunnel Thru the Air (a coded science fiction novel containing some of his core ideas) and 45 Years In Wall Street. Late in his career, he sold a ‘master course’ to private students for $5,000 apiece (roughly equivalent to $50,000 today).
Gann Time Cycles
Gann often quoted the Book of Ecclesiastes, chapter 1, verse 9: “That which has been is what will be, that which is done is what will be done, and there is nothing new, under the sun.” He believed everything occurring in markets has historical reference points. Essentially, everything has happened before and will eventually repeat itself. He studied ancient geometry and astrology to investigate how market events and specific numbers repeated across various time cycles.
On these cycles, he stated: “To make a success you must continue to study past records because the market in the future will be a repetition of the past. If I have the data, I can tell by the study of cycles when a certain event will occur in the future. The limit of future predictions based on exact mathematical law is only restricted by lack of knowledge of correct data on past history to work from.”
60-Year Cycle
He identified a number of time cycles of importance, viewing the 60-year cycle as being of major importance. He stated: "This is the greatest and most important cycle of all, which repeats every 60 years or at the end of the third 20-Year Cycle. You will see the importance of this by referring to the war period from 1861 to 1869 and the panic following 1869: also 60 years later – 1921 to 1929 – the greatest bull market in history and the greatest panic in history followed.
This proves the accuracy and value of this great time period." In November 1928, Gann reportedly issued an "Annual Forecast for 1929" which predicted the end of the great bull market of the 1920s on September 3, 1929 (the crash actually occurred on October 24) and the crisis that followed.
90-Year Cycle
He also placed great emphasis on the 90-year cycle, which, Gann advocates say, predicts a potential financial crisis occurring in 2019. This year will be 90 years after the financial crisis of 1929, which itself occurred roughly 90 years after the Panic of 1837. And a smaller cycle of note, 144 months, also coincides with 2019: 144 months is the span between 2007 (the most recent major financial crisis) and 2019.
Some of Gann’s less esoteric ideas are commonly used in technical analysis tools today, often integrated into charting and trading software platforms. A common example is Gann fans, consisting of a series of diagonal lines called Gann angles. These angles are superimposed over a price chart to show potential support and resistance levels.
Supporters vs. Doubters of GannSupporters
One of the strongest pieces of evidence bolstering Gann’s reputation as a master trader hails from a 1909 Ticker and Investment Digest article by Richard D. Wyckoff, a well-respected figure on Wall Street at the time.
The article describes Gann’s performance recorded by an independent observer: “During the month of October 1909, in twenty-five market days, W D Gann made, in the presence of our representative, two hundred and eighty-six transactions in various stocks, on both the long and short side of the market. Two hundred and sixty-four of these transactions resulted in profits; twenty-two in losses. The capital with which he operated was doubled ten times so that at the end of the month he had one thousand percent of his original margin.”
Gann defenders counter John L. Gann's statement should be viewed with the knowledge of the bitter falling-out he had with his father, which stemmed from an ill-fated decision to join his father's business in the 1940s—the two wound up parting ways.
Doubters
At the other end of the spectrum, Alexander Elder, in his 1993 book Trading for a Living, presented a more skeptical view, later used as evidence by Gann doubters. "Various opportunists sell 'Gann courses' and 'Gann software.' They claim that Gann was one of the best traders who ever lived, that he left a $50 million estate, and so on. I interviewed W.D. Gann's son [John L. Gann], an analyst for a Boston bank.
"He told me that his famous father could not support his family by trading but earned his living by writing and selling instructional courses. When W.D. Gann died in the 1950s, his estate, including his house, was valued at slightly over $100,000. The legend of W.D. Gann, the giant of trading, is perpetuated by those who sell courses and other paraphernalia to gullible customers," wrote Elder.
The Bottom Line
While the scope of W.D. Gann’s trading achievements remains unclear, it's obvious Gann's legacy, inflated or no, continues to fascinate traders. There will always be those in the financial markets who are looking for a mechanism (or a guru) to find order in the apparent chaos of price movements.
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624d772d601147abcaabdbff8fce600c | https://www.investopedia.com/articles/investing/091714/how-get-good-deal-used-car.asp | How to Get a Good Deal on a Used Car | How to Get a Good Deal on a Used Car
Depreciation is Depressing
Why should you buy a used car? A new car will depreciate about 10% the moment it leaves the lot and another 20% within its first year. After three years, the average car is worth about 60% of what it was when new. That might be depressing news for the original owner, but it represents a screaming deal for the prudent used-car buyer.
A model that is one to three years older will likely still be under the manufacturer’s warranty, and unless it has been abused, it is likely to offer many more years of good service. Also, consider that the used car marketplace is huge—about 43 million used vehicles change hands each year, dwarfing the 17 million in new car sales.
Key Takeaways Buying a used car can be a confusing, complex, and anxiety-inducing process. Getting a good deal on a used car can be done by conducting thorough research online, checking out cars and test-driving them, and comparing prices. Private parties may be less expensive but come with greater risk, while dealer lots and certified pre-owned vehicles may be more reliable and are backed by lemon laws in most states.
Research First
So, how do you make sure you get a good deal? “Do everything you can before physically going to buy the car,” said Philip Reed, a senior consumer advice editor at automotive review site Edmunds. That means researching what make and model you are interested in and how much they sell for in your area. By researching specific vehicles that have the features and mileage you are looking for, you introduce competition to the car-buying process. A seller might not match the lowest price you find, but it cannot hurt to ask.
Edmunds is a good resource for auto shoppers. It, along with Kelley Blue Book and National Automotive Dealers Association, track new and used car purchases to provide granular pricing information. “We collect tens of thousands of transactions per week from wholesale auctions, dealers both large and small, vehicle registration data, listing data and other sources,” said Alec Gutierrez, a senior analyst for Kelley Blue Book, of his organization’s process. “This data is then cleansed, normalized and run through a statistical modeling process.”
Some of the automotive magazines — particularly the largest, Car and Driver — are also useful for their lengthy backlog of reviews with a slant towards driving enthusiasts.
Check It Out
Once you have determined what you want to buy, and what they sell for, it is time to check out the car, take it for a test drive and make sure everything the seller says about it is true. Get the vehicle history report (Carfax and AutoCheck are two popular choices) to confirm the odometer reading, ownership history and reports of accidents and flood damage.
Private Sellers
When shopping, note that dealers usually charge at least 10% more than private sellers. Most people selling cars are not professional salespeople and are not as skilled at haggling. Also, they might be moving, or, having purchased a new car, need to make space in the driveway. Before you hand a private seller your money make sure they have signed the title (also called the pink slip) over to you. You will also need to insure the car before you drive it away. It is a less structured process than buying from a dealer, but if you are looking to save as much as possible, and if you trust the seller, a private party purchase could work.
Dealers
Sure, it is a markup, but that dealer’s markup can come with substantial advantages. First off, it is easier to shop a range of cars from a dealer’s lot than schlepping all over town to cross-shop individual sellers. Dealers are also more likely to clean and perform a basic inspection of a car, plus they are governed by Federal Trade Commission rules as well as state and local regulations. “If you buy from an established business, it has a reputation to uphold,” Reed said. “In many instances, they will also offer some sort of warranty — even if it is only for 30 days.”
Buyers should ask how warranties will be honored and where any needed repairs will be made, however.
How Much Can You Talk a Dealer Down on a Used Car?
This is the central question that you should be considering when you’re planning to buy a used car and there’s no one-size-fits-all answer. The amount you can knock off the price ultimately depends on what the car is worth, how strong your financing position is and how long the car has been on the lot. Here are some things to keep in mind as you open negotiations. Kelly's Blue Book (KBB) is a free online resource for determining what cars like the one you are interested in sell for. Having a firm idea of the car’s value can help you decide how much you’re willing to pay. If the dealer is asking $18,000, for example, but you believe it’s only worth $15,000 based on your research, you may decide to meet in the middle and offer $16,500. The most important thing to remember is to set your buying max before trying to negotiate. Otherwise, you could end up paying more than you intended for a car.
If you want that used car, but are nervous about reliability, you might want to look into factory-certified offerings.
Certified Pre-owned
Certified pre-owned (CPO) are offered by most luxury brands, such as Lexus, Lincoln, and Mercedes-Benz, but also mainstream makes such as Nissan and Chevrolet. CPO vehicles are thoroughly inspected, any maintenance issues are addressed, and they are cosmetically sound — no shredded interiors, bashed fenders or missing trim. When talking to a dealer (by their nature, certified cars are sold through dealers, not private individuals) about a certified car, have them show you its inspection report, which will list all of the areas checked, whether or not there were any recalls on the model and even details such as tire tread depth and the thickness of the brake pads. CPO cars tend to have less wear and tear. Mercedes, for instance, will only certify cars six years old or less, with fewer than 75,000 miles. The German brand then adds a year and unlimited miles to whatever initial warranty is left, plus 24-hour roadside assistance, trip-interruption protection, and service loan cars.
You pay extra for CPO cars, however. “There is usually a $1,000 premium,” Reed said. “But you are getting the cream of the (used car) crop. It turns used-car buying into a new-car-buying experience.”
Like new cars, CPO vehicles are best purchased at the end of the month, when dealers are looking to make quotas and are more receptive to haggling. However, a used car sale is not generally cyclical this way, though timing can still be employed.
For instance, if you live in an area that gets a lot of snow, you’ll likely get a better deal on a convertible in the fall and winter months. Conversely, there is usually an uptick in all sales around April, when people blow their tax refunds, so avoid shopping then, if possible.
The Discontinued Model
Buying a car that’s been discontinued or slow-selling is another good option. Dealers have a finite amount of space and will heavily discount these vehicles to make way for new models. I bought my 2006 PT Cruiser convertible in 2007 at slightly over half the $30,000 list price. It only had 12 miles on the odometer and was a used car in name only, but after months languishing on the dealer’s lot, the salesperson was ready to make a deal.
Negotiation Tactics
Knowledge is your best resource for getting the best deal. Knowing what other cars like the one you are bargaining over sell for is key to talking down a price. But what else? Here’s where your bargaining skills come into play. Simply accepting the dealer’s sticker price as the lowest price possible is a good way to give yourself a case of buyer’s remorse. Unlike a new car, which may have never been driven past the dealer’s lot, a used car has been on the road and as a result, it’s already lost some of its value.
Consider this example. According to data from Edmunds, an average midsize sedan with a sale price of $27,660 loses $7,419 in value in the very first year. In its second year, that same car loses just $1,114 in value. Between the second and fourth years of its life cycle, it depreciates by $5,976, which is less than the total amount of depreciation incurred in the first year. The takeaway? When you buy a car that’s already a year or two old, it’s likely to have experienced its biggest value drop already. That gives you as the buyer some leverage in terms of getting the dealer to cut you a better deal on price.
Be Strategic
When a lower purchase price is the goal, you don’t want to go in with the wrong approach. Come off as too demanding and the dealer may not be willing to make any concessions in your favor. Go in too soft and they may see you as a pushover.
When you sit down with the salesperson and present your offer, be firm but polite. Let them know that you’ve done your homework and you have an idea of what the car is worth. Don’t let them try to steer the conversation off-course; stay focused on the issue at hand. A salesperson may try to distract you by discussing financing, insurance or extras like a maintenance plan; this is a trap you should be prepared to avoid.
Take the opportunity to clearly make your case as to why the dealer should accept a lower price. For example, if you’ve seen the same car sitting on the lot for weeks, remind the salesperson that cutting you a deal would help to free up space for another vehicle. If your inspection turned up something minor you’ll need to have repaired, be sure to point that out. The goal here is to get the dealer to acknowledge anything that might justify accepting your offer.
If the salesperson tells you the dealer can’t take anything less than sticker price, be ready to walk away. At this point, two things can happen: The salesperson will suddenly suggest that the two of you can reach an agreement on price or they will shake your hand and tell you to come back if you change your mind.
If the salesperson chooses the former, be ready to make a counteroffer to any price that's suggested. The counteroffer may not be much lower than the sticker price but it’s an opening to further negotiations. At this point, you can increase your own offer slightly, but remember to keep your absolute ceiling in sight. It may take some back and forth but eventually, you may be able to compromise on a price that’s acceptable to both sides.
Be Persistent
Negotiating is a fine art and sometimes, the salesperson simply may not want to hear what you have to say. One ploy is to adopt hardball tactics to try and you wear you down. This is where the true test of your negotiating skills comes in.
If your offer is refused point-blank, don’t wear out your welcome. Thank the salesperson for their time and say you’ll be looking elsewhere for a vehicle.Hand over your phone number and say that if they change their mind about making a sale, to give you a call. Then wait and see what happens.
It’s possible that in a day or two, the dealer may call you to tell you they’ve reconsidered your offer. If not, that’s a sign to move on to the next used car lot and begin the negotiations process again. It can be time-consuming and tedious but at the end of the day, you’ll thank yourself if your negotiation efforts allow you to purchase the right car at the right price.
The Bottom Line
If you know what you want and what it should cost, you are halfway there. Check NADA, Kelley Blue Book or Edmunds for pricing information. Both dealers and private sellers have their advantages and disadvantages, but thoroughly inspect and test drive any car prior to purchase, and get their vehicle history report. For a nearly new used car, CPO programs and leftover models are worth a look.
(For more, see: 7 Things to Avoid When Buying a Used Car and Is Trade-In or Down Payment Better When Buying a Car?)
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4b7b644d46751292d45b0d55f4a27740 | https://www.investopedia.com/articles/investing/091715/basics-income-tax-mutual-funds.asp | The Basics of Determining Taxes on Mutual Funds | The Basics of Determining Taxes on Mutual Funds
Many investors have questions on the best way to calculate their taxes on mutual funds. The way your mutual fund is treated for tax purposes has a lot to do with the type of investments within the fund's portfolio.
In general, most distributions you receive from a mutual fund must be declared as investment income on your yearly taxes. However, the type of distribution received, the duration of the investment holding, and the type of investment are all important factors in determining how much income tax you pay on each dollar of a distribution.
In some cases, distributions are subject to your ordinary income tax rate, which is the highest rate. In other cases, you may be eligible to pay the lower capital gains tax rate. Other distributions may be completely tax-free.
Key Takeaways Mutual funds that create a lot of short-term capital gains—and are taxed at ordinary income (not capital gains) rates—can cost you.When it comes to distributions, the difference between ordinary income and capital gains is based on how long that fund has held an individual investment within its portfolio.If you receive a distribution from a fund that results from the sale of a security the fund held for only six months, that distribution is taxed at your ordinary-income tax rate.If the fund held the security for several years, however, then those funds are subject to the capital gains tax instead.
Ordinary Income vs. Capital Gains
The difference between ordinary income and capital gains income can make a huge difference to your tax bill. In short, only investment income you derive from investments held for more than a year is considered capital gains.
This concept is pretty straightforward when it comes to investing in individual stocks. The world of mutual funds, however, is a little more complicated.
Mutual funds are investment companies that invest the collective contributions of their thousands of shareholders in numerous securities called portfolios. When it comes to distributions, the difference between ordinary income and capital gains has nothing to do with how long you have owned shares in a mutual fund, but rather how long that fund has held an individual investment within its portfolio.
If you receive a distribution from a fund that results from the sale of a security the fund held for only six months, that distribution is taxed at your ordinary-income tax rate. If the fund held the security for several years, however, then those funds are subject to the capital gains tax instead. When a mutual fund distributes long-term capital gains, it reports the gains on Form 1099-DIV, Dividends and Distributions, and issues the form to you before the annual tax filing date.
Why Is This Important?
The difference between your ordinary income tax rate and your corresponding long-term capital gains tax rate can be quite large. This is why it is important to keep track of which income is subject to the lower rate. For 2020 and 2021, those in the 10% and 12% income tax brackets are not required to pay any income tax on long-term capital gains. Individuals in the 22%, 24%, 32%, and part of the 35% tax brackets (up to $518,400 in 2020 and up to $523,600 for 2021) must pay a 15% tax on capital gains. In both 2020 and 2021, those in the highest income tax bracket of 37% are subject to a 20% capital gains tax (in addition to some taxpayers in the 35% tax bracket).
Figuring Your Gains and Losses
If you sell your shares in a mutual fund, any amount of the proceeds that is a return of your original investment is not taxable, since you already paid income taxes on those dollars when you earned them. Therefore, it is important to know how to calculate the amount of your distribution attributed to gains rather than investments.
To determine how much of your investment income is gain or loss, you must first know how much you paid for the shares that were liquidated. This is called the basis. Because mutual fund shares are often bought at various times, in various amounts, and at various prices, it is sometimes difficult to determine how much you paid for a given share.
Cost Basis and Average Basis
There are two ways the IRS allows taxpayers to determine the basis of their investment income: cost basis and average basis.
If you know the price you paid for the shares you sold, then you can use the specific share identification cost basis method. However, if you own many shares that have been purchased at different times, this method may be very time-consuming. Alternatively, you can use the first-in, first-out cost basis method, in which you use the price of the first share purchased as the basis for the first share sold and so forth.
If you cannot determine the price you paid for specific shares, you may choose to use the average basis method, where you can use the aggregate cost of all your shares as the cost basis for each share sold. However, all your mutual fund shares must be identical to employ this method, meaning you cannot use the average basis method to figure your gains if some of your shares are part of a dividend reinvestment plan (DRIP) and some are not.
Like income from the sale of any other investment, if you have owned the mutual fund shares for a year or more, any profit or loss generated by the sale of those shares is taxed as long-term capital gains. Otherwise, it is considered ordinary income.
Dividend Distributions
In addition to distributing income generated by the sale of assets, mutual funds also make dividend distributions when underlying assets pay earnings or interest. Mutual funds are pass-through investments, which means any income they receive must be distributed to shareholders. This most often occurs when a fund holds dividend-bearing stocks or bonds, which typically pay a regular amount of interest annually, called a coupon.
When a company declares a dividend, it also announces the ex-dividend date and date of record. The date of record is the date on which the company reviews its list of shareholders who will receive the dividend payment. Because there is a time delay when trading stocks, any sale of shares that occurs fewer than three days before the date of record is not registered, and the list of shareholders still includes the name of the selling investor. The date three days before the date of the record is the ex-dividend date.
How Are Dividend Distributions Taxed?
In general, dividend income is taxed as ordinary income. If your mutual fund buys and sells dividend stocks often, more than likely any dividends you receive are taxed as ordinary income. For example, assume you receive $1,000 in dividend payments from your actively managed fund. If you are in the 24% income tax bracket, you pay $240 at tax time.
However, there are two very important exceptions: qualified dividends and tax-free interest.
Qualified Dividends
Dividend distributions received from your mutual fund may be subject to the capital gains tax if they are considered qualified dividends by the IRS. To be qualified, the dividend must be paid by a stock issued by a U.S. or qualified foreign corporation. Also, your mutual fund must have held the stock for more than 60 days within the 121-day period beginning 60 days before the ex-dividend date.
The ex-dividend date is the date after which the owners of newly purchased stock are ineligible for the dividend payment. If the ex-dividend date is April 12, for example, any investors who purchase stock on or after this date do not receive the impending dividend.
This may sound confusing, but essentially it means the fund must own the stock for either 60 days before the ex-dividend date or a combination of days before and afterward, adding up to at least 60 days. This complicated requirement is meant to discourage investors from purchasing funds with dividend-bearing stocks right before payments and then selling them off again, just to get the dividend. If your fund distributes qualified dividends, these dividends are reported to you on Form 1099-DIV.
Tax-Free Interest
The other way to minimize your income tax bill is to invest in so-called tax-free mutual funds. These funds invest in government and municipal bonds, also called "munis," that pay tax-free interest. Money market mutual funds, for example, invest primarily in short-term government bonds and are widely considered stable and safe investments.
However, while municipal bonds pay interest that is exempt from federal income tax, they may not be exempt from your state income tax or local income taxes. In some cases, interest paid on bonds issued by governments in your state of residence may be triple-tax-free, meaning the bonds are exempt from all income tax. However, verify with your fund which bonds within its portfolio are tax-free and to what degree in order to avoid being caught off guard by unexpected taxation.
The Bottom Line
Calculating the taxes you owe on mutual fund income and distributions can be extremely complex, even for the most seasoned investor. IRS Publication 550 can be some help in informing you about these issues. But unless you own just a handful of shares and keep careful records, you may benefit from consulting a tax professional to ensure you are properly reporting all your investment income.
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310d1859cf4a1f93af70d31867466183 | https://www.investopedia.com/articles/investing/091814/fannie-mae-what-it-does-and-how-it-operates.asp | Fannie Mae: What It Does and How It Operates | Fannie Mae: What It Does and How It Operates
There's a very good chance you've heard of Fannie Mae. But do you know what it does and how it operates?
The Federal National Mortgage Association (FNMA), typically known as Fannie Mae, is a government-sponsored enterprise (GSE) founded in 1938 by Congress during the Great Depression as part of the New Deal. It was established to stimulate the housing market by making more mortgages available to moderate- to low-income borrowers.
Fannie Mae does not originate or provide mortgages to borrowers. But it does purchase and guarantee them through the secondary mortgage market. In fact, it's one of two of the largest purchasers of mortgages on the secondary market. The other is its sibling, the Federal Home Loan Mortgage Corporation, or Freddie Mac, another government-sponsored enterprise created by Congress.
Fannie Mae's Early Days
In the early 1900s, getting a mortgage—let alone a home—was not an easy task. Many people couldn't afford to secure a down payment, and loans were almost always short-term—not like those with the long-term amortization periods we know of today. In fact, when many of the loans came due at the time, they normally called for large balloon payments from the debtor. The bank would foreclose if the homeowner couldn't make the payment or refinance. That would become difficult with the onset of the Great Depression. Annual foreclosure rates rose every year from 1926 (the first year figures were kept) until 1934, when the rate peaked at well over 12%.
The United States Congress responded by creating Fannie Mae. The aim was to help create a stream of housing funding available to everyone in every market. This led to the financing of long-term fixed-rate mortgages, allowing homeowners to refinance their loans at any point during the course of their loan.
1938 The year Congress created Fannie Mae.
In 1968, Fannie Mae began funding itself by selling stock and bonds after the government removed it from the Federal Budget. Fannie Mae retained its ties to the government as a GSE, though, with a board of directors comprised of no more than 13 members. It is also exempt from local and state taxes.
Key Takeaways Fannie Mae is a government-sponsored enterprise that makes mortgages available to low- and moderate-income borrowers. It does not provide loans, but backs or guarantees them in the secondary mortgage market. Fannie Mae provides liquidity by investing in the mortgage market, pooling loans into mortgage-backed securities. Fannie Mae was bailed out by the U.S. government following the financial crisis and was delisted from the NYSE.
Creating Liquidity
By investing in the mortgage market, Fannie Mae creates more liquidity for lenders such as banks, thrifts, and credit unions, which in turn allows them to underwrite or fund more mortgages. The mortgages it purchases and guarantees must meet strict criteria. For example, the limit for a conventional loan for a single-family home in 2021 is $548,250 (up from $510,400 in 2020) for most areas and $822,375 (up from $765,600 in 2020) for high-cost areas. These areas include Hawaii, Alaska, Guam, and the U.S. Virgin Islands, where average home values are above the baseline amount by at least 115%.
In order to do business with Fannie Mae, a mortgage lender must comply with the Statement on Subprime Lending issued by the federal government. The statement addresses several risks associated with subprime loans, such as low introductory rates followed by higher variable rates; very high limits on how much an interest rate may increase; limited to no income documentation; and product features that make frequent refinancing of the loan likely.
In 2019, Fannie Mae provided more than $650 billion in liquidity to fund the housing market. This helped people across the country buy, refinance, and rent about three million homes.
Fannie Mae backs or guarantees mortgages but does not originate them.
Mortgage-Backed Securities
After purchasing mortgages on the secondary market, Fannie Mae pools them to form mortgage-backed securities (MBS). MBS are asset-backed securities secured by a mortgage or pool of mortgages. Fannie Mae’s mortgage-backed securities are purchased by institutions such as insurance companies, pension funds, and investment banks. It guarantees payments of principal and interest on its MBS.
Fannie Mae also has its own portfolio, commonly referred to as a retained portfolio. This invests in its own mortgage-backed securities as well as those from other institutions. Fannie Mae issues debt called agency debt to fund its retained portfolio.
The Financial Crisis
Fannie Mae has been publicly traded since 1968. Until 2010, it traded on the New York Stock Exchange (NYSE). It was delisted following the mortgage, housing, and financial crisis after its stock plummeted below the minimum capital requirements mandated by the New York Stock Exchange. It now trades over-the-counter.
Unethical lending practices led to the crisis. During the housing boom of the mid-2000s, lenders lowered their standards and offered home loans to borrowers with poor credit. In 2007, the housing bubble burst, and hundreds of thousands of these borrowers went into default, which led to what was known as the subprime meltdown. This had a ripple effect on the credit markets, which sent the financial markets into a tailspin and created the most severe recession in decades in the United States. (For more, see: A Review of Past Recessions.)
Government Takeover and Bailout
In the latter half of 2008, Fannie Mae and Freddie Mac were taken over by the government via a conservatorship of the Federal Housing Finance Committee. At the time, both held $4.9 trillion in bonds and mortgage-backed securities. The U.S. Treasury provided $191.5 billion to keep both solvent. In essence, the U.S. government intervened in order to restore trust in the markets by promising to bail out bad loans and to prevent a further slump in the housing market. As of May 2019, the federal government has received $292 billion in dividend payments from Fannie Mae and Freddie Mac.
Credit Options
Fannie Mae now offers a number of different business initiatives and credit options to homeowners, working with lenders to help people who may otherwise have difficulties obtaining financing.
HomeReady Mortgage: This product allows homeowners to secure financing and purchase a home with a low down payment. Borrowers qualify if they have low to moderate income and a credit score below 620. People with scores above 620 get better pricing. 3% Down Payment: Another resource for homeowners who may not have access to enough funds to secure a large down payment. HFA Preferred: This program helps homeowners access affordable financing through local and state Housing Finance Agencies and other lenders. Income-levels for borrowers are determined by the HFA, and there are no first-time buyer requirements.
A full list of products and their descriptions are available on Fannie Mae's website.
Loan Modifications
Following the mortgage meltdown, Fannie Mae began to focus on loan modifications. Since September 2008, Fannie Mae and Freddie Mac have completed roughly 2.37 million loan modifications. Loan modifications change the conditions of an existing mortgage to help borrowers avoid defaulting on their mortgages, ending up in foreclosure, and ultimately losing their home. Modifications can include a lower interest rate or extend the term of the loan. Loan modification can also lower monthly payments.
The Bottom Line
Fannie Mae has managed to turn itself around since being on the brink in 2008. Today it is the largest backer of 30-year fixed-rate mortgages and remains a key mechanism for facilitating homeownership.
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7f8574524903f7671e729f655d31d993 | https://www.investopedia.com/articles/investing/092214/how-pick-winning-penny-stocks.asp | How to Pick Winning Penny Stocks | How to Pick Winning Penny Stocks
Penny stocks, as the name suggests, are stocks of those companies that trade with a low share price, often for less than $1. Given such a low share price, there is an understandable draw for retail investors who dream of buying 10-cent shares and seeing them rise to ten or more times that sum.
But before dabbling in penny stocks, an investor should note several key factors that affect the way these stocks trade and have a solid understanding of the inherent risks that follow.
Key Takeaways Penny stocks, or securities that typically trade for under $1, are appealing to investors who see them as a way to make easy money, but there are many risks that are often overlooked. Some penny stocks are good stocks that have become devalued for a variety of reasons and have the potential to rebound, while others have little chance of recovery and could be a money pit. The share price does not always speak to the quality of the company, so investors need to consider the number of shares available, share liquidity, and the risk of dilution if there are too many shares outstanding.
Share Price and Valuation
One of the biggest mistakes that retail investors make is that they view penny stocks as being affordable. There is a sense that one is getting a better bang for their buck when they buy thousands of shares rather than a couple of a company with a higher share price.
At first glance, this thinking seems rational because after all, a $1,000 investment in Company A that trades at $0.10 allows the investor to buy 10,000 shares, rather than 10 shares of a Company B that trades at $100. A key piece of information that is often overlooked is the number of shares outstanding.
Let’s assume that Company A and Company B shared identical fundamentals with the exception of the number of shares outstanding. For simplification, let’s also assume both companies have a market capitalization of $100 million.
Company Name Shares Outstanding Share Price Market Cap Company A 1,000,000,000 $0.10 $100,000,000 Company B 1,000,000 $100 $100,000,000
When the share price is the only factor taken into consideration, a retail investor might think that the quality of the firm trading at $100 is much higher than the one trading at $0.10. As we’ve seen in the example, this may not always be the case since they are identical, so it is important to consider the number of shares available.
Beware of Dilution
Another factor to be conscious of when trading penny stocks is dilution. The number of shares outstanding can often balloon out of control through the use of tools such as employee stock options, share issuance in order to raise capital and stock splits. If a company issues shares to raise capital, which many small companies need to do, then it can often dilute the ownership percentage held by other investors.
For example, if Company A issued an extra 110,000,000 shares in an effort to raise capital, then it's natural that the share price would decline to $0.09 ($0.09 keeps the market cap steady at $100 million). In this case, the underlying business hasn’t changed. But the number of shares has, causing the share price to drop.
When trading penny stocks, it's important to find a company that has a strong grasp on its share structure because consistent dilution erodes the value of the shares held by existing owners.
How to Spot a Possible Winner
Most companies that trade with share prices under a dollar have relatively small market capitalizations, but as shown above, this doesn’t always have to be the case. When it comes to investing, it is important to consider the strength of the company’s fundamentals.
Does the management team rely on issuing new shares to raise capital? Is the company profitable or will it be able to turn a profit based on its current business structure? Can the company compete in its sector? For those willing to do their homework, there are definitely gems that can be found that meet these criteria.
As you can see from the chart of GGP, Inc. (GGP), the company’s share price got battered down into penny stock range during the financial crisis of 2008. For those who don’t follow the company, GGP owns, manages, leases and redevelops real estate such as regional malls. Investors who kept an eye on the share structure, underlying fundamentals and competition could have identified GGP as a prime candidate and profited from a tremendous rise in the years that followed.
Another key factor to consider is that certain sectors are more common for finding stocks that trade under a dollar. For example, the metals and mining sector is well-known for the number of companies that trade in pennies.
Given the reliance on issuing new shares to raise capital to fund operations, increased competition, and aggressive incentive plans, it's particularly important for investors to pay attention to the factors mentioned above in order to be successful. For those willing to do their homework, you’ll be able to identify winners.
The Bottom Line
When most retail traders look at a penny stock, they often ignore underlying fundamentals, such as the number of shares outstanding. As is the case with all investing, it's important to examine a company’s underlying fundamentals and overlay this information with details, such as how badly the shares are being diluted through the use of stock splits, stock options and issuing new shares to raise capital.
Share dilution hurts existing shareholders and it's particularly common with penny stocks. Keeping an eye on the share structure and other fundamental factors mentioned above will help investors find winners.
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203b395cd327615a1f528cbbd07c726b | https://www.investopedia.com/articles/investing/092214/tracking-your-portfolio-yahoo-finance.asp | Tracking Your Portfolio On Yahoo! Finance | Tracking Your Portfolio On Yahoo! Finance
Tracking portfolio holdings is an integral part of investing in securities. Even buy and hold long-term investors need to follow the news and trends that affect both investment securities and the whole market. This not only improves knowledge of the securities but also give perspective on when to add to positions or lighten them.
It also aids in understanding market patterns and whether or not the movement of a security is due to the actual company performance or if it is a tangential impact from overall market or sector news. Using a tracking tool, like Yahoo! Finance, is probably the easiest way to monitor portfolios, especially if an investor has more than one portfolio (such as a 401(k) and a personal investment account).
Yahoo! Finance allows users to sync up with brokerage accounts, create customized portfolio metrics, and most importantly, amalgamate the portfolios in one place.
How Does it Work?
Yahoo! Finance provides help with all the functions related to setting up and tracking a portfolio on their own site, but below we provide a quick guide on how to use the tool.
After clicking on the
My Portfoliolink on the Yahoo! Finance home page (left side of page), users can select the “create new” link.
Here users can sync up to investment accounts at over 80 brokers and new portfolios are created.
The first step in the manual setup is to input ticker symbols and selecting a name for the portfolio. For example, create a portfolio called New Portfolio, that consists of three stocks-GE, IBM, and Disney.
Then choose an index to act as a benchmark for the portfolio. In the above screenshot, we have chosen Dow Jones Industrial.
Lastly, choose what characteristics to track and view for each security.
Although there is a default view, it can be further customized by selecting the “customize current view” link after the new portfolio has been saved.
After saving the selections, the output is a single screen that provides all the necessary information to track the portfolio.
A final step is to download the mobile app so that investors can monitor the portfolio at any time.
The Bottom Line
Relying on monthly statements to track retirement or trading accounts is ineffective in today’s fast-paced markets. That's where Yahoo! Finance comes in. You can use it to monitor investment performance, merge all investment accounts including mutual funds. This should help you in understanding where investment risks lie. For example, if the same security is owned in several accounts, it may unknowingly create a higher specific stock risk for you.
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9b65097f5c3749209d969ccf9b47a3b9 | https://www.investopedia.com/articles/investing/092215/best-strategies-manage-your-stock-options.asp | The Best Strategies to Manage Your Stock Options | The Best Strategies to Manage Your Stock Options
For most people stock options are an addition to their base compensation and an opportunity to profit if the company does well. Yet each year, it is estimated that more than 10% of in-the-money options expire unexercised. Some other mistakes options owners make include selling vested shares early and missing out on future appreciation, not taking action to protect gains when options have appreciated in value, waiting until the last minute and exercising options at expiration, failing to plan for taxes until they are due, and not considering risk and portfolio diversification issues. We will help you manage your stock options most effectively.
First thing first. There are two kinds of stock options that have different rules and tax issues: incentive stock options (ISO) and non-qualified stock options (NSO). Before implementing any it is important to understand how ISO and NSO are taxed.
Taxation
Under an ISO, there is no tax liability when you exercise the options and hold the stock, until you actually sell the stock or make a non-sale disqualifying disposition. When you sell the stock, the difference between the amount you paid and the amount you receive from the sale is taxed as capital gains income (or loss). To qualify for long-term capital gains treatment, you must hold ISO shares for at least one year and a day from the date of exercise. If you sell the shares in less than 12 months you will have taxable ordinary income, which is subject to federal, state, local and social security taxes. The taxable amount (or loss) is generally measured by the difference between the fair market value on the exercise date and the option price. However, the exercise of an ISO can trigger the alternative minimum tax (AMT).
When you exercise an NSO, you can be subject to taxes on two occasions: at time of exercise and again at the sale of the stock. Any gain at the time of exercise is taxed as ordinary income. If you hold the stock and sell it at some point in the future, you would pay capital gains tax on any additional appreciation (meaning any appreciation of the stock from the price at exercise). It is important to remember that long-term capital gains treatment only applies if the stock is held for more than one year from the date of exercise.
Strategies
Here are some strategies to consider if you are have stock options:
A cashless exercise in which vested options are exercised at a predefined price or expiration. With a cashless exercise there is no out of pocket cost. The options are exercised and the shares are sold immediately. The net proceeds (market price less the cost of the option, transaction fees and taxes) are deposited in your account several days later. A cashless hold is when you exercise enough options to purchase the remaining shares without using additional cash. In this strategy, you simultaneously exercise and sell enough stock to cover the cost of exercising the options (and taxes). You receive the remaining shares and any fractional shares will be paid in cash. Setting up a plan to track the price of the underlying stock and systematically exercising vested in-the-money options prior to expiration or at a set target price to capture the gain. If the stock price continues to increase, continue exercising additional options. This is a situation where you do not want taxes to drive your decision. You may be better off exercising the options and moving the stock to a brokerage account where you can place stop orders to protect your gain if the stock’s price suddenly plunges. Keep in mind that if the price of the stock plunges and the options were left unexercised, you would have had no gain. Timing the exercise of options to help manage taxes. Most companies withhold some taxes when options are exercised. However, that may not be enough to cover your full tax liability. If options are exercised in January, February or March, the stock can be held for 12 months, allowing the shares to be sold and receive capital gains tax treatment, and then sold in the next calendar year to help cover any taxes due. For example, exercise options in February of 2016 and then sell the shares in March of 2017. The 2016 taxes from the initial exercise are not due until April of 2017. If you use this strategy, be sure to place stop orders in case the stock drops in price. Granted, any gain will be taxed as ordinary income, but you will not have to come up with other funds to cover your tax obligation. If the plan allows, consider a stock swap. In this strategy, the option exercise is funded using company stock you already own. A stock swap is a tax-deferred exchange. You surrender enough shares of stock to equal the exercise price of the options you plan to exercise. The cost basis and holding period in the old shares carry over to the new shares. Any additional bargain element would be taxable income. This avoids any tax liability on the unrealized appreciation in the old shares, until the stock is ultimately sold. It also will provide the funds to exercise the options without having to tie up additional capital. If you expect the company stock to significantly appreciate in value, make an 83(b) election. In this strategy, you exercise the options prior to vesting. The bargain element is taxed as if the options were vested. Once the options actually vest and holding period requirements are fulfilled, any gain is taxed at capital gain rates. This can help avoid AMT if the election is made when the bargain element is small. Bear in mind, even though the options have been exercised, the owner has no control until they fully vest, and there is a risk that the stock will not appreciate or drops in value. Gift NSOs if the plan allows. The transfer is not considered a completed gift until the options vest, and the donor is liable for any income taxes due on bargain element. This strategy allows you to remove the value of the options from your estate and transfer the future appreciation to others, possibly in a lower tax bracket. If you have already exercised ISOs and the price of the underlying stock drops, consider a disqualifying disposition. This disqualifies the ISOs from receiving favorable tax treatment—in essence turning them into NSOs. Options become disqualified after exercising by selling the stock before meeting holding period requirements. In some cases, an intentional disqualifying disposition could be used if ISOs were exercised and then the price of the stock plunged before the shares were sold. The exercise would be taxed as ordinary income avoiding the AMT issue.
The Bottom Line
Options are a great incentive and need to be managed. Depending on your financial situation, employing more than one strategy may be the best approach. And always consider portfolio diversification and reducing risk by not building a concentrated position (more than 5% of your investments) in one stock.
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d8748c21b368afa2a6f9fce5a94c0caf | https://www.investopedia.com/articles/investing/092215/how-protect-your-retirement-lawsuits.asp | How to Protect Your Retirement From Lawsuits | How to Protect Your Retirement From Lawsuits
Workplace defined-contribution plans and IRAs are vital for growing your money tax-deferred until you withdraw your savings at a later date. Hopefully, this is when all of your hard work pays off, while you’re laying on a beach somewhere, reaping the benefits of your tax-deferred savings plans and the strategic advice from your wealth managers.
Unfortunate Events
Getting sued is just one of those life events that no one plans for. However, like divorce or the loss of a loved one, unfortunate events do happen, often with huge financial implications. The best way to deal with the prospect of a negative situation is to protect yourself from the potential pitfalls in advance.
Nothing makes a situation worse than a blindsided hit, where your assets can be taken from you along with the emotional burden of the circumstance at hand. For those late in their careers, a lawsuit could potentially wipe out their retirement savings. A survey by ICI Research Perspective showed that 63% of all U.S. households had retirement plans through work or IRAs, and 36% of U.S. households owned traditional IRAs and Roth IRAs in 2019. Much of the growth in IRA accounts results from employer-sponsored retirement plan rollovers.
Additional Benefits of Retirement Accounts
Retirement accounts have many additional benefits, apart from their well-known tax advantages. This is excellent news for the majority of Americans, as it turns out that one of the most effective ways to protect assets is to shield them in retirement accounts. Individual retirement accounts, 401(k)s, and other types of tax-efficient plans can help you prevent the loss of your assets in case of a lawsuit.
At the federal level, the rules are clear for 401(k) and employer-sponsored retirement accounts. State laws are more complicated when it comes to whether or not IRAs are fair game in case of a lawsuit.
The Retirement Plan Shield
First and foremost, make sure you do not owe any child support or taxes to the IRS since this will open up your accounts to lawsuits. Domestic relations lawsuits will lift IRA protections anywhere you reside within the country.
If you owe taxes to the IRS, your retirement assets may be fair game, just like any other asset that can be seized from you to settle the unpaid debt. The federal government will not change any rules associated with minimum withdrawal rules in case of a lawsuit and will charge a 10% early withdrawal rate if you are extracting money in reaction to your lawsuit.
In the event of a private creditor suing for unpaid debt, retirement accounts are usually protected, despite some exceptions to the rule. The Employee Retirement Income Security Act (ERISA) relates to federal protection of 401(k) and other employer-sponsored retirement accounts from creditors. The federal government ensures the safety of these accounts to protect retirement even in case of a lawsuit. Up to $1 million of a defendant’s IRA will be protected under the Bankruptcy Abuse Prevention Act of 2005.
However, in June of 2014, the U.S. Supreme Court decided that inherited IRAs will no longer be sheltered if the inheritor files for bankruptcy—except for any IRAs being inherited from a spouse.
Profession-Specific
Business owners, entrepreneurs, and other self-employed individuals should be aware of the issues that can arise in case of a lawsuit, which can damage not only the company but also their assets. To hedge against the risk of personal injury, business owners need to register as a limited liability company (LLC) or an S corporation.
If your field of work has a history of frequent lawsuits, it might be best to create an asset protection trust. Fields where this may be particularly beneficial are real estate, health, and the law itself.
According to Galfand Berger LLP, the average annual number of medical malpractice lawsuits filed each year was 85,000. Professional malpractice insurance can be relatively inexpensive and should be used to save professionals around the U.S. the stress of a wishy-washy consensus on IRAs.
Local Nuances
Laws regarding retirement protection in the event of lawsuits vary state by state. Many states will not stop angry creditors from seizing your retirement and IRA accounts.
For example, California is a precarious state in which to own a retirement account if you are being sued or filing for bankruptcy. In California, IRAs are not as well protected as 401(k)s. What this means in practice is that if you are being sued for personal injury in California, your 401(k) will be protected from the prosecutor; however, your IRA will only be protected up to the point that the court deems necessary. The judgment will be based on a certain threshold that the court says will be sufficient to support you and your dependents in retirement. This should alarm those planning for retirement, as there is no specific threshold in place, and future events are far from predictable.
It is important to note that some states have limited or no laws protecting IRA savings in case of lawsuits. On the other hand, the best states for IRA protection in a lawsuit are Texas, Washington, and Arizona. In Arizona, only IRA contributions made within 120 days of the lawsuit are exposed to risk by the claimant.
Although there are established distinctions between states, it is crucial to understand that the law is never clear-cut. There may not be a straight answer for the outcome of your lawsuit, subject to the type of account (Roth IRA, traditional IRA, etc.) and local jurisdiction. For example, you may have greater protection of funds inside of your IRA account as opposed to those outside, even if they consist of distributions from the account.
Moran Knobel, a certified retirement plan consulting and administration firm, offers a comprehensive state-by-state list of laws protecting IRAs and provides an analysis of individual retirement accounts as exempt property.
Remember Your Umbrella
To those with assets tied to retirement plans and IRAs, acquiring an umbrella insurance policy may help shield against the possibility of a creditor dipping into retirement accounts. Personal umbrella insurance can be added on top of your pre-existing homeowners insurance and auto insurance and will cover the excess cost in case of a catastrophe.
An attractive feature of an umbrella insurance policy during a lawsuit is that the insurance company is required to provide you legal defense on top of the coverage you already receive. It is important to note that umbrella policies do not cover business activities, intentional acts (such as sexual harassment), or punitive damages. In the case of a lawsuit, if you are required to pay out a claim, the umbrella insurance will come into play when your standard liability insurance has run out.
Umbrella insurance policies and professional malpractice insurance are two great ways to safeguard your IRAs. In this case, you can still receive the benefits of IRAs, which are more attractive due to the lower associated fees and investment flexibility in comparison to other employer-sponsored plans and 401(k)s.
The Bottom Line
It’s important to put in place basic safeguards to protect your retirement against lawsuits and bankruptcy. The federal government has laws in place to protect many retirement accounts, including 401(k) and employer-sponsored plans. When it comes to IRAs, states have a greater jurisdiction in deciding what is up for grabs in the case of a lawsuit.
If you are planning to retire or have many assets in retirement and IRA accounts, you may want to look into moving to a state with heavy protection of these accounts. To avoid kicking yourself later, make sure to be proactive in safeguarding your retirement—whether it be through malpractice insurance, umbrella insurance policies, or simply understanding the laws. As the laws are complex and often contain possible loopholes, it may be in your best interest to consult a legal professional.
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dd9b546fbf7c33c46bb330d5e7aa7637 | https://www.investopedia.com/articles/investing/092215/understanding-taxes-mutual-funds-dividends.asp | Understanding Taxes on Mutual Funds Dividends | Understanding Taxes on Mutual Funds Dividends
Many people choose to invest in dividend-bearing mutual funds as a way to generate regular income throughout the year. While this can be a simple and effective way to augment your regular earnings, it is important to understand the tax implications of dividend income from mutual funds.
When Does a Mutual Fund Pay Dividends?
A mutual fund pays dividend distributions when assets in its portfolio pay dividends or interest. Most commonly, dividend distributions are the result of dividend-bearing stocks or interest-bearing bonds. Not all funds pay dividends. However, mutual funds are required to distribute all net profits each year to avoid paying income taxes on those earnings. A fund that receives interest or dividend income from stocks or bonds must make at least one dividend distribution per year. If your mutual fund distributes dividends or capital gains in a given year, this income is reported to you on Form 1099-DIV.
Understanding Dividends
A dividend is simply a redistribution of profits to shareholders. The difference between a mutual fund dividend and a stock dividend is that mutual fund dividends are generated by underlying assets, while stock dividends are the result of profitable operations.
When an individual company turns a profit, it can elect to retain those earnings, reinvest them into the company by funding growth or distribute them to shareholders in the form of a dividend. In the stock market, consistently paying dividends each year is considered a sign of the issuing company's financial health. Mutual funds are pass-through investments, meaning any dividend income they receive must be distributed to shareholders. Therefore, a dividend payment is not indicative of the health or success of a given fund but rather of the types of investments in its portfolio.
In addition to dividend-bearing stocks, mutual fund dividends can be the result of interest-bearing bonds. Most bonds pay a set amount of interest each year, called a coupon rate. The coupon is simply a percentage of the bond's par value and may be paid monthly, quarterly, semi-annually or annually. Dividends are paid to shareholders according to their holdings. Thus, a fund that announces a 50 cent dividend per share pays $50 to an investor who owns 100 shares.
Earning Dividends
Mutual funds and individual stocks that pay dividends are popular investments. However, earning dividends is a matter of timing. When a company declares a dividend, it also announces the ex-dividend date and date of record. The date of record is the date on which the company reviews its list of shareholders who will receive the dividend payment. Because there is a time delay when trading stocks, any sale of shares that occurs fewer than three days prior to the date of record is not registered, and the list of shareholders still includes the name of the selling investor.
The date three days prior to the date of record is the ex-dividend date. An investor who sells his shares on or after the ex-dividend date still receives the dividend despite the fact he no longer owns shares by the time the dividend is paid. Similarly, any share purchase made after the ex-dividend date is not eligible for the dividend. The same rules that apply to the receipt of stock dividends also apply to mutual funds. To receive payment, an investor must own shares in the fund prior to the ex-dividend date.
Ordinary Dividends
In general, dividends paid by a stock or mutual fund are considered ordinary income and are subject to your normal income tax rate. If your mutual fund buys and sells dividend stocks often, more than likely any dividends you receive are taxed as ordinary income. For example, assume you receive $1,000 in dividend payments from your actively managed fund. If you are in the 25% income tax bracket, you pay $250 at tax time.
Capital Gains Tax
Minimizing your investment tax burden is primarily a matter of generating long-term gains rather than short-term income. This means holding investments for long periods of time, generally more than one year.
Income from investments held longer than a year is subject to the capital gains tax, which can be substantially lower than your ordinary income tax bracket. In fact, for those in the 10 and 15% brackets, the capital gains tax rate is 0%. If your annual income is low enough, you may be able to earn long-term investment income tax-free. For those in the 25 to 35% brackets, the capital gains tax rate is 15%. For the highest earners, the capital gains tax is 20% rather than their ordinary income tax rate of 39.6%.
Because the difference between these two tax rates is so significant, at up to 20%, employing a buy-and-hold strategy has some very real tax benefits.
Qualified Dividends
Though most dividends are considered ordinary income, dividends considered "qualified" by the IRS are subject to the lower capital gains tax. The primary requirement for qualified dividends is the dividend-bearing stock must be held for a certain amount of time, called the holding period. When it comes to mutual fund dividends, the holding period refers to the length of time the fund has owned the stock, rather than how long you have owned shares in the fund.
For a mutual fund dividend to be considered qualified, it must be the result of a dividend payment by a stock in the fund's portfolio that meets the holding requirement outlined by the IRS. The fund must have owned the stock for at least 60 days within the 121-day period that starts 60 days prior to the ex-dividend date. This may sound confusing, but essentially it means the fund must own the stock for either 60 days before the ex-dividend date or a combination of days before and after that add up to at least 60 days. This regulation is in place to discourage funds and individual investors from buying and selling stocks just to get the dividend.
Tax-Free Dividends
If a mutual fund issues a dividend distribution as a result of interest earned on bonds, then that income is generally subject to your ordinary income tax rate. In some cases, mutual fund dividend payments may not be subject to any federal income tax. This only occurs if the dividend is the result of interest payments from government or municipal bonds. Some funds invest exclusively in this type of security, often called tax-free funds.
While earnings from municipal bonds are not subject to federal income tax, they may still be subject to state or local income taxes. Bonds issued in your state of residence may be triple-tax-free, meaning interest payments are not subject to any income taxes. Investing in dividend-bearing mutual funds can be a great source of regular income. To be properly prepared for tax season, it is important to know which assets are generating dividends and how the different tax rates apply to different types of dividend income.
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